Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: jeffbas who wrote (8208)	9/11/1999 10:58:00 AM
From: Michael Burry	Read Replies (1) \| Respond to of 78817

Jeffrey, I agree completely. HealthSouth is the low cost operator if things come to a head, but I wonder at the size of the restructuring charge given what's covered too. I believe this was really an attempt to lay out all the bad news in one swoop, and the charge will cover a bunch of other things too. Their AR is way up (at 1/4 of annual revs), but this is no manufacturing firm stuffing the channel with unneeded product. HealthSouth provided needed, documented services under contract with major insurers, and those major insurers are simply not paying. Smaller doctor groups are going bankrupt because of this widespread refusal of insurers to pay despite contractualy a, and I believe this situation will break soon. There has to be some relief from somewhere. That HealthSouth is actually producing free cash flow of about $640 million after cap ex, taxes, and interest coverage and despite the increasing AR is tremendous. It's now going for about 7.5 times that very free cash flow. I think it's important to focus too on the CEO's claim that Medicare will become more profitable under PPS. For years, rehab prospered as one of the only specialties free from the PPS bugaboo. They (and pediatrics) got a cost-plus-profit-based reimbursement because nobody could figure out a good way to measure the average cost of different illnesses from a diagnosis-related perspective. For instance, Medicare would pay only X dollars for a broken femur repair, and it was up to the hospital to provide the services for under X dollars. This occurred via TEFRA of 1982 and the Social Security amendments of 1983 which established so-called DRG's, or Diagnosis-Related Groups. After the femur was repaired (or stroke occurred, or head trauma occurred, etc), the patient would be shipped to a rehab facility soon in order to get the cost-plus-a-profit-based reimbursement and minimize the days under the prospective payment plan. The sooner one could get the patient out of the acute facility and into a rehab facility, the more money one could make. Rehab facilities flourished from the mid-80's to the early 90s as many acute care facilities built their own rehab adjuncts in order to take advantage of this reimbursement loophole. 1987 was the first time the DHHS mandated a PPS for rehab. But the deadlines passed without action because people were having a hard time developing a measuring tool (most efforts centered on scoring the physical ability of a rehab patient and paying a certain amount prospectively depending on the numeric score, but there have been problems converting phsyical qualities into numbers in a reliable fashion). While working at the Rehabilitation Institute of Chicago during the summer of 1994, I wrote a paper entitled "The Coming Revolution in Rehabilitation Medicine," which detailed the financial dynamics of the rehab industry for the first time. I'll see if it's still around, and post it on my web site when I get a chance. Health care is a very very complex business. How the Medicare PPS will affect rehab is uncertain, but due to the measurement difficulties associated with rehab, it is possible it could turn into a decent profit-center again. Whatever the situation, I am confident HealthSouth will be the one that can best take advantage of it. Rehab is absolutely one of the best things to hit medicine in the last 2 decades. If you want a pure play on the aging of the population, this is it. And HealthSouth is the biggest, but by no means dominant. There is still room for growth, both internal and external. I took a smallish position before the crash, and quickly doubled the next morning when I signed on. If I had been up when it opened in the 4's, I might have tripled up. This is as contrarian as contrarian gets. Mike