HCA Honcho Ready to Rouse HealthSouth

The struggling health care company names Jay Grinney chief executive as its recovery continues.
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HealthSouth

is acting like a real survivor.

The ailing health care company has managed to tap the No. 3 executive at

HCA

(HCA) - Get Report

-- the largest for-profit hospital chain in America -- to lead its ongoing recovery effort. Jay Grinney, an HCA veteran who most recently managed the company's largest division, will become HealthSouth's new CEO. By leaving powerful HCA, Grinney has strongly indicated that he believes in HealthSouth's long-term viability.

"HealthSouth has made an impressive turnaround over the past year, and I am confident that it has a future of solid growth and profitability," Grinney stated on Monday. "I look forward to working together with the company's dedicated and talented employees to ensure that HealthSouth reaches its full potential as the nation's largest provider of healthcare services."

Investors celebrated Grinney's arrival as another step closer to a possible miracle cure. HealthSouth shares -- nearly worthless this time last year and even now trading only on the largely unregulated pink sheets -- surged 6.7% to $4.59 Monday afternoon.

Thick Forest

Still, HealthSouth isn't out of the woods yet.

Indeed, the company remains partially at the mercy of litigating bondholders who, less than a week ago, reiterated their dissatisfaction with current arrangements. The bondholders are demanding additional payments from HealthSouth to compensate them for the company's high credit risk.

HealthSouth technically defaulted on its credit agreement more than a year ago, when it admitted that its past financial statements were unreliable. The disclosure followed news of a multibillion-dollar accounting fraud allegedly ordered by disgraced founder Richard Scrushy, and dating back to HealthSouth's earliest days as a public company.

Scrushy is headed for trial this summer in an effort to defend himself against federal fraud charges.

In the meantime, HealthSouth itself continues to show an incredible will to live. The company has already survived what some believed was certain bankruptcy, and was still attempting to mend its relationship with bondholders late last week.

On Thursday, HealthSouth offered to sweeten its consent fee to $13.75 per $1,000 in principle -- up from $10 earlier -- in an effort to settle the dispute. But bondholders have yet to accept the deal. Instead, the two parties are currently scheduled for a court hearing late next month.

"The unofficial committee

of bondholders is cautiously optimistic that its negotiations with the company will result in a consensual arrangement that will provide the bondholders with reasonable compensation for the increased credit risk due to the company's current circumstances and for the material amendments to the indentures," Brad Eric Scheler, the group's legal counsel, stated last week.

For its part, HealthSouth has pointed out that it continues to make interest payments but admits that it remains in technical default due to its lack of accurate financial statements.

New Caretaker

Robert May, who has served as interim CEO since Scrushy's ouster early last year, called the company's recent progress "nothing less than remarkable" when announcing Grinney's appointment on Monday. But he also seemed eager to entrust HealthSouth's care to another leader and simply return to his post on the board.

Interim Chairman Joel Gordon viewed the management change as appropriate medicine for the company.

"Jay has broad operating and financial experience and is recognized as one of today's outstanding leaders in the healthcare industry," Gordon explained. "He brings with him not only a wealth of practical know-how built over a 23-year career, but a real vision of the opportunities and challenges in today's health care industry."

Recently, Grinney served as chairman of the Federation of American Hospitals, the powerful lobbying group which still counts him as a member of its board. Barry Schochet, the executive vice chairman of troubled

Tenet

(THC) - Get Report

, is a past chairman and current director of that same group.

Both men are familiar with challenges in the industry and at their own companies in particular. Over the years, both HCA and Tenet have paid massive fines for allegedly defrauding the government in an effort to maximize profits during tough operating environments. But HCA has already paid its penalty and moved on, as Tenet has assumed the company's former spot in the sickbed.

Grinney presided over some key HCA operations when the company came under fire. According to the

Houston Chronicle

, Grinney was president of HCA's southwest division when it settled charges that it paid bounties for patients referred to mental health centers in the company's Texas market. (Tenet faced similar charges a decade ago as well.) Grinney went on to become president of HCA's large eastern division after that.

Grinney cashed in, along with several other HCA executives, before the company landed in serious trouble a few years later. According to the

Tulsa World

, he sold nearly $400,000 worth of HCA stock in the months before the federal government raided HCA's Texas facilities, and

The New York Times

followed up with a damaging story about the company's Medicare billing in 1997. He scored a bucket of stock options that same year even though the company lost money.

"Despite the fact that the company did not meet its earnings per share goal," HCA explained in its 1997 proxy statement, "the compensation committee firmly believes that these payments are necessary to help ensure the retention of those executives whose performance is critical to the company's ability to respond successfully to the challenges it faces."

To be fair, HCA's stock has since recovered. After falling below $20 in early 1998, it went on to hit $50 in 2002 before bad debts and other negative trends began taking a toll on the company's bottom line last year.

Grinney picked up $1.52 million in total compensation for his last full year at HCA. HealthSouth has not yet released details of Grinney's compensation. But his old employer was quick to wish him well.

"This is a great opportunity for Jay," said HCA CEO, Jack Bovender. "In his years at HCA, he has proven to be an intelligent, principled and tenacious leader who is focused on patient care. These qualities will serve him very well as a chief executive."