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(Courtesy of Google Images)

Coastal Health Consulting Team #2, Section 2

Sean Hanagan

Allie Fisher

Chris Attridge

Monica Hucks

Michael T. Remus

II

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Table of Contents

Introduction 1

a. Position 1

b. Leadership 2

c. Alignment 4

d. Challenges 5

2. External Analysis 5

a. Dominant Economic Characteristics 5

b. Five Forces Analysis 10

c. PESTLE Analysis 13

d. Key Success Factors 16

e. Competitor Analysis 17

f. Industry Attractiveness 18

3. Appendices

a. Segmented Sales Appendix 1

b. Stock Price Tracking Appendix 2

c. Timeline Appendix 3

d. Board of Directors Appendix 4

e. Committee Structure Appendix 5

f. Stock Ownership of Directors Appendix 6

g. Top Management Team Appendix 7

h. Beneficial Owners Appendix 8

i. Mission and Vision Appendix 9

III

j. Alignment (7 S’s) Appendix 10

k. Healthcare Industry Rates Appendix 11

l. Subsidiaries Appendix 12

m. PESTLE Analysis Appendix 13

n. Strategic Group Map Appendix 14

o. U.S. Physical Therapy, Inc. Financials Appendix 15

p. Health Management Associates, Inc. Financials Appendix 16

q. Competitor Overview Appendix 17

r. Industry Attractiveness Matrix Appendix 18

s. Opportunities and Threats Matrix Appendix 19

IV

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This report is intended to complete an in-depth analysis of HealthSouth Corp., a leading

organization in the healthcare industry. By looking at the internal and external factors in which

the organization operates, Coastal Health Consulting will be able to identify the business

landscape that HealthSouth Corp. has formed. By completing this, Coastal Health Consulting

will be able to earn greater insight to help HealthSouth in growing strategically and make

recommendations against the possibilities of threats within the industry.

Introduction

Position

PLAC Analysis

HealthSouth started in February of 1984, in Delaware, when it was incorporated as a

successor to Amcare. Since that incorporation, HealthSouth has grown and is now “located in 26

states, mainly in Texas, Pennsylvania, Florida, Tennessee, and Alabama,” with 22,000

employees to help run these facilities (Mergent Online, 2009). HealthSouth’s SIC code is 8093 -

Specialty outpatient clinics, NEC and it is NAICS code is 621498 - All other outpatient care

centers. In 2008, the company reported $1,842,400,000 in revenues, which can be seen in

Appendix 1, and a net income of $252,400,000, which is down 38.6% from last year (Business &

Resource Center, 2009). HealthSouth Corp., according to Mergent Horizon, primarily focuses on the

healthcare services of patient care sector of the industry, which include acute care and rehabilitative

hospitals (Mergent Horizon, 2009). Some major competitors, such as U.S. Physical Therapy, and Tenet

Healthcare Corp., fall into the same products and service line as HealthSouth. Within the last five years,

Tenet and HealthSouth have been following the same track in the market, which can be seen in Appendix

2, while U.S. Physical Therapy looks to be above the market average the past few years. Tenet has fallen

about 50%, while HealthSouth has only fallen 40% and U.S. Physical therapy looks to be up 5% over the

last five years.

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Evolution

There are several major milestones, which can be found in Appendix 3, that have helped

to shape HealthSouth into what the company has become today. HealthSouth was formed in

1984 by Richard Scrushy and some of his colleagues (Business & Company Resource Center,

2009). In 1989 HealthSouth made a move that would direct their future actions by entering the

sports rehabilitation market. Moving forward the firm focused much of its resources into

becoming the top provider of inpatient rehabilitative services. From 1995 to 2002 HealthSouth

made many lucrative deals to cement itself as one of the top organizations in the healthcare

industry. Unfortunately in 2002 the company’s CEO Richard Scrushy was fired after allegations

of accounting fraud (Business & Company Resource Center, 2009). HealthSouth was accused of

overstating revenues by 2.5 billion from 1997-2002. By 2006, HealthSouth decided to adjust its

strategy by divesting some of its less profitable locations (outpatient, diagnostic and surgery

centers) and focus its resources on inpatient rehabilitation. By focusing on inpatient

rehabilitation HealthSouth has been able to become more profitable in the last few years.

Leadership

Board of Directors

On the Board of Directors, three-quarters must be independent. These independent

members should have no relationship to the company either directly, through a partnership, a

shareholder, etc within the past three years. The chairman position is held by Jon F Henson who

is independent of the executives and CEO of the business (HealthSouth, 2009). The current

board of directors, which can be found in Appendix 4, has been together since 2003

(HealthSouth, 2009).

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There are five different committees that guide the board. These committees consist of the

Audit Committee of HealthSouth Corporation, Compensation Committee of HealthSouth

Corporation, Nominating/Corporate Governance Committee of HealthSouth Corporation,

Corporate Compliance Committee of HealthSouth Corporation and the Corporate Finance

Committee of HealthSouth Corporation. These committees, which can be found in Appendix 5,

are very independent from one another, and have a lot of freedom to do what they want

(HealthSouth, 2009).

In order to prevent fraud, HealthSouth entered into a settlement agreement with the

Securities and Exchange Commission (SEC) in June of 2005. Among other obligations, the

settlement agreement required HealthSouth to retain independent consultants to review the

adequacy and effectiveness of HealthSouth’s corporate governance and internal accounting

control policies and systems; develop training programs for officers, employees and contractors

covering securities laws and other obligations applicable to public financial reporting; and create

a new position of Inspector General reporting directly to the Audit Committee of the Board of

Directors to identify violations of law or HealthSouth policy relating to accounting or public

financial reporting.

Top Management Team

HealthSouth’s Top Management Team (TMT), in Appendix 6, consists of a number of

well qualified diverse individuals with a variety of skills. Although HealthSouth’s executive

management team has only been in place for a few years, all key executives have ample work

experience in the health care industry. Along side of the executive management team there are 18

members of HealthSouth’s senior management team who are all extremely accomplished and

experienced in management as well.

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Each one of HealthSouth’s top executives brings a variety of different skills which are all

extremely useful when creating and implementing strategic decisions. All current directors and

executives hold stock in the company which may also influence their strategic decisions.

Together they collectively own 1.87%, while Mr. Grinney owns the largest portion with 1.15%.

For complete list of executive stock holdings see Appendix 7.

Outside Investors

HealthSouth’s company website shows that there are a number of institutional investors

that currently hold a portion of the company in Appendix 8. The largest holder of outstanding

shares is Rowe Price Associates, Inc. with 10.06% of HealthSouth’s stock. There are many other

institutional investors who are also currently holding a portion of HealthSouth. They may be able

to slightly influence management; however, none have a controlling influence in HealthSouth.

Mission and Vision

HealthSouth’s mission, as stated in Appendix 9, is fairly vague with a main focus on

providing quality healthcare. In their vision, as in Appendix 9, their commitment to operating

their business ethically and honestly could be questioned, due to the recent lawsuit, but their

commitment to its patients and employees is very concise about what is expected. HealthSouth

focuses solely on quality customer care and quality atmosphere.

Alignment

The company is focused on providing quality healthcare at affordable prices. HealthSouth

currently operates in several different healthcare fields such as inpatient rehabilitation hospitals,

long term care hospitals, and outpatient rehabilitation satellites (Mergent, 2009). The physicians

at HealthSouth Corp. strive to provide the latest technologies in patient care (HealthSouth, 2009).

Having been plagued in the past with executive management scandals, HealthSouth has

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completed a board transition plan to provide board members who are independent of the

company and have varied fields of expertise. Overall, after the scandal, HealthSouth has

restructured itself and is now very well aligned, which is explained in Appendix 10.

Challenges

The biggest challenge facing HealthSouth Corp. as well as the entire healthcare industry

is the ongoing proceedings in congress over the proposed healthcare reform. Should the bill be

passed anytime in the near future, HealthSouth must be able to adapt and change their practices.

To prepare for these possible changes, HealthSouth must become as familiar as possible with the

healthcare reform bill and create a plan of action. The rising numbers of uninsured patients

represents a substantial obstacle for HealthSouth and other healthcare facilities (Standard &

Poor’s, 2009). Qualified nurses are a commodity that is currently not being met (Standard &

Poor’s, 2009). In order to become more successful, HealthSouth must find ways to attract more

qualified nurses to their healthcare facilities. Just 7 years ago, HealthSouth was stunned by

accounting fraud that involved to financial employees as well as possibly the C.E.O. prior to

2002. HealthSouth was growing into one of the most successful healthcare organizations in the

country. Since the accounting scandal was uncovered, the organization is still struggling to

regain its integrity and climb back to the top where it once stood.

Dominant Economic Characteristics

External Analysis

Overall Size and Market

According to the American Hospital Association (AHA), “a national trade organization

for hospitals, healthcare networks, and providers, the number of inpatient admissions per 1,000

persons had remained relatively flat between 2003 and 2006 at 118-119 per 1,000 persons.

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However, in 2007, it reached a level of 117.2, the lowest since 1996 (which was the lowest rate

in the last 20 years). In addition, the rate of growth in hospital admissions has generally been

declining during this decade, from just over 2% in 2000 to -0.2% in 2007, according to the AHA

(Standard & Poor’s, 2009).” The overall market for the healthcare industry is falling fast, which

can be seen in Appendix 11, but looks like it will rebound in the future.

Number of Rivals

HealthSouth finds itself in an industry cluttered with competition. Currently, HealthSouth

controls a fairly substantial piece of the market but to regain the form they once had they must

make further improvements (Standard & Poor’s, 2009). The healthcare industry is going through

changes and is seeing the lowest hospitalization rates in some time as well as decreases in

consolidation efforts between competing firms (Standard & Poor’s, 2009). Experts believe that

the economic downturn of 2009 has led to the decrease in mergers in the industry (Standard &

Poor’s, 2009).

Scope of competitive rivalry

HealthSouth competes at a national level. It offers the nation’s largest inpatient

rehabilitation services and they are located in 26 states across the country and in Puerto Rico.

The presence of national markets is not very important to the company right now because

HealthSouth is not completely national. Their goal is to remain the nation’s preeminent provider

of inpatient rehabilitation services (HealthSouth, 2009). However, due to the requirement of

earning a “certificate of need,” or CON, which HealthSouth must establish before opening any

new facilities with the state government, causes the scope to increase due to their rivals ability to

appeal this process and keep HealthSouth from opening new facilities (HealthSouth, 2009).

Degree of Product Differentiation

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The products of rivals are mainly different then what HealthSouth focuses on. Although

HealthSouth has facilities in inpatient rehabilitation, outpatient rehabilitation, long-term acute

care hospitals and home health, what they mainly focus on is the inpatient rehabilitation

(HealthSouth, 2009). A lot of other competitors in the industry focus on other things such as

pharmacy services, orthotic and prosthetic, behavioral healthcare services, general surgery,

emergency room care, etc (Mergent Online, 2009). There are always going to be companies that

will try and compete with HealthSouth since it is the nation’s leading inpatient rehabilitation

center.

Product Innovation

Technological innovation and R&D is essential to sustaining a competitive advantage in

the health care industry. New technologies provided by health care companies are helping to

advance patients’ quality of life and increase recovery time (HealthSouth, 2009). Advances in

new IT have the ability to improve quality, safety, and efficiency of healthcare (HealthSouth,

2009). While these new technologies will greatly improve the healthcare industry there initial

cost is a massive barrier to overcome.

Number of Buyers

The healthcare industry includes several sectors that serve different areas of society’s

healthcare needs. Included in this group are acute care hospitals, rehabilitation hospitals

psychiatric hospitals, nursing homes, assisted-living facilities, and home healthcare services

(Standard & Poor’s, 2009). As our population continues to age the need for healthcare will

continuously increase dramatically. Entities that pay for the majority of healthcare services,

which are primarily private insurance companies, Medicare, and Medicaid, have significant

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bargaining power over providers. Outside of government health providers, HealthSouth must

deal with private healthcare providers, as well as, the patients themselves purchasing the service.

Supply/ Demand Conditions

Since the recent economic downturn, and with the unemployment rate on the rise, many

of the Health Care providers have dropped those who could not afford health insurance. This has

allowed for the decrease in inpatient care and has drastically moved towards outpatient care.

According to the American Hospital Association (AHA), “the average length of stay (a

secondary driver of hospital utilization), declined from 5.6 days per admission for all US

hospitals in 2006, to 5.5 days per admission in 2007, a decline of approximately 2%.”(Standard

& Poor’s, 2009) Because of this unfortunate economic “flat line,” patients are looking for the

most affordable outcome, which seems to be outpatient facilities. With the prices dramatically

increasing at the inpatient facilities or even the long term care hospitals, which “must have an

average-length of stay in excess of 25 days” (HealthSouth 2008), most cannot afford to pay those

premium prices without affordable healthcare.

Pace of technological change

In order to compete in this industry, not only does HealthSouth need to be innovative

with technology, but so does its competitors. They must keep inventing new machines or

programs that will help with the recovery of patients within this industry. With HealthSouth

being the largest provider of inpatient rehabilitation facilities in this industry, they pride

themselves on being innovative. For example, they just “developed an innovative therapeutic

device called the ‘AutoAmbulator’ which can help advance the rehabilitative process for patients

who experience difficulty walking” (HealthSouth, 2008). This is the newest device that

HealthSouth has acquired, but they have many more devices/procedures that help with strokes,

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brain or spinal injury, walking, muscle spasms, and much more. This technology allows the

company to innovate new ideas to help treat the patients with multiple or severe disabilities.

With HealthSouth being a leader in this sector of the industry, a lot of its competitors are trying

to catch up and compete with new ideas.

Vertical Integration

HealthSouth operates in several stages of the healthcare market. They own and operate

hospitals, rehabilitation centers and long term care facilities (HealthSouth 2009). Looking at

HealthSouth’s subsidiaries, shown in Appendix 12, there are many surgery centers which could

allow for HealthSouth to vertically integrate into that market as well. This also allows for

customers to experience more than just rehabilitation at HealthSouth, but allows them to have

surgery with the firm as well. This relieves the pressure of patients having to change facilities in

order to completely recover.

Economies of Scale

Economies of scale are present in the healthcare industry. A doctor can see six patients in

an hour instead of three, which has helped cut down on the cost of supplying medical care to the

patients. If a new machine that was purchased can speed up the wait time in the emergency

room, then this helps cut down on the cost of having the patient in the hospital. Whether this cost

is passed down to the patients is up to hospital management. HealthSouth seems to be at an

advantage since they are such a large company. If a certain hospital in their chain does not have

the equipment to do a particular procedure, the patient can easily be referred to another

HealthSouth hospital that can accommodate that patient and HealthSouth will still get the

patient’s business. This is possible because in 22 of the 26 states that HealthSouth provides its

services, have more than one facility within the state and therefore allows for comfortable

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transfers. If an on-staff specialist is needed at a hospital and also at a long term healthcare center

that are close to each other, then HealthSouth saves money by having a doctor than can visit both

centers. If a particular hospital were a stand-alone facility, then it would have to have a specialist

come in, which costs more money. HealthSouth is able to save by having one specialist to

service two facilities.

Learning/ Experience Curve Effects

In the healthcare industry, a learning curve is definitely present. New technologies are

constantly on the forefront and it is up to the healthcare facilities to keep up with the changing

pace. If one hospital learns something new and is able to do it well, it certainly has an advantage

over other hospitals. There does not seem to be a significant cost advantage to learning these new

technologies. If anything, it costs the facility money to keep up; however, if it earns a reputation

for being the best in its new field or procedure, then the cost of the technology should pay off.

HealthSouth seems to be at an advantage because if one of their facilities is able to come up with

a new procedure or acquires a new technology, then it can share this information or tool with the

other facilities in the HealthSouth chain so they are able to benefit from it also. It all benefits the

HealthSouth brand as a whole.

Five Forces Analysis

Rivalry among competing sellers

The competition’s intensity within the industry is known as rivalry. Split between for-

profit, non- profit, and public hospitals, the healthcare industry finds it biggest competition with

the for-profit organizations. That sector must compete with non-profit hospitals as well because

“[i]nvestor-owned hospitals have 19% higher charges than non-profit hospitals, according to a

study appearing today in the Canadian Medical Association Journal (Devereaux, PJ. &

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Woolhandler, S. & Young, Q., 2004).” There is an strong rivalry among these competitors

because they must “secure the public’s trust; hospitals [need] to become highly reliable –

ensuring patients’ safety, providing clinically effective care, and embodying the ethical ideal that

has long been the expectation of the public (The Joint, 2008).” This in turn, could lower the

intensity of the rivalry by losing revenue and pressuring profit margins. “[W]hile some hospitals

experience healthy profit margins, an uncomfortable number of hospitals continue to be

unprofitable. There is a growing gap between have and have-not hospitals that may very well

widen as the future unfolds (The Joint, 2008),” and because of this there is a strong rivalry

among competitors in this industry.

Threat of new entrants

Although new entrants are always possible, this force in the healthcare industry is a weak

one. A new entrant into the healthcare industry is not a frequent occurrence. One of the largest

barriers to entry is the millions of dollars in financing it takes to even build the facility and stock

it with the most up to date medical tools. The next barrier would be to hire capable physicians to

care for the patients that may or may not come. The healthcare industry is not predictable. A

hospital cannot afford empty beds but also needs as much capacity as it can handle in case of

emergency situations. It must be flexible to the needs of its patients.

A potential entrant would be a company who has experience in this field and is able to

get the financing needed to build the facility. It would preferably have a name that its future

patients recognize and associate with good healthcare. Existing firms in the industry would be

affected by this new company because it will undoubtedly take potential patients away.

However, due to the requirements of filing a CON with the state government, it allows for other

companies to keep that company from coming to market.

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Firms in other industries offering substitute products

There are always going to be substitute products in the healthcare industry because it is very

competitive, and there are many products that HealthSouth has that other companies have as well

(Standard & Poor’s, 2009). HealthSouth has a variety of different services it offers in order to

stay on level with everyone else, and they are constantly trying to improve these services in order

to keep their customers on board with them (HealthSouth, 2009). Since the economy is not doing

as well right now, price if a huge factor because not a lot of people are able to afford healthcare.

HealthSouth has very strong competition and that is why it is important for them to stay on top.

Supplier bargaining power

Some of HealthSouth’s biggest suppliers are Healthcare Realty Trust Incorporated,

Edgewater Technology Inc. and Nationwide Health Properties Inc (Mergent Horizon 2009).

Healthcare Realty Trust Incorporated supplies HealthSouth with properties for its outpatient

services and Nationwide Health Properties Inc supplies the senior housing, long-term care

properties and medical office buildings (Mergent Horizon 2009). Information technology utilized

by HealthSouth is supplied by Edgewater Technology Inc., the technology is used to optimized

performance at each location (Mergent Horizon 2009). Suppliers of labor include therapists,

nurses and office staff (HealthSouth 2009). Suppliers such as Nationwide Health Properties Inc.

and Healthcare Realty Trust Incorporated hold less power over its buyers than the suppliers of

labor and technology can. With the drastic need for more nurses in the healthcare industry, the

labor force in this industry holds considerable power. In addition to the labor force, the providers

of innovative technology used in HealthSouth facilities are not easy to replace, see the list of

subsidiaries in Appendix 12. The strength of suppliers in this industry seem to be strong to

moderate depending on which type of supplier is being investigated.

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Buyer bargaining power

The primary buyers of the industry are private insurance companies and the government

sponsored programs Medicare and Medicaid. According to National Health Expenditure (NHE)

data from the Centers for Medicare & Medicaid Services (CMS), government sources financed

46% of all health care spending in 2007 (Standard & Poor’s, 2009). This number will only

increase in the future as the population continues to age and baby boomers, roughly 77 million

Americans, become eligible for Medicare. The CMS Office of the Actuary predicts that

government sources will fund about 51% of the projected $4.4 trillion in domestic healthcare

expenditures in 2018 (Standard & Poor’s, 2009). The government can also control the rates at

which it reimburses health care providers who care for Medicare and Medicaid recipients. These

factors give the U.S. government a huge influence on quality standards and treatment options,

and result in strong buyer power.

Driving Forces (PESTLE) Analysis

Political

With the introduction of the controversial healthcare bill by President Obama, it seems as

though the political driving force has become the most influential force on the healthcare

industry. The new healthcare bill stands to drastically change how the industry does its business

by giving the government substantial power to compete with private insurance companies

(Access World News 2009). With the introduction of this bill has come much skepticism and

debate, which has led to two strong opposing views on the subject. The president has attempted

to bring both sides together in an effort to create a united front to revolutionize the healthcare

industry; however his attempts have been to no avail (Xinhua 2009). The Republicans and

Democrats have not shown any willingness to negotiate on terms of the new bill, which has

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stalled chances of its implementation in the near future. The reality of the situation is that some

sort of healthcare reform will be passed in the not too distant future but due to the current

instability, no one can predict when the bill will actually pass into law. HealthSouth must do the

necessary research and planning to prepare for the future healthcare reform. More analysis is

shown in Appendix 13.

Social

Socially, there is a cry for help when it comes to affordable healthcare. Because the U.S.

economy is in such a recession, and because the unemployment rate is rising, many Americans

cannot afford healthcare. The unemployment rate in the U.S., up until 2007, was fairly stable.

According to S&P however, “between October 2008 and March 2009, the nation’s employment

situation only worsened, as an additional 3.7 million people became unemployed, further

increasing the ranks of those potentially losing healthcare coverage (Standard & Poor’s 2009).”

The demand for affordable healthcare is high mainly because of unemployment, but many people

just can’t afford it. “In 2007, 46.6 million people had no health insurance—a decrease of 1.3

million from 2006 (Standard & Poor’s 2009).”

Economic

Economically, the healthcare industry has been struggling in recent years with the decline

of economic activity within the U.S. Due to this recession, more people will file for

unemployment and businesses will have to cut costs. But health insurance companies keep

raising their prices while workers wages don’t rise by much. “The amount employees paid for

family coverage rose 30 percent, while their incomes rose by three percent (The Joint,2008),”

and not only that but, “[o]verall, 2.4 million fewer people have private health insurance, a drop

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of six percent (The Joint 2008)” in 2008 from 2007. See Appendix 11 for a look at the increasing

unemployment rate.

Technological

Technologically, many firms within the industry must be able to stay afloat with the

technological advances to be able to prevent or treat patients. “With a well-funded biotechnology

industry, new technologies are constantly being created with the hope of creating a new disease

market or need (The Joint 2008).” However, this does cause care for concern. With the

implementation of new technologies the industry raises its costs and therefore its overall price.

Also, “Technologies that are not integrative with other technologies add very little value to the

patient’s care and the health care worker’s practice (The Joint 2008).” But, firms in the industry

must buy into the advances in technology in order to compete.

Legal

With the rise in fraud cases with in the healthcare industry there is cause for concern on

whether to attend for-profit organizations. “Columbia/HCA — the largest hospital firm — paid a

$1.7 billion settlement for overbilling Medicare last year. Tenet — the second largest — paid a

half a billion dollars to settle fraud and abuse charges in the 1980’s (when the firm was known as

NME) and is under investigation again for massive billing fraud, and performing hundreds of

unnecessary heart operations. And HealthSouth — which dominates the rehab hospital market —

just admitted to $3.4 billion in fraudulent accounting. In each case, the CEO who presided over

the fraud was forced out (Devereaux, PJ. Et al., 2004).” With the rise in damages awarded for

malpractice suits, many healthcare organizations have begun turning away patients simply to

reduce the risk of future lawsuits (Loguercio 2009). President Obama has begun talks to attempt

to reform malpractice laws, but only after the new healthcare bill is passed (Arnst 2009).

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Unfortunately for healthcare facilities, the new healthcare bill would only reduce healthcare costs

by about 2.3% (Arnst 2009).

Key Success Factors

It’s important in the healthcare industry to have the best staff a company is able to

acquire to care for their patients. HealthSouth has a talented workforce compiled of the most

skilled physicians in the industry. Their chief medical officer, Dexanne Clohan, is ranked

number 13 in Modern Healthcare Magazine’s annual list of the 50 Most Powerful Physician

Executives (Modern Healthcare 2009). National recognition of staff, as seen above with

HealthSouth, is good publicity to ensure the firm’s patients that they are striving to be the best in

the industry.

Most firms in the healthcare industry are large, national companies that operate several

types of facilities. HealthSouth is no exception. They are a national company that operates in 26

states (HealthSouth, 2009). HealthSouth operates “93 inpatient rehabilitation hospitals, six

freestanding long term care hospitals, 49 outpatient rehabilitation satellites (operated by its

hospitals), and 25 licensed, hospital-based home health agencies. They also manage eight

inpatient rehabilitation units, and one outpatient satellite through management contracts.”

(Mergent Bus. Summary). It is important to any firm in the healthcare industry to have a large

presence in the market and by having a high number of facilities to service patients, they are able

to gain this market presence that will attract new patients in the future.

Size is a major factor to the healthcare industry. HealthSouth has many locations, but are

located mainly in Alabama, Florida, Pennsylvania, Tennessee and Texas (Mergent Online). As

stated above, most firms in this industry are national companies that have a similar profile to

HealthSouth.

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Competitor Analysis

Strategic Group Map

The healthcare industry can be broken down into a few key categories: geographic reach,

variation of services and the size of the organization. The firms recognized to be competitors

with HealthSouth include U.S. Physical Therapy, Health Management Associates, and Hanger

Orthopedic Group. These firms are in a tight niche within the industry but also have a little

competition from firms such as LCA vision and Psychiatric Solutions. Although HealthSouth

does not operate in every state, they have a large presence across the nation and are therefore

considered national. The Strategic Group map can be found in Appendix 14.

Compared to HealthSouth, U.S. Physical Therapy

U.S. Physical Therapy

(USPH, 2009) is probably its biggest

competitor, specializing in outpatient physical therapy facilities including pre- and post-

operational therapy and treatment, as well as, sports injuries, preventative care and neurological

injuries (Mergent, 2009). USPH’s strategy looks to be the participation of specialized therapists

to work with patients while opening new clinics to help lower costs and to use great marketing

and management to compete in the healthcare industry (USPH, 2009)

USPH owns a 1% general partnership through its subsidiaries but also has limited

partnerships that help them own from 50 to 99% of some clinics

.

(USPH, 2009). By doing this

each subsidiary is allowed to great governmental benefits as well as centralized support systems

and management teams. This is a great strength in that it allows them to keep their costs low by

implementing the support systems and management teams. This money they save allows them to

make their facilities less institutionalized and more aesthetically pleasing. USPH is capable of

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increasing their facilities by acquiring and developing new clinics allowing them to increase their

profits. Financials and evaluation of USPH can be found in Appendix 15.

Tenet Healthcare Corporation is an investor-owned health care services company that

operates general hospitals and related health care facilities. Tenet currently ranks as the second

largest U.S. for-profit hospital manager. At December 31, 2008, it owned or operated 53

hospitals (including three hospitals not yet divested but classified as discontinued operations),

with 14,352 licensed beds. The largest concentrations of hospital beds were in California, Florida

and Texas (Standard and Poor 2009). THC also owns and operates a small number of

rehabilitation hospitals, a specialty hospital, skilled nursing facilities, and medical office

buildings located on or near the general hospital properties. Financials and evaluations of Tenet

Healthcare can be found in

Tenet Healthcare Corporation

Appendix 16.

In January 2003, Tenet was sued by the U.S. Justice Department for allegedly submitting

false claims to Medicare. In June 2006, Tenet and the U.S. Department of Justice reached an

agreement to settle the ongoing investigation into Medicare outlier billing. The company agreed

to pay $725 million over a period of four years, plus interest, and to waive its right to collect

$175 million in Medicare payments for past services. In addition to this the Securities Exchange

Commission is investigating the financial disclosures of Tenet regarding their Medicare outlier

payments (Standard and Poor’s 2009). This lawsuit seriously hurt Tenets business, and will

continue to negatively affect them in the future. In Appendix 17, there is a competitor overview,

showing the differences between HealthSouth and its major competitors.

Industry Attractiveness

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According to the Industry Attractiveness Summary Matrix, found in Appendix 18, it is

attractive for HealthSouth Corp. to remain in this industry. They scored 6.08 out of a possible 10

in the matrix. The effect of driving forces on profitability seems to be among the most important

of the attractiveness measures. The driving forces of the industry touch on so many levels that

can affect the profitability of the firm. This factor was given a weight of 20% in the matrix with a

score of 1.8 for HealthSouth Corp. Since technology is constantly improving, this forces firms to

keep up to date with the latest innovations (HealthSouth, 2007). Industry profitability is also an

important attractiveness measure. It was given a weight of 20% in the matrix. Industry growth

potential is important for HealthSouth because they are involved in many different levels of

healthcare, such as inpatient/outpatient rehabilitation, long term acute care and home health

(HealthSouth, 2007). This attractiveness measure was given 20% in the matrix. Intensity of

competition is important to HealthSouth in order to stay ahead of the competition by always

improving and expanding their services. It was given a weight of 15%. Regulatory issues and

buyer demand were both given a weight of 10%. It is important to keep buyer demand up and

that the pertinent regulatory issues are complied with. Industry overcapacity was given a weight

of .5% because of the amount of financial strength it takes to even enter this industry.

A major opportunity in the industry is the constant increase and improvement in

technology. New procedures and less invasive methods of performing surgeries are constantly

coming out. HealthSouth tries to be at the forefront of these new technologies while still

providing low cost healthcare. Since HealthSouth is a national company, they are poised to

expand not only nationally, but internationally. They operate in 26 states and also in Puerto Rico,

which would make it easier for them to expand (HealthSouth 2009).

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There are several threats to this industry. One of the largest is the proposed healthcare

reform. Healthcare reform is in the future, so HealthSouth will need to be prepared to face this. It

will change the way all firms in the healthcare industry operate. Another threat to the industry is

the lack of qualified nurses available. HealthSouth needs to figure out how to attract nurses to

their industry (Standard & Poor’s 2009). The current recession is also a threat for the healthcare

industry. With many employees losing their jobs, and consequently their health benefits, more

people are unable to get the quality healthcare they need. The final threat indentified is new

entrants into the industry. Although it is very difficult to enter this industry, the threat is still

there. Large healthcare companies can easily open new hospitals or rehabilitative centers

anywhere in the country. See the opportunities and threats matrix in Appendix 19 for more

analysis.

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Appendix 1

Segmented Sales Additional information regarding our operating results for the years ended December 31, 2008, 2007, and

2006 is as follows:

For the Year Ended December 31, 2008 2007 2006 (In Millions) Net patient revenue—inpatient $ 1,659.5 $ 1,544.0 $ 1,482.9 Net patient revenue—outpatient and other revenues 182.9 193.5 212.6

Net operating revenues $ 1,842.4 $ 1,737.5 $ 1,695.5 The revenues for the segmented financials decline from 2006 to 2008 in the outpatient sector, while in the inpatient sector they are rising. This is due to the amount of outpatient, surgical, and diagnostic facilities that HealthSouth sold off. “[They] closed the transaction to sell [their] surgery centers division to ASC Acquisition LLC (“ASC”) on June 29, 2007, other than with respect to certain facilities in Connecticut, Rhode Island, and Illinois for which approvals for the transfer to ASC had not yet been received as of such date. [They also] closed the transaction to sell [their] outpatient division to Select Medical on May 1, 2007, other than with respect to certain facilities for which approvals for the transfer to Select Medical had not yet been received as of such date. [Finally, they] closed the transaction to sell [their] diagnostic division to The Gores Group on July 31, 2007, other than with respect to one facility for which approval for the transfer had not yet been received as of such date (HealthSouth, 2009).” By eliminating some of their outpatient facilities, it allowed HealthSouth to turn more resources towards their inpatient facilities to help raise revenues. Source: HealthSouth Corp. (2009). Investors: Financial Data: Form 10-K. Retrieved September 28, 2009 from http://investor.healthsouth.com/secfiling.cfm?filingID=1442643-09-12

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Appendix 2

Sales and Stock Price Tracking

The stock prices gradually seem to decline, while the S&P 500 index seems to increase. Up until the end of 2008 when the stock prices drop drastically when the recession kicked in causing the market index to fall as well. However, with the introduction of a government intervention into the healthcare industry, the prices seem to be rising in 2009. The hope that the healthcare bill will pass through Congress has people more interested in the healthcare industry, which is why the volume increases drastically in the beginning of 2009. Source: Standard & Poor’s (2009). HealthSouth. Company Chart. Retrieved October 26, 2009 from http://0-www.netadvantage.standardandpoors.com.library.coastal.edu/NASApp/NetAdvantage/cp/companyChart.do

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Appendix 3

Timeline

1984 Jan.: Richard Scrushy, vice president of Lifemark Corp., a health care management business, convinces four of his colleagues to leave their positions and help him establish Amcare Inc. in Birmingham, Alabama. Scrushy sees a niche in the healthcare industry which he plans to fill "with high-quality hospital-type rehabilitative services in a low-cost setting." 1984 Jan.: Many in the health care and insurance industries are recognizing that rehabilitation can reduce medical expenses by taking the place of unnecessary, costly surgery and by helping injured employees return to their jobs more quickly. 1985 May: Amcare changes its name to HealthSouth. By offering rehabilitative services in a setting that more closely resembles a health club than a traditional hospital rehabilitation center, and by employing trained physical therapists, HealthSouth facilities quickly attract the attention of doctors and patients alike. 1985: Sales total $5 million. Several centers are in operation, and they are designed to offer general outpatient rehabilitation services. 1986: Dr. Scott Burke, a spinal rehabilitation specialist based in Denver, Colorado, asks HealthSouth to put together a protocol to treat back problems. The company complies with a four-week program that utilizes stretching, aerobic exercise, anatomy instruction and work simulation training for a reasonable price of $3,700. 1988: HealthSouth operates 21 outpatient complexes, 11 inpatient units, and seven rehabilitation equipment centers in 15 states. Sales reach $75 million, growing at rate of 100% annually. 1989 Dec.: The firm enters the sports rehabilitation market with the $21 million purchase of a general hospital in Birmingham that specializes in orthopedic surgery and sports medicine. The success of the acquisition eventually prompts HealthSouth to establish a sports division with separate facilities and well known specialists who treat celebrities like Bo Jackson and Charles Barkley. 1989: Sales jump to $114 million. HealthSouth continues to purchase other health care and rehabilitation companies and covert them to into HealthSouth operations. 1990: Sales grow to $181 million. 1991: Net income reaches $22 million. 1992: HealthSouth is second only to Continental Medical Systems, Inc. in the U.S. rehabilitative services market. The two companies announce plans to merge into a $2 billion organization, but HealthSouth eventually backs out of the deal.

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1993 Dec.: The firm acquires National Medical Enterprises Inc., gaining 31 inpatient rehabilitation centers and 12 outpatient units. HealthSouth now operates 171 outpatient facilities. 1993: Sales climb to $575 million as HealthSouth overtakes Continental Medical Systems as the leading rehabilitative services concern in the U.S. 1994 Sept.: Purchases ReLife Inc., a rehabilitation services company with 31 inpatient centers and 12 outpatient units. 1994: Sales exceed $1 billion for the first time. 1995 Feb.: After acquiring the inpatient rehabilitation hospital division of NovaCare Inc., HealthSouth operates 425 facilities in 33 states. The company diversifies into outpatient surgery services with the purchase of Surgical Health Corp. 1995 Oct.: The purchase of Caremark International's rehabilitation services operations for $127 million in cash secures for HealthSouth roughly 40% of the U.S. rehabilitation services market. Outpatient facilities in operation now total 440. 1995: HealthSouth buys Diagnostic Health Corp., an outpatient imaging business. After market value jumps 297% to $5.48 billion, Forbes lists HealthSouth as fourth in its ranking of the fastest growing companies in the U.S. 1996 Jan.: The firm operates 850 facilities in 45 states. 1996 Dec.: Acquisitions continue with the purchase of ReadiCare, Inc. HealthSouth is the only health care company in the U.S. to operate in all 50 states. 1997 Jan.: Stock splits two-for-one. 1997 Nov.: Shareholders and the Federal Trade Permission grant approval for HealthSouth's $1.7 billion buyout of Horizon/CMS Healthcare Corp. HealthSouth Rehabilitation Corp. is now the largest inpatient rehabilitation hospital operator in the U.S. The company then begins divesting the non-core assets of Horizon/CMS. 1998: HealthSouth acquires National Surgery Centers Inc. for $590 million, and pays $500 million to purchase 33 ambulatory surgery centers from Columbia/HCA Healthcare Corp. 1999: HealthSouth sells its medical staffing unit to an investment group, and acquires the American Rehability Services division of Mariner Post-Acute Network, Inc. HealthSouth abandons its plan to divide into two independent companies by spinning off its inpatient operations. 2000: HealthSouth forms an alliance with MedCenter Direct.com Inc., a start-up health care eprocurement firm.

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2001: GNC and HealthSouth agree to jointly create a line of vitamins and other nutritional supplements. 2002: Allegations of accounting fraud at HealthSouth surface. CEO Richard Scrushy is fired and replaced by finance chief William Owens, who is also later indicted. The firm reveals its intent to spin off its outpatient surgery centers as an independent public company. Losses for the year total $270.1 million. 2003: The U.S. Securities and Exchange Commission (SEC) accuses the firm of overstating earnings by roughly $2.5 billion between 1997 and 2002. A total of 11 former executives, including William Owens, are charged with filing false information with the SEC and conspiracy to commit fraud. Prosecutors also launch a criminal investigation of Scrushy 2003: Struggling with a massive debt load, HealthSouth nears bankruptcy. The firm is delisted from the New York Stock Exchange. 2004 Dec.: By now, a total of 17 indictments have been handed down by federal prosecutors. Scrushy is the only defendant to maintain his innocence. 2004: Losses for the year total $175 million on revenues of $3.7 billion. 2005 Jan.: The trial against Scrushy begins. He is charged with leading a $2.7 billion accounting fraud while at the helm of HealthSouth. 2005 May: After closing arguments in the Scrushy trial are completed, the jury begins deliberations 2005 June: Jurors are unable to reach a decision, and Scrushy is acquitted. 2005 Dec.: William Owens is sentenced to five years in prison. Scrushy files a breach of contract suit against HealthSouth for firing him before his contract was set to expire. 2006: The company announces it will divest its surgery centers, diagnostic division, and outpatient rehabilitation clinics and focus more on inpatient care. 2006: Former outpatient division controller Hannibal "Sonny" Crumpler is sentenced to eight years in federal prison for accounting fraud. 2006: A Jefferson County Circuit Court judge orders former CEO Richard M. Scrushy to repay more than $47.8 million in bonuses to the company. 2007: HealthSouth pursues plans to reduce debt by roughly $3.3 billion and become a post-acute healthcare services provider. 2007 Jan.: In a $245 million deal with Select Medical Corp., HealthSouth announces the sale of its outpatient rehabilitation division, which is comprised of 600 rehab centers in 35 states.

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2007 Mar.: The investment firm TPG agrees to buy the firm's surgery division for $945 million. 2007 May: Los Angeles-based The Gores Group snaps up the company's diagnostic arm in a $47.5 million deal. 2007 June: HealthSouth agrees to sell its 200,000-square-foot Alabama to Dallas, Tex.-based Trammell Crow. 2007 June: HealthSouth is named to the Russell 3000 Index. 2008 Apr.: In a new deal, Birmingham, Ala.-based Daniel Corp. acquires the company's campus for $43.5 million. 2008 Apr.: In a deal with The Mediplex/Cumberland Rehabilitation Limited Partnership, the company agrees to acquire The Rehabilitation Hospital of South Jersey in Vineland, N.J. 2008 Apr.: Approval for the construction of a Rehabilitation Hospital in Loudoun County, Va., is received. 2008 Aug.: In a deal with Columbia Medical Center of Arlington Subsidiary L.P., HealthSouth acquires a 30-bed inpatient rehabilitation unit at the Medical Center of Arlington in Texas. 2008 Sept.: Midland, Tex.-based Rehabcare Rehabilitation Hospital is acquired. 2008 Oct.: The company breaks ground on HealthSouth East Valley Rehabilitation Hospital in Mesa, Ariz.

Source: Mergent. (2009). HealthSouth: History. Retrieved September 22 from Mergent Online database.

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Appendix 4

HealthSouth’s Board of Directors

Jon F. Hanson, Chairman Mr. Hanson is the chairman and founder of The Hampshire Companies and has over 50 years of experience in the real estate industry. Mr. Hanson was named non-executive Chairman of the Board of HealthSouth, effective October 1, 2005. From 1994 through 2005, Mr. Hanson served as chairman of the National Football Foundation and College Hall of Fame, Inc. He now serves as chairman emeritus. Since 1991, Mr. Hanson has served as a director, and now serves as the lead director, of Prudential Financial Corp. He also served for 20 years as a director, and now serves as an honorary director, of the Hackensack University Medical Center. Mr. Hanson currently serves as chairman of the board of Pascack Community Bank and as a director of Yankee Global Enterprises.

Edward A. Blechschmidt Mr. Blechschmidt was chief executive officer for Novelis, Inc. from December 2006 to May 2007. He was chairman, chief executive officer and president of Gentiva Health Services, Inc., a leading provider of specialty pharmaceutical and home health care services, from March 2000 to June 2002. From March 1999 to March 2000, Mr. Blechschmidt served as chief executive officer and a director of Olsten Corporation. He served as president of Olsten Corporation from October 1998 to March 1999. He also served as president and chief executive officer of Siemens Nixdorf Americas and Siemens’ Pyramid Technology from July 1996 to October 1998. Prior to Siemens, he spent more than 20 years with Unisys Corp., including serving as its chief financial officer. Mr. Blechschmidt currently serves as a director of Lionbridge Technologies, Inc., Columbia Laboratories, Inc., Diamond Foods, Inc., and VWR International, LLC.

John W. Chidsey Mr. Chidsey is the chairman of the board of Burger King Holdings, Inc. and has served as chief executive officer and a member of its board of directors since April 2006. From September 2005 until April 2006, he served as president and chief financial officer. He served as president, North America, from June 2004 to September 2005, and as executive vice president, chief administrative and financial officer from March 2004 until June 2004. Prior to joining Burger King, Mr. Chidsey served as chairman and chief executive officer for two corporate divisions of Cendant Corporation: the Vehicle Services Division that included Avis Rent A Car, Budget Rent A Car Systems, PHH and Wright Express and the Financial Services Division that included Jackson Hewitt and various membership and insurance companies. Prior to joining Cendant, Mr. Chidsey served as the director of finance of Pepsi-Cola Eastern Europe and the chief financial officer of PepsiCo World Trading Co., Inc. Mr. Chidsey currently serves on the Board of Trustees for Davidson College in Davidson, North Carolina. Mr. Chidsey is a certified public accountant and a member of the Georgia Bar Association.

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Donald L. Correll Mr. Correll is president and chief executive officer of American Water Works Company, Inc., the largest and most geographically diversified provider of water services in North America. Between August 2003 and April 2006, Mr. Correll served as president and chief executive officer of Pennichuck Corporation, a publicly traded holding company which, through its subsidiaries, provides public water supply services, certain water related services, and certain real estate activities, including property development and management. From 1991 to 2001, Mr. Correll served as chairman, president and chief executive officer of United Water Resources, Inc., a water and wastewater utility company. Prior to 1991, Mr. Correll spent nearly 15 years with United Water, including serving as its chief financial officer. From 2001 to 2003, Mr. Correll served as an independent advisor to water service and investment firms on issues relating to marketing, acquisitions, and investments in the water services sector. Mr. Correll served as a director of Interchange Financial Services from 1994 to 2007 and currently serves as a director and Audit Committee member of New Jersey Resources Corporation. Mr. Correll currently serves as a member of the USEPA Environmental Financial Advisory Board.

Yvonne M. Curl Ms. Curl is a former vice president and chief marketing officer of Avaya, Inc., which position she held from October 2000 through April 2004. Before joining Avaya, Ms. Curl was employed by Xerox Corporation beginning in 1976, where she held a number of middle and senior management positions in sales, marketing and field operations, culminating with her appointment to corporate vice president. Ms. Curl currently serves as a director of Nationwide Mutual Insurance Company, Charming Shoppes, Inc., and Welch Allyn, Inc.

Charles M. Elson Mr. Elson holds the Edgar S. Woolard, Jr. Chair in Corporate Governance and has served as the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware since 2000. Mr. Elson has served on the National Association of Corporate Directors’ Commissions on Director Compensation, Executive Compensation and the Role of the Compensation Committee, Director Professionalism, CEO Succession, Audit Committees, Governance Committee, Strategic Planning, and Director Evaluation. He was a member of the National Association of Corporate Directors’ Best Practices Council on Coping with Fraud and Other Illegal Activity and he presently serves on that organization’s Advisory Council. In addition, Mr. Elson serves as vice chairman of the American Bar Association’s Committee on Corporate Governance and was a member of the American Bar Association’s Committee on Corporate Laws. Mr. Elson has been Of Counsel to the law firm of Holland & Knight LLP from 1995 to the present.

Jay Grinney Mr. Grinney was named president and chief executive officer on May 10, 2004. From June 1990 to May 2004, Mr. Grinney served in a number of senior

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management positions with HCA, Inc., or its predecessor companies, in particular, serving as president of HCA’s Eastern Group from May 1996 to May 2004, president of the Greater Houston Division from October 1993 to April 1996 and as chief operating officer of the Houston Region from November 1992 to September 1993. Before joining HCA, Mr. Grinney held several executive positions during a nine year career at the Methodist Hospital System in Houston, Texas.

Leo I. Higdon, Jr. Mr. Higdon has served as president of Connecticut College since July 1, 2006. He served as the president of the College of Charleston from October 2001 to June 2006. Between 1997 and 2001, Mr. Higdon served as president of Babson College in Wellesley, Massachusetts. He also served as dean of the Darden Graduate School of Business Administration at the University of Virginia. His financial experience includes a 20-year tenure at Salomon Brothers, where he became vice chairman and member of the executive committee, managing the Global Investment Banking Division. Mr. Higdon also serves as a director of Eaton Vance Corp.

John E. Maupin, Jr. Dr. Maupin is president and chief executive officer of the Morehouse School of Medicine located in Atlanta, Georgia, a position he has held since July 2006. Prior to joining Morehouse, Dr. Maupin held several other senior administrative positions including president and chief executive officer of Meharry Medical College from 1994 to 2006, executive vice president and chief operating officer of the Morehouse School of Medicine from 1989 to 1994, chief executive officer of Southside Healthcare, Inc. from 1987 to 1989, and Deputy Commissioner of Health of the Baltimore City Health Department from 1984 to 1987. Dr. Maupin currently serves as a director of LifePoint Hospitals, AIG Retirement Companies, and Regions Financial Corp.

L. Edward Shaw, Jr. Since March 1, 2006, Mr. Shaw has served as a senior managing director of Richard C. Breeden & Co., or affiliated companies engaged in investment management, strategic consulting, and governance matters. From September 2004 to January 2006, Mr. Shaw was Of Counsel with the international law firm of Gibson Dunn & Crutcher LLP. From January 1, 2004 to September 15, 2004, Mr. Shaw practiced law as a sole practitioner and served as Independent Counsel to the Board of Directors of the New York Stock Exchange on regulatory matters. From May 1999 to December 2003, Mr. Shaw served as general counsel of Aetna, Inc., one of the leading providers of health and group insurance benefits in the United States. Mr. Shaw also served as an executive vice president and member of the Office of the Chairman of Aetna from September 2000 to December 2003. Mr. Shaw also currently serves as a director of H & R Block, Inc., Mine Safety Appliances Co., and Covenant House, the nation's largest privately funded provider of crisis care to children.

Healthsouth Corp. (2009) Healthsouth Leadership: Board of Directors. Retrieved September 23, 2009 from healthsouth.com

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Appendix 5

Committee Structure Below is a summary of the committee structure and its members.

Audit

Committee Compensation

Committee

Compliance/ Quality of

Care Committee

Finance Committee

Nominating/ Corporate

Governance Committee

Number of Meetings in 2008: 6 6 4 9 5 Edward A. Blechschmidt Chair John W. Chidsey X Donald L. Correll X Chair Yvonne M. Curl X X Charles M. Elson Chair Jon F. Hanson X X Leo I. Higdon, Jr. Chair X John E. Maupin, Jr. Chair X L. Edward Shaw, Jr. X X

Source: Healthsouth Corp. (2009). Investors: Financials: Definitive Proxy Statement. Retrieved September 28, 2009 from http://investor.healthsouth.com/secfiling.cfm?filingID=1193125-09-71683

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Appendix 6

HealthSouth’s Executive Management Team Jay Grinney President and Chief Executive Officer Jay Grinney was named President and Chief Executive Officer of HealthSouth Corporation on May 3, 2004. Mr. Grinney has an extensive background in the healthcare industry. Prior to joining HealthSouth, he served as President of Hospital Corporation of America’s (HCA) Eastern Group, which employs more than 65,000 people and consists of 91 hospitals located in 10 states with annual net revenues of $10.5 billion. In his tenure with HCA, he also served as President of the Greater Houston Division and Chief Operating Officer of the Houston Region. Before joining HCA, Grinney held several executive positions during his nine-year career at the Methodist Hospital System in Houston. After receiving a bachelor’s degree from St. Olaf College in Northfield, Minn., Grinney earned both an M.B.A. and an M.H.A. from Washington University in St. Louis, Mo. John L. Workman Executive Vice President and Chief Financial Officer Mr. Workman was named Executive Vice President and Chief Financial Officer on Sept. 20, 2004. From 1998 to 2004, Mr. Workman served in various management and executive capacities with U.S. Can Company, including serving as its Chief Financial Officer from 1998 to 2002, as its Chief Operating Officer from 2002 to 2003, and as its Chief Executive Officer from 2003 to 2004. Prior to joining U.S. Can Company, Mr. Workman was employed by Montgomery Ward & Company, Inc. for 14 years, where he held several management and executive positions, including General Auditor, Chief Financial Officer and Chief Restructuring Officer. Mr. Workman began his career in public accounting, and was a partner with the public accounting firm KPMG. Mark J. Tarr Executive Vice President, Operations Mr. Tarr was named Executive Vice President of Operations on August 1, 2007, having served as President of our Inpatient Division since September of 2004. Mr. Tarr joined us in 1993, and has held various management positions with us, including serving as a Senior Vice President with responsibility for all inpatient operations in Texas, Louisiana, Arkansas, Oklahoma, and Kansas from 1997 to 2004, as Director of Operations of our 80-bed rehabilitation hospital in Nashville, Tenn. From 1994 to 1997, and as Chief Executive Officer/Administrator of our 70-bed rehabilitation hospital in Vero Beach from 1992 to 1994. John P. Whittington Executive Vice President, General Counsel and Secretary John P. Whittington was named Executive Vice President, General Counsel and Corporate Secretary on October 19, 2006, having served in the same position in an interim role since July 26, 2006. Prior to joining HealthSouth, Whittington was a partner of Bradley Arant Rose & White LLP, a regional law firm based in Birmingham, Ala. He has been a practicing attorney for almost 35 years, representing parties in complex business reorganization cases. Since 1990,

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Whittington has served as adjunct professor at Cumberland School of Law at Samford University and he is a member of the Birmingham Bar Association, the Alabama State Bar and co-chair of the ABA sub-committee on Financial Institution Litigation. He is a graduate of Guilford College and received his J.D. from Cumberland School of Law.

HealthSouth’s Senior Management Team

Mary Ann Arico Senior Vice President, Investor Relations and Corporate Communications Mary Ann was named HealthSouth’s Senior Vice President of Investor Relations and Communications in August 2008. Prior to joining HealthSouth, she served as Director of Investor Relations at Mirant Corporation (NYSE: MIR), an Atlanta-based energy company. A graduate of Pepperdine University with a bachelor’s degree in business management, Mary Ann previously served as Director of Investor Relations at Duke Energy from 2002-2006 and Eastman Chemical Company from 1998 until 2002. Prior to her investor relations position at Eastman Chemical, she held a variety of operations and staff positions beginning in 1983. Christine Bachrach Senior Vice President and Chief Compliance Officer Christine Bachrach is Senior Vice President and Chief Compliance Officer. Christine has been with HealthSouth’s Compliance Department since March 2004. Prior to joining HealthSouth, Christine was a principal at Navigant Consulting where she specialized in compliance program implementation, investigations and financial operations for all types of healthcare organizations. Prior to Navigant, Christine was with Arthur Andersen where she assisted clients in several areas including: government investigations, multi-district /commercial payer litigation support, and CIA IRO activities. Christine started her career as an internal consultant for Kaiser Permanente in Southern California and then as a managed care specialist for a large home healthcare company. Christine’s undergraduate degree is from Rensselaer Polytechnic Institute in industrial engineering and decision support. Christine received a master’s degree through a Graduate Fellowship in engineering and operations research from the University of California at Berkeley.

Randy Carpenter Senior Vice President, Chief Information Officer Randy Carpenter was named Senior Vice President and Chief Information Officer in May 2003. He joined HealthSouth in October of 2000 as Vice President and Associate Chief Information Officer. Randy has also served in other healthcare roles including Corporate Chief Information Officer for 18 acute care hospitals in Hampton, Va.; Chief Information Officer for the Air Force Academy Hospital in Colorado Springs, Colo.; and Chief Software Development Executive for the Medical Systems Program Management Office in Montgomery, Ala. He holds bachelor’s degrees in computer and information systems, as well as a master’s degree in personnel management, all from Troy State University. He also received a master’s degree in health informatics from the University of Alabama at Birmingham (UAB).

Dexanne B. Clohan, M.D. Senior Vice President, Chief Medical Officer

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Dexanne B. Clohan, M.D., a board-certified physical medicine and rehabilitation physician, was named HealthSouth’s Chief Medical Officer in April 2006. Prior to joining HealthSouth, Dexanne acted as a Medical Director for several well-known organizations including Aetna, Inc., Meridian Health Care Management, and Memorial Independent Practice Association. In addition, she practiced medicine with Rehabilitation Associates Medical Group and served as Director of Congressional Affairs for the American Medical Association. Dexanne received a bachelor’s degree in social sciences, magna cum laude, from the University of Colorado; a master’s degree in administration from The George Washington University; and a doctor of medicine from The George Washington University School of Medicine.

Edmund Fay Senior Vice President, Treasurer Ed Fay joined HealthSouth in 2008 as Senior Vice President and Treasurer. Ed has more than 15 years of experience in financial services specializing in corporate development, mergers and acquisitions, bank treasury management, fixed income and capital markets products. Prior to joining HealthSouth, he served in various positions at Regions Financial Corporation, including Executive Vice President of Strategic Planning/ Mergers and Acquisitions, Senior Vice President and Senior Treasury Officer. He also has held vice president positions at Wachovia Corporation for asset and liability management and at J.P. Morgan & Company, Inc. for global treasury and capital management. Ed received a bachelor’s degree in business administration from Fordham University and a master’s degree in business administration from New York University’s Leonard N. Stern School of Business. Jerry Gray President, West Region Jerry Gray is President of the West Region where he is responsible for the operations of 15 rehabilitation hospitals, one long-term acute care hospital, two transitional care units, four outpatient centers, and eight home health agencies encompassing seven states. He has also served as Director of Operations and Chief Executive Officer for HealthSouth Rehabilitation of Memphis. Jerry completed his undergraduate degree in nursing at the University of Oklahoma and earned a graduate degree in health administration from the University of Oklahoma Health Sciences Center. Justin Hunter Senior Vice President of Government and Regulatory Affairs Justin Hunter is Senior Vice President of Government and Regulatory Affairs. Justin is based in Washington, D.C., and represents the company before Congress and the Centers for Medicare and Medicaid Services (CMS). Prior to joining HealthSouth in 2004, Justin practiced law in the Washington, D.C., firm of Powers, Pyles, Sutter, and Verville, where he was engaged in a healthcare practice involving a range of legal, regulatory, and legislative issues. Justin previously worked on Capitol Hill for former Congressman Ed Bryant (R-TN), and has worked in and managed a number of grassroots and political campaigns. He also served as a legal clerk for Memphis, Tenn.-based Methodist HealthCare during law school.

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Justin earned a bachelor’s degree in political science in 1992 from Mississippi State University and a law degree from The University of Memphis in 2000. A native Missourian, Justin and his wife Caroline reside in Washington,D.C with their two daughters, Helena and Vivian.

David Klementz Senior Vice President and CFO Operations David joined HealthSouth as Senior Vice President and Chief Financial Officer of Operations in September of 2005. He has also served as Senior Vice President and Chief Financial Officer for Progress Rail, a $1.3 billion rail services business, where he was responsible for strategic and business planning, financial performance and leadership of the company’s financial, accounting and information technology functions. He has also held the position of Manager of Business Development and Planning for Progress Energy, Vice President of Finance and Accounting for Analytical Sciences, Inc., and Division Controller for the Oracle Corporation. A certified public accountant, David received his bachelor’s degree in finance from James Madison University, his certification in procurement and contract administration from the University of Virginia, and completed Duke University’s Fuqua School of Business’ Leadership Development Program. Cheryl Levy Senior Vice President, Human Resources Cheryl Levy joined HealthSouth in March of 2007. Prior to that, she was the National Director, Human Resources/Recruiting, for KPMG, where she advised clients in such diverse areas as recruitment, compensation, benefits, training, development and employee relations. Prior to joining KPMG she held senior executive human resources positions at several health services companies including Preferred Care, a large skilled nursing facility company in Texas. Cheryl is a member of the National Association and Birmingham Chapter of the Society of Human Resources Management. Cheryl manages compensation, benefits, training and development, employee and labor relations and recruiting.

Peter Mantegazza President, Northeast Region Peter recently was named President of the Northeast Region. In this role, he will oversee operations for HealthSouth hospitals in the states of Pennsylvania, Massachusetts, Maine, New Hampshire, New Jersey, Indiana and Maryland. Having worked in rehabilitation management for 30 years, Peter most recently served as Chief Executive Officer at Fairlawn Rehabilitation Hospital, a joint venture between HealthSouth and the University of Massachusetts. He previously served as Chief Operating Officer at Fairlawn. As an active leader in healthcare in the Northeast, Peter serves as the Chairman of the Governing Board of HealthSouth Rehabilitation Hospital of Western Massachusetts, as well as a Governing Board Member of HealthSouth New England Rehabilitation Hospital of Portland Maine and the Worcester State College Foundation. Peter holds a master’s degree in health care administration from Mt. Sinai School of Medicine, City University of New York. Terry Maxhimer President, Mid Atlantic Region

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Terry Maxhimer is President of the Midatlantic Region. He joined HealthSouth in 1993 as the Chief Executive Officer of the inpatient hospital in Kingsport, Tenn. Prior to his HealthSouth career, he was with Medicon, a start-up inpatient rehabilitation company in West Virginia, from 1990 until 1993. He worked within a Minnesota healthcare system, serving as Chief Executive Officer from 1985 until 1990. He also served as Chief Executive Officer for a Minnesota acute care hospital from 1982 until 1985 and as an Assistant Administrator from 1977 until 1982. Terry earned a bachelor’s degree in accounting and a master’s degree in healthcare administration from the University of Minnesota.

Jim McAndrews Senior Vice President, Tax Jim McAndrews was named Senior Vice President of Tax in September 2005. Prior to joining HealthSouth, Jim was a partner with Tatum CFO Partners and he also consulted with a major mortgage finance company. From 1985 to 2003, Jim was an officer at Freddie Mac in McLean, Va., serving as Vice President of Finance, Vice President of Corporate Tax, and Tax Counsel. Jim began his career with Arthur Andersen in Washington, D.C. He received a bachelor’s degree in accounting from Georgetown University, and a law degree and master’s degree of law in taxation from The Georgetown University Law Center. He is admitted to the bar in Pennsylvania and Virginia and is a certified public accountant.

Andy Price Senior Vice President, Operations Accounting Andy Price joined HealthSouth in June 2004 as Vice President of Operations Accounting. From 1996 through 2004, Andy served as Senior Vice President and Corporate Controller of Centennial HealthCare Corp, an Atlanta-based operator of skilled nursing centers and home health agencies. Prior to 1996, Andy was a Senior Audit Manager with BDO Seidman in Atlanta. Andy received a bachelor’s degree in accounting from Florida State University and is a certified public accountant. Stephen L. Royal Senior Vice President of Development Steve Royal joined HealthSouth as Senior Vice President of Development in 2008. Most recently, Steve served as President of the Hospital Corporation of America’s (HCA) East Florida Division, which is comprised of 13 hospitals, a regional laboratory, 10 ambulatory surgery centers and eight imaging centers. Prior to that time, he held positions as HCA’s Southwest Florida Market President and CEO at Southwest Florida Regional Medical Center and Gulf Coast Hospital in Ft. Myers, Fla. Steve earned a bachelor’s degree in business administration and a master’s degree in healthcare administration from Xavier University in his hometown of Cincinnati, Ohio. Steve is a Fellow with the American College of Healthcare Executives. He and his wife Lana have two children, Russin and Asher. Sandra K. Vollman Inspector General and Senior Vice President, Internal Audit and Controls Sandy Vollman is Inspector General and Senior Vice President, Internal Audit and Controls. She joined HealthSouth as Senior Vice President of Finance in March 2005. Prior to HealthSouth, she worked with U.S Can Corporation, an international manufacturer of steel packaging, from

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1999 to February 2005, where she served as Senior Vice President and Chief Financial Officer, Senior Vice President of Finance and Vice President of Business Development. Sandy also worked with Montgomery Ward and Co., from 1983 to 1999, where she held a number of positions, including Vice President and Corporate Controller. She began her career with Arthur Anderson &Co., progressing from staff Auditor to Audit Manager. Sandy graduated from Western Illinois University with a bachelor's degree in accounting and received her certified public accountant certification in Illinois.

Linda Wilder President, Southeast Region Linda Wilder is President of the Southeast Region. In this role, she oversees operations for 21 HealthSouth hospitals in Alabama, Louisiana, Florida and Puerto Rico. She has thirty years of clinical and administrative experience ranging from patient support to regional operations including development of new business lines in diversified organizations for university, not-for-profit and proprietary facilities. Linda joined HealthSouth in 1994 as an Assistant Administrator. She has also served as an Administrator, Regional Director of Operations, Area Manager, Regional Vice President and Vice President. Prior to joining HealthSouth, Linda was Administrative Director of Patient Services for ReLife Corporation. She holds a bachelor’s degree from the University of Alabama in Birmingham and a master’s degree in business administration.

Art Wilson Senior Vice President, Real Estate Art Wilson is the Senior Vice President of Real Estate. During his 34-year career, he spent 13 years auditing, specializing in the healthcare and insurance industries. He worked with Ernst and Ernst in Detroit and Louisville, Ky.; and conducted auditing for Coopers and Lybrand of Tampa, Fla., and Miami. Real estate executive positions included Vice President of Real Estate, Risk Management Insurance Contracts and CAPEX for OrNda Healthcare in Nashville, Tenn.; Senior Vice President of Real Estate for Mariner Post-Acute Network in Atlanta; and President of Paramount Real Estate in West Palm Beach, Fla. Art received a bachelor’s degree in business administration in 1971.

Rob Wisner Senior Vice President, Reimbursement Rob Wisner was named Senior Vice President of Reimbursement in November 2003. From 1992 to October 31, 2003, Rob served in various senior management positions with Integrated Health Services, a leading provider of post-acute care services in Baltimore. From 1988 to 1992, he served as a Senior Team Leader with Blue Cross Blue Shield of Maryland, a Medicare fiscal intermediary. Rob worked for the accounting firm, Clifton, Gunderson & Company, from 1986 to 1988. He holds a bachelor’s degree in accounting. During his career, he has also served on several healthcare association payment committees and boards.

Healthsouth Corp. (2009) Healthsouth Leadership: executive Management Team. Retrieved September 23, 2009 from healthsouth.com

37

Appendix 7

Stock Ownership of Directors

Name Share Beneficially Owned Percent of Class

Management Edward A. Blechschmidt 21,845 * John W. Chidsey 17,639 * Dexanne B. Clohan 25,500 * Donal L. Correll 14,096 * Yvonne M. Curl 13,833 * Charles M. Elson 19,856 * Jay Grinney 1,016,167 * Jon F. Hanson 57,843 * Leo I. Higdon, Jr. 14,266 * John E. Maupin, Jr. 15,898 * L. Edward Shaw, Jr. 28,718 * Mark J. Tarr 129,947 * John P. Whittington 84,164 * John L. Workman 200,538 *

All current directors and executive officers as a group (14 people) 1,660,310 1.87%

Source: HealthSouth. (2008). Annual Report. Retrieved September 15, 2009 from http://files.shareholder.com/downloads/HLSS/725741423x0x284925/FE1A05CA-A18A-4FE0-A0D9-706B83B052EA/87813_002_HeatlthSouth_BMK1.pdf

38

Appendix 8

Beneficial Owners

Name Share Beneficially Owned Percent of Class

Certain Beneficial Owners Morgan Stanley 6,979,797 7.93% Wellington Management 6,907,560 7.85% TIAA-CREF investment Management, LLP 6,865,216 7.80% Lord, Abbett & Co. LLC 5,938,447 6.75% T. Rowe Price Associates, Inc. 5,248,757 5.96% FMR LLC 5,043,944 5.72%

Barclays Global Investors, NA 4,544,045 5.16%

Source: HealthSouth. (2008). Annual Report. Retrieved September 15, 2009 from http://files.shareholder.com/downloads/HLSS/725741423x0x284925/FE1A05CA-A18A-4FE0-A0D9-706B83B052EA/87813_002_HeatlthSouth_BMK1.pdf

39

Appendix 9

Mission and Vision Statements

Our Mission To be the healthcare company of choice for patients, employees, physicians and shareholders by providing high quality care in the communities we serve. Our Values At HealthSouth, the cornerstone of our operations is the delivery of quality healthcare in the most appropriate, safe, patient-centered environment. We place primary value on: Quality We look to provide our patients with the finest clinicians, technology, facilities and programs available. We do this in a safe environment, responding to the needs of our diverse patient population, always working to achieve superior outcomes for each patient in a professional, caring, and cooperative manner. Integrity We consider trust and integrity to be essential in all our relationships. We are committed to operating our business honestly, with financial integrity, and in adherence with all federal, state and local regulatory obligations affecting the operation of our business. Cost-effectiveness We are committed to providing high quality healthcare in an innovative, yet cost-effective manner, managing our resources wisely, and responding proactively to the changes in our industry. We seek to develop relationships with a diverse array of business partners that share similar values and conduct business in an ethical manner. Respect We respect and embrace the diversity all of our employees bring to HealthSouth. We provide opportunities for our employees’ growth and development and encourage their participation in an open and inclusive culture. In addition, we respect our patients, physicians, shareholders, business partners and vendors, recognizing the valuable role each of them plays in our business and striving to communicate with them openly and honestly.

Healthsouth Corp. (2009) Mission Statement. Retrieved September 23, 2009 from healthsouth.com

40

Appendix 10

Alignment – (7 S’s)

Shared values:

The company seems focused on providing quality healthcare at affordable prices. This is

supported by HealthSouth’s vision, which touches on quality and efficient resource management

(HealthSouth, 2009).

Strategy:

HealthSouth currently operates in several different healthcare fields such as inpatient

rehabilitation hospitals, long term care hospitals, and outpatient rehabilitation satellites. (

Mergent

Online) By having each hospital or rehabilitation center operating on its own, it allows the

individual company to make the best decisions when facing a problem.

Style/Staff:

The physicians at HealthSouth Corp. strive to provide the latest technologies in patient

care. The company itself emphasizes quality and efficiency, which provides a better bottom line

for all concerned parties. Having been plagued in the past with executive management scandals,

HealthSouth has completed a board transition plan to provide board members who are

independent of the company and have varied fields of expertise. They have implemented a new

culture of transparency and accountability in order to bring confidence back in their

shareholders.

(HealthSouth, 2009).

Skills:

41

HealthSouth focuses its skills on the rehabilitation of patients. It offers many different

lines of services from inpatient and outpatient rehabilitative services, long-term acute care

hospitals and home health (HealthSouth, 2007). “HealthSouth's [long-term care hospitals] LTCH

offer the clinical, technical and professional resources necessary to provide individualized care

that promotes progress toward recovery. Our specialized, multidisciplinary team approach to

patient care focuses on the unique needs of each patient. All patients receive 24-hour nursing and

respiratory care, as well as care by their attending physicians and specialists, as needed. Patients

also receive physical, occupational and speech therapies, as appropriate (HealthSouth, 2007).”

With multiple subsidiaries, HealthSouth “operates 93 inpatient rehabilitation hospitals

(including 3 joint venture hospitals), six freestanding long-term acute care hospitals, 49

outpatient rehabilitation satellites (operated by its hospitals), and 25 licensed, hospital-based

home health agencies

Structure:

(Mergent, 2009).” This allows HealthSouth to operate in 26 states, as well

as Puerto Rico. Their inpatient rehabilitation clinics and long term care hospitals have roughly

6,500 licensed beds, with their main hospitals located in Texas, Pennsylvania, Florida,

Tennessee, and Alabama. “In addition to HealthSouth hospitals and outpatient satellites, the

company manages eight inpatient rehabilitation units and one outpatient satellite through

management contracts (Mergent, 2009).” After the exposure of Richard Scrushy, the company

developed an integrity agreement in 2004 to make sure that the integrity of HealthSouth would

not be compromised (HealthSouth, 2004).

Systems:

42

HealthSouth focuses daily on the patients that they have in their rehabilitation and long

term care hospitals. They have multiple systems in place during the rehabilitation of their

patients. “Internal case managers monitor each patient's progress and provide documentation of

patient status, achievement of goals, discharge planning, and functional outcomes” (Mergent,

2009). “These facilities provide the level of care necessary to manage a patient's care after an

injury or illness and enhance their quality of life upon discharge from a traditional acute care

setting. HealthSouth's inpatient rehabilitation hospitals provide a smooth transition from

inpatient rehabilitation to outpatient therapy (HealthSouth, 2007).”

43

Appendix 11

Healthcare Industry Rates

Source: Standard and Poor's. (2009). HealthSouth. Standard & Poor's Industry surveys, healthcare facilities. Retrieved September 15, 2009 from http://www.netadvantage.standardandpoors.com/

44

Appendix 12

HealthSouth Corp. Subsidiaries

Advantage Health Harmarville Rehabilitation Corporation Advantage Health, LLC AnMed Enterprises, Inc./HealthSouth, L.L.C. BJC / HEALTHSOUTH Rehabilitation Center, LLC Baton Rouge Rehab, Inc. Beaumont Rehab Associates Limited Partnership Central Arkansas Rehabilitation Associates, L.P. CMS Development and Management Company, Inc. CMS Elizabethtown, Inc. CMS Fayetteville Rehabilitation, Inc. CMS Jonesboro Rehabilitation, Inc. CMS Rehab of WF, L.P. Central Louisiana Rehab Associates LP Collin County Rehab Associates Limited Partnership Continental Medical of Kentucky, Inc. Continental Medical Systems, Inc. Continental Rehabilitation Hospital of Arizona, Inc. DHC Subsidiary Dissolution Corporation Former Surgery Holdings, LLC Gamma Knife Center at Barnes-Jewish Hospital LLC HCA Wesley Rehabilitation Hospital, Inc. HealthSouth /GHS, LLC HealthSouth Aviation, LLC HEALTHSOUTH LTAC of Sarasota, Inc. HealthSouth Medical Center, Inc. HealthSouth Metro West Hospital, Inc. HEALTHSOUTH OF HENDERSON, INC. HealthSouth of Mechanicsburg, Inc. HealthSouth of Phenix City, Inc. HEALTHSOUTH OF SEA PINES LIMITED PARTNERSHIP HEALTHSOUTH OF YORK, INC. HEALTHSOUTH Rehabilitation Center, Inc.

HealthSouth Rehabilitation Hospital of Arlington Limited Partnership HealthSouth Rehabilitation Hospital of South Jersey, LLC HEALTHSOUTH Specialty Hospital, Inc. HealthSouth Specialty Hospital of Union, Inc. HEALTHSOUTH Sub-Acute Center of Mechanicsburg, Inc.

45

HEALTHSOUTH Surgery Center of Aventura, L.P.

HEALTHSOUTH Tri-State Regional Rehabilitation Hospital Limited Partnership HEALTHSOUTH of Altoona, Inc. HEALTHSOUTH of Austin, Inc. HEALTHSOUTH of Charleston, Inc. HEALTHSOUTH of Dothan, Inc. HealthSouth of East Tennessee, LLC HEALTHSOUTH of Erie, Inc. HEALTHSOUTH of Fort Smith, LLC HEALTHSOUTH of Houston, Inc. HEALTHSOUTH of Montgomery, Inc. HEALTHSOUTH of Pittsburgh, Inc. HEALTHSOUTH of Reading, Inc. HEALTHSOUTH of San Antonio, Inc. HEALTHSOUTH of Sewickley, Inc. HEALTHSOUTH of South Carolina, Inc. HEALTHSOUTH of Spring Hill, Inc. HEALTHSOUTH of Tallahassee Limited Partnership HEALTHSOUTH of Texarkana, Inc. HEALTHSOUTH of Texas, Inc. HEALTHSOUTH of Toms River, Inc. HEALTHSOUTH of Utah, Inc. HEALTHSOUTH of Yuma, Inc. HEALTHSOUTH/Deaconess, L.L.C.

HEALTHSOUTH/Methodist Rehabilitation Hospital Limited Partnership HealthSouth of Ft. Lauderdale Limited Partnership HealthSouth of Midland, Inc. HealthSouth of Nittany Valley, Inc. HealthSouth of Treasure Coast, Inc.

HealthSouth Bakersfield Rehabilitation Hospital Limited Partnership

HealthSouth Meridian Point Rehabilitation Hospital Limited Partnership

HealthSouth Northern Kentucky Rehabilitation Hospital Limited Partnership HealthSouth Rehabilitation Center of New Hampshire, Ltd.

HealthSouth Rehabilitation Hospital of Arlington Limited Partnership HealthSouth Rehabilitation Hospital of New Mexico, Ltd. HealthSouth Rehabilitation Hospital of Manati, Inc. HealthSouth Rehabilitation Hospital of Odessa, Inc.

46

HealthSouth Surgery Center of Baton Rouge, Inc. HealthSouth Surgery Center of Baton Rouge, Inc.

HealthSouth Valley of the Sun Rehabilitation Hospital Limited Partnership HealthSouth of Largo Limited Partnership HealthSouth of Sarasota Limited HealthSouth Provo Surgical Center Limited Partnership HealthSouth S.C. of Charlotte, Inc. Houston Rehabilitation Associates Joliet Surgery Center Limited Partnership K.C. Rehabilitation Hospital, Inc. Kansas Rehabilitation Hospital, Inc. Kokomo Rehabilitation Hospital, Inc. Kokomo Rehabilitation Hospital, L.P. Lakeshore System Services of Florida, Inc. Lakeview Rehabilitation Group Partners Nevada Rehabilitation Hospital, Inc. New England Home Health Care, Inc. New England Rehabilitation Management Co, Inc.

New England Rehabilitation Services of Central Massachusetts, Inc. NIA of Indian River, Inc. North County Surgery Center, L.P. North Louisiana Rehabilitation Center, Inc. Northwest Arkansas Rehabilitation Assoc. Northwest Surgicare, Ltd. NSC Connecticut, Inc. Piedmont HealthSouth Rehabilitation, LLC Plano Health Associates LP Premier Ambulatory Surgery of Forest Park, Inc. Premier Ambulatory Surgery of Tri-Valley, Inc. Rehab Concepts Corporation Rehabilitation Hospital Corporation Of America Rehabilitation Hospital of Colorado Springs, Inc. Rehabilitation Hospital of Fredericksburg, Inc. Rehabilitation Hospital of Nevada - Las Vegas, Inc. Rehabilitation Hospital of Nevada - Las Vegas, L.P. Rehabilitation Hospital of Petersburg, Inc. Rehabilitation Hospital of Phenix City, LLC Rehabilitation Institute Of Western Massachusetts, Inc. Romano Rehabilitation Hospital, Inc. Rusk Rehabilitation Center, LLC Sarasota LTAC Properties, LLC

47

Saint Barnabas / HEALTHSOUTH Rehab Center LLC San Angelo Imaging Affiliates, Inc. Sherwood Rehabilitation Hospital, Inc. Southeast Texas Rehabilitation Hospital, Inc. Southern Arizona Regional Rehabilitation Hospital, L.P. Surgicare of Joliet, Inc. Tarrant County Rehabilitation Hospital, Inc. Tyler Rehab Associates LP Tyler Rehabilitation Hospital, Inc. University of Virginia/HEALTHSOUTH, L.L.C. Van Matre Rehabilitation Center LLC Vanderbilt Stallworth Rehabilitation Hospital, L.P. West Virginia Rehabilitation Hospital, Inc. Western Medical Rehabilitation Associates, L.P. Yuma Rehabilitation Hospital, LLC

Source: Mergent (2005). HealthSouth Corp.: Subsidiaries. Retrieved September 23, 2009 from Mergent Online database.

48

Appendix 13

PESTLE Analysis

Source of Force

Description & Source of Force

Potential Specific Impact

Timing of Impact (within (6 mos., 1 yr., 2 yrs.?)

Direction and Intensity of Impact (positive, negative, Increase, unchanged, decrease, etc.)

Relative Importance to Focal Firm

Political The new Healthcare Bill being debated in Congress

Significant Government control over healthcare. Potential loss of profits to meet new regulations.

6 months to a year

Negative Impact and will change the industry drastically

It would be detrimental to the firm because it would lower revenues without being able to cut costs

Economic Economic Recession in the U.S.

Decrease in employer health coverage. Increase in uninsured patients.

6 – 18 months Negative Impact but will increase when economy bounces back

It will initially hurt revenues but only in the near future because economy will eventually turn around

Social Public demand for affordable healthcare

This represents a decline in the industry because its unaffordable

6 months to a year

Negative Impact and will cause firms to lower prices

This hurts the firms’ revenues because it has to lower its prices to meet the public demand for affordable healthcare

Technological Technology advances in new tools and procedures to keep up with new medical problems

More effective treatments for patients.

Immediately Positive Impact and allows firms to stay ahead of the curve.

New technologies increase opportunities for growth in the industry

Legal Malpractice laws to change

Could cause increase in industry because ho can lower costs.

1 – 2 years Positive Impact and allow for increase in revenues since the industry can potentially lower costs

Could allow the firm to cut costs across the board and in turn lower prices

Environmental Not found to be a significant driving force

49

Appendix 14

Various Company Profiles compiled from: Mergent (2009). Healthsouth Corp.: Competitors. Retrieved September 22, 2009 from Mergent Online Database.

Strategic Group Map

Deg

ree

of S

ervi

ce O

ffere

d

Full

HealthSouth

Tenet Healthcare Corp.

US Physical Therapy

Universal Health Services, Inc.

UCI Medical Affiliates

Health Mgmt Associates

Rehab Care Group, Inc.

Hanger Orthopedic

Group

Lim

ited

Paincare Holdings

Sun Healthcare Group, Inc.

Psychiatric Solutions/ LCA Vision

Integra/ R.F.Management

Alliance

Local Regional National Global

Geographic Coverage

50

Appendix 15

U.S. Physical Therapy, Inc. Financials

U.S. Physical Therapy, Inc.: 5 Year Income Statement

As Reported Annual Income Statement 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 Currency

USD USD USD USD USD

Auditor Status

Not

Qualified Not

Qualified Not

Qualified Not

Qualified Not

Qualified

Consolidated

Yes Yes Yes Yes Yes Scale

Thousands Thousands Thousands Thousands Thousands

Net patient revenues 182,939 149,437 133,376 130,030 116,295 Management contract revenues - 1,945 1,784 2,022 1,968 Other revenues - 304 34 70 45

Management contract revenues & other revenues 4,747 - - - -

Net revenues 187,686 151,686 135,194 132,122 118,308 Salaries & related costs 100,269 79,191 69,340 67,567 59,053

Rent, clinic supplies, contract labor & other clinic operating costs 39,814 32,581 27,896 27,197 24,929

Provision for doubtful accounts 3,073 2,553 2,115 1,446 1,293 Closure costs 432 - - - - Total clinic operating costs 143,588 114,325 99,351 96,210 85,275 Corporate office costs 20,222 17,326 17,247 16,425 16,802 Closure costs - - - 514 690

Gain (loss) on sale or disposal of fixed assets - - - (90) 452

Operating income (loss) from continuing operations 23,876 20,035 18,596 18,883 15,993

Interest & investment income - 273 - - - Interest, investment & other income 260 - - - - Interest expense 542 301 - - -

Earnings (loss) in unconsolidated joint venture - - (31) (34) -

Minority interests in subsidiary limited partnerships 7,085 5,727 5,647 4,908 5,362

Interest income, net - - 332 361 146

Income (loss) before income taxes from continuing operations 16,509 14,280 13,250 14,302 10,777

Current federal income taxes 3,693 4,298 4,231 4,578 3,360 Current state income taxes 890 826 885 889 593 Total current income taxes 4,583 5,124 5,116 5,467 3,953 Deferred federal income taxes 1,592 261 (26) 54 140 Deferred state income taxes 330 80 (33) (10) 6 Total deferred income taxes 1,922 341 (59) 44 146 Provision for income taxes 6,505 5,465 5,057 5,511 4,099

51

Net income from continuing operations 10,004 8,815 8,193 - - Income (loss) from continuing operations - (121) (2,985) - -

Tax benefit (expense) from discontinued operations - 44 1,088 - -

Income (loss) from discontinued operations - (77) (1,897) - -

Net income (loss) 10,004 8,738 6,296 8,791 6,678

Weighted average shares outstanding - basic 11,907 11,643 11,690 11,923 11,916

Weighted average shares outstanding - diluted 12,055 11,718 11,731 12,075 12,431

Year end shares outstanding 12,037.316 11,838.455 11,467.112 11,835.382 12,116.054

Income (loss) per share - continuing operations - basic 0.84 0.76 0.7 - -

Income (loss) per share - discontinued operations - basic - (0.01) (0.16) - -

Net income (loss) per share - basic 0.84 0.75 0.54 0.74 0.56

Income (loss) per share - continuing operations - diluted 0.83 0.75 0.7 - -

Income (loss) per share - discontinued operations - diluted - - (0.16) - -

Net income (loss) per share - diluted 0.83 0.75 0.54 0.73 0.54 Number of full time employees 1,683 - 1,210 1,269 1,138 Number of part time employees 366 - 296 310 211 Total number of employees 2,049 1,957 1,506 1,579 1,349 Number of common stockholders 53 58 34 36 37

52

USPH 3 Year Balance Sheet

USPH Current Position 2006 2007 2008

(Millions)

Cash Assets 11 8 10.1

Receivables 22.3 26.7 26.7

Other 2.7 1.3 1.9

36 Current Assets 36 38.7

Accounts Payable 1.6 1.6 1.5

Debt Due 7 9 11.7

Other 6 0.8 1.4

9.2 Current Liabilities 11.4 14.6

71.5 Equity 96.3 118.2

53

Ratios

Ratio Analysis for USPH 2006 2007 2008

ROA 9.13 10.42 9.3 ROE 11.55 13.99 13.21 GPM 0.2651 0.2463 0.235 NPM 0.0466 0.0576 0.0533

Quick Ratio 3.68 3.03 2.52 Total Debt Ratio 0.01 0.013 0.17

Current Ratio 3.92 3.15 2.65 Cash/Equivalents TA 10.22 15.62 20.69 Total Asset Turnover 1.96 1.81 1.75

ROI 33.73 29.79 27.44 EBITDA Margin 17.08 16.68 13.03

Calculated Tax Rate 26.72 27.32 27.57 Revenue per Employee 89,770 77,509 91,349

ROA % (Net) 12.43

Compare to Healthsouth

ROE % (Net) AvgEqty<0 ROI % (Operating) 29.88 EBITDA Margin % 22.92 Calculated Tax Rate % (38.12) Revenue per Employee 83,517 The ratio analysis for USPH shows that they have experienced little growth while both EBITDA and ROI have been declining throughout the past several years while HealthSouth has continued to outperform them in these areas. Also, USPH’s results from ROA and ROE have both varied over this time period. UPSH has continued to outperform HealthSouth in ROE due to the fact that HealthSouth has reported negative shareholder equity for the past several years. Although performance has varied over several years, the financial position of USPH shows them to be a close competitor and a possible threat in the future.

54

Appendix 16

Tenet Healthcare Corp. Financials

Tenet Healthcare Corp.: 5 Year Income Statement

As Reported Annual Income Statement 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 Currency

USD USD USD USD USD

Auditor Status

Not

Qualified Not

Qualified Not

Qualified Not

Qualified Not

Qualified

Consolidated

Yes Yes Yes Yes Yes Scale

Millions Millions Millions Millions Millions

Net operating revenues 8,663 8,852 8,701 9,614 9,919 Salaries, wages & benefits 3,816 3,964 3,883 4,388 4,325 Supplies 1,528 1,573 1,587 1,774 1,724 Provision for doubtful accounts 632 567 530 698 1,205 Other operating expenses 1,955 2,047 2,014 2,183 2,231 Depreciation - 330 313 352 368 Amortization - 32 29 30 20 Depreciation & amortization 373 - - - - Impairment of long-lived assets & goodwill, net - - 376 255 1,236

Impairment of long-lived assets & goodwill & restructuring charges, net of insurance recoveries

18 60 - - -

Restructuring charges - - 4 11 36 Hurricane insurance recoveries, net of costs - (3) (14) - - Loss from hurricanes & related costs - - - 55 -

Litigation & investigation costs, net of insurance recoveries 41 13 766 212 74

Loss from early extinguishment of debt - - - 15 13 Operating income (loss) 300 269 (787) (359) (1,313) Interest expense 418 419 409 405 333 Investment earnings 22 47 62 59 20 Minority interests 6 4 4 7 (3) Net gains on sale of investments 139 - - - -

Net gain (loss) on disposal of facilities & long-term investment - - 5 - -

Net gains on sales of facilities & long-term investment & subsidiary common stock - - - 4 10

Income (loss) from continuing operations before income taxes 37 (107) (1,133) (708) (1,613)

Current federal income tax expense (benefit) (1) (75) (156) (29) (116) Current state income tax expense (benefit) (9) 13 4 4 7 Total current income tax expense (benefit) (10) (62) (152) (25) (109) Deferred federal income tax expense (benefit) (1) 20 (104) (28) 274 Deferred state income tax expense (benefit) (14) (16) (6) (34) 19

55

Total deferred income tax expense (benefit) (15) 4 (110) (62) 293 Income tax expense (benefit) (25) (58) (262) (87) 184

Income (loss) from continuing operations before discontinued operations & cumulative effect of change in accounting principle

62 (49) (871) (621) (1,797)

Discontinued operations-Income (loss) from operations 6 (23) (58) (47) (293)

Discontinued operations-Impairment of long-lived asset & goodwill & restructing charges, net

(93) (29) (99) (56) (439)

Discontinued operations-Hurricane insurance recoveries, net of costs - - 186 - -

Discontinued operations-Litigation settlements, net of insurance recoveries 39 - 35 - (395)

Discontinued operations-Net gains on sales of asset group - - 15 19 71

Discontinued operations-Net gains (losses) on sales of facilities 6 (8) - - -

Discontinued operations-Income tax benefit (expense) 5 20 (13) (3) 213

Income (loss) from discontinued operations (37) (40) 66 (87) (843)

Income (loss) before cumulative effect of changes in accounting principle 25 (89) (805) - -

Cumulative effect of change in accounting principle, net of tax - - 2 (16) -

Net income (loss) 25 (89) (803) (724) (2,640) Weighted average shares outstanding-basic 476.349 473.405 470.847 468.898 466.226 Weighted average shares outstanding-diluted 478.606 473.405 470.847 468.898 466.226 Year end shares outstanding 477.173 474.379 471.585 469.71 467.236

Earnings (loss) per share-continuing operations-basic 0.13 (0.1) (1.85) (1.32) (3.85)

Earnings (loss) per share-discontinued operations-basic (0.08) 0.09 0.14 (0.19) (1.81)

Earnings (loss) per share-accounting change-basic - - - (0.03) -

Net earnings (loss) per share-basic 0.05 (0.19) (1.71) (1.54) (5.66)

Earnings (loss) per share-continuing operations-diluted 0.13 (0.1) (1.85) (1.32) (3.85)

Earnings (loss) per share-discontinued operations-diluted (0.08) (0.09) 0.14 (0.19) (1.81)

Earnings (loss) per share-accounting change-diluted - - - (0.03) -

Net earnings (loss) per share-diluted 0.05 (0.19) (1.71) (1.54) (5.66) Total number of employees 60,297 63,264 68,952 73,434 91,633

Number of common stockholders 9,211 9,262 8,892 9,125 9,296

56

Tenet Healthcare Corp.: 3 Year Balance Sheet

Current position (Millions) 2006 2007 2008

Cash Assets 784 572 507

Receivables 1,556 1,549 1,543

Inventory (LIFO) 184 183 161

Other 501 256 498

Current Assets 3,025 2,560 2,709

Accounts Payable 775 780 686

Debt Due 22 1 2

Other 1128 1267 1261

Current Liabilities 1,925 2,048 1,949

Equity 264 54 103

57

Ratios

ROA % (Net) 12.43

Compared to HealthSouth

ROE % (Net) AvgEqty<0 ROI % (Operating) 29.88 EBITDA Margin % 22.92 Calculated Tax Rate % (38.12) Revenue per Employee 83,517

Ratio Analysis for Tenet 2006 2007 2008 ROA (8.75) (1.05) 0.3 ROE (124.98) (55.97) 31.76 GPM (9.04) 3.04 3.46 NPM (0.09) (0.01) 0.002 Quick Ratio 1.22 1.04 1.05 Total Debt to Equity Ratio 18.11 88.37 46.41 Current Ratio 1.57 1.25 1.39 Cash/ Equivalents TA 8.07 13.06 16.01 Total Asset Turnover 0.95 1.05 1.04 ROI (14.48) 5.45 6.16 EBITDA Margin (4.68) 7.3 9.63 Calculated Tax Rate EBT<0 EBT<0 (58.14) Revenue per Employee 126,189 139,922 143,280

58

Appendix 17

Competitor Overview in thousands:

Revenues Gross Margin

Net Income

EBITDA Total Assets Total Liabilities

PE Ratio

Market Cap

Employees Daily Price

HealthSouth Corp.

1,842,000.00 1,733.50 252,400 422,200 1,998,200 2,780,200 6.73 1,427,000 22,000 15.65

U.S. Physical Therapy

187,868.00 44,100 1,000 24,450 118,300 36,640 17.68 192,000 2,049 16.62

Tenet Healthcare Corporation

8,663,000.00 3,319 25,000 834,000 8,174,000 8,071,000 19.37 2,516,000 60,297 5.23

59

Appendix 18

Industry Attractiveness Summary Matrix

Rating Scale: 1 = Weak; 10 = Very Strong

Attractiveness Measure Importance Weight Rating/Score

Industry growth potential .2 9/ 1.8 Intensity of competition .15 7/1.05 Effect of driving forces on profitability

.2 9/ .18 Regulatory issues .1 5/ .5 Buyer demand .1 6/ .6 Industry overcapacity .05 3/ .15

Industry profitability .2 9/1.8

Sum of importance weights 1.00 Weighted overall attractiveness rating

6.08

60

Appendix 19

Opportunities and Threat Summary Matrix

OT Specific Item Analytical Source

Opportunities

Increase in technology Key Success Factors

National company /have room for expansion

Key Success Factors

International Growth / expansion into foreign markets

Key Success Factors

Threats

Proposed Healthcare Reform PLAC (Challenges)

Lack of Qualified Nurses PLAC (Challenges)

Current Recession Driving Forces(Economic)

New Entrants in Industry Five Forces

61

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