WEBVTT 00:00:00.000 --> 00:00:02.779 Picture this, if you will. The year is 1986. 00:00:03.439 --> 00:00:06.759 We're in New York City, the absolute epicenter 00:00:06.759 --> 00:00:09.500 of the financial universe. The go -go 80s. Exactly. 00:00:09.820 --> 00:00:12.220 And we're inside one of those boardrooms you 00:00:12.220 --> 00:00:14.349 always see in the movies. You know, the kind 00:00:14.349 --> 00:00:18.429 dark wood paneled walls, high ceilings, probably 00:00:18.429 --> 00:00:21.350 a view of the skyline that costs more than most 00:00:21.350 --> 00:00:23.870 people make in a lifetime. Right. It smells like 00:00:23.870 --> 00:00:27.050 old money and serious decisions. And it's an 00:00:27.050 --> 00:00:31.129 investor roadshow. So the room is just jam packed 00:00:31.129 --> 00:00:33.549 with investment bankers. Masters of the universe. 00:00:33.789 --> 00:00:36.409 That's the crowd. And if you know anything about 00:00:36.409 --> 00:00:38.710 investment bankers, especially in the mid 80s, 00:00:38.710 --> 00:00:41.869 you know they are not. an emotional bunch. They 00:00:41.869 --> 00:00:43.950 are stoic. They are skeptical. You've seen it 00:00:43.950 --> 00:00:46.049 all. Or they think they have. Right. They're 00:00:46.049 --> 00:00:47.929 there to look at the numbers, to find the holes 00:00:47.929 --> 00:00:50.030 in your logic, to basically tear your business 00:00:50.030 --> 00:00:52.009 model apart and then move on to the next deal. 00:00:52.130 --> 00:00:54.770 They don't do feelings. No. Applause is definitely 00:00:54.770 --> 00:00:57.030 not part of the protocol. It's usually a very 00:00:57.030 --> 00:01:00.270 dry, grilling kind of affair. You present, you 00:01:00.270 --> 00:01:02.750 get interrogated, and you leave sweating. But 00:01:02.750 --> 00:01:04.909 not on this day. At the front of the room is 00:01:04.909 --> 00:01:07.930 a man named Richard Scrushy. He's young, he's 00:01:07.930 --> 00:01:10.209 full of energy, and he's pitching a health care 00:01:10.209 --> 00:01:13.650 company. He talks for about an hour. He's weaving 00:01:13.650 --> 00:01:15.969 this narrative, not just about a company, but 00:01:15.969 --> 00:01:18.409 about the future of medicine in America. So he's 00:01:18.409 --> 00:01:21.209 a showman. A complete showman. And when he finishes 00:01:21.209 --> 00:01:24.010 his speech, he steps back from the podium and 00:01:24.010 --> 00:01:28.349 something just unprecedented happens. These stoic... 00:01:28.590 --> 00:01:31.109 Stone faced bankers. They stand up where they 00:01:31.109 --> 00:01:33.450 stood up. They stand up and they give him a standing 00:01:33.450 --> 00:01:36.370 ovation at a roadshow. That is I mean, that is 00:01:36.370 --> 00:01:38.189 almost unheard of. I've been to my share of these. 00:01:38.290 --> 00:01:40.609 And the best you can hope for is a polite nod 00:01:40.609 --> 00:01:43.290 and maybe maybe a follow up meeting. I mean. 00:01:43.719 --> 00:01:45.959 Bankers don't clap, let alone give a standing 00:01:45.959 --> 00:01:48.500 ovation. It just doesn't happen. No. The company's 00:01:48.500 --> 00:01:51.260 CFO at the time, a guy named Aaron Beam, said 00:01:51.260 --> 00:01:53.280 that one of the bankers came up to him afterward 00:01:53.280 --> 00:01:55.760 and told him he had literally never seen a reaction 00:01:55.760 --> 00:01:58.719 like that in his entire career. He said Scratchy 00:01:58.719 --> 00:02:01.379 had this remarkable magnetic ability to sell 00:02:01.379 --> 00:02:04.459 a concept. He wasn't just selling stock. He was 00:02:04.459 --> 00:02:07.640 selling a belief system. And that image. That 00:02:07.640 --> 00:02:10.000 standing ovation, it really tells you everything 00:02:10.000 --> 00:02:12.120 you need to know about the roller coaster we 00:02:12.120 --> 00:02:14.120 are about to go on. It really does. It's a story 00:02:14.120 --> 00:02:16.520 about charisma. Absolutely. But it's also a story 00:02:16.520 --> 00:02:19.120 about how that charisma built an empire and then 00:02:19.120 --> 00:02:21.580 how it was used to hide one of the largest, most 00:02:21.580 --> 00:02:24.300 audacious corporate frauds in American history. 00:02:24.460 --> 00:02:27.360 But here's the kicker. Usually when we do these 00:02:27.360 --> 00:02:30.560 deep dives on massive frauds, think Enron, think 00:02:30.560 --> 00:02:33.659 WorldCom. The company just disappears. It goes 00:02:33.659 --> 00:02:36.020 to zero. It becomes a footnote in a business 00:02:36.020 --> 00:02:39.340 textbook. A cautionary tale. Exactly. But the 00:02:39.340 --> 00:02:41.460 company Richard Scrushy was pitching that day, 00:02:41.560 --> 00:02:44.319 it's still here. And in fact, it's huge. That's 00:02:44.319 --> 00:02:46.599 right. Today, we know it as Encompass Health. 00:02:47.069 --> 00:02:49.870 So today on The Deep Dive, we are unpacking the 00:02:49.870 --> 00:02:52.770 wild, tumultuous, and frankly, the surprisingly 00:02:52.770 --> 00:02:55.449 resilient history of Encompass Health, formerly 00:02:55.449 --> 00:02:57.949 known, of course, as HealthSouth. And just to 00:02:57.949 --> 00:02:59.569 give you a sense of the scale here before we 00:02:59.569 --> 00:03:01.590 get into all the drama, Encompass Health, which 00:03:01.590 --> 00:03:04.030 is based in Birmingham, Alabama, is currently 00:03:04.030 --> 00:03:07.050 the nation's largest provider of inpatient rehabilitative 00:03:07.050 --> 00:03:09.469 services. The largest in the entire country. 00:03:10.060 --> 00:03:11.560 We're talking about a massive network. They have 00:03:11.560 --> 00:03:15.340 166 inpatient rehabilitation hospitals. They're 00:03:15.340 --> 00:03:18.020 operating in 38 states and Puerto Rico. Wow. 00:03:18.300 --> 00:03:21.039 They employ roughly 40 ,000 people. And as of 00:03:21.039 --> 00:03:24.699 this year, 2024, they're pulling in over $5 .3 00:03:24.699 --> 00:03:27.479 billion in revenue. So this is no small operation. 00:03:27.699 --> 00:03:29.979 This is a titan of the healthcare industry. Absolutely. 00:03:30.219 --> 00:03:32.560 And our mission for this deep dive is to really 00:03:32.560 --> 00:03:35.740 trace the life cycle of this corporate giant. 00:03:35.960 --> 00:03:38.199 We want to understand how a really smart business 00:03:38.199 --> 00:03:41.000 idea in the early 80s turned into this massive 00:03:41.000 --> 00:03:43.719 empire and how that empire rotted from the inside 00:03:43.719 --> 00:03:48.319 out because of a $2 .7 billion accounting scandal. 00:03:48.439 --> 00:03:50.939 And then, and this is the part that I think often 00:03:50.939 --> 00:03:53.219 gets overlooked, how they pulled off surprisingly 00:03:53.219 --> 00:03:55.860 successful turnaround that actually saved the 00:03:55.860 --> 00:03:58.270 business. It's a story that has everything. I 00:03:58.270 --> 00:04:00.509 mean, we've got a fleet of corporate jets. We 00:04:00.509 --> 00:04:02.710 have a futuristic digital hospital that never 00:04:02.710 --> 00:04:04.830 actually opened. The old white elephant. We've 00:04:04.830 --> 00:04:07.189 got world famous sports surgeons. And then we 00:04:07.189 --> 00:04:09.229 have executives literally running to the FBI 00:04:09.229 --> 00:04:11.469 because they were terrified of going to jail. 00:04:11.930 --> 00:04:13.789 It really is the Wild West of corporate health 00:04:13.789 --> 00:04:16.829 care. But to understand how we got to the fraud 00:04:16.829 --> 00:04:19.730 and how we got to that standing ovation, we have 00:04:19.730 --> 00:04:21.649 to go back to the very beginning. We have to 00:04:21.649 --> 00:04:23.769 look at the origin story. Because before the 00:04:23.769 --> 00:04:26.589 crimes, there was a legitimate idea. There was 00:04:26.589 --> 00:04:28.569 actually a very legitimate, very smart business 00:04:28.569 --> 00:04:31.250 idea. OK, so let's rewind the clock. It's 1983. 00:04:31.769 --> 00:04:34.750 Our main character, Richard Scrushy, is working 00:04:34.750 --> 00:04:37.189 as a vice president at a company called LifeMark 00:04:37.189 --> 00:04:40.189 Corporation. LifeMark was a publicly traded hospital 00:04:40.189 --> 00:04:42.550 company. Pretty standard stuff for the time. 00:04:42.930 --> 00:04:45.490 But Scrushy is looking around and he has one 00:04:45.490 --> 00:04:48.750 of those classic aha moments. He sees a huge 00:04:48.750 --> 00:04:51.089 gap in the market. And to really appreciate this 00:04:51.089 --> 00:04:53.139 gap. You have to understand what was happening 00:04:53.139 --> 00:04:55.740 in health care in the early 1980s. The whole 00:04:55.740 --> 00:04:58.459 landscape was shifting dramatically under everyone's 00:04:58.459 --> 00:05:00.680 feet. What was driving that shift? In a nutshell, 00:05:00.819 --> 00:05:02.980 the federal government. They had just introduced 00:05:02.980 --> 00:05:05.819 this new payment system called diagnosis -related 00:05:05.819 --> 00:05:09.639 groups, or DRGs. DRGs. Okay, what does that mean 00:05:09.639 --> 00:05:12.560 in plain English? Well, before DRGs, hospitals 00:05:12.560 --> 00:05:14.959 got paid for, you know, every service they provided. 00:05:15.259 --> 00:05:17.620 The longer you stayed, the more tests they ran, 00:05:17.680 --> 00:05:19.620 the more money they made. So there was an incentive 00:05:19.620 --> 00:05:22.579 to keep you there. A huge incentive. But DRGs 00:05:22.579 --> 00:05:25.100 changed all that. Suddenly, the government said, 00:05:25.220 --> 00:05:27.720 look, for a heart attack, we will pay you a single 00:05:27.720 --> 00:05:31.620 flat fee. That's it. All of a sudden, hospitals 00:05:31.620 --> 00:05:34.420 were under immense pressure to cut costs. The 00:05:34.420 --> 00:05:37.199 old model of keeping patients in expensive acute 00:05:37.199 --> 00:05:40.800 care beds for weeks was just becoming unsustainable. 00:05:41.000 --> 00:05:43.180 So the days of checking into a hospital for a 00:05:43.180 --> 00:05:45.540 minor issue and staying for two weeks were officially 00:05:45.540 --> 00:05:48.600 over. They were over. Because every single day 00:05:48.600 --> 00:05:51.319 a patient sat in that hospital bed, it was costing 00:05:51.319 --> 00:05:54.360 the hospital money from that flat fee. And Scrushy 00:05:54.360 --> 00:05:56.339 noticed something really specific about physical 00:05:56.339 --> 00:05:58.620 therapy and rehabilitation in this new environment. 00:05:58.990 --> 00:06:01.470 What did he see? He saw that the demand for physical 00:06:01.470 --> 00:06:04.089 therapy was absolutely booming. Medical technology 00:06:04.089 --> 00:06:06.110 was getting better. It was saving more lives. 00:06:06.290 --> 00:06:08.910 People were surviving strokes, car accidents, 00:06:09.129 --> 00:06:11.730 heart attacks. But they needed rehab to recover 00:06:11.730 --> 00:06:14.329 their function. So more survivors meant more 00:06:14.329 --> 00:06:17.980 demand for rehab. Exactly. But, and here's the 00:06:17.980 --> 00:06:20.579 key insight, doing that rehab inside a traditional 00:06:20.579 --> 00:06:23.540 hospital in that acute care setting was incredibly 00:06:23.540 --> 00:06:25.939 expensive. You're paying for the overhead of 00:06:25.939 --> 00:06:29.300 an emergency room, an ICU, specialized surgeons, 00:06:29.480 --> 00:06:31.560 even if the patient just needs to learn to walk 00:06:31.560 --> 00:06:34.439 again on a treadmill. So Scrushy's idea was simple 00:06:34.439 --> 00:06:36.800 but kind of revolutionary for the time. Take 00:06:36.800 --> 00:06:38.800 it out of the hospital. Precisely. Move that 00:06:38.800 --> 00:06:41.259 service to an outpatient setting. If you can 00:06:41.259 --> 00:06:43.480 offer those same physical therapy services in 00:06:43.480 --> 00:06:46.500 a standalone facility. It's just far more cost 00:06:46.500 --> 00:06:48.620 effective. You strip away all the hospital overhead. 00:06:48.759 --> 00:06:50.579 You strip it all away. You focus entirely on 00:06:50.579 --> 00:06:53.339 the therapy. And it creates this win -win situation. 00:06:54.120 --> 00:06:56.079 The patients get the care they need in a more 00:06:56.079 --> 00:06:58.160 convenient setting. The insurance system saves 00:06:58.160 --> 00:07:01.000 a ton of money. And the provider, in this case, 00:07:01.040 --> 00:07:03.759 Scrushy's Future Company, can run a very, very 00:07:03.759 --> 00:07:06.389 profitable business. with high margins. It's 00:07:06.389 --> 00:07:08.470 a classic business arbitrage. Provide the same 00:07:08.470 --> 00:07:10.949 service, but with a much lower cost basis. So 00:07:10.949 --> 00:07:13.529 he takes this idea and in 1984, he incorporates 00:07:13.529 --> 00:07:16.649 a company called Amcare Inc. Amcare. It sounds 00:07:16.649 --> 00:07:19.089 a bit generic, doesn't it? Like a brand of bandages 00:07:19.089 --> 00:07:21.410 or something. It doesn't quite scream future 00:07:21.410 --> 00:07:24.810 Fortune 500 company, but he didn't do it alone. 00:07:25.110 --> 00:07:27.870 He had four co -founders. They scraped together 00:07:27.870 --> 00:07:32.870 $50 ,000 in seed money. And get this. Scrushy 00:07:32.870 --> 00:07:35.069 himself put in the most, and his contribution 00:07:35.069 --> 00:07:39.509 was $25 ,000. A $25 ,000 investment. Just keep 00:07:39.509 --> 00:07:40.970 that number in your head for a minute, because 00:07:40.970 --> 00:07:42.790 we're talking about a company that would eventually 00:07:42.790 --> 00:07:45.709 be worth billions of dollars. That is a staggering 00:07:45.709 --> 00:07:48.129 initial return on investment. I'll say. And they 00:07:48.129 --> 00:07:50.089 also got about a million dollars from Citicorp 00:07:50.089 --> 00:07:51.850 Venture Capital, so they have some real cash 00:07:51.850 --> 00:07:54.230 to get started. They opened their first facility 00:07:54.230 --> 00:07:57.290 in Little Rock, Arkansas in early 84, then a 00:07:57.290 --> 00:08:00.129 second one back home in Birmingham. And Scrushy 00:08:00.129 --> 00:08:03.310 is the chairman and... CEO right from the get 00:08:03.310 --> 00:08:05.389 go. He's the engine. He's the one pushing the 00:08:05.389 --> 00:08:07.730 pace. Now, pretty quickly, they realize Amcare 00:08:07.730 --> 00:08:10.790 is a bit bland. So in 1985, they changed the 00:08:10.790 --> 00:08:13.269 name to Health South Rehabilitation Corporation, 00:08:13.709 --> 00:08:15.910 which is a much smarter move. Health South sounds 00:08:15.910 --> 00:08:18.110 established. It sounds institutional. It gives 00:08:18.110 --> 00:08:19.670 it a sense of place and permanence. Yeah, it 00:08:19.670 --> 00:08:21.350 sounds like it's been around for 50 years already. 00:08:21.449 --> 00:08:23.829 And that new name set them up for that IPO we 00:08:23.829 --> 00:08:26.509 mentioned at the start. The 1986 IPO on the Nasdaq. 00:08:26.670 --> 00:08:28.470 Right. That's where we got the standing ovation. 00:08:28.910 --> 00:08:31.529 But then right after that. Scrushy does something 00:08:31.529 --> 00:08:34.590 that really, really puts them on the map. He 00:08:34.590 --> 00:08:37.490 pivots or maybe expands is the better word. He 00:08:37.490 --> 00:08:39.669 expands the scope. Absolutely. They started in 00:08:39.669 --> 00:08:41.230 outpatient. These are the clinics where you go 00:08:41.230 --> 00:08:42.850 for an hour of therapy and then you go home. 00:08:43.250 --> 00:08:46.590 But in 1986, they purchased their first inpatient 00:08:46.590 --> 00:08:48.990 rehabilitation hospital. OK, so now they actually 00:08:48.990 --> 00:08:51.269 have beds. They're keeping patients overnight. 00:08:51.509 --> 00:08:53.809 Correct. And this moves them way up the health 00:08:53.809 --> 00:08:57.370 care food chain. Inpatient rehab is for more 00:08:57.370 --> 00:09:00.129 serious cases. Yeah. People who need 24 -hour 00:09:00.129 --> 00:09:02.370 nursing care along with their intensive therapy. 00:09:02.769 --> 00:09:05.450 But the real game changer comes a few years later 00:09:05.450 --> 00:09:08.529 in 1989. What happens then? They move their stock 00:09:08.529 --> 00:09:10.450 listing from the NASDAQ to the New York Stock 00:09:10.450 --> 00:09:12.889 Exchange, the big leagues. And they buy a very 00:09:12.889 --> 00:09:15.509 specific hospital in Birmingham called South 00:09:15.509 --> 00:09:18.110 Highlands Hospital. And they rename it Health 00:09:18.110 --> 00:09:20.470 South Medical Center. And this wasn't just any 00:09:20.470 --> 00:09:22.659 old community hospital. This purchase marked 00:09:22.659 --> 00:09:25.059 their big entrance into acute care, but with 00:09:25.059 --> 00:09:28.490 a very, very specific focus. Orthopedics. And 00:09:28.490 --> 00:09:31.269 this is where that cool factor comes into play. 00:09:31.529 --> 00:09:34.529 Because when you talk about orthopedics in Birmingham, 00:09:34.809 --> 00:09:36.889 Alabama, or really anywhere in the sports world 00:09:36.889 --> 00:09:40.070 in the 90s, you are talking about one name. Dr. 00:09:40.169 --> 00:09:43.250 James Andrews. The surgeon to the stars. I mean, 00:09:43.330 --> 00:09:46.230 Michael Jordan, Bo Jackson, Jack Nicklaus, Troy 00:09:46.230 --> 00:09:49.049 Aikman. You name a super athlete from that era, 00:09:49.190 --> 00:09:52.169 if they blew out a knee or tore an elbow, they 00:09:52.169 --> 00:09:53.950 were probably getting on a plane to Birmingham 00:09:53.950 --> 00:09:57.889 to see Dr. Andrews. He was the guy. By buying 00:09:57.889 --> 00:10:01.009 this hospital, HealthSouth immediately affiliated 00:10:01.009 --> 00:10:03.950 itself with the Alabama Sports Medicine and Orthopedic 00:10:03.950 --> 00:10:06.409 Center. So suddenly, HealthSouth wasn't just 00:10:06.409 --> 00:10:08.110 a place where your grandma went to recover from 00:10:08.110 --> 00:10:10.269 a hip replacement. No, it was now associated 00:10:10.269 --> 00:10:12.169 with the American Sports Medicine Institute. 00:10:12.269 --> 00:10:14.610 It was associated with elite performance. It 00:10:14.610 --> 00:10:16.870 was an absolute branding coup. It was brilliant. 00:10:17.090 --> 00:10:20.710 It linked the HealthSouth brand to success, vitality, 00:10:20.710 --> 00:10:22.970 and high -performance professional sports. They 00:10:22.970 --> 00:10:24.929 even developed partnerships with other top surgeons, 00:10:25.090 --> 00:10:28.779 like Dr. Frank Jobe in Los Angeles. invented 00:10:28.779 --> 00:10:31.240 Tommy John surgery for baseball pitchers. So 00:10:31.240 --> 00:10:33.700 all of a sudden, going to a HealthSouth facility 00:10:33.700 --> 00:10:35.960 didn't feel like going to a regular hospital. 00:10:36.200 --> 00:10:38.120 It felt like going to a high -end training camp. 00:10:38.399 --> 00:10:41.000 Exactly. And Scrushy understood this intuitively. 00:10:41.419 --> 00:10:44.139 He understood that health care is also a consumer 00:10:44.139 --> 00:10:47.740 product. Brand matters. Perception matters immensely. 00:10:48.039 --> 00:10:50.559 So by the end of the 80s, they are on a roll. 00:10:50.960 --> 00:10:53.860 They have 50 facilities by 1990. They're making 00:10:53.860 --> 00:10:57.460 $400 million in revenue by 1992. But then comes 00:10:57.460 --> 00:10:59.679 the 90s. And if the 80s were about the launch, 00:10:59.740 --> 00:11:03.259 the 90s were about, well, world domination. This 00:11:03.259 --> 00:11:05.940 is the empire building phase. And the strategy 00:11:05.940 --> 00:11:09.539 was unbelievably aggressive. In business, we 00:11:09.539 --> 00:11:11.779 call this a roll -up strategy. A roll -up. Can 00:11:11.779 --> 00:11:13.700 you explain what that means for us? A roll -up 00:11:13.700 --> 00:11:15.720 is when a company sets out to acquire as many 00:11:15.720 --> 00:11:17.980 smaller independent companies in the same industry 00:11:17.980 --> 00:11:21.299 as possible. The idea is to consolidate a very 00:11:21.299 --> 00:11:23.480 fragmented market. So if there are thousands 00:11:23.480 --> 00:11:25.980 of little mom -and -pop rehab clinics out there... 00:11:25.980 --> 00:11:28.200 You buy them all, or as many as you can. You 00:11:28.200 --> 00:11:29.980 become the giant. The strategy was basically 00:11:29.980 --> 00:11:32.879 eat or be eaten, and HealthSouth was doing all 00:11:32.879 --> 00:11:34.700 the eating. They just started buying everything 00:11:34.700 --> 00:11:38.379 in sight. The real milestone year was 1993. In 00:11:38.379 --> 00:11:41.360 late 93, they made a massive move. They acquired 00:11:41.360 --> 00:11:45.000 28 inpatient rehab hospitals and 45 outpatient 00:11:45.000 --> 00:11:47.399 facilities from a company called National Medical 00:11:47.399 --> 00:11:49.659 Enterprise. That sounds like a big deal. It was 00:11:49.659 --> 00:11:52.559 huge. That single acquisition more than doubled 00:11:52.559 --> 00:11:55.860 the size of the company overnight. In one transaction, 00:11:56.279 --> 00:11:58.639 HealthSouth became the nation's largest provider 00:11:58.639 --> 00:12:01.519 of both inpatient and outpatient rehabilitation. 00:12:02.139 --> 00:12:05.009 They became the category killer. Like the Home 00:12:05.009 --> 00:12:07.669 Depot or Walmart of rehab. A perfect analogy. 00:12:08.090 --> 00:12:11.009 And they did not stop there. In 1994, they bought 00:12:11.009 --> 00:12:12.909 another company called Relife. Then they dropped 00:12:12.909 --> 00:12:14.629 the word rehabilitation from their corporate 00:12:14.629 --> 00:12:16.889 name and just became HealthSouth Corporation. 00:12:17.289 --> 00:12:19.409 Which is a signal, right? It says we are doing 00:12:19.409 --> 00:12:22.080 more than just rehab now. Precisely. They started 00:12:22.080 --> 00:12:24.679 diversifying aggressively. In 94, they bought 00:12:24.679 --> 00:12:27.039 Diagnostic Health Corporation. So now they're 00:12:27.039 --> 00:12:30.019 in the diagnostic imaging business, MRIs, CT 00:12:30.019 --> 00:12:33.480 scans, x -rays. In 1995, they bought Surgical 00:12:33.480 --> 00:12:36.080 Health Corporation. So surgery centers. Outpatient 00:12:36.080 --> 00:12:38.899 surgery centers. Then, just one month later, 00:12:39.100 --> 00:12:41.220 they bought Novacare's Rehab Hospital business. 00:12:41.620 --> 00:12:45.159 And then... We're still in 1995. They dropped 00:12:45.159 --> 00:12:48.720 $1 .2 billion to acquire surgical care affiliates. 00:12:48.759 --> 00:12:52.200 $1 .2 billion. That's real money, even today. 00:12:52.440 --> 00:12:55.440 Yes. And that deal instantly made them the largest 00:12:55.440 --> 00:12:57.440 provider of outpatient surgery in the entire 00:12:57.440 --> 00:12:59.759 country. This pace is just relentless. They're 00:12:59.759 --> 00:13:02.440 buying occupational health businesses like Redicare. 00:13:02.580 --> 00:13:04.820 They're buying competitors. They're buying everything. 00:13:05.059 --> 00:13:08.740 By 1999, the numbers are just staggering. HealthSouth 00:13:08.740 --> 00:13:11.440 had over 2 ,000 facilities. They were in all 00:13:11.440 --> 00:13:15.159 50 states, plus the UK, Australia, Puerto Rico, 00:13:15.220 --> 00:13:18.200 Canada, even Saudi Arabia. They were truly a 00:13:18.200 --> 00:13:20.759 global health care empire. I want to pause on 00:13:20.759 --> 00:13:23.159 this strategy for a second. Why buy all these 00:13:23.159 --> 00:13:25.600 different things? Why surgery and diagnostics 00:13:25.600 --> 00:13:28.320 and rehab? What was the logic? A logic was all 00:13:28.320 --> 00:13:30.480 about leverage and what we call vertical integration. 00:13:30.820 --> 00:13:32.559 Think about it from the patient's perspective, 00:13:32.620 --> 00:13:34.580 from their journey through the system. Let's 00:13:34.580 --> 00:13:36.720 say you get injured playing softball on a weekend. 00:13:36.980 --> 00:13:39.740 You might need an MRI to diagnose the injury. 00:13:40.350 --> 00:13:43.110 Well, HealthSouth owns the diagnostic center. 00:13:43.250 --> 00:13:45.710 The doctor says you need minor surgery to fix 00:13:45.710 --> 00:13:48.490 it. HealthSouth owns the outpatient surgery center. 00:13:48.629 --> 00:13:50.789 And then you need physical therapy to recover. 00:13:51.049 --> 00:13:54.149 And HealthSouth owns the rehab clinic. They capture 00:13:54.149 --> 00:13:56.289 the revenue at every single step of your care. 00:13:56.470 --> 00:13:59.210 They keep the patient inside the HealthSouth 00:13:59.210 --> 00:14:02.110 ecosystem. That's powerful. It's incredibly powerful. 00:14:02.350 --> 00:14:04.429 And because they were the largest provider in 00:14:04.429 --> 00:14:06.350 every single one of those lines of business, 00:14:06.590 --> 00:14:09.750 they had immense negotiating power with the insurance 00:14:09.750 --> 00:14:12.149 companies. If you're a big insurer like Blue 00:14:12.149 --> 00:14:14.889 Cross, you basically had to have HealthSouth 00:14:14.889 --> 00:14:16.830 in your network. They were just too big to ignore. 00:14:17.129 --> 00:14:18.909 It sounded like the perfect business model. They 00:14:18.909 --> 00:14:21.870 seemed unstoppable. On the surface, yes. It looked 00:14:21.870 --> 00:14:24.460 perfect. But when you grow that fast, when you 00:14:24.460 --> 00:14:27.139 are that ambitious, sometimes the ambition starts 00:14:27.139 --> 00:14:29.620 to outpace the reality. What do you mean? Well, 00:14:29.659 --> 00:14:31.720 when you acquire that many companies that quickly, 00:14:31.899 --> 00:14:34.159 the integration is a complete nightmare. You're 00:14:34.159 --> 00:14:36.679 trying to merge dozens of different computer 00:14:36.679 --> 00:14:38.659 systems, different corporate cultures, different 00:14:38.659 --> 00:14:41.740 accounting practices. It gets incredibly messy. 00:14:42.169 --> 00:14:44.889 Very fast. And it's amidst all this chaotic growth 00:14:44.889 --> 00:14:46.950 that we see this physical manifestation of that 00:14:46.950 --> 00:14:50.990 hubris. In 2001. The digital hospital. The digital 00:14:50.990 --> 00:14:53.990 hospital. This was Scrushy's ultimate vision 00:14:53.990 --> 00:14:56.509 of the future. HealthSouth announced they were 00:14:56.509 --> 00:14:59.090 partnering with Oracle Corporation to build the 00:14:59.090 --> 00:15:02.730 world's first all -digital acute care hospital. 00:15:03.070 --> 00:15:05.330 And they actually started building it. A massive 00:15:05.330 --> 00:15:08.750 13 -story structure on 19 acres of prime real 00:15:08.750 --> 00:15:10.750 estate right next to their corporate headquarters 00:15:10.750 --> 00:15:13.549 in Birmingham. It was meant to be the jewel in 00:15:13.549 --> 00:15:15.629 the crown of the empire. What did all digital 00:15:15.629 --> 00:15:18.110 even mean? It meant bedside touchscreens for 00:15:18.110 --> 00:15:20.230 patients, automated drug dispensing, maybe even 00:15:20.230 --> 00:15:22.350 robots delivering meals. It was supposed to be 00:15:22.350 --> 00:15:24.889 the hospital of the 21st century. A paperless, 00:15:24.909 --> 00:15:28.309 seamless, high -tech marvel. A monument to HealthSouth's 00:15:28.309 --> 00:15:30.950 dominance and innovation. But as we often see 00:15:30.950 --> 00:15:33.590 in history, monument building often comes right 00:15:33.590 --> 00:15:36.350 before the fall of the empire. Construction on 00:15:36.350 --> 00:15:39.070 that hospital was halted just two years later. 00:15:39.929 --> 00:15:43.700 It sat there. an empty steel skeleton for years, 00:15:43.940 --> 00:15:46.379 a perfect symbol of ambition hitting a brick 00:15:46.379 --> 00:15:48.980 wall. And that brick wall was the year 2002. 00:15:49.320 --> 00:15:51.659 This is where the first cracks start to appear. 00:15:51.940 --> 00:15:53.879 And it's fascinating because it didn't start 00:15:53.879 --> 00:15:56.700 with a huge explosion. It started with a suspicion. 00:15:57.059 --> 00:16:00.399 So set the scene for us. It's 2002. The stock 00:16:00.399 --> 00:16:03.320 is still flying high. Scrushy is a corporate 00:16:03.320 --> 00:16:06.600 celebrity. But then in May and again in July 00:16:06.600 --> 00:16:09.700 of 2002, Richard Scrushy sells a very large amount 00:16:09.700 --> 00:16:12.419 of his company stock. Which, in isolation, isn't 00:16:12.419 --> 00:16:14.779 necessarily illegal. Executives sell stock all 00:16:14.779 --> 00:16:16.960 the time to diversify their portfolios or buy 00:16:16.960 --> 00:16:20.559 a new boat. But the timing here was, let's just 00:16:20.559 --> 00:16:22.539 say, was suspicious. Because right after he sells 00:16:22.539 --> 00:16:25.019 all that stock, in August 2002, the company makes 00:16:25.019 --> 00:16:27.440 a surprise announcement. They announce a huge 00:16:27.440 --> 00:16:30.419 shortfall in earnings to the tune of $175 million. 00:16:30.879 --> 00:16:33.539 And markets absolutely hate surprises, especially 00:16:33.539 --> 00:16:35.480 bad ones. The stock gets hammered. And naturally, 00:16:35.600 --> 00:16:37.539 the SEC, the Securities and Exchange Commission, 00:16:37.659 --> 00:16:39.879 starts asking some pointed questions. Their question 00:16:39.879 --> 00:16:43.909 being... Did Scrushy know about this $175 million 00:16:43.909 --> 00:16:47.210 shortfall when he sold all his stock back in 00:16:47.210 --> 00:16:50.110 May and July? Exactly. So it starts as a classic 00:16:50.110 --> 00:16:53.470 insider trading investigation. The SEC is looking 00:16:53.470 --> 00:16:56.269 to see if Scrushy dumped his shares because he 00:16:56.269 --> 00:16:58.649 knew bad news was on the way. That's a serious 00:16:58.649 --> 00:17:01.129 crime for sure, but it's a specific kind of crime. 00:17:01.330 --> 00:17:03.330 But they had no idea what was really going on. 00:17:03.789 --> 00:17:06.009 They were pulling on a single loose thread, not 00:17:06.009 --> 00:17:08.509 realizing it was attached to a bomb. They really 00:17:08.509 --> 00:17:10.849 didn't. This is the big twist in the story. The 00:17:10.849 --> 00:17:14.710 SEC was investigating a $175 million earnings 00:17:14.710 --> 00:17:17.990 miss. They had no idea that the entire financial 00:17:17.990 --> 00:17:20.230 foundation of the company was a complete and 00:17:20.230 --> 00:17:22.730 utter lie. So how did the truth finally come 00:17:22.730 --> 00:17:24.630 out? Because usually these things drag on for 00:17:24.630 --> 00:17:26.789 years. The lawyers get involved. Everyone denies 00:17:26.789 --> 00:17:28.690 everything. It came out because of raw fear. 00:17:29.230 --> 00:17:31.890 and specifically fear of a brand new law called 00:17:31.890 --> 00:17:34.529 the Sarbanes -Oxley Act. Okay, let's unpack that. 00:17:34.609 --> 00:17:37.190 Sarbanes -Oxley. We hear that term thrown around 00:17:37.190 --> 00:17:38.970 in business news, and it's usually followed by 00:17:38.970 --> 00:17:41.250 a groan from an accountant. But what did it actually 00:17:41.250 --> 00:17:43.869 mean for the guys at HealthSouth? Well, the Sarbanes 00:17:43.869 --> 00:17:47.210 -Oxley Act, or SOX as it's known, was passed 00:17:47.210 --> 00:17:50.940 in 2002. It was a direct response to those massive 00:17:50.940 --> 00:17:53.819 frauds we mentioned earlier, like Enron and WorldCom. 00:17:53.920 --> 00:17:55.920 Right. Those scandals had wiped out billions 00:17:55.920 --> 00:17:58.400 of dollars of retirement savings. People were 00:17:58.400 --> 00:18:01.660 furious. Congress was furious. Yeah. The public 00:18:01.660 --> 00:18:05.279 was furious. So they passed this law to completely 00:18:05.279 --> 00:18:07.599 change the rules of the game for corporate executives. 00:18:07.960 --> 00:18:11.180 And what was the key change? Before SOX, a CEO 00:18:11.180 --> 00:18:14.640 or a CFO could often claim ignorance. They could 00:18:14.640 --> 00:18:16.740 say, oh, I had no idea the accountants were cooking 00:18:16.740 --> 00:18:18.500 the books. I just sign off on the big picture. 00:18:18.539 --> 00:18:21.920 But SOX made it so that top executives had to 00:18:21.920 --> 00:18:24.720 personally certify the accuracy of their company's 00:18:24.720 --> 00:18:26.980 financial statements. Personally certify? Yes. 00:18:27.259 --> 00:18:29.160 And if they certified statements that turned 00:18:29.160 --> 00:18:31.319 out to be false, they could go to prison for 00:18:31.319 --> 00:18:34.000 up to 20 years. Wow. Okay, so suddenly it's not 00:18:34.000 --> 00:18:36.079 just a corporate fine or getting fired. It's 00:18:36.079 --> 00:18:38.099 real hard jail time. It made them personally 00:18:38.099 --> 00:18:41.000 liable. Exactly. The plausible deniability was 00:18:41.000 --> 00:18:44.420 gone. And that change absolutely terrified the 00:18:44.420 --> 00:18:48.039 executives at HealthSouth. In early 2003, two 00:18:48.039 --> 00:18:50.539 executive officers who knew about the fraud, 00:18:50.660 --> 00:18:53.680 who had been participating in it for years, realized 00:18:53.680 --> 00:18:56.720 they just couldn't keep signing these false papers. 00:18:56.900 --> 00:19:00.119 The risk was suddenly too high. The new law had 00:19:00.119 --> 00:19:02.599 raised the stakes to a life or death level, professionally 00:19:02.599 --> 00:19:05.000 speaking. So terrified that the whole scheme 00:19:05.000 --> 00:19:07.019 would be exposed and they would be the ones left 00:19:07.019 --> 00:19:08.779 holding the bag. They did something drastic. 00:19:08.799 --> 00:19:11.220 They went to the FBI. They turned themselves 00:19:11.220 --> 00:19:14.140 in. And apparently they did it separately without 00:19:14.140 --> 00:19:16.160 knowing the other was doing it. They walked into 00:19:16.160 --> 00:19:18.779 the FBI offices to confess their involvement 00:19:18.779 --> 00:19:21.359 and try to cut a deal to save themselves. That 00:19:21.359 --> 00:19:23.539 is just incredible. The SEC is over here looking 00:19:23.539 --> 00:19:25.839 for insider trading. And meanwhile, the company's 00:19:25.839 --> 00:19:28.079 own executives are walking into the FBI saying, 00:19:28.220 --> 00:19:30.720 hi, we've been cooking the books for seven years. 00:19:30.940 --> 00:19:33.740 And once those two started talking, the floodgates 00:19:33.740 --> 00:19:37.009 just opened. It was revealed that the $175 million 00:19:37.009 --> 00:19:40.089 shortfall they had announced back in August wasn't 00:19:40.089 --> 00:19:41.869 a real shortfall at all. It was actually a cover 00:19:41.869 --> 00:19:44.430 story. A cover story for what? They were trying 00:19:44.430 --> 00:19:47.809 to unwind fraud. They were trying to intentionally 00:19:47.809 --> 00:19:50.329 lower Wall Street's expectations so they wouldn't 00:19:50.329 --> 00:19:52.869 have to keep lying by such a large amount every 00:19:52.869 --> 00:19:55.269 quarter. They knew they couldn't keep inflating 00:19:55.269 --> 00:19:57.430 the numbers forever, so they were trying to orchestrate 00:19:57.430 --> 00:19:59.769 a soft landing. But the hole they had dug was 00:19:59.769 --> 00:20:02.809 just too deep. Way too deep. The full investigation 00:20:02.809 --> 00:20:06.190 revealed that from 1996 all the way to 2003, 00:20:06.609 --> 00:20:10.490 the company had committed accounting fraud totaling 00:20:10.490 --> 00:20:16.670 $2 .7 billion. $2 .7 billion. That is just a 00:20:16.670 --> 00:20:18.869 staggering number. I mean, how do you even fake 00:20:18.869 --> 00:20:20.789 that much money? How does that work mechanically? 00:20:20.990 --> 00:20:23.700 Well. The accusation was that Scrushy and his 00:20:23.700 --> 00:20:26.039 inner circle of executives, a group the insiders 00:20:26.039 --> 00:20:28.819 sometimes called the family, would direct employees 00:20:28.819 --> 00:20:31.500 to report false earnings. And the method was 00:20:31.500 --> 00:20:34.079 surprisingly crude. How so? They would meet every 00:20:34.079 --> 00:20:36.160 quarter to review the preliminary earnings reports. 00:20:36.480 --> 00:20:38.099 They would look at what the company actually 00:20:38.099 --> 00:20:40.039 earned, and then they'd look at what Wall Street 00:20:40.039 --> 00:20:42.319 analysts expected them to earn. Let's say Wall 00:20:42.319 --> 00:20:44.640 Street expects them to make a dollar a share 00:20:44.640 --> 00:20:47.759 in profit. Right. And if the real internal numbers 00:20:47.759 --> 00:20:50.319 showed they only made, say, 70 cents a share. 00:20:50.839 --> 00:20:55.440 There was a 30 cent gap. And Scrushy would reportedly 00:20:55.440 --> 00:20:58.319 look at his CFO and accountants and say one simple 00:20:58.319 --> 00:21:01.900 thing. Fix it. Just fix it. Fix it. And so the 00:21:01.900 --> 00:21:03.700 accountants, the family, would go back to their 00:21:03.700 --> 00:21:06.500 desks and literally invent revenue to fill that 00:21:06.500 --> 00:21:09.279 gap. They had nicknames for it. They called the 00:21:09.279 --> 00:21:12.160 fake entries dirt or pixie dust. Pixie dust. 00:21:12.359 --> 00:21:15.000 Yes. And they would find obscure line items on 00:21:15.000 --> 00:21:17.089 the balance sheet. things like contractual adjustments 00:21:17.089 --> 00:21:19.950 or patient refunds, accounts that auditors might 00:21:19.950 --> 00:21:22.049 not scrutinize as heavily. And they would just 00:21:22.049 --> 00:21:24.109 type in new numbers. They would add a few million 00:21:24.109 --> 00:21:26.710 here, a few million there, until the bottom line 00:21:26.710 --> 00:21:29.349 number magically matched the Wall Street expectation. 00:21:29.670 --> 00:21:31.170 Because they were literally just making up numbers 00:21:31.170 --> 00:21:33.329 every quarter to keep the stock price from falling. 00:21:33.450 --> 00:21:36.849 Yes. It was a massive, systematic effort to deceive 00:21:36.849 --> 00:21:39.230 investors. And one of the smarter things they 00:21:39.230 --> 00:21:42.130 did, if you can call it that, was they made thousands 00:21:42.130 --> 00:21:44.549 of tiny, fraudulent entries instead of one big 00:21:44.549 --> 00:21:46.839 one. That made it much harder for the auditors 00:21:46.839 --> 00:21:49.160 at Ernst & Young to catch. The fallout from this 00:21:49.160 --> 00:21:51.519 revelation must have been immediate and catastrophic. 00:21:52.000 --> 00:21:55.680 It was incredibly swift. On November 4th, 2003, 00:21:56.079 --> 00:21:59.559 a federal grand jury indicted Richard Scrushy 00:21:59.559 --> 00:22:02.779 on 85 counts, including fraud and money laundering. 00:22:02.880 --> 00:22:05.039 What happened to the company itself? The company 00:22:05.039 --> 00:22:07.920 was in absolute chaos. It was immediately delisted 00:22:07.920 --> 00:22:10.019 from the New York Stock Exchange. It was kicked 00:22:10.019 --> 00:22:13.119 out of the S &P 500 index. The stock price, which 00:22:13.119 --> 00:22:16.140 had once been over $30 a share, plummeted to 00:22:16.140 --> 00:22:18.759 just pennies. The board of directors fired the 00:22:18.759 --> 00:22:20.900 entire executive management team. Scrushy was 00:22:20.900 --> 00:22:22.839 out. And that digital hospital construction? 00:22:23.059 --> 00:22:25.220 Stopped cold. The crane stopped moving that very 00:22:25.220 --> 00:22:26.859 day. Now, here's an important distinction you 00:22:26.859 --> 00:22:29.599 pointed out earlier. Scrushy and other executives 00:22:29.599 --> 00:22:33.200 were indicted, but the company itself, HealthSouth 00:22:33.200 --> 00:22:35.619 as a corporate entity, was not indicted. Why 00:22:35.619 --> 00:22:37.569 was that? Because the new board of directors 00:22:37.569 --> 00:22:40.369 made a very smart decision. Once they realized 00:22:40.369 --> 00:22:43.029 the extent of the fraud, they decided to cooperate 00:22:43.029 --> 00:22:45.289 fully with the investigators. They opened the 00:22:45.289 --> 00:22:47.970 doors. They said, come in. We will help you find 00:22:47.970 --> 00:22:50.230 everything. We will not hide a single document. 00:22:50.509 --> 00:22:52.630 They turned on their old bosses. Completely. 00:22:52.910 --> 00:22:55.750 And because they cooperated, the government decided 00:22:55.750 --> 00:22:58.369 to pursue the individuals who were responsible, 00:22:58.650 --> 00:23:02.130 not the corporate entity itself. That single 00:23:02.130 --> 00:23:04.750 decision probably saved the company from total 00:23:04.750 --> 00:23:07.839 destruction and liquidation. but even so a 2 00:23:07.839 --> 00:23:10.819 .7 billion dollar fraud most companies would 00:23:10.819 --> 00:23:13.019 just declare bankruptcy they would fold they'd 00:23:13.019 --> 00:23:16.460 be gone forever why didn't health south die this 00:23:16.460 --> 00:23:19.160 is for me the most fascinating part of the entire 00:23:19.160 --> 00:23:22.420 business case why didn't they go bankrupt because 00:23:22.420 --> 00:23:25.930 ironically the underlying business model was 00:23:25.930 --> 00:23:28.549 actually sound the actual business of rehabbing 00:23:28.549 --> 00:23:31.349 patients exactly the fraud was about inflating 00:23:31.349 --> 00:23:32.950 the earnings to make the company look better 00:23:32.950 --> 00:23:35.769 than it really was but the core business helping 00:23:35.769 --> 00:23:38.250 stroke victims learn to walk again helping athletes 00:23:38.250 --> 00:23:40.789 recover from surgery that business was real and 00:23:40.789 --> 00:23:43.150 it was generating actual positive cash flow so 00:23:43.150 --> 00:23:45.470 they were making money just not nearly as much 00:23:45.470 --> 00:23:47.829 as they were lying about correct this wasn't 00:23:47.829 --> 00:23:49.769 a ponzi scheme where there was no underlying 00:23:49.769 --> 00:23:53.359 business at all there was a real profitable and 00:23:53.359 --> 00:23:56.460 necessary business underneath all the lies. A 00:23:56.460 --> 00:23:59.000 top tier restructuring firm, Alvarez and Marsal, 00:23:59.099 --> 00:24:01.220 came in. They looked at the real books and they 00:24:01.220 --> 00:24:03.619 realized, wait a minute, this company has cash 00:24:03.619 --> 00:24:06.539 flow. If we manage this correctly, we don't need 00:24:06.539 --> 00:24:08.960 to file for Chapter 11. So they survived the 00:24:08.960 --> 00:24:12.099 initial crash, but now they had to rebuild everything. 00:24:12.259 --> 00:24:15.619 They had to clean up this colossal mess. And 00:24:15.619 --> 00:24:17.599 this begins the turnaround phase of the story. 00:24:17.779 --> 00:24:20.380 It starts with completely new leadership. In 00:24:20.380 --> 00:24:23.200 2004, the board brings in a man named Jay Grinney 00:24:23.200 --> 00:24:25.619 as the new president and CEO. And where did he 00:24:25.619 --> 00:24:27.920 come from? He came from HCA Hospital Corporation 00:24:27.920 --> 00:24:30.359 of America, one of the biggest and most respected 00:24:30.359 --> 00:24:33.180 hospital operators in the country. He was a seasoned, 00:24:33.299 --> 00:24:36.259 no -nonsense operator. He was the complete opposite 00:24:36.259 --> 00:24:38.440 of a showman like Scrushy. He was a grinder. 00:24:38.980 --> 00:24:41.740 And he brought in a new CFO, John Workman. Their 00:24:41.740 --> 00:24:43.720 job was just to stabilize the ship. And a big 00:24:43.720 --> 00:24:45.460 part of stabilizing the ship had to be changing 00:24:45.460 --> 00:24:47.559 the corporate culture. Because under Scrushy, 00:24:47.640 --> 00:24:51.019 the culture was, let's just say, extravagant. 00:24:51.039 --> 00:24:54.059 To put it mildly, Scrushy lived an incredibly 00:24:54.059 --> 00:24:56.940 flashy lifestyle. And that permeated the whole 00:24:56.940 --> 00:24:59.680 company. So one of the very first things the 00:24:59.680 --> 00:25:02.319 new management team did was symbolic but very 00:25:02.319 --> 00:25:04.720 meaningful. They sold the fleet of corporate 00:25:04.720 --> 00:25:07.660 jets. They had a whole fleet, not just one jet. 00:25:07.799 --> 00:25:10.279 They had multiple jets. It was a huge symbol 00:25:10.279 --> 00:25:13.640 of the excess of the Scrushy era. Getting rid 00:25:13.640 --> 00:25:16.099 of them sent a powerful message to employees 00:25:16.099 --> 00:25:18.839 and Wall Street. The party is over. We are here 00:25:18.839 --> 00:25:21.299 to work and fix this. And they also started selling 00:25:21.299 --> 00:25:23.839 off major assets, right? They had to. They needed 00:25:23.839 --> 00:25:26.380 to simplify the business and raise cash. They 00:25:26.380 --> 00:25:28.819 sold that Southside Medical Center to UAB, the 00:25:28.819 --> 00:25:31.519 University of Alabama at Birmingham. That officially 00:25:31.519 --> 00:25:34.039 ended their big venture into acute care orthopedics. 00:25:34.240 --> 00:25:36.500 They also closed another hospital called Metro 00:25:36.500 --> 00:25:40.480 West. And then between 2006 and 2007, they did 00:25:40.480 --> 00:25:42.700 something really drastic. They basically dismantled 00:25:42.700 --> 00:25:45.180 the entire empire that Scorsese had spent the 00:25:45.180 --> 00:25:47.619 90s building. We can call this period the Great 00:25:47.619 --> 00:25:50.819 Divestiture. The strategy was essentially shrink 00:25:50.819 --> 00:25:54.380 to grow. They looked at that massive, vertically 00:25:54.380 --> 00:25:57.380 integrated empire, the surgery centers, the diagnostic 00:25:57.380 --> 00:25:59.500 clinics, the outpatient rehab, the inpatient 00:25:59.500 --> 00:26:02.099 hospitals, and they asked themselves a simple 00:26:02.099 --> 00:26:06.410 question. What are we actually best at? Where's 00:26:06.410 --> 00:26:08.869 the real sustainable value in this company? And 00:26:08.869 --> 00:26:11.269 the answer that came to was inpatient rehabilitation. 00:26:11.609 --> 00:26:13.809 Exactly. That was the core. So they decided to 00:26:13.809 --> 00:26:17.369 sell everything else. In 2007, they sold the 00:26:17.369 --> 00:26:20.210 entire outpatient business to a competitor, Select 00:26:20.210 --> 00:26:22.750 Medical. They sold the massive surgery center 00:26:22.750 --> 00:26:25.569 division to a private equity firm, PPG Capital. 00:26:26.059 --> 00:26:28.940 Which, interestingly, was spun back out as surgical 00:26:28.940 --> 00:26:31.619 care affiliates again. Yes. The names often cycle 00:26:31.619 --> 00:26:33.579 back in the world of private equity. And they 00:26:33.579 --> 00:26:35.720 sold the diagnostic imaging division to another 00:26:35.720 --> 00:26:38.119 firm called the Gores Group. They even sold the 00:26:38.119 --> 00:26:39.779 real estate, right? The headquarters in that 00:26:39.779 --> 00:26:42.279 empty digital hospital. They sold it all in 2008 00:26:42.279 --> 00:26:44.619 to a real estate firm. They then leased back 00:26:44.619 --> 00:26:46.680 the headquarters building they needed. But they 00:26:46.680 --> 00:26:48.619 finally got that empty hospital off their books. 00:26:48.819 --> 00:26:52.259 So by 2007, 2008, what is actually left of HealthSouth? 00:26:52.670 --> 00:26:56.210 What's left is a lean, mean, focused machine. 00:26:57.230 --> 00:26:59.289 They were back to their roots. They were almost 00:26:59.289 --> 00:27:02.170 purely an inpatient rehabilitation company. They 00:27:02.170 --> 00:27:04.289 had stripped away all the distractions, all the 00:27:04.289 --> 00:27:06.890 flash and sizzle, and focused entirely on their 00:27:06.890 --> 00:27:09.470 core competency. And this strategy worked. They 00:27:09.470 --> 00:27:11.529 managed to get relisted on the New York Stock 00:27:11.529 --> 00:27:14.289 Exchange in 2006. That must have felt like a 00:27:14.289 --> 00:27:17.309 huge victory. It was a massive validation. It 00:27:17.309 --> 00:27:19.829 meant that the markets, the investors, they trusted 00:27:19.829 --> 00:27:22.700 them again. It was a signal that they had survived 00:27:22.700 --> 00:27:25.559 the fraud, paid their penance, and had emerged 00:27:25.559 --> 00:27:27.839 as a viable public company once more. So that 00:27:27.839 --> 00:27:30.539 brings us into the modern era of the company. 00:27:30.700 --> 00:27:33.279 They've survived, they've stabilized, they've 00:27:33.279 --> 00:27:36.359 shrunk. Now it was time to start growing again. 00:27:36.559 --> 00:27:38.700 But this time, the growth was going to be disciplined. 00:27:38.740 --> 00:27:42.000 It was focused. So from 2014 onwards, they started 00:27:42.000 --> 00:27:44.400 acquiring again, but they stayed squarely in 00:27:44.400 --> 00:27:46.779 their lane. In 2014, they made a big purchase. 00:27:47.369 --> 00:27:49.869 encompass home health and hospice. Which made 00:27:49.869 --> 00:27:52.569 perfect strategic sense. Home health is a natural 00:27:52.569 --> 00:27:55.269 extension of inpatient rehab. A patient leaves 00:27:55.269 --> 00:27:57.650 your rehab hospital, they go home, but they still 00:27:57.650 --> 00:28:00.309 need care. It fits the continuum of care perfectly. 00:28:00.759 --> 00:28:04.220 And then in 2015, they bought Reliant Hospital 00:28:04.220 --> 00:28:09.180 Partners for $730 million, which added another 00:28:09.180 --> 00:28:12.259 11 rehab hospitals to their network. Right. Expanding 00:28:12.259 --> 00:28:14.400 their footprint, but sticking to what they know 00:28:14.400 --> 00:28:17.740 best. Then in 2018 came what was probably the 00:28:17.740 --> 00:28:20.740 final symbolic break from the past. The name 00:28:20.740 --> 00:28:23.559 change. HealthSouth officially became Encompass 00:28:23.559 --> 00:28:26.950 Health Corporation. Why the change? I mean. Everyone 00:28:26.950 --> 00:28:28.690 in health care knew the name HealthSouth. It 00:28:28.690 --> 00:28:31.069 was a powerful brand, for better or worse. It 00:28:31.069 --> 00:28:34.289 was, but it carried so much baggage. It was forever 00:28:34.289 --> 00:28:38.009 linked to Richard Scrushy and the scandal. By 00:28:38.009 --> 00:28:40.509 rebranding to Encompass Health, they accomplished 00:28:40.509 --> 00:28:43.269 two things. First, they integrated the Encompass 00:28:43.269 --> 00:28:45.390 name from their big home health acquisition, 00:28:45.630 --> 00:28:47.609 showing a unified company. Right. And second, 00:28:47.769 --> 00:28:49.890 and maybe more importantly, they signaled to 00:28:49.890 --> 00:28:52.259 the world that this was a new day. It was a clean 00:28:52.259 --> 00:28:54.640 slate. The past was the past. Encompassed from 00:28:54.640 --> 00:28:56.920 the new home health side and health from the 00:28:56.920 --> 00:28:59.059 legacy name. Exactly. It was a bridge from the 00:28:59.059 --> 00:29:00.900 past to the future. And they haven't stopped 00:29:00.900 --> 00:29:03.960 evolving. Just in 2022, they made another big 00:29:03.960 --> 00:29:07.119 strategic move. They did. They spun off that 00:29:07.119 --> 00:29:09.579 home health and hospice business they had bought 00:29:09.579 --> 00:29:12.759 as a brand new separate publicly traded company 00:29:12.759 --> 00:29:16.970 called Inhabit. So now today. What is Encompass 00:29:16.970 --> 00:29:20.490 Health? Today, they are a pure play inpatient 00:29:20.490 --> 00:29:23.069 rehabilitation provider. That is their sole focus. 00:29:23.190 --> 00:29:25.430 They do one thing and they aim to do it better 00:29:25.430 --> 00:29:27.450 than anyone else in the country. Let's talk about 00:29:27.450 --> 00:29:29.569 the patients for a second. Who are they actually 00:29:29.569 --> 00:29:32.430 helping day to day? When we say inpatient rehab, 00:29:32.670 --> 00:29:34.549 what does that really look like? We're talking 00:29:34.549 --> 00:29:36.529 about patients recovering from very serious, 00:29:36.710 --> 00:29:39.269 often life altering medical events. The biggest 00:29:39.269 --> 00:29:42.680 category is stroke. but also other neurological 00:29:42.680 --> 00:29:45.680 disorders, major cardiac and pulmonary conditions, 00:29:45.940 --> 00:29:48.740 traumatic brain injuries, spinal cord injuries, 00:29:49.039 --> 00:29:52.000 complex orthopedic injuries, amputations. So 00:29:52.000 --> 00:29:53.839 these are not people coming in for a sprained 00:29:53.839 --> 00:29:56.640 ankle. These are people who need intensive round 00:29:56.640 --> 00:29:58.859 -the -clock therapy just to regain their independence. 00:29:59.339 --> 00:30:01.579 That's exactly right. It's critical, life -changing 00:30:01.579 --> 00:30:03.720 work. And it seems the market recognizes that 00:30:03.720 --> 00:30:06.220 they're doing it well. The turnaround is so complete 00:30:06.220 --> 00:30:08.950 that they're winning awards now? They are. Fortune 00:30:08.950 --> 00:30:11.029 has ranked them on their world's most admired 00:30:11.029 --> 00:30:13.950 companies list. Modern Healthcare magazine has 00:30:13.950 --> 00:30:16.269 called them one of the best places to work. To 00:30:16.269 --> 00:30:19.730 go from a $2 .7 billion fraud to a most admired 00:30:19.730 --> 00:30:22.869 company, that is quite the arc. It really is 00:30:22.869 --> 00:30:24.710 one of the most remarkable turnaround stories 00:30:24.710 --> 00:30:27.230 in modern corporate history. So let's try to 00:30:27.230 --> 00:30:30.250 wrap this incredible story up. We started with 00:30:30.250 --> 00:30:33.950 a $50 ,000 startup built on a really smart idea. 00:30:34.400 --> 00:30:37.420 It grew into a dominant globe spanning empire 00:30:37.420 --> 00:30:41.200 that owned everything from surgery to diagnostics. 00:30:41.220 --> 00:30:44.380 It collapsed spectacularly under the weight of 00:30:44.380 --> 00:30:46.680 one of the biggest frauds we'd ever seen. It 00:30:46.680 --> 00:30:49.460 almost died. And then through discipline management 00:30:49.460 --> 00:30:51.960 and a painful restructuring, it stripped itself 00:30:51.960 --> 00:30:55.019 down, survived and rebuilt itself into the focused 00:30:55.019 --> 00:30:57.259 industry leader it is today. It's the ultimate 00:30:57.259 --> 00:30:59.519 corporate survival story. Before we go, I want 00:30:59.519 --> 00:31:01.579 to go back for a moment to that digital hospital, 00:31:01.779 --> 00:31:04.480 that empty skeleton. It's such a haunting image, 00:31:04.559 --> 00:31:07.299 isn't it? It stood empty for years on a major 00:31:07.299 --> 00:31:10.480 highway in Birmingham, Highway 280, just a steel 00:31:10.480 --> 00:31:12.799 frame against the sky, a monument to failure. 00:31:13.099 --> 00:31:15.859 But eventually it was sold. It was finished by 00:31:15.859 --> 00:31:18.339 another company, Community Health Systems, and 00:31:18.339 --> 00:31:20.940 it's now the Grandview Medical Center. So it 00:31:20.940 --> 00:31:23.500 is a working hospital today. It is, but it's 00:31:23.500 --> 00:31:25.740 not the one Richard Scrushy envisioned. It has 00:31:25.740 --> 00:31:27.670 a different legacy now. And I think that brings 00:31:27.670 --> 00:31:29.950 us to the biggest takeaway here for me. The story 00:31:29.950 --> 00:31:32.190 of Encompass Health is really a powerful lesson 00:31:32.190 --> 00:31:34.190 in distinguishing between a business and its 00:31:34.190 --> 00:31:36.950 management. That is the absolute key point. The 00:31:36.950 --> 00:31:39.329 management's scrushy and his inner circle was 00:31:39.329 --> 00:31:42.990 corrupt. They were driven by greed, by ego, by 00:31:42.990 --> 00:31:45.009 the pressure to keep the stock price soaring. 00:31:45.230 --> 00:31:48.250 But the business, the actual act of providing 00:31:48.250 --> 00:31:50.829 rehabilitation services to people in need, was 00:31:50.829 --> 00:31:53.710 solid. It was necessary. It created real value. 00:31:54.029 --> 00:31:56.250 And because that underlying business had real 00:31:56.250 --> 00:31:58.490 value, it was able to outlive the corruption 00:31:58.490 --> 00:32:00.750 of its creators. Exactly. The need for rehab 00:32:00.750 --> 00:32:03.430 didn't go away just because the CEO was a crook. 00:32:03.490 --> 00:32:06.390 It really makes you wonder, doesn't it? In our 00:32:06.390 --> 00:32:09.670 current age of tech unicorns and nonstop hype, 00:32:09.910 --> 00:32:13.309 how often do we confuse a charismatic CEO with 00:32:13.309 --> 00:32:16.150 a solid, sustainable business model? We do it 00:32:16.150 --> 00:32:18.349 all the time. We fall in love with the pitch, 00:32:18.490 --> 00:32:21.170 the vision, the standing ovation. But at the 00:32:21.170 --> 00:32:24.049 end of the day... Boring, reliable cash flow 00:32:24.049 --> 00:32:27.309 usually wins out over flashy promises. So here's 00:32:27.309 --> 00:32:29.410 the final thought for you to chew on. Does the 00:32:29.410 --> 00:32:32.170 boring work of rehabilitation actually hold more 00:32:32.170 --> 00:32:34.849 intrinsic value than the flashy work of empire 00:32:34.849 --> 00:32:36.950 building? I think the story of Encompass Health 00:32:36.950 --> 00:32:39.789 proves that. In the long run, it absolutely does. 00:32:40.029 --> 00:32:41.930 Couldn't agree more. Something to think about 00:32:41.930 --> 00:32:44.069 the next time you see a CEO getting a standing 00:32:44.069 --> 00:32:47.390 ovation. That's it for this deep dive into Encompass 00:32:47.390 --> 00:32:48.369 Health. Thanks for listening.