THE FINANCIAL COLLAPSE OF HEALTHSOUTH Part 1 HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON ENERGY AND COMMERCE HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS FIRST SESSION OCTOBER 16, 2003 Serial No. 108–53 Printed for the use of the Committee on Energy and Commerce ( Available via the World Wide Web: http://www.access.gpo.gov/congress/house VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00001 Fmt 6011 Sfmt 6011 89963.TXT HCOM1 PsN: HCOM1 VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00002 Fmt 6011 Sfmt 6011 89963.TXT HCOM1 PsN: HCOM1 THE FINANCIAL COLLAPSE OF HEALTHSOUTH—Part 1 VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00003 Fmt 6019 Sfmt 6019 89963.TXT HCOM1 PsN: HCOM1 VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00004 Fmt 6019 Sfmt 6019 89963.TXT HCOM1 PsN: HCOM1 THE FINANCIAL COLLAPSE OF HEALTHSOUTH Part 1 HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON ENERGY AND COMMERCE HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS FIRST SESSION OCTOBER 16, 2003 Serial No. 108–53 Printed for the use of the Committee on Energy and Commerce ( Available via the World Wide Web: http://www.access.gpo.gov/congress/house U.S. GOVERNMENT PRINTING OFFICE 89–963PDF WASHINGTON : 2004 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 5011 Sfmt 5011 89963.TXT HCOM1 PsN: HCOM1 COMMITTEE ON ENERGY AND COMMERCE W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan JOE BARTON, Texas Ranking Member FRED UPTON, Michigan HENRY A. WAXMAN, California CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia CHRISTOPHER COX, California EDOLPHUS TOWNS, New York NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey RICHARD BURR, North Carolina SHERROD BROWN, Ohio Vice Chairman BART GORDON, Tennessee ED WHITFIELD, Kentucky PETER DEUTSCH, Florida CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois BARBARA CUBIN, Wyoming ANNA G. ESHOO, California JOHN SHIMKUS, Illinois BART STUPAK, Michigan HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland CHARLES W. ‘‘CHIP’’ PICKERING, GENE GREEN, Texas Mississippi KAREN MCCARTHY, Missouri VITO FOSSELLA, New York TED STRICKLAND, Ohio ROY BLUNT, Missouri DIANA DEGETTE, Colorado STEVE BUYER, Indiana LOIS CAPPS, California GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine MARY BONO, California JIM DAVIS, Florida GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois LEE TERRY, Nebraska HILDA L. SOLIS, California ERNIE FLETCHER, Kentucky MIKE FERGUSON, New Jersey MIKE ROGERS, Michigan DARRELL E. ISSA, California C.L. ‘‘BUTCH’’ OTTER, Idaho DAN R. BROUILLETTE, Staff Director JAMES D. BARNETTE, General Counsel REID P.F. STUNTZ, Minority Staff Director and Chief Counsel SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS JAMES C. GREENWOOD, Pennsylvania, Chairman MICHAEL BILIRAKIS, Florida PETER DEUTSCH, Florida CLIFF STEARNS, Florida Ranking Member RICHARD BURR, North Carolina DIANA DEGETTE, Colorado CHARLES F. BASS, New Hampshire JIM DAVIS, Florida GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois Vice Chairman HENRY A. WAXMAN, California MIKE FERGUSON, New Jersey BOBBY L. RUSH, Illinois MIKE ROGERS, Michigan JOHN D. DINGELL, Michigan, W.J. ‘‘BILLY’’ TAUZIN, Louisiana (Ex Officio) (Ex Officio) (II) 2 VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 0486 Sfmt 0486 89963.TXT HCOM1 PsN: HCOM1 C O N T E N T S Page Testimony of: Cohen, Martin, Senior Managing Director, FTI Consulting ......................... 28 Cullison, Kelly, former Vice President of Compliance, HealthSouth Cor- poration .......................................................................................................... 30 Goodreau, James, former Chief of Security, HealthSouth Corporation ....... 75 Hale, Brandon, former Executive Vice President of Administration, Cor- porate Security and Compliance Officer, HealthSouth Corporation ......... 75 Henze, Diana, Assistant Controller, HealthSouth Coorporation .................. 21 Horton, William, former Executive Vice President and Corporate Counsel, HealthSouth Corporation ............................................................................. 75 Jones-Smith, Susan, former Vice President of Finance and Reimburse- ment, HealthSouth Corporation .................................................................. 19 Sanders, Teresa, former Group Vice President and Chief Auditing Officer of HealthSouth Corporation ......................................................................... 24 Schlatter, Steve, former HealthSouth Physical Therapist ............................ 26 Scrushy, Richard, former Chairman and CEO, HealthSouth Corporation .. 16 Smith, Greg, Chief Auditing officer, HealthSouth Corporation .................... 32 Tanner, Anthony, founder and former Corporate Secretary and Compli- ance Officer, HealthSouth Corporation ....................................................... 75 Vines, Michael, former HealthSouth Employee, Corporate Fixed Assets Department ................................................................................................... 27 (III) VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 0486 Sfmt 0486 89963.TXT HCOM1 PsN: HCOM1 VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00008 Fmt 0486 Sfmt 0486 89963.TXT HCOM1 PsN: HCOM1 THE FINANCIAL COLLAPSE OF HEALTHSOUTH THURSDAY, OCTOBER 16, 2003 HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, Washington, DC. The subcommittee met, pursuant to notice, at 9:30 a.m., in room 2123, Rayburn House Office Building, James C. Greenwood (chair- man) presiding. Members present: Representatives Greenwood, Bilirakis, Stearns, Burr, Bass, Walden, Ferguson, Rogers, Tauzin (ex officio), and DeGette. Staff present: Casey Hemard, majority counsel; Kelli Andrews, majority counsel; Ann Washington, majority counsel; Yong Choe, legislative clerk; Edith Holleman, minority counsel; and Voncille Hines, research assistant. Mr. GREENWOOD. The hearing of the Committee on Energy and Commerce Subcommittee on Oversight and Investigations will come to order, and the Chair recognizes himself for the purpose of making an opening statement. This morning we hold the first day of our hearing to examine al- legations of accounting fraud and poor corporate governance poli- cies at HealthSouth, the largest provider of outpatient rehabilita- tion services in the United States. This committee has a well recog- nized history of bringing important matters of corporate govern- ance and accounting fraud to the forefront of public awareness in a timely and thorough fashion. In the last Congress, this Committee took the lead in examining the corporate governance practices and accounting fraud allega- tions associated with the financial collapse of several companies, all of which were in industries that fell within with the Energy and Commerce Committee’s broad jurisdictional ground. For example, the Enron investigation focused on corporate governance practices and accounting matters associated with the energy industry. Ques- tionable accounting practices at telecommunication companies were brought to light during our hearings last year on Qwest and Global Crossing. We now turn to another area that falls within this committee’s jurisdiction, the health care industry. The HealthSouth hearings will provide this committee the opportunity to examine various cor- porate governance and accounting issues as they apply to and as they may impact the health care industry specifically. (1) VerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 89963.TXT HCOM1 PsN: HCOM1 2 The importance of having congressional hearings on matters ef- fecting the investing public cannot be over emphasized. Due in large to the work of this committee, last year Congress passed and President Bush signed into law historic corporate reform legisla- tion, legislation that addressed many corporate governance and ac- counting matters that were first brought to the public’s attention by our hearings. While investigations by other branches of the government can last months, even years, timely congressional hearings can result in changes that benefit the public sooner rather than later. With respect to the HealthSouth investigation, on March 19 of this year the first of 15 former HealthSouth officers plead guilty to a variety of Federal charges including conspiracy to commit wire fraud, securities fraud, falsifying books and records, falsification of financial information filed with the SEC, bank fraud and con- spiracy to make false statements to auditors. Incredibly, all five of the company’s chief financial officer spanning a period of over 15 years have plead guilty to a variety of these Federal offense. Guilty pleas also have been obtained from several controllers and treas- urers of the company. The essence of the fraud was similar to those we have witnessed in the past. It involved the