The Healthsouth Debacle

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  • Topic: Fraud, HealthSouth, Richard M. Scrushy
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  • Published : January 11, 2011
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The HealthSouth Debacle:
A Legal and Ethical Perspective
Jay Buntemeyer
Regis University

HealthSouth Corporation is the largest operator of rehabilitation hospitals in the United States. Since the company’s inception in 1984, HealthSouth has garnered the attention of Wall Street and millions of investors. However, the attention was because the iconic HealthSouth was involved in one of the largest accounting fraud scandals in United States history. HealthSouth’s founder and CEO, Richard M. Scrushy, was also the inventor of the entire scheme that defrauded the government and private investor out of $2.5 billion dollars. The HealthSouth scandal provides a look at several different legal cases involving civil and criminal charges, as well as administrative liabilities. HealthSouth also provides ample opportunity to evaluate the ethical implications of its behavior. The HealthSouth debacle still leaves one with several unanswered questions. How did HealthSouth avoid detection for so long? Could this scandal have been detected earlier? HealthSouth is an excellent example of corporate turmoil from a legal and ethical perspective.

Keywords: Scrushy, HealthSouth scandal, fraud, criminal litigation, civil trials.

The HealthSouth Debacle: A Legal and Ethical Perspective
Company Overview

HealthSouth Corporation (HealthSouth) is one of the largest providers of inpatient rehabilitative health care services in the United States (Reuters, 2009, para. 1). HealthSouth was incorporated in the state of Delaware in 1984 as Amcare, Inc. before changing its name to HealthSouth Corporation in 1985 (Reuters, 2009 & “Funding Universe,” 2000). From that day, HealthSouth set about expanding its business and becoming a health care icon. By 1988, HealthSouth was operating a vast network of facilities: 21 outpatient facilities, 11 inpatient facilities and 7 rehabilitation centers. The HealthSouth network spanned across 15 states and was just beginning to spread its wings. In 1989, HealthSouth reported revenues of $114 million, but that was just the beginning of accelerated growth (“Funding Universe,” 2000, para. 11). Mostly through acquisitions, HealthSouth continued a pattern of growth that captivated the most experienced investors while raising the eyebrows of the Securities and Exchange Commission (SEC). In the mid-1990s, HealthSouth acquired two large companies that only added to its rapid growth: ReLife Inc and NovaCare, Inc. The largest HealthSouth acquisition happened in 1995 when the company announced it was purchasing Diagnostic Health Corporation for $1.1 billion. HealthSouth continued expanding and diversifying its business by mergers and acquisitions of other health care service companies (“Funding Universe,” 2000, para. 14-15). HealthSouth acquired companies in specialty health care services and purchased surgical centers to further contribute to HealthSouth’s status as the largest rehabilitation provider in the country (“Funding Universe,” 2000, para. 16). At the end of 2008, HealthSouth was operating 93 inpatient rehabilitation hospitals, six long-term acute care hospitals, and 49 outpatient rehabilitation facilities. In aggregate, HealthSouth operates 6,543 licensed beds in 26 different states and Puerto Rico. The bulk of the facilities that HealthSouth operates are clustered in Texas, Pennsylvania, Florida, Tennessee, and Alabama, as well as operations in Puerto Rico, the United Kingdom and Australia (Reuters, 2009, para. 2). Unfortunately for HealthSouth, the era of growth and expansion came crashing down around allegations and charges of accounting fraud and falsification of financial statements. In similar situations to other prominent corporate scandals, HealthSouth’s problems point directly at their leadership, more specifically their CEO, Richard M. Scrushy. Leadership

The leadership of HealthSouth was spread over several different institutions and states, yet one common factor united...
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