updated 8/14/2006 2:53:24 PM ET 2006-08-14T18:53:24

The name will remain the same at HealthSouth Corp., but plenty else will change under a restructuring announced Monday as the medical services company continues its recovery from a $2.7 billion fraud.

HealthSouth said it plans to shed its outpatient rehabilitation clinics, surgery centers and diagnostic division to focus on inpatient intensive care, an area where it is making the largest share of revenue.

But it shelved the idea of coming up with a new name to replace the one that was marred during an accounting scandal that resulted in guilty pleas, layoffs and a sharply lower stock price.

CEO Jay Grinney said studies found “a bit of a blemish” on the HealthSouth name around its hometown of Birmingham, but the company’s reputation was mostly intact nationally.

“From an overall standpoint, HealthSouth is synonymous with high-quality health care,” he said in an interview.

Besides, Grinney said, a name change would have cost at least $20 million for new signs, uniforms and letterhead, and “tens of millions” more for a comprehensive rebranding.

HealthSouth, which started as a rehabilitation company and diversified through a growth period that ended in the fraud, said it is considering selling or spinning off its outpatient rehabilitation division, its surgery centers and diagnostics operations.

The proceeds would be used to pay off debt, and HealthSouth would be left to focus on its inpatient business, which accounted for about 58 percent of its net operating revenues for the last quarter.

Grinney said HealthSouth will become a “pure play” post-acute company focusing on inpatient rehabilitation for people suffering from medical problems like brain injuries and strokes.

The company reported a second-quarter loss of $51.7 million, or 13 cents per share, down from $62.4 million, or 16 cents per share, a year ago. Results for the latest quarter included preferred dividends of $9.2 million.

Second-quarter revenue fell 4 percent to $787.5 million, down from $818.3 million in the same period last year, and slightly below the average estimate of $792.2 million among analysts surveyed by Thomson Financial.

The company said the narrower loss resulted from cost controls. Investors reacted favorably, with HealthSouth stock rising 42 cents to $4.52 a share in afternoon over-the-counter trading.

A decision by HealthSouth to sell its outpatient clinics isn’t as radical as it might seem to some, according to analyst Derrick C. Dagnan of Avondale Partners in Nashville, Tenn.

While the clinics are the most visible part of the business to the general public, he said, the medical community is more focused on HealthSouth’s post-acute care centers, which generally specialize in intensive therapy for older patients, most of whom are on Medicare.

“It seems like you are getting rid of your bread and butter. But that inpatient rehab business to clinicians and doctors is really the business of HealthSouth,” said Dagnan.

HealthSouth has hired Goldman Sachs to assist with the possible divestment, which is expected to take about a year.

A decision on selling or spinning off the divisions will come within six months, Grinney said, and the restructuring should be done within a year. Grinney said he already had had four inquiries from private equity firms interested in the surgery centers.

“That shows you the level of interest,” he said.

The company also said Monday it will seek to be re-listed on the New York Stock Exchange, announcing a one-for-five reverse stock split. The company has about 398.2 million outstanding shares that would consolidate into 80 million shares.

Birmingham-based HealthSouth is struggling to overcome both changes in government reimbursement rules and the lingering effects of a long-running, $2.7 billion accounting fraud.

The report was only the second earnings statement since the company became embroiled in scandal in 2003.

Fifteen former executives pleaded guilty to falsifying financial records, and a 16th was convicted by a jury. HealthSouth founder and longtime CEO Richard Scrushy was ousted from the company, but jurors acquitted him last year on all charges.

Scrushy was subsequently convicted in a government bribery scheme linked to his time at HealthSouth.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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