IN THE UNITED STATES DISTRICT COURT F ! .,~ E WJFOR THE NORTHERN DISTRICT OF ALABAM A

SOUTHERN DIVISION 03 MAR 12 PM 3` 3 6

U.S . Di Ft RIOT COURTConsolidated Fil4' J

In re HEALTHSOUTH CV-02-BE-2105- S

CORPORATION 2002 SECURITIES

LITIGATION

This Document Relates To :

All Actions

CONSOLIDATED CLASS ACTION

COMPLAINT FOR VIOLATION OF

THE FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

This Consolidated Class Action Complaint supersedes each o f

the complaints filed in the actions listed on Schedule 1 hereto .

Plaintiffs, individually and on behalf of others similarly

situated, by and through their attorneys, allege the following

upon information and belief, except as to those allegations

concerning Plaintiffs, which are alleged upon personal knowledge .

Plaintiffs' information and belief is based upon, among other

things, their counsel's investigation, which includes : (a) review

and analysis of filings made by HealthSouth Corporation

("HealthSouth" or the "Company") with the United States

Securities and Exchange Commission (the "SEC") ; (b) review and

analysis of securities analysts' reports concerning HealthSouth ;

(c) review and analysis of press releases and other

pronouncements by or on behalf of HealthSouth ; (d) review of

other publicly available information concerning HealthSouth

including transcripts of interviews with certain of the

Defendants ; (e) review of information obtained by private

investigators retained by counsel ; (f) information received from

1730 / CMP / 00060147 .WPD v1

qa

former employees of HealthSouth ; and (g) information obtained

from qui tam actions that have been filed against the Company .

SUMMARY OF THE ACTION

1 . This class action is brought under the federal

securities laws on behalf, of purchasers of HealthSouth common

stock on the open market from December 12, 2001 through August

26, 2002 (the "Class Period") . As a leading provider of

outpatient physical and rehabilitation therapy in the United

States, HealthSouth is required to comply with Federal

regulations governing billing for services to patients covered by

Medicare and other Government reimbursement programs . For many

years, the Government has had separate billing procedures and

codes distinguishing between individual and group therapy

sessions, with decidedly higher rates of reimbursement being paid

for individual rather than group therapy sessions .

2 . In order to artificially inflate the reported revenues

and profits of HealthSouth, Defendants caused the Company's

employees to systematically overcharge the Government by, among

other wrongful acts, "upcoding" the billing for group therapy

sessions as individual sessions . Indeed, the Company's billing

system did not even enable HealthSouth's employees to record

charges for group (as opposed to individual) therapy sessions .

Defendants then compounded that wrongdoing by, among other acts

of deception, repeatedly making inflated estimates of the

Company's revenues and earnings for 2002 ; and having Defendant

1730 / CMP / 00060147.WPD V1 2

Richard Scrushy ("Scrushy"), Chairman and Chief Executive

Officer, represent that the Company's shares should be "north of

$20 a share right now" (at a time when the shares were trading in

the $15 per share range) based on the Company's "growth rate" and

"strong cash flow ." As demonstrated herein, the numerous

material misrepresentations and materially incomplete statements

disseminated by Defendants caused an artificial inflation in the

market price of HealthSouth shares and enabled Defendant Scrushy

and other senior executives of the Company to sell more than $100

million in HealthSouth shares at inflated prices during the Class

Period .

3 . Offended by Defendants' wrongful conduct, HealthSout h

supervisory employees repeatedly complained to their colleagues

and superiors that they were being "stonewalled" in attempting to

obtain correct billing guidance ; compelled to participate in a

Medicare fraud ; and being put at risk of disciplinary or other

action by the Government . Those complaints were ignored by

HealthSouth and its senior executives .

4 . The fraud began to unravel in early 2002 when the

United States Department of Justice intervened as a named

plaintiff in several qui tam actions filed by former patients

charging the Company with billing fraud . Then on May 17, 2002,

the Centers for Medicare and Medicaid Services ("CMS") issued

regulations reaffirming that group therapy sessions are to be

billed as such, not as individual sessions . Throughout this

period, the Company did not curb its wrongful practices or

1730 / CMP / 00060147 .WPD v1 3

publicly disclose that its revenue, earnings and stock price

projections were grossly overstated .

5 . On August 27, 2002, the Company issued a press release

withdrawing its previous earnings guidance for 2002 and belatedly

disclosing that the Company's annualized earnings would b e

reduced by approximately $175 million as a result of the

Company's failure to comply with the Government's billing

regulations . Investor reaction was swift and negative . The

price of HealthSouth shares plunged nearly 60% on August 27 and

28, 2002, causing damages aggregating hundreds of millions of

dollars to Plaintiffs and the other members of the Class .

JURISDICTION AND VENUE

6 . The claims asserted herein arise under and pursuant t o

Sections 10(b) and 20(a) of the Securities Exchange Act of 1934

(the "Exchange Act"), 15 U .S .C . §§ 78j(b) and 78t(a), and Rule

lob-5 promulgated thereunder by the Securities and Exchange

Commission ("SEC"), 17 C .F .R . § 240 .10b-5 .

7 . This Court has jurisdiction over the subject matter of

this action pursuant to 28 U .S .C . §§ 1331, and Section 27 of the

Exchange Act, 15 U .S .C . § 78aa .

8 . Venue is proper in this District pursuant to Section 27

of the Exchange Act and 28 U .S .C . § 1391(b) .

9 . In connection with the acts and omissions alleged in

this Complaint, Defendants, directly or indirectly, used the

means and instrumentalities of interstate commerce, including ,

1730 / CMP / 00060147 .WPD v1 4

but not limited to, the mails, interstate telephone

communications, and the facilities of the national securities

markets .

PARTIES

Plaintiffs

10 . By Order dated December 12, 2002, the Court appointe d

the "Federated Funds," consisting of the Federated Capital

Appreciation Fund, Federated Growth Strategies Fund, Federated

Capital Appreciation 2 Fund, Federated Growth Strategies 2 Fund,

Federated Stock & Bond Fund and the Federated Kaufmann Fund as

Lead Plaintiffs . The Federated Funds are registered investment

companies . As set forth in the certifications attached to the

Motion for Appointment as Lead Plaintiffs and Lead Counsel, and

incorporated herein by reference, the Federated Funds purchased

shares of HealthSouth common stock during the Class Period an d

were damaged thereby .

11 . The persons and entities listed on Schedule 2 annexed

hereto are additional plaintiffs in this action . During the

Class Period, each purchased shares of HealthSouth common stock

as specified in their respective certifications previously filed

with the Court, and were damaged thereby .

1730 / CMP 100060147 .WP1v1 5

Defendants

12 . (a) Defendant HealthSouth represents that it is the

nation's largest provider of outpatient surgery and

rehabilitative healthcare services . It provides such services

through its national network of outpatient and inpatient

rehabilitation facilities, outpatient surgery centers, diagnostic

centers, medical centers and other healthcare facilities . The

Company operates patient care locations throughout the United

States . HealthSouth maintains its principal executive offices at

One HealthSouth Parkway, Birmingham, Alabama 35243 .

(b) At all relevant times, HealthSouth derived a

material portion of its revenues and profits from Medicare and

other Government reimbursement programs . For example,

HealthSouth represented in a Report on SEC Form 10-K for the year

ended December 31, 2001 (the "2001 Form 10-K") that the Company

had derived 31% of its revenues from Medicare .

(c) At all relevant times, the Company had more than

390,000,000 shares of common stock issued and outstanding which

were listed and traded on the New York Stock Exchange (the

"NYSE") under the ticker symbol "HRC . "

13 . Defendant Scrushy is the founder of HealthSouth and

was, at all relevant times, Chairman, Chief Executive Officer,

and a Director of the Company . As detailed herein, during the

Class Period, Defendant Scrushy was the Company's principal

spokesman and made many of the false and misleading statements

issued by Defendants . Additionally, he sold or disposed of more

1730 / CMP / 00060147.WPD v1 6

than 7,700,000 shares of HealthSouth common stock for more than

$99,000,000, knowing of undisclosed material information

concerning the Company's business and operations .

14 . Defendant William Owens ("Owens") at all relevant time s

was the President and Chief Operating Officer of HealthSouth .

Owens has been a director of the Company since 2001 . As detailed

herein, Owens was integrally involved in making the materially

false and misleading statements to HealthSouth investors during

the Class Period . He signed the 2001 Form 10-K and was a

spokesman at Company presentations to analysts and investors and

a participant in conference calls with investors and analysts

during which many of the misrepresentations were made .

15 . Defendant Weston L . Smith ("Smith") was at all relevant

times the Executive Vice President and Chief Financial Officer of

HealthSouth . He also was integrally involved in the wrongdoing .

As Chief Financial Officer, Smith signed SEC filings containing

materially false and misleading statements and participated in

the quarterly conference calls with investors during which

numerous of the misrepresentations were made .

16 . Scrushy, Owens, and Smith are collectively referred to

as the "Individual Defendants . "

17 . (a) The Individual Defendants were the Company's

principal officers and controlled HealthSouth and its public

disclosures . Each of them made false and misleading statements

and/or failed to disclose material adverse information concerning

the Company's business and operations during the Class Period, as

1730 / CMP / 00060147.WPD v1 7

detailed herein . Because of the Individual Defendants' senior

executive positions with the Company, they had access to the

adverse undisclosed information about its business, operations,

operational trends, financial statements, and present and future

business prospects through access to internal corporate documents

(including the Company's operating plans, budgets, and forecasts

and reports of actual operations compared thereto), conversations

and connections with other corporate officers and employees,

attendance at management and/or Board of Directors meetings and

committees thereof, and via reports and other information

provided to them in connection therewith .

(b) In this regard, weekly 'Senior Management

Meetings" were held on Monday mornings at the Company's corporate

headquarters . Defendant Scrushy and/or Owens would preside at

those meetings, with Defendant Smith regularly in attendance on

behalf of the Finance Department . At the Senior Management

Meetings, the Individual Defendants received reports from

HealthSouth financial, regulatory and operational Department

heads on developments within their departments and matters of a

material nature that had arisen . As a result of these weekly

meetings and the numerous other communications to which the

Individual Defendants were privy, each of the Individual

Defendants was fully familiar with the status of HealthSouth's

regulatory, financial and business affairs .

18 . It is appropriate to treat the Individual Defendants as

a group for pleading purposes and to presume that the false ,

1730 / CMP / 00060147 .WPD v1 8

misleading, and incomplete information conveyed in the Company's

public filings, press releases, interviews, and other statements,

as alleged herein, were the collective actions of the thre e

Individual Defendants . Each of those officers and/or directors

of HealthSouth, by virtue of his high-level positions with the

Company, directly participated in the management of the Company,

was directly involved in the day-to-day operations of the Company

at the highest levels, and was privy to confidential proprietary

information concerning the Company and its business, operations,

growth, financial statements, and financial condition, as alleged

herein . Said Defendants knowingly or recklessly made the

materially false and misleading statements alleged herein ; were

involved in drafting, producing, reviewing and/or disseminating

the statements ; or approved or ratified the statements, in

violation of the federal securities laws .

19 . As officers and/or directors and controlling persons o f

a publicly held corporation whose common stock was, and is,

registered with the SEC pursuant to the Exchange Act, traded on

the NYSE, and governed by the provisions of the federal

securities laws, each of the Individual Defendants had a duty to

disseminate promptly accurate information with respect to the

Company's financial condition and performance , growth,

operations, financial statements , revenues , earnings , and present

and future business prospects , and to correct any previously

issued statements that were materially misleading or untrue, so

that the market price of HealthSouth common stock would be base d

1730 / CMP / 00060147 .WPD v1 9

upon truthful and accurate information . The Individual

Defendants' misrepresentations and materially incomplete

statements during the Class Period violated these specific

requirements and obligations .

20 . Because of their positions of control and authority a s

officers and/or directors of the Company, each of the Individual

Defendants was able to and did control the content of the various

SEC filings, press releases and other public statements issued by

or on behalf of the Company during the Class Period . Each

Individual Defendant was provided with copies of the documents

alleged herein to be misleading prior to or shortly after their

issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected . Accordingly, each

of the Individual Defendants is responsible for the accuracy of

the public reports and releases detailed herein and is therefore

primarily liable for the misrepresentations and materially

incomplete statements contained therein .

21 . Each of the Defendants is liable as a participant in a

wrongful scheme and course of business that operated as a fraud

or deceit on those who purchased or otherwise acquired

HealthSouth common stock during the Class Period by disseminating

materially false and misleading statements and/or concealing

material adverse facts . The scheme deceived the investing public

regarding HealthSouth's current and past business, operations,

and the intrinsic value of Company common stock ; caused

Plaintiffs and other members of the Class to purchase HealthSouth

1730 / CMP / 00060147 .WPD v1 10

common stock at artificially inflated prices ; and allowed

Defendant Scrushy and other corporate insiders to profit

personally from unlawful insider trading .

CLASS ACTION ALLEGATIONS

22 . Plaintiffs bring this as a class action pursuant to

Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a

class (the "Class") consisting of all persons and entities who

purchased HealthSouth common stock on the open market during the

Class Period of December 12, 2001 through August 26, 2002, and

were damaged thereby . Excluded from the Class are Defendants ;

the officers and directors of the Company during the Class

Period; any entity in which any Defendant has or had a

controlling interest ; members of the immediate family of any

excluded person ; and the legal representatives, heirs, successors

or assigns of any such excluded person or entity .

23 . The members of the Class are so numerous that joinde r

of all Class members is impracticable . More than 480 million

shares of HealthSouth common stock were traded publicly on the

NYSE during the Class Period . While the exact number of Class

members is unknown to Plaintiffs at this time and can only be

ascertained through appropriate discovery, Plaintiffs believe

that there are many thousands of geographically dispersed members

of the proposed Class . Record owners and other members of the

Class may be identified from records maintained by HealthSouth or

its stock transfer agent and may be notified of the pendency of

1730 / CMP / 00060147 .WPD vl 11

this action by mail, using a form of notice similar to that

customarily used in securities class actions .

24 . Plaintiffs' claims are typical of the claims of the

members of the Class as all members were similarly affected by

Defendants' wrongful conduct in violation of federal law that is

complained of herein .

25 . Plaintiffs will fairly and adequately protect the

interests of the members of the Class . Plaintiffs have no

interests antagonistic to the interests of the Class and have

retained counsel competent and experienced in class and

securities litigation .

26 . Common questions of law and fact exist as to the

members of the Class and predominate over any questions affecting

individual members . Among the questions of law and fact common

to the Class are :

a . whether Defendants' acts and/or statements as

alleged herein violated the federal securities laws ;

b . whether Defendants' billing practices knowingly

violated Government rules and regulations ;

c . whether Defendants knowingly or recklessly

misrepresented and/or omitted material facts about the business,

operations and earnings of HealthSouth during the Class Period ;

d . whether the market price of HealthSouth shares was

artificially inflated during the Class Period ; and

e . whether the members of the Class have sustained

damages and the proper measure of damages .

1730 / CMP / 00060147 . WPD v1 12

27 . A class action is superior to all other available

methods for the fair and efficient adjudication of this

controversy . As the damages suffered by individual Class members

may be relatively small, the expense and burden of individual

litigation make it impossible for members of the Class

individually to redress the wrongs done to them . There will be

no difficulty in the management of this action as a class action .

ADDITIONAL SUBSTANTIVE ALLEGATIONS

Outpatient Billing Under Medicare

28 . Medicare is a federally funded program that provides

health insurance coverage for persons age 65 or older and for

some disabled persons . That program and the related Medicaid

program are administered by CMS .

29 . Providing therapeutic treatment to persons covered by

Medicare is an integral part of HealthSouth's business, and

generates a material portion of the Company's revenues and

earnings . HealthSouth has represented in its public filings that

approximately 30% of its revenues are derived from patients

covered by Medicare .

30 . In 1997, Congress passed the Balanced Budget Act of

1997 (the "BBA") which contained numerous changes to the way

Medicare reimbursed healthcare providers . Prior thereto,

healthcare providers were reimbursed by Medicare on a cost basis,

whereby interim estimated payments were made to providers an d

1730 / CMP / 00060147.WPD v1 13

reconciled by a cost report submitted at the end of a fiscal

year . After the enactment of the BBA, a prospective payment

system was gradually implemented, where reimbursement was made to

providers after services were provided and claims were submitted

to Medicare . Rules promulgated concerning Medicare are published

in the Medicare Manual, the Federal Register and also through

transmittals and program memoranda issued by CMS .

31 . CMS, through its predecessor, the Healthcare Financing

Administration ("HCFA"), developed a sophisticated coding system

known as HCFA Common Procedural Coding System ("HCPCS") to

reimburse physicians and other healthcare professionals for

services rendered .

32 . Effective January 1, 1999, all providers, includin g

outpatient physical therapy and speech pathology rehabilitation

agencies such as those owned and operated by HealthSouth, were to

be paid under HCPCS . The codes applicable to outpatient

rehabilitative therapy were developed by the American Medical

Association (the "AMA") Current Procedural Terminology Editorial

Panel . The codes are republished and updated annually by th e

33 . The codes are known as "CPT" codes and are set forth in

an annual compendium known as the AMA Current Procedural

Terminology publication (the "CPT Publication") . CPT codes are

nearly universally recognized and utilized by payers of health

claims across the nation . (In fact, even before January 1, 1999,

non-cost based providers -- including therapists in privat e

1730 / CMP / 00060147 .WPD v1 1 4

practice -- used the codes to bill Medicare for rehabilitation

services . )

34 . As explained in the CPT Publication : "The purpose of

the terminology is to provide a uniform language that will

accurately describe medical, surgical, and diagnostic services

and will thereby provide an effective means for reliable

nationwide communications among physicians, patients, and third

parties . "

35 . The CPT Publication contains a section entitled

"Physical Medicine and Rehabilitation" which is further

subdivided into two sections, "Modalities" and "Therapeutic

Procedures ." Therapeutic Procedures is defined as "a manner of

effecting change through the application of clinical skills

and/or services that attempt to improve function . The physician

or therapist is required to have direct (one on one) patient

contact . "

36 . Two primary CPT codes have been available since the

early 1990s for rehabilitative therapeutic procedures provided to

outpatients -- Code 97110 for "therapeutic exercise" and Code

97150 for "group therapeutic procedure . "

37 . Code 97110 pertains to one-on-one therapeuti c

procedures while 97150 pertains to group activities during which

constant attendance is required but one-on-one treatment is not .

Code 97110 is billable for every fifteen minutes of one-on-one

treatment whereas 97150 is not a timed code . Under CMS rules, a

1730 / CMP / 00060147.WPD vi 15

provider generally cannot bill for services within the same

session under both 97110 and 97150 .

38 . Each CPT code is assigned a value by CMS based on it s

own assessment and recommendation from the CPT Relative Value

Update Committee . The value for each CPT code is determined by

comparing the value of the resources needed to provide that

particular service to the value needed for other services .

39 . Group therapy has always been valued lower than

individual therapy because it requires less resources from a

therapist . In 2002, Medicare reimbursement for individual

physical therapy services under Code 97110 averaged $27 .51, which

can be billed per 15-minute interval, versus $18 .10 for group

therapy services under Code 97150 which cannot be billed in 15-

minute intervals .

The 1994 Codification of Individual and Group Billinc Codes

40 . On December 8, 1994, CPT codes 97150 and 97110 wer e

codified in the Federal Register, Vol . 61, No . 227 . Under that

regulation enacted by the HCFA, therapists "must bill" using the

group code -- 97150 -- for any therapy that is not provided on a

one-on-one basis :

. . . If the provider is overseeing the therapy

of more than one patient during a period of

time, he or she must bill the code for grouptherapy (CPT code 97150), since he or she isnot furnishing constant attendance to asingle patient .

1730 / CMP / 00060147 .WPD v1 16

The Repeated Reminders of the Distinction

Between Individual and Group Therapy Treatment

41 . The AMA publishes a monthly periodical entitled the

"CPT Assistant" which contains discussions of various codes and,

on occasion, sets forth questions and answers pertinent to a

code . The CPT Assistant is widely read by practitioners in the

healthcare industry, including executives at healthcare providers

such as HealthSouth . An issue of the CPT Assistant that was

disseminated during the Summer of 1995 contained the following

relevant explanation of the individual and group therapy codes at

issue :

Therapeutic Procedures

Therapeutic procedures are intended to be

performed with one-on-one patient contact .

If a provider is performing therapeutic

procedures in a group of two or more

individuals, only CPT code 97150 will bereported . Time and/or number of therapeutic

procedures is not defined in this code .

(Emphasis in original . )

42 . Further rules and regulations distinguishing individual

and group therapy billing procedures were enacted by the HCFA

published on November 22, 1996 in Vol . 61, No . 227 of the Federal

Register . Those regulations stated, in relevant part as follows :

We base the work [relative value units] forthese services on the expectation that the

definition of the codes represents how theservices will be furnished when billed toMedicare . For example, we expect that when

15 minutes of a service in the constant

attendance category is billed, we may beconfident that the provider furnished the 1 5

1730 / CMP / 00060147.WPD vl 17

minutes of constant one-on-one attendancethat is included in the definition of thecode . If the provider did not furnish 15minutes of one-on-one constant attendance, asthe code is defined, he or she may not bill acode for 15 minutes of constant attendance .If the provider is overseeing the therapy ofmore than one patient during a period oftime, he or she must bill the code for grouptherapy (CPT code 97150), since he or she isnot furnishing constant attendance to asingle patient .

(Emphasis added . )

43 . In the December 1996 issue of the CPT Assistant, th e

following question was raised concerning billing under the group

code and the following response was given :

Question

When reporting CPT code 97150, therapeutic

procedure(s), group (2 or more individuals),should another code(s) be reported in

addition to the group code to specify the

type of therapy ?

AMA Comment

Group therapeutic procedures include CPT

codes 97110-97139 . If any of these

procedures are performed with two or moreindividuals, then only report 97150 . Do not

code the specific type of therapy in addition

to the group therapy code .

44 . In the February 1997 edition of the CPT Assistant ,

healthcare providers were again reminded that group code 97150 i s

to be used if therapeutic procedures are performed with "2 or

more individuals" :

Question

When reporting CPT code 97150, therapeutic

procedure(s), group (2 or more individuals) ,

1730 / CMP / 00060147 .WPD v1 18

should another code(s) be reported in

addition to the group code to specify the

type of therapy ?

AMA Cozmneut

Group therapeutic procedures include CPT

codes 97110-97139 . If any of these

procedures are performed with two or more

individuals, then only report 97150 . Do notcode the specific type of therapy in addition

to the group therapy code .

45 . The CPT Publication for 1999 contained the followin g

descriptions for the 97110 and 97150 codes :

97110 Therapeutic procedure , one or more

areas , each 15 minutes ; therapeutic exercisesto develop strength and endurance, range of

motion and flexibility .

97150 Therapeutic procedure(s), group (2 or

more individuals . )

46 . The CPT Publications for 2000, 2001 and 2002 describ e

therapeutic exercise and group therapeutic procedures as follows :

97110 Therapeutic procedure, one or more

areas, each 15 minutes ; therapeutic exercises

to develop strength and endurance, range of

motion and flexibility .

97150 Therapeutic procedure(s), group (2 ormore individuals )

• (Report 97150 for each member of thegroup )

• (Group therapy procedures involve

constant attendance of the physician ortherapist : but by definition do notrequire one-on-one patient contact by

the physician or therapist . )

47 . In May 2000, HCFA issued Transmittal AB-00-39 which se t

forth the time parameters by which one could bill a single 15-

minute unit under code 97110 .

1730 / CMP / 00060147 . WPD v1 19

48 . An article concerning the appropriate procedure fo r

billing for group therapy was contained in the April 13, 2001

edition of Eli's Rehab Report, another widely read industry

publication . In that article, healthcare practitioners were told

the following :

HCFA also weighs in on group therapy in the

transmittal, stating that "we are concerned

that some providers may not be familiar withthe CPT definition" of group therapy . HCFA

explains that Code 97150 must be used when a

therapist performs "procedures with two or

more individuals concurrently or during thesame time period . "

HEALTHSOUTH EMPLOYEES REPEATEDLY QUESTION

THE COMPANY'S UPCODING AND BILLING PRACTICE S

49 . The foregoing CMS rules and regulations, CPT cod e

descriptions, and AMA and other industry pronouncements setting

forth the appropriate method for billing individual and group

therapy sessions caused numerous HealthSouth employees (now

former employees) who were integrally involved in the Company's

outpatient therapy operations as administrators, supervisors and

therapists repeatedly to question whether the Company was

systematically overbilling the Government by upcoding : improperly

billing group therapy sessions as individual sessions . These

employees further noted that HealthSouth's nationally used

billing program -- "HCAP Support Services" -- (HealthSouth

Clinical Automated Program Number 7) ("HCAP") did not even allow

coding for group therapy under CPT Code 97150 . Notwithstanding

1730 / CMP / 00060147 .WPD v1 2 0

these repeated communications on the matter to senior executives

at HealthSouth, the Company continued systemically to upcode and

overcharge the Government by, among other improper acts, billing

group therapy sessions as individual sessions .

Former Employee No . 1

50 . From July 1995 to December 2001, Former Employee No . 1

was a physical therapist and head administrator of a HealthSouth

rehabilitation clinic located in Indiana . In that capacity,

Former Employee No . 1 supervised eight other employees, including

three physical therapists and an occupational therapist .

51 . In the Spring of 2001, Former Employee No . 1 and other

employees at the HealthSouth facility read the article contained

in the April 13, 2001 edition of Eli's Rehab Report (see 9[ 48,

supra) concerning outpatient group therapy coding and also spoke

to other physical therapists with HealthSouth, including one

physical therapist whose billing practices had been audited .

Those communications confirmed that the Eli Rehab Report had

accurately described the Government's policy on coding for

outpatient individual and group physical therapy .

52 . Acting on his own initiative and at the urging o f

another colleague who was also concerned about the

appropriateness of HealthSouth's billing practices, on April 23,

2001, Former Employee No . 1 e-mailed his supervisor Bill Schmidt

("Schmidt") at HealthSouth's regional office in Indiana and Jon

A . Santini ("Santini"), a HealthSouth technical support executive

1730 / CMP / 00060147 .WPD vi 2 1

based in Ohio, seeking clarification of the appropriate billing

practices . Former Employee No . 1 also raised the matter with

Vicki Sherman ("Sherman"), a HealthSouth Regional Clinical

Director based in Ohio, who was visiting the facility .

53 . Former Employee No . 1 and his co-workers were extremely

concerned about this issue because treating two or more

individuals concurrently was "the rule more than the exception,"

and the HCAP billing program utilized at HealthSouth did not even

permit group billing under CPT Code 97150 . Former Employee No . 1

further noted in his April 23 e-mail to Messrs . Schmidt and

Santini that the Government "pays much less" for a group therapy

session .

54 . When a response was not forthcoming, Former Employee

No . 1 sent follow-up e-mails to his supervisor, Mr . Schmidt, and

other supervisors, seeking "Corporate input" on the matter . He

further stated in one of his e-mails sent on April 26, 2001 to

Mr . Schmidt ; Walt Jimenez ("Jimenez"), Schmidt's supervisor ; and

Ms . Sherman, "I certainly understand the huge financial

implications, but am not willing to jeopardize my license . "

55 . That afternoon, Mr . Santini communicated with David

McMullan ("McMullan"), a HCAP Support Services Manager based in

HealthSouth's headquarters in Birmingham, Alabama . In an e-mail

response to Mr . Santini, Mr . McMullan confirmed that the HCAP

billing system "does not support Group PT/OT," i .e ., permit entry

of a group billing code . Mr . McMullan further noted that if the

interpretation were accurate, "you could consider 75-80% of HS

1730 / CMP / 00060147 .WPD v1 22

patients treated in group " and that doing so would have

"significant impact financially to the clinic " and, of necessity,

to HealthSouth .

56 . On April 30, 2001, Former Employee No . 1 sent another

follow-up e-mail to Messrs . Jimenez and Schmidt when he still had

not received an acceptable response . in that e-mail message,

entitled "HCAP-HCFA Group Therapy," Former Employee No . 1

elaborated upon his reasons for believing the Company was

committing "Medicare billing fraud" :

As you know from last weeks e-mails I have

expressed a concern re : this issue . I am

still concerned . . . . I base my concerns notonly on the Eli Rehab Report article dated 4-

13-01, but I also have talked to another

Indiana P .T . who had an independent

compliance audit done for his practice . . . .[T]he auditor that visited my friend agreed

with what is reported in the Eli report . I

am not trying to create trouble and certainly

do understand the financial ramifications of

this, but one must also consider the

financial issues of a Medicare billing fraud

claim . In Orlando we repeatedly hear "do the

right thing" and listen to the compliance

attorneys [sic] presentations . I will feel

much more comfortable when someone is able to

actually produce this policy . Your response

to this will be appreciated .

(Emphasis added . )

57 . Dissatisfied with the lack of response from his

HealthSouth superiors, Former Employee No . 1 contacted the

American Physical Therapy Association ("APTA") for its

interpretation on group therapy billing . That organization

confirmed that the practices being employed by HealthSouth were

improper .

1730 / CMP / 00060147.WPD v1 2 3

58 . On May 2, 2001, Former Employee No . 1 then sent an

e-mail summarizing his discussions with the APTA to Schmidt . In

that e-mail, Former Employee No . 1 stated that he had been told

by APTA "that the group therapy code should be used whenever

treating two or more patients at the same time . She stated that

this has been a HCFA guideline dating back to 1996 . "

59 . On May 3, 2001, Former Employee No . 1 then received a

fax transmission from APTA explaining : "If you are treating two

patients at the same time you need to use group therapy code ."

That fax transmission enclosed the applicable page from the 1996

HCFA regulations (see % 42, supra) on which APTA based its

conclusion .

60 . The next day, Former Employee No . 1 forwarded the APTA

transmissions to his superiors, Mr . Schmidt and Ms . Sherman, and

reiterated his request for clarification concerning HealthSouth's

position on group therapy billing . Former Employee No . 1 wrote

as follows :

All I am asking for is to be advised inwriting or e-mail form what HS's position is

on this issue based upon the fact that I can

not bill for group therapy even if I want to .

61 . In response, Ms . Sherman sent an e-mail to Former

Employee No . 1, his superior (Mr . Schmidt) and seventeen other

HealthSouth executives, stating :

I wanted to let you all know that I will be

attending a training in Birmingham on May 7 .The focus of the training will be on the HCAR

Audit (Medicare) and the new Outpatient P&PManual .

1730 / CMP 100060147 .WPD v1 2 4

After I return from the training, I will sendout information to each of you (or schedule aconference call) on both the HCAR audit andthe new P&P manual .

While I'm in Birmingham, I will also try toobtain information on Medicare billingissues, especially regarding the use of"group therapy" codes .

62 . On May 9, 2001, Former Employee No . 1 was told by Ms .

Sherman that she had not obtained clarification of the group

billing issue from HealthSouth's senior management while in

Birmingham . She further told Former Employee No . 1 that

HealthSouth was continuing to have its employees (impermissibly)

bill group therapy sessions as if they were one-on-one sessions .

In an e-mail to Schmidt that afternoon, Former Employee No . 1

repeated Ms . Sherman's remarks and stated : "Scares me . Advise .,,

63 . Still unable to obtain a response, on May 10, 200 1

Former Employee No . 1 sent an e-mail re : "Stonewalled on group

therapy" to Messrs . Santini, Jimenez, and Jimenez's superior,

Floyd Stahl ("Stahl") . In that e-mail, Former Employee No . 1

summarized his concerns that HealthSouth was perpetrating

"billing fraud" :

As most of you know I have been repeatedlyexpressing my concerns re : group therapy

billing dating back to 4-23-01 . I know andrealize that this is a very controversial

issue and is open to many differentinterpretations . What concerns me is that

many people and organizations (HCFA & APTA)state that when treating two or more people

at the same time you must bill as group

1730 / CMP / 00060147 .WPD v1 25

therapy . I have the HCFA transmittal, a tape

recorded message from Elizabeth O'Brien from

the APTA Department of Governmental Affairs,and a copy of the HCFA Federal Register all

backing-up this interpretation . I have been

advised that HS has a policy on this, but allefforts on my part to obtain a copy of this

have been unsuccessful . As you should knowthere is no way for us to bill for group

therapy in the HCAP system even if we wanted

to . The fact that we are being asked to

continue billing with this system, knowingthat some people may interpret this asbilling fraud causes me significant

concern . . . .

(Emphasis added . )

64 . On may 14, 2001, the "Stonewalled on group therapy "

e-mail message was sent by Mr . Santini to Mike McCracken

("McCracken") in HealthSouth's corporate headquarters . Mr .

Santini requested clarification of the "Group Therapy issue" in

an effort to "resolve the problems and put everyone's minds at

ease ."

65 . On May 15, 2001, Mr . Schmidt provided Former Employe e

No . 1, Mr . Jimenez and Ms . Sherman with a document entitled

"Position on Group Therapy" which purported to set forth

Schmidt's understanding of HealthSouth's position on group

therapy billing :

It is the position of HealthSouth that simplybecause two patients are being treated during

the same period, this does not necessarilyconstitute group therapy and, as such,

patients will continue to be charged forindividual therapy sessions . A group therapy

charge would only be appropriate in caseswhere two or more patients are being treated

during the same time period for the samediagnosis and with the same modality or

treatment .

1730 / CMP / 00060147 .WPD v1 2 6

Notably, this interpretation is inconsistent with the plai n

language of the existing CPT codes and interpretative literature ,

as set forth in paragraphs 31-48, supra .

66 . Ms . Sherman then sent an e-mail later that day to

Messrs . Schmidt, Jimenez, and Stahl, stating :

I have now talked to 6 people from corporatein the various departments of MedicareCertification, Medicare Reimbursement andQuality Standards . So far, I have not beentold that there is an "official corporatepolicy ." None of the people that I havetalked to have been able to give a definitiveanswer . . . .

67 . On May 17, 2001, Former Employee No . 1 sent Mr . Schmidt

a schedule summarizing 30 of the communications Former Employee

No . 1 had had with his superiors, colleagues, or APTA questioning

the appropriateness of HealthSouth's billing practices . In his

accompanying e-mail message to Mr . Schmidt, Former Employee No . 1

stated :

Enclosed please find my documentedcommunication efforts trying to resolve the

"group therapy" issue . I know management has

become irritated that I continue to pursuethis, but I feel my clinicians and myself

need to be assured that we are "doing the

right thing" . We are the one with a license,

career, and profession to protect and I donot feel my requests have been at all

unreasonable .

68 . On May 17, 2001, Mr . McCracken sent an e-mail message

to Messrs . Santini, McMullan and Former Employee No . 1

representing that the group therapy issue was "being worked on a t

a high level in HealthSouth" :

1730 / CMP / 00060147.WPD v1 2 7

From what I understand, HCAP does not allow

the therapist to bill group therapy .

Information received recently from APTAindicates that group therapy should be billed

for 2 or more individuals receiving

therapy . . . . This is being worked on at a

high level in HealthSouth, but it sounds like

you know as much as I do right now .

(Emphasis added . )

69 . On May 18, 2001, Former Employee No . 1 sent Mr . Santini

an e-mail thanking him for his assistance in having HealthSouth's

senior executives address the group billing issue . In that

e-mail, Former Employee No . 1 further expressed his awareness

that he had "ruffled a few feathers" at the Company by pressing

the fact that HealthSouth had been systematically overbilling the

Government by upcoding group therapy sessions to one-on-one

sessions for billing purposes and "need[ed] to back off" on the

matter .

70 . Nevertheless, on May 29, 2001, Former Employee No . 1

sent Mr . Santini an e-mail reopening the matter because of a

recently announced settlement with Medicare for "overbilling" :

I know I had vowed to back off on the "group"

controversy, but in view of last week'ssettlement with Medicare, for "overbilling"

would it not be advisable to get some

resolution on this ASAP? Just my views . . . .

71 . On May 31, 2001, Mr . Schmidt sent an e-mail to his

superiors, Messrs . Stahl and Jimenez, recommending that

HealthSouth address the overbilling issue :

I appreciate your recognition of the issue

. . . regarding how HCAP does (or does not)address group therapy charges . While we seem

to have reached consensus conceptually on

1730 / CMP / 00060147.WPD v1 2 8

this matter, I think we still need to look atthis matter on a global level as there hasnever been clear resolution provided byanyone at the corporate level .

This recommendation was ignored too and HealthSouth continued t o

stonewall and systematically overbill the Government on group

therapy sessions .

Former Employee No . 2

72 . Former Employee No . 2 worked for HealthSouth as a

Supervisor for Registration at a HealthSouth clinic in New Jersey

for about three years until her departure on or about October 1,

2001 . Former Employee No . 2 also witnessed rampant upcoding by

the HealthSouth employees at the clinic . Again, group physical

therapy sessions were improperly upcoded and charged to Medicare

as if the sessions had involved individual treatment . Former

Employee No . 2 witnessed these practices throughout her career at

HealthSouth .

73 . Moreover, there were other upcoding practices at th e

HealthSouth clinic which were even more egregious . For example,

a HealthSouth employee who lacked any "formal training," and was

not a physical, occupational or speech therapist, was designated

as a "job coach ." He would work with 7 or 8 patients and do

practically nothing -- perhaps discuss employment opportunities,

perhaps do a few exercises , and would bill for each patient as if

individual therapy had been performed .

1730 / CMP / 00060147 .WPD v1 2 9

Former Employee No . 3

74 . Former Employee No . 3 was a HealthSouth Director of

Business Development at a hospital in Florida from mid-1999 to

late 2000 . In that capacity, Former Employee No . 3 supervised

4-6 employees . Her duties included supervising the admissions

department and in-patient and out-patient business development .

After leaving HealthSouth, Former Employee No . 3 remained in

contact with former colleagues at HealthSouth facilities . From

those colleagues she learned that questions arose as to whethe r

HealthSouth was improperly billing group therapy sessions as

individual sessions . Specifically, colleagues of Employee No . 3

asked management at HealthSouth's corporate headquarters for

guidance as to whether the facility was correctly billing as

individual sessions therapy that should be billed under the group

CPT Code . Instead of providing its employees with guidance on

the matter, HealthSouth's executives at corporate headquarters

advised Former Employee No . 3's colleagues to continue billing

their activities as individual rather than group therapy

sessions .

Former Enwloyee No . 4

75 . Former Employee No . 4 was employed as a Prospective

Payment Systems Specialist at a HealthSouth rehabilitation

hospital in Las Vegas, Nevada for about six months until her

departure in June 2002 . During her employment, Former Employee

No . 4 was aware of practices by the Company to manipulate billin g

1730 / CMP / 00060147.WPD v1 30

codes under PPS to boost revenues . Specifically, Former Employee

No . 4 was pressured by her supervisors to "move up" the codes,

i .e ., bill a code that earns a higher rate, to obtain a higher

reimbursement from Medicare .

THE QUI TAM ACTIONS

76 . In addition to the questionable billing practices

raised internally by HealthSouth's employees, over at least the

past five years, the Company has been a defendant in at least

four gui tam actions alleging that HealthSouth had improperly

overcharged Medicare for therapy services provided to patients at

the Company's facilities . Those actions are as follows :

The Devace Action

77 . On April 24, 1998, James Devage, a former HealthSouth

patient, filed an action (the "Devage Comp .") in the United

States District Court for the Western District of Texas, San

Antonio Division, U.S . ex rel Devage v. HealthSouth Corp . et al .,

Civil Action No . SA-98-CA-0372 (DWS) (the "Devage Action") .

78 . In the Devage Action, Plaintiff alleged, among other

unlawful acts, that HealthSouth knowingly and fraudulently

overcharged Medicare for :

• individual therapy sessions that were in

fact group therapy, under the pertinentbilling codes and procedures ; DevageComp . 19[ 49, 50 .

1730 / CMP / 00060147.WPD v1 31

• therapeutic exercises (gym) to develop

strength and endurance, range of motion,and flexibility with direct (one-on-one)

contact between the patient and the

therapist when in fact, one-on-one

services were never performed ; DevageComp . 1 56 .

• aquatic therapy with therapeutic

exercises with direct contact when infact one-on-one services were not

performed and/or where the service was

not medically necessary . Devage Comp .1 62 .

79 . Mr . Devage further alleged that after demonstratin g

exercises to new patients on an individual basis, and thereafter

not providing one-on-one contact except to answer occasional

questions as set forth in Devage Comp . 11 57-58, the physical

therapists would nevertheless bill for individual therapy .

80 . According to Mr . Devage, HealthSouth als o

misrepresented to Medicare the location where the outpatient

therapeutic services had been performed in order improperly to

receive the higher reimbursement rates allowed in certain

geographic areas . Devage alleged that he had received his

physical therapy in San Antonio, Texas, but his Medicare

explanation of benefits indicated that he had received the

therapy in Austin, Texas, where Medicare reimbursement rates are

higher . Devage Comp . 1% 67-68 .

81 . All of the above allegations were based on either

Devage's personal knowledge or communications with fellow

patients who confirmed that they had had similar experiences .

Devage Comp . ¶j 13, 65 .

1730 / CMP / 00060147 . WPD vl 32

82 . In May of 2002, the United States intervened in the

Devage Action as a plaintiff . The Government complaint (the

"U .S . Comp .") alleged that between January 1, 1996 and May 23,

2002, the date of the filing of the Government complaint ,

HealthSouth improperly submitted claims to Government payors for

therapy services provided at outpatient physical therapy

facilities without a properly certified plan of care, as required

by Medicare regulations .!/ The Government further alleged that

HealthSouth improperly billed Government payors for services not

provided or for services provided by unqualified personnel . Id .

83 . Since early 1995, the Cahaba Government Benefit s

Administration, a division of Blue Cross Blue Shield of Alabama

("Cahaba") has served as national fiscal intermediary/carrier for

HealthSouth . U .S . Comp . 1 15 . In this capacity, Cahaba

processed most Medicare claims submitted by HealthSouth . Id . In

1996 and 1997, during a routine analysis of outpatient claims,

Cahaba noticed certain aberrations in claims that HealthSouth had

submitted . U .S . Comp . 1 16 . Accordingly, Cahaba began a full

investigation of HealthSouth's Medicare billing practices . id .

84 . According to the Government, the Cahaba investigation

included a review of more than 5,000 Medicare claims for services

1 A plan of care is required by law before a therapy

provider can be reimbursed by Medicare . The plan, required by 42U .S .C . § 1395 must be prepared by a physician or physicaltherapist . 42 C .F .R . § 410,61(b)(1) ; 42 C .F .R . § 485 .711 . It

must describe the type, amount, frequency and duration of thephysical therapy to be furnished to the patient, and must

indicate the diagnosis and anticipated goals . 42 C .F .R .§ 410,61(b)(1) ; 42 C .F .R . § 485 .711 .

1730 / CMP / 00060147 .WPD v1 33

rendered at 60 HealthSouth outpatient facilities . U .S . Comp .

1 17 . The consultants who reviewed the records found similar

instances of HealthSouth's failure to obtain properly certified

plans of care in connection with a substantial percentage of the

Medicare claims reviewed, including facilities where the failure

to comply with the plan of care requirements was nearly 100% .

U .S . Comp . 1 26 . In addition, Cahaba conducted pre-payment

audits of Medicare claims submitted by HealthSouth outpatient

physical therapy facilities during 1999 . Id . Those audits

revealed a similarly high claims denial rate based on

HealthSouth's failure to obtain a properly certified plan of care

for the physical therapy services rendered to the beneficiary .

Id . In fact, from January 1, 1996 until the date the Government

complaint was filed in May 2002, HealthSouth routinely sought

reimbursement for outpatient physical therapy services provided

in the absence of a certified or recertified plan of care .? /

U .S . Comp . ¶ 23 .

85 . The Government also charged HealthSouth with billin g

for services provided by unqualified personnel . For example, the

Medicare program only pays for outpatient physical therapy

services that are provided by qualified personnel . U .S . Comp .

1 30 . Specifically, personnel qualified to provide outpatient

physical therapy services are limited to licensed physica l

2 The Government alleged numerous specific examples,

provided by confidential sources, of HealthSouth's submission ofclaims to Medicare despite a failure to comply with the plan ofcare requirements . U .S . Comp . ¶ 25 a-d .

1730 / CMP / 00060147 .WPD v1 34

therapists and licensed physical therapy assistants who are

acting under the supervision of a licenced physical therapist .

Id . The Medicare program does not pay for physical therapy

services provided by supportive personnel, such as physical

therapy aides, athletic trainers or student trainees . U .S . Comp .

1 31 . Nevertheless, in an effort to boost its Medicare claims

and revenues, HealthSouth adopted and implemented a corporate

policy permitting and encouraging the use of supportive personnel

to provide physical therapy services to Medicare beneficiaries .

U .S . Comp . 1 32 . This policy was sometimes referred to as "Team

Treatment ." Id . Implementation of the "Team Treatment" policy

resulted in Medicare claims for reimbursement being

systematically submitted by HealthSouth facilities for physical

therapy services provided by supportive personnel . Id .

86 . On occasion, the "Team" would consist of a physical

therapy assistant and supportive personnel . U .S . Comp . ' 33 .

For each member of the "Team," two or more patients would be

given appointments to receive physical therapy at the same or at

an overlapping time . Id . HealthSouth submitted a claim for

reimbursement for the services provided to the patient

notwithstanding the fact that the patient was treated by

supportive personnel rather than a physical therapist or physical

therapy assistant . Id . Also, the services provided to each

patient were billed as if the physical therapist or physical

therapy assistant provided direct, one-on-one care . U .S . Comp .

1 48 .

1730 / CMP / 00060147 .WPD v1 35

87 . The Government further alleged that the practice o f

filing for services provided by unqualified personnel occurred

throughout HealthSouth facilities nationwide . For example :

• At a HealthSouth outpatient physical

therapy clinic in St . Petersburg,Florida supportive personnel often had

full patient schedules . U .S . Comp .

134(a) .

• At a HealthSouth outpatient

rehabilitation facility in Des Moines,

Iowa, HealthSouth physical therapists at

the facility were told that it wasexpected that they would team with onesupportive person and together they

would see 24 patients in an 8 hour day,

billing between $150-200 (or 4 units of

direct, one-on-one care) per patientvisit . The only way this goal could bemet was to have the supportive personnel

provide services directly to the

patient, and to bill those services asif the physical therapist had provided

the care . Id . 134(b) .

At a HealthSouth outpatient facility in

Scottsdale, Arizona, physical therapy

was provided to a patient by a certifiedathletic trainer . HealthSouth submitted

Medicare claims for interim payments to

Cahaba for the physical therapy as if it

had been performed by a physicaltherapist . Id. 135(b) .

At a HealthSouth outpatient facility in

Glen Burnie, Maryland on multipleoccasions in June 1995, the physical

therapy was rendered by a studentphysical therapist . HealthSouth

submitted Medicare claims for interim

payments to Cahaba for the physicaltherapy as if it had been performed by a

physical therapist . Id . 135(c) .

88 . The Cahaba investigation of HealthSouth's Medicar e

billing practices outlined above also found similar instances o f

1730 / CMP / 00060147 . WPD v1 36

billings for services provided by supportive personnel in a

substantial percentage of cases . In fact, Cahaba's review team

observed many instances of supportive personnel rendering

physical therapy services to patients during the on-site visits

to the 60 facilities . U .S . Comp . 1 36 .

89 . According to the Government's complaint, HealthSouth

also routinely sought reimbursement for outpatient physical

therapy services which in fact were not provided . For example,

after January 1, 1999, HealthSouth billed for direct care (one-

on-one) services when such services were not provided . U .S .

Comp . 1 46 . This allegation was corroborated by the Cahaba

investigation . Id .

90 . In addition, the Government charged HealthSouth with

billing for unskilled services as if they were skilled services .

HealthSouth also systematically billed Medicare for unskilled

services that were not reimbursable under Medicare . U .S . Comp .

Q 47 .

91 . Finally, the Government alleged that there were

numerous meetings, telephone conversations and other contacts

between Cahaba and HealthSouth at which various Medicare

regulations and billing issues were discussed since HealthSouth

selected Cahaba to be its national fiscal intermediary/carrier in

1995 . Despite these contacts, however, HealthSouth never sought

guidance from Cahaba concerning whether the Company's corporate

billing practices conflicted with Medicare reimbursement

regulations . U .S . Comp . 1 38 .

1730 / CMP / 00060147.WPD v1 3 7

The Darling Actio n

92 . In February of 2000, John Darling, another former

HealthSouth patient, filed an action (the "Darling Comp .")

against HealthSouth in the United States District Court for the

Middle District of Florida, Tampa Division, U. S . ex rel . Darling

vs . HealthSouth Sports Medicine & Rehabilitation Center o f

Clearwater LP, Case No . 8 :00-cv-416-T-26B, for improperly billing

Medicare for physical therapy (the "Darling Action") . The

allegations by Mr . Darling, which are based on Darling's personal

experience and similar to those made by Devage, charge that a

HealthSouth facility in Clearwater, Florida wrongfully upcoded

Darling's Medicare billings . Darling Comp . a 22 .

93 . Mr . Darling also alleged that HealthSouth billed for

therapy sessions by licensed therapists when in fact the therapy

received was provided by a low-paid, unlicenced employee with no

formal training whatsoever . Id . In addition to providing

therapy, this unlicenced employee also performed laundry and

cleaning functions . Nevertheless, he was dressed to look th e

same as the licensed therapists . Id . According to Mr . Darling,

the improper therapy practices at HealthSouth's Clearwater

Facility spanned a period of at least four years . Id .

94 . On February 28, 2002, the Government intervened as a

plaintiff in the Darling Action with respect to those allegations

asserting that HealthSouth "improperly billed government payers

for excessive units of one-on-one physical therapy services or

1730 / CMP / 00060147 .WPD v1 38

for physical therapy services performed by unlicenced personnel ."

In addition, the Government gave notice of its intention to

assert additional allegations not alleged in the Darling

complaint that HealthSouth "improperly billed government payers . "

The Mandel Action

95 . On or about October 1, 1999, another action (the

"Mandel Comp .") alleging similar misconduct was filed in the

United States District Court for the Southern District of New

York entitled U .S . ex . rel . Mark D. Mandel v. HealthSouth d/b/a

HealthSouth Network Services of NY IPA, Inc ., 99 Civ . 10184 (JSM)

(the "Mandel Action") .

96 . According to a signed Statement attached to hi s

complaint (the "Statement"), Mr . Mandel has 28 years of

experience in the "health and management fields encompassing

marketing, computer-based system design and installation,

research [and] teaching ." Statement T 2 . Mr . Mandel further

asserted that he holds a Master's Degree in Public

Administration, has been published "in many healthcare journals"

and "has been certified as an expert in healthcare reimbursement

in Federal Court ." Id . 1 3 .

97 . Based on his personal experiences at a HealthSout h

rehabilitation facility in New York City, Mr . Mandel alleged that

the Company was "[d]efraud[ing] the Medicare [p]rogram by

[m]isrepresenting the [n]ature of [t]heir [p]rovided [s]ervices" .

Mandel Comp ., at 5 . According to Mr . Mandel, in April 1999, he

1730 / CMP / 00060147 .WPD v1 39

received therapy from a HealthSouth facility in New York City for

treatment related to herniated discs . Statement 1 10 . Over his

objection, the therapy was provided by a student, not a certified

physical therapist . Id. 11 11-12 . When Mr . Mandel complained

about HealthSouth's practice, he was told by the physical

therapist supervising the student that there were four students

in the practice and that all patients were treated by students .

Id . 1 13 .

98 . Mr . Mandel further alleged that his insurance carrier,

The Prudential, was billed by HealthSouth "as if a licensed

physical therapist had delivered the care to me rather than the

practitioner (who is unlicensed and donates his services as part

of his educational requirements) ." Statement 1 16 . Based on the

fact that as part of the registration process HealthSouth had

provided the Relator with a number of documents pertaining to

Medicare reimbursement, Mr . Mandel alleged that the Company "has

defrauded the Medicare program and violated the False Claims Act

by billing Medicare in the same manner as HealthSouth billed The

Prudential in my case ." Id. 1 17 .

99 . At the request of the Government, the Mandel and

Darling Actions have been transferred to the United States

District Court for the Western District of Texas, San Antonio

Division, and consolidated with the Devage Action .

1730 / CMP / 00060147 .WPD vl 4 0

The Manning Action

100 . On August 18, 1999, an action was filed in the United

States District Court for the Northern District of Alabama

entitled U.S. ex. rel . Dewayne Manning v . HealthSouth Corp .,

Civil Action No . CV-99-B-2150-S (the "Manning Action") . In his

Complaint, Manning averred that he began employment with

HealthSouth as a physical therapist technician in May 1996 and

that the Company, among other wrongful acts, billed Government

payors for physical therapy services performed by unlicensed

personnel at outpatient rehabilitation facilities .

101 . On December 27, 2001, the Government intervened in th e

Manning Action to assert the foregoing claim . In addition, the

Government gave notice of its intention to assert additional

claims not alleged in the Manning Action that HealthSouth

"improperly billed government payors ." On May 8, 2002, the

Government withdrew its intervention based on the existence of

the earlier-filed cases alleging the same claims .

TRANSMITTAL 1753

102 . After years of clear direction from CMS on how to code

and bill for outpatient rehabilitative therapy -- Code 97150 for

group therapy consisting of 2 or more individuals, and Code 97110

for individual therapy - on May 17, 2002, CMS issued Transmittal

1753, effective July 1, 2002, which stated :

1730 / CMP / 00060147 .WPD v1 4 1

15302 .GROUP THERAPY SERVICES (CODE 97150 )

Pay for outpatient physical therapy services

(which includes outpatient speech-language

pathology services) and outpatientoccupational therapy services provided

simultaneously to two or more individuals by

a practitioner as group therapy services .

The individuals can be, but need not beperforming the same activity . The physician

or therapist involved in group therapy

services must be in constant attendance, but

one-on-one patient contact is not required .

103 . In issuing Transmittal 1753, CMS emphasized at the tim e

and thereafter, that the Transmittal was merely a reaffirmation

of the proper method of billing for therapeutic exercise and

procedures . That view was shared by leading commentators on

healthcare billing practices . For example, in its July 5, 2002

edition, Eli's Rehab Report (in an article that was circulated

among members of HealthSouth senior management) reported as

follows :

[1753 is] old news in a new package -- it

merely "manualizes" information that was

already noted in the Federal Register last

year . . . .

The American Physical Therapist

Association says the transmittal is inaccordance with what APTA has been telling

its members since the group therapy codes

were first added to the Federal Register in

1994 .

[Y]ou need to be careful to bill

individual CPT codes only if you are giving apatient one-on-one care . Otherwise you'rebilling for more time than you worked, which

would win you a government audit and fines .

If you're the only person in the room, youreally shouldn't be walking out with four

1730 / CMP / 00060147 .WPD V1 42

units of time for one hour [actuallyworked] . . . .

MISREPRESENTATIONS DURING THE CLASS PERIOD

104 . The Class Period begins on December 12, 2001, whe n

HealthSouth issued a press release representing that the Company

anticipated earning $1 .14 per share for the year ending December

31, 2002 . Defendant Scrushy was quoted in that press release as

stating : "We will continue in our efforts to reduce the cost of

healthcare services through hard work, innovation and efficiency,

and we expect that to be beneficial for our patients, physicians

and stockholders alike ." The release further represented : "The

guidance on HealthSouth's earnings objectives set forth above is

based on current budget goals and HealthSouth's assessment of

current conditions affecting its business . . . . HealthSouth

expects to update such guidance to reflect any material changes

in its expectations and objectives if and when it determines that

it is necessary or desirable to do so . "

105 . The foregoing representations were materially false an d

misleading . As detailed herein, HealthSouth's financial

forecasts and business model were predicated upon systematically

overcharging Medicare and other payors for the Company's

services . Accordingly, there was no reasonable basis for the

$1 .14 per share earnings estimate released by Defendants .

Similarly false and misleading was Defendants' representation

that the Company was taking steps "to reduce the cost o f

1730 / CMP / 00060147 .WPD v1 43

healthcare services," or that the Company's fraudulent activities

would be "beneficial for . . . stockholders . "

106 . On January 14, 2002, HealthSouth issued a press release

(the "January 14 Press Release") reiterating its earnings

guidance for the year ending December 31, 2002 . The Company

announced that it remained comfortable with its previously

announced earnings per share estimate of $1 .14 for 2002, and

Defendant Scrushy stated : "'We remain very excited about the

change from cost-based reimbursement to PPS . HealthSouth has

been an outspoken advocate of PPS in congressional and regulatory

circles for some time .," "PPS," or Prospective Payment System,

was the new reimbursement system implemented by Medicare

regulations .

107 . At the time the January 14 Press Release was issued ,

Defendants knew, or were reckless in not knowing, that

HealthSouth's practice of upcoding group therapy sessions and the

other unlawful practices described herein were inconsistent with

long- established Government coding and reimbursement policies,

thereby artificially inflating the Company' s revenues and

earnings . The earnings guidance provided in the January 14 Press

Release was premised on the continuation of this artificial

inflation of the Company's revenues and profits .

108 . On January 22, 2002, HealthSouth issued a press release

touting the accuracy of its "internal claims model" and

reaffirming its earnings per share guidance of $1 .14 per share

for 2002 . In the press release, HealthSouth represented that the

1730 / CMP / 00060147 .WPD v1 44

total payment received on the first claims submitted under PPS

was "identical" to that predicted by the Company's internal

model . Defendant Scrushy further represented : "'We are very

pleased that the first PPS payments are exactly what we expected,

validating the accuracy of our internal claims model . . . . We

remain comfortable with our 2002 earnings per share guidance of

$1 .14, which represents a 39% increase over consensus estimates

for 2001 .'"

109 . The foregoing statements were materially false and

misleading . As noted previously, HealthSouth's billing and

financial models were predicated upon upcoding and the other

unlawful billing practices detailed herein .

110 . On March 12, 2002, HealthSouth issued a press release

(the "March 12 Press Release") announcing financial results for

the fourth quarter and year ended December 31, 2001 . That Press

Release stated in part as follows :

For the quarter, HealthSouth's revenues were$1 .115 billion, an increase of 3 .5% as

compared to $1 .077 billion for the fourthquarter of 2000 and an increase of 7 .5% afteradjusting in both periods for divestitures in

2001 . Income before unusual and non-

recurring items for the 2001 quarter was$88 .6 million, an increase of 15 .2% compared

to net income of $76 .9 million in the 2000

quarter . The comparable income per share(assuming dilution) was $ .22 for the 2001

quarter, consistent with consensus Wall

Street estimates, an increase of 15 .8% ascompared to earnings per share (assumingdilution) of $ .19 in the 2000 quarter . For

the year ended December 31, 2001,HealthSouth's revenues were $4 .380 billion,

compared to $4 .195 billion for 2000 . Incomebefore unusual and non-recurring items for

1730 / CMP / 00060147.WPD vl 45

2001 was $326 .1 million, compared to net

income of $278 .5 million for 2000 . The

comparable income per share ( assuming

dilution) for 2001 was $ .82, a 15 .5% increase

compared to net income per share (assuming

dilution) of $ .71 for 2000 .

111 . In the March 12 Press Release , Defendant Scrushy

stated :

`Our fourth quarter results reflect a strong

finish to a very successful year . . . . The

fundamentals of our business showed continuedimprovement, as same-store volume growth

ranged from 6 .5% to 13% in our outpatient

lines of business compared to the fourth

quarter of 2000 . Pricing trends were alsostrong on both a sequential quarter and year-

over-year basis, contributing to an increase

in our EBITDA margin to 28 .2% . Looking

ahead, our early experience under the newinpatient rehabilitation prospective payment

system is confirming our expectations for thepositive impact that PPS will have on our

business . . . . We are proud of our performancelast year, and we are committed to strategic

growth, continued innovation and strong

financial performance in 2002 . '

112 . The revenues, earnings and margins reported in th e

March 12 Press Release were artificially and materially inflated

through the Company's systematic overbilling of Medicare and

other payors through upcoding of group therapy sessions and the

other improper billing practices described herein . Similarly,

the "commit[ment] to . . . strong financial performance in 2002"

was also predicated upon a continuation of inflated billings to

the Government .

113 . On that same day, HealthSouth hosted a conference call

for investors and securities analysts moderated by Defendant

Scrushy . During that call, Defendant Scrushy represented :

1730 I CMP / 00060147 .WPD vl 4 6

Now as far as the financial outlook, we'revery comfortable with the 28 to 29 percent

EBITDA margin for 102 . Very comfortable with

the consensus EPS estimate of $1 .14 for 2002,

and that represents 39 percent earnings

growth from where we were . We're verycomfortable with a sustained EPS growth of 15

percent or greater per year .

The foregoing representations were materially false and

misleading . As Scrushy knew, or was reckless in not knowing,

HealthSouth's reported and projected earnings and EBITDA margins

were predicated on upcoding and other improper Medicare billing

practices which artificially inflated the Company's revenues,

earnings, and margins .

114 . In an interview with CNBC Anchor Ted David on March 12 ,

2002, Defendant Scrushy falsely represented that HealthSouth was

poised for "a very strong year and I think everybody knows it ."

This assertion was also materially false and misleading, a s

HealthSouth was fast approaching the end of its deceptive

practices .

115 . On March 27, 2002, HealthSouth filed with the SEC the

2001 Form 10-K (for the year ended December 31, 2001) signed by,

inter alia, each of the individual Defendants . In that 10-K,

Defendants represented as follows :

Medicare Participation and Reimbursemen t

In order to participate in the Medicare

program and receive Medicare reimbursement,each facility must comply with the applicable

regulations of the United States Departmentof Health and Human Services . . . . All of our

inpatient facilities participate in theMedicare program . All of our surgery centers

and 121 of our diagnostic centers ar e

1730 / CMP / 00060147.WPD vl 47

certified (or awaiting certification) under

the Medicare program . Our Medicare-certified

facilities, inpatient and outpatient, undergo

annual on-site Medicare certification surveys

in order to maintain their certificationstatus . Failure to comply with the program's

conditions of participation may result in

loss of program reimbursement or other

governmental sanctions . We have developed

our operational systems to attempt to assure

compliance with the various standards and

requirements of the Medicare program and have

established ongoing assurance activities to

monitor compliance .

(Emphasis added . )

116 . The foregoing representations in the 2001 Form 10- K

were materially false and misleading . As detailed herein, the

Company's "operational systems" were designed to systematically

overcharge Medicare and other payors through upcoding and other

improper billing practices, not "to assure compliance with the

various standards and requirements of the Medicare program ."

Similarly, the Company was engaged in a concerted effort to avoid

rather than "assur[e] . . . compliance," with the Government's

billing procedures .

117 . In April 2002, Defendant Scrushy determined that h e

would exercise options due to expire on May 14, 2002, to purchase

5,275,360 shares of HealthSouth common stock at an exercise price

of $3 .7825 per share . Scrushy also determined at that time that

he would sell all of the underlying shares upon exercise of the

options . Defendant Owens was fully aware of Scrushy's plans .

118 . On May 2, 2002, Defendants caused HealthSouth to issue

a press release announcing the Company's financial results fo r

1730 / CMP / 00060147 .WPD vl 4 8

the first quarter ended March 31, 2002 (the "May 2 Pres s

Release ") . That Press Release contained the following

representations , among others :

For the first quarter, HealthSouth's revenueswere $1 .130 billion, an increase of 3 .6% as

compared to $1 .090 billion for the firstquarter of 2001 and an increase of 8 .8% after

adjusting in both periods for divestitures in

2001 . Net income for the 2002 quarter was

$107 .7 million, an increase of 43% comparedto net income of $75 .3 million in the 2001

quarter . Earnings per share (assuming

dilution) were $ .27 for the 2002 quarter,consistent with consensus Wall Street

estimates, an increase of 42% as compared to

earnings per share (assuming dilution) of

$ .19 in the 2001 quarter . For the quarter,the company's earnings before interest,

taxes, depreciation and amortization (EBITDA)

margin was 29 .1% compared to 27 .3% in thefirst quarter of 2001 .

119 . Defendant Scrushy was quoted in the May 2 Press Releas e

as follows :

"We showed strong operational performance inthe first quarter of 2002 . . . . Our first waveof inpatient rehabilitation facilities movedinto the new inpatient rehabilitationprospective payment system beginning January1, and just as we had projected, PPS had a

positive impact on our bottom line . We have

spent years preparing for this change,lowering our costs and increasing our

efficiencies, and our initial PPS payments

have continued to come in on target with ourpreliminary estimates . In addition, we saw

strong same-store volume growth in all of ourambulatory lines and in our inpatient

rehabilitation facilities . We are especially

pleased to report the seventh consecutivequarter of increases in same-store volume in

our surgery centers . Given these positivetrends, we are actively pursuing additional

strategic growth and development ofopportunities across our product lines .

After a very successful 2001, the firs t

1730 / CMP / 00060147 .WPD v1 49

quarter has positioned us well to moveforward to a new level in 2002 . "

120 . The revenues and earnings reported in the May 2 Press

Release were artificially and materially inflated through the

systematic upcoding and other improper billing practices, which

Defendants knew, or were reckless in not knowing, were improper

under long-established CMS coding and reimbursement policies .

Moreover, at the time of the May 2 Press Release, Defendant

Scrushy knew, but did not disclose, that he would be selling

5,275,360 HealthSouth shares in less than two weeks .

121 . Defendants held a conference call with the financia l

community on May 2 (the "May 2 Conference Call") to discuss

HealthSouth's recently released financial results for the quarter

ended March 31, 2002 and future prospects . Each of the

Individual Defendants participated in the Conference Call with

Defendant Scrushy acting as the principal Company spokesman .

During his presentation, Defendant Scrushy reaffirmed, "our 2002

financial outlook, we are very comfortable with a 28 to 30%

ebitda margin for 102 . We are very comfortable with a consensus

eps estimate of $1 .14 for this year, represent[ing] a 39%

earnings growth . . . . "

122 . At the time of the May 2 Conference Call, Defendant

Scrushy knew, or was reckless in not knowing, that HealthSouth's

improper billing practices were artificially inflating the

Company's revenues, profits, and margins . The financial results

and guidance provided during the May 2 Conference Call wer e

1730 / CMP / 00060147_WPD vl 5 0

premised on the continuation of the improper billing practices .

Moreover, Defendant Scrushy had already determined, but did not

disclose, that he would be selling more than 5,200,000 shares of

HealthSouth common stock twelve days later, when he exercised his

stock options on May 14 .

123 . During the May 2 Conference Call, defendant Scrush y

announced that HealthSouth would be hosting an "investor day" in

Birmingham on May 14, 2002 and invited all the participants on

the call to attend . Scrushy explained that the attendees would

be given access to "well over 100 people that are in leadership

positions in our company . We will have our market managers, our

market leaders, senior executives and the middle management . We

have numerous presentations that will present our current

situation as well as our plans . . . ." And, later in the May 2

Conference Call, Scrushy told the participants that he had to

conclude his participation in order to make a planned appearance

on CNBC, the financial news television network .

124 . Defendant Scrushy was then interviewed concerning

HealthSouth's financial condition and stock price on CNBC on May

2, 2002 . In the interview, when asked by CNBC anchor Ted Davis,

"Where do you see your company fairly valued?" Defendant Scrushy

answered :

Well, I think the company should be north of$20 a share right now . I mean certainly weshould trade at our growth rate . And, weshould trade, you know, our company has a,you know, strong cash flow. You know, we,certainly should be higher than we are now .

1730 / CMP / 00060147 .WPD v1 5 1

I would expect to see the company in the 20s,

and that's [where] we're headed, we believe .

(Emphasis added . )

125 . Defendants' numerous misrepresentations on May 2 ha d

their intended effect . In response to those representations,

HealthSouth shares rose on that day to a Class Period high of

$15 .90 per share . Yet, the foregoing representations, among

others, that (a) the price of HealthSouth shares should be "north

of $20 a share right now ;" (b) HealthSouth shares "certainly . . .

should trade at our growth rate ;" (c) the Company was

experiencing "strong cash flow ;" (d) HealthSouth's stock price

"certainly should be higher than we are now ;" and (e) the

Company's stock price was "headed" into the "20s," were

materially false and misleading . Defendants knew, or were

reckless in not knowing, that the systematic upcoding and other

improper billing practices at HealthSouth had been artificially

inflating the Company's revenues, "growth rate," "cash flow," and

stock price . Moreover, Defendant Scrushy did not disclose that

he had already determined to sell more than 5,200,000 shares of

HealthSouth common stock just twelve days later .

126 . On May 10, 2002, HealthSouth filed with the SEC a

report on Form 10-Q for the quarter ending March 31, 2002 (the

"First Quarter 10-Q") . That report, signed by Defendants Scrushy

and Smith, repeated the financial results contained in the May 2

press release . The revenues and earnings reported in the First

Quarter 10-Q were artificially and materially inflated throug h

1730 / CMP / 00060147 .WPD v . 52

the Company's systematic pattern of billing improprieties, which

the Defendants knew, or were reckless in not knowing, was

improper under long-established CMS coding and reimbursement

policies .

127 . The numerous misrepresentations by Defendants durin g

the Class Period repeatedly caused securities analysts to

recommend the purchase of HealthSouth shares . For example, in a

report dated May 13, 2002 (one day before Defendant Scrushy sold

more than 5,200,000 shares), Lehman Brothers, Inc . ("Lehman

Brothers") issued a "Strong Buy" on HealthSouth shares and set a

"target" price of $22 per share . Lehman Brothers advised its

clients that HealthSouth shares represented "an attractive

risk/reward scenario analysis with little downside from current

levels (which we would peg in the $11-$12 range), in our view,

and solid upside potential for possibly a 40-50%+ return if the

shares reach the $19-$22 level which we have determined as fair

value . "

128 . On May 14, 2002, Defendant Scrushy exercised options t o

purchase 5,275,360 HealthSouth shares at an exercise price of

$3 .7825 per share and sold all of the shares at $14 .05 per share

for gross proceeds exceeding $74 million . The selling price of

$14 .05 per share was near the Class Period high price of $15 .90,

reached on May 2, 2002 .

129 . On that same day, the Company hosted its "Investor Day"

for securities analysts and investors to tout the Company and its

financial prospects (see 1 123, supra) . Merrill Lynch Capital

1730 / CMP / 00060147 .WPD vl 53

Markets ("Merrill Lynch") described the Investor Day presentation

as "upbeat" in a comment circulated to brokers and analysts .

130 . Also on May 14, HealthSouth issued a press release

disclosing the foregoing stock option exercise and sale of

HealthSouth shares by Defendant Scrushy and representing that he

had "no intention of selling additional shares in the near

future ." Additionally, in addressing the sales during his

Investor Day presentation, Scrushy stated that he planned to use

the proceeds of the sales to pay down a loan from the Company .

The foregoing disclosures were materially false and incomplete

because, at the time, Defendant Scrushy was negotiating to repay,

with additional HealthSouth shares, a $25 million loan owed to

HealthSouth .

131 . A few days later, on may 17, 2002, CMS issued

Transmittal 1753 (9[ 5 102-03, supra) . It was readily available on

the CMS website, as well as widely disseminated within the

healthcare industry . Numerous employees of HealthSouth received

copies of the transmittal within days of its issuance, including

Defendant Owens . Transmittal 1753 was also a supplement to the

CMS Carrier Manual, Part 3 -- Program Administration (CMS Pub .

14-3), covering the period April-June 2002 .

132 . Within days of its issuance , numerous senior executives

within HealthSouth, including Defendant Owens, were considering

the impact of Transmittal 1753 on HealthSouth' s business and

revenues from outpatient physical therapy . The issuance of

Transmittal 1753 made two things immediately clear : (i) the

1730 / CMP / 00060147 . WPD v1 54

Company could no longer ignore the plain language of CPT Codes

97110 and 97150, and (ii) the switch to proper billing practices

would have a significant adverse impact on the Company's

revenues, profits, costs and margins .

133 . On June 7 and 11, 2002, George H . Strong ("Strong"), a

Director of HealthSouth and Chairman of the Audit Committee, sold

(for his personal account or through trusts he had established)

52,125 HealthSouth shares at $13 .78 per share and 17,216 shares

at $14 .28 per share, respectively, for total proceeds exceeding

$900,000 . Additionally, earlier in the Class Period, on February

13-15, 2002, Strong had sold or disposed of an aggregate of

46,525 shares for proceeds exceeding $550,000 . Strong's sales

during the Class Period, which are detailed in paragraph 173,

infra, resulted in total proceeds exceeding $1,500,000 .

134 . On June 11, 2002, Defendants Owens and Malcolm E . McVay

("McVay"), Treasurer of HealthSouth, were the featured speakers

at a breakfast in New York on HealthSouth for investors and

analysts hosted by Lehman Brothers . During their presentation,

Owens and his subordinate continued to portray a rosy outlook for

HealthSouth, even though they were aware at the time that

Transmittal 1753 would cause the Company to change significantly

its coding and billing practices for therapy sessions with

Medicare patients .

135 . Following that upbeat presentation by Defendant Owens

and HealthSouth's Treasurer, Lehman Brothers issued a report

dated June 17, 2002 reiterating a "Strong Buy" recommendation on

1730 / CMP / 00060147 .WPD v1 5 5

HealthSouth shares . After summarizing the positive statements by

Owens and his subordinate, Lehman Brothers concluded : "We still

highlight an attractive risk/reward scenario analysis with little

downside risk from current levels (which we would peg in the $11-

$12 range), in our view, and solid upside potential for possibly

a 40-50%+ return if the shares reach the $19-$22 level which we

have determined as fair value . Thus we continue to recommend

purchase of the shares of HRC with a STRONG BUY rating . "

136 . On July 11, 2002, HealthSouth issued a press releas e

entitled "HealthSouth Confirms Guidance for 2002" (the "July 11

Press Release"), in which Defendants proclaimed comfort with the

consensus Wall Street earnings estimates for the remainder of

2002 . Defendant Scrushy was quoted in part as follows :

"We have had strong operating results throughthe first half of 2002 . . . . While the current

market instability has had an adverse affect

on our stock price, the fundamentals of our

business continue to be solid, and we remainconfident in our guidance for the rest of the

year . "

137 . Defendants issued the materially false and misleadin g

July 11 Press Release to stabilize the market price of

HealthSouth shares . At the time of the issuance of the release,

Defendants were aware of Transmittal 1753 and that implementation

of appropriate coding, billing and reimbursement procedures would

have a material adverse impact on the Company's revenues and

earnings . In addition, Defendants Scrushy and Owens knew that

the terms of a forthcoming sale of stock by Scrushy to the

Company to satisfy an outstanding $25 million loan had bee n

1730 / CMP / 00060147 .WPD v1 5 6

finalized ; and the transaction was scheduled to close at the end

of July, with the value of the shares to be calculated at their

market price on the date of the closing . Accordingly, Scrushy

and his subordinate Owens had every reason to attempt to maximize

the market price of HealthSouth shares, in order to limit the

number of shares Scrushy needed to sell to satisfy his

outstanding loan obligation .

138 . Issuance of the July 11 Press Release had its intende d

effect . In a report dated July 12, 2002, Merrill Lynch raised

its recommendation on HealthSouth shares from "NEUTRAL" to a

"STRONG BUY ." Merrill Lynch based its reco mmendation on the

representations by Defendants in the July 11 Press Release that

"management . . . knew of no reason for the recent decline on its

stock price and it remained confident in its guidance for the

rest of the year . "

139 . A favorable analysis of HealthSouth and its shares als o

appeared in the July 29, 2002 edition of Barron's, the weekly

financial periodical (the "July 29 Article") . (That edition was

first publicly disseminated on Saturday, July 27, 2002 .) Based

in large measure on discussions with Defendant Scrushy and

Defendants' false and misleading public statements, Barron's told

its readers in the July 29 Article that HealthSouth's shares were

poised to rise . Baryon's explained its reasoning as follows :

HealthSouth . . . has been recklessly diagnosedin the past few months with some of the same

management and accounting ills that havesapped the broader market's vigor . The

experience has cost the company more than

1730 / CMP / 00060147.WPD v1 57

half its market value, leaving its shares ata recent 7 .66 .

Yet HealthSouth is poised to heal itself

by meeting its profit targets for the second

quarter and the year, and by convincing Wall

Street that its books are as clean as, yes,an operating room . As investors grow to

appreciate the strength of the company's

markets, the fitness of its balance sheet and

the false nature of the charges that have

tarred HealthSouth, its limpid shares are aptto regain not just a pulse but the healthy

glow they sported before suspicion cloudedsense as the market's driving force .Specifically, with just a modest revaluation,

the stock could return at least to the mid-

teens .

140 . Defendants' misrepresentations induced Barron's to

issue the materially false and misleading statements contained in

the July 29 Article . In fact, HealthSouth was not poised to meet

its profit targets and Defendants did not warn Barron's tha t

compliance with the Government's billing requirements would

materially reduce HealthSouth's earnings and revenues .

141 . On July 31, 2002, Defendant Scrushy completed his sal e

to the Company of 2,506,770 shares of HealthSouth stock at $10 .0 6

per share .

142 . According to an article published by Forbes .com on

October 14, 2002, the underlying loan agreement between Defendant

Scrushy and HealthSouth required that it obtain a fairness

opinion from an independent investment bank in connection with

the transaction . According to Forbes .com, which obtained a

response from Defendant Scrushy on the matter that avoided th e

1730 / CMP / 00060147 .WPD v1 5 8

question, that independent fairness opinion was never obtained by

HealthSouth .

143 . On August 7, 2002, Defendants issued a press releas e

(the "August 7 Press Release ") reporting that HealthSouth ha d

recorded strong financial results for the second quarter ende d

June 30, 2002 . The press release stated :

For the second quarter, HealthSouth's

revenues were $1 .164 billion, an increase of5 .9% as compared to $1 .099 billion for the

second quarter of 2001 and an increase of

8 .6% after adjusting for divestitures in2001 . Operating earnings for the 2002

quarter were $113 .7 million, an increase of

36 .8% compared to operating earnings of $83 .1

million in the 2001 quarter . Operatingearnings per share (assuming dilution) were

$0 .28 for the 2002 quarter, consistent with

consensus Wall Street estimates, an increase

of 33 .3% as compared to operating earnings

per share (assuming dilution) of $0 .21 in the

2001 quarter . For the quarter, the Company's

earnings before interest, taxes, depreciation

and amortization (EBITDA) margin, excludingunusual and non-recurring items, was 29 .8%,compared to 28 .1% in the second quarter of

2001 .

144 . Commenting on the strong revenues for the secon d

quarter of 2002, Defendant Scrushy highlighted strong growth fo r

all the Company's product lines and announced that the Company

was close to completing a $1 billion note offering :

"The second quarter showed strength across

all product lines with each of our businesses

demonstrating continued positive volume andpricing trends . "

The revenues, earnings and margins reported in the August 7 Pres s

Release were materially inflated through the Company's systemati c

upcoding of group therapy sessions to individual sessions and th e

1730 / CMP / 00060147 .WPD v1 59

other improper billing practices described herein . Defendants

knew, or were reckless in not knowing, these actions were

improper under long-established CMS coding and reimbursement

policies .

145 . HealthSouth held a conference call that day wit h

securities analysts and investors to discuss the Company's second

quarter financial results . Each of the Individual Defendants

participated in the Conference Call with Defendant Scrushy acting

as the principal Company spokesman . During his presentation,

Defendant Scrushy emphasized the Company's "[v]ery strong second

quarter results" in which HealthSouth recorded "record quarter

revenues," met analyst consensus earnings per share estimates of

$ .20 and "continued our EBITDA margins improvement" -- results

all achieved through systematic upcoding of Medicare billings and

the other unlawful practices detailed herein . Moreover,

Defendants made no mention of Transmittal 1753 or the impact

compliance with the Government's billing procedures would have on

the financial condition, revenues, earnings and margins of the

Company .

146 . Three days after the Company released its secon d

quarter results of operations, a follow-up article appeared in

Barron's . In an article in its August 12, 2002 edition (first

disseminated to the public on August 10), Barron's reported that

the Company's stock price had risen since the publication of its

previous article and HealthSouth's release of second quarter

results of operations :

1730 / CMP / 00060147.WPD v1 6 0

Barron ' s argued in a recent profile of

HealthSouth ("Down, Not Out," July 29) thatthese charges were misplaced or exaggerated

and that the company ' s shares represented a

compelling opportunity to play an attractive

part of the health- care business at a bargainprice .

The shares began to recover thereafter, atrend that continued through last week, whenthe company' s second quarter earnings report

gave tangible evidence of progress on allfronts .

147 . The foregoing positive statements by Barron's were

based on the false assumption that the Company's second-quarter

earnings report and the numerous positive representations made by

Defendants were accurate and complete . In fact, Defendants had

failed to disclose the following adverse facts, among others :

a . Defendants ' repeated reassurances that the

Company's fundamentals were strong and that the Company woul d

meet its earnings targets for 2002 were lacking any reasonabl e

basis ;

b . Defendants had known for years that the Company

was not billing for outpatient individual and group physical an d

rehabilitation therapy in accordance with Medicare reimbursement

regulations and policies ;

c . the CMS directive set forth in Transmittal 175 3

would materially reduce the Company's revenues and earnings an d

increase its expenses going forward ; and

d . substantial expense and disruption would b e

incurred retraining Company personnel and otherwise bringing th e

1730 / CMP / 00060147 .WPD v1 6 1

Company's billing practices and procedures into compliance with

the long-standing applicable CMS rules and regulations .

148 . On August 14, 2002, HealthSouth filed with the SEC a

report on Form 10-Q for the quarter ended June 30, 2002 (the

"Second Quarter 10-Q") . The Second Quarter 10-Q was signed by

Defendants Scrushy and Smith and repeated the false financial

representations contained in the August 7 Press Release .

149 . On that same day, the Company filed with the SEC a

Report on Form 8-K (the "8-K Form") signed by Defendants Scrushy

and Smith . That filing was made in response to SEC Order 4-460,

requiring senior executives of nearly 1,000 publicly trade d

corporations to file sworn statements attesting to the accuracy

of, among other public filings, their companies' most recent

annual and quarterly financial reports .

150 . In the Form 8-K, Defendants Scrushy and Smith each

represented under oath the following with respect to the

Company's "covered report[s]," which expressly included the 2001

Form 10-K and the Second Quarter 10-Q :

no covered report contained an untrue

statement of a material fact as of end of theperiod covered by such report . . . and

no covered report omitted to state a materialfact necessary to make the statements in thecovered report, in light of the circumstancesunder which they were made, not misleading asof the end of the period covered by suchreport . . . .

151 . The foregoing representations in the Form 8-K were

materially false and misleading because they failed to disclose ,

1730 / CMP / 00060147 . WPD v1 62

among other adverse facts, that HealthSouth's "covered report[s]"

had been based on revenues and earnings predicated upon upcoding

and the other unlawful billing practices detailed herein .

Indeed, as of the date of the issuance of the Form 8-K (and

Second Quarter 10-Q), defendants or their subordinates were

finalizing their computations confirming that the Company's

belated steps to comply with the Government's long-standing

Medicare reimbursement policies would have a material adverse

effect on the revenues, earnings and margins of HealthSouth .

THE TRUTH BEGINS TO EMERGE

The August 27 Press Release Causes

HealthSouth Shares to Plunce In Pric e

152 . On August 27, 2002, prior to the commencement of

trading in HealthSouth shares, the Company stunned the investment

community by announcing that it was reducing its earnings

guidance by $175 million annually, and discontinuing and

disavowing the earnings guidance it had previously given to

investors for 2002 and 2003 . In an effort to distract attention

from the real causes of this development -- the Company's

unlawful upcoding and other overbilling practices -- Defendants

falsely claimed that the Medicare rules on outpatient individual

and group therapy billing had been changed by the Government .

153 . The Company further tried to soften the blow by

announcing the proposed separation of its Surgery Center Division

into a new public company, and changes in senior management, with

1730 / CMP / 00060147 .WPD v1 63

Defendant Scrushy serving as Chairman of the Board of the new

surgery center company ; Defendant Owens becoming Chief Executive

Officer of HealthSouth ; Defendant Smith assuming responsibility

for implementing the proposed transaction ; and McVay, then

HealthSouth Executive Vice President and Treasurer, becoming

Chief Financial Officer of HealthSouth . Additionally,

HealthSouth announced that it had hired the investment banking

firm of UBS Warburg LLC to assist "in evaluating potential

divestitures and other strategies . "

154 . The August 27, 2002 press release (the "August 27 Press

Release") stated in part as follows :

The company indicated that it was moving

forward with the separation plan at this time

in part because of unfavorable developmentsin outpatient therapy reimbursement .

Effective July 1, the Centers for Medicare

and Medicaid Services ("CMS") issued a

directive to Medicare Part B carriersrequiring that outpatient therapy services

provided to two or more patients in a single

time period be paid for under the "grouptherapy" payment code, regardless of whether

such patients were engaged in the same

activity . This directive, whichsignificantly lowers reimbursement for

services previously paid as individual

therapy, is inconsistent with many providers'understanding of appropriate coding practice,

which looks to the nature of the services

provided and the clinical judgment of thetherapist to determine whether the group code

or individual codes are appropriate .

Because this program transmittal was not

directed to Medicare providers or to MedicarePart A fiscal intermediaries, who administer

payments under Part B to rehabilitationagencies such as those typically operated byHealthSouth, and because it appears to

conflict with other statements by CMS an d

1730 / CMP / 00060147 .WPD v1 64

practices followed in the therapy industry,

there has been substantial confusion

regarding the impact and applicability of the

directive . HealthSouth sought clarification

through several meetings with its national

medicare intermediary and CMS officials in

July and August and continued to receive

somewhat conflicting guidance . However,

pending further clarification , the company

has implemented policies and proceduresdesigned to reflect a conservative

interpretation of current Medicare coding

requirements in light of the recentdirective . Management believes that, over

time , it will be able to adjust scheduling

and staffing patterns to reduce the negativeimpact of this new interpretation . However,compliance with the conservative policies

will adversely impact its revenues and

expenses relating to outpatientrehabilitation services in the near term . . . .

. . . [T]he company currently believes that the

impact of this reimbursement change will

require material revisions to its business

model and operating strategy in outpatientrehabilitation . In light of this assessment,

and based on available information, the

company currently believes that its earnings

before interest, taxes, depreciation andamortization will be lower than previously

projected by approximately $175 millionannually . Because of the uncertaintiessurrounding the full impact of these

developments at this time, this initialassessment may prove incorrect, and thecompany is accordingly discontinuing earnings

guidance for the remainder of 2002 and 2003

at this time .

155 . Investor reaction to the shocking revelations containe d

in the August 27 Press Release was immediate and adverse .

HealthSouth shares closed at $11 .97 per share on August 26, 2002 .

On August 27, HealthSouth shares plunged to a closing price of

$6 .71 per share on extraordinarily heavy volume exceeding 42 .5

million shares ; and the following day, August 28, HealthSout h

1730 1 CMP / 0 0060147 .WPD vl 65

shares declined to a closing price of $5 .05 per share on volume

exceeding 42 .1 million shares . Accordingly, HealthSouth shares

lost nearly 60 percent of their value in just two days o f

trading . As further adverse news has been released by

Defendants, the price of HealthSouth shares has continued to

decline .

Defendants ' Explanations Are Discredited

156 . Knowledgeable Government and industry executive s

disputed Defendants' claim that there had been a change in the

Government's billing practices or procedures . For example, on

August 27, 2002, CMS Administrator Tom Scully was quoted by

Reuters as follows :

I know those guys well, I'm astounded by(their claims) . We made that decision in Mayand they never called me . If this were such abig problem for them, why am I just hearingabout this now?

157 . Similarly, Frank Mallon, chief executive of APTA ,

confirmed in the September 6, 2002 edition of The New York Times

that the group-billing rule had been accepted practice for many

years : "He said the group-billing rule had been accepte d

practice by the association since Medicare first announced it in

The Federal Register in 1994 and repeated the ruling in 1996 . "

158 . And, on August 27, 2002, The Wall Street Journal online

reported that RehabCare Group, a competitor of HealthSouth which

derives 9% of its revenue from outpatient rehabilitation, 30% of

which comes from Medicare, was unaffected by the CMS transmittal .

1730 / CMP / 00060147 .WPD v1 6 6

As Alan Henderson, the Chief Financial Officer of RehabCare Group

explained : "`We looked at the interpretation several years ago

and changed our practices at that time,' Henderson said . 'We

don't do concurrent therapy and bill for it at the individual

therapy rates . We bill it as concurrent therapy . It just

depends on what's appropriate .'"

159 . Former Employee No . 1 said of the August 2 7

announcement that "they [HealthSouth] must have had their head in

the sand not to know of CMS's consistent policy on outpatien t

individual and group therapy billing . "

160 . The reaction by securities analysts was equall y

skeptical . An article in the August 28, 2002 edition of The Wall

Street Journal reported that analysts were "shocked" at the

Company's belated disclosures, and that the Company had lost its

credibility :

Analysts said they were shocked, particularlysince the company didn't mention the Medicareissue in either its earnings conference callearlier this month, or in its quarterl yfinancial filing . . . . HealthSouth . . . has"lost credibility . "

161 . In response to the adverse disclosures and loss o f

credibility, a large number of securities analysts downgraded

their recommendations on HealthSouth shares on August 27, 2002 .

The brokerage firms issuing those downgrades included Lehman

Brothers ; Jeffries & Company ; U .S . Bancorp Piper Jaffray ; Salomon

Smith Barney ; UBS Warburg LLC (which had just been retained b y

1730 / CMP / 00060147 .WPD v1 67

HealthSouth for advice in connection with the potential

divestitures) ; and H&R Block Financial Advisors .

The SEC Investigation

162 . On September 19, 2002, HealthSouth announced that it

was the target of an SEC investigation . As reported in the

September 19, 2002 edition of The Wall Street Journal, the

investigation is "focusing in part on accounting issues and

trading in the company's stock, a person familiar with the matte r

said ." Over the next few days it was further reported that the

Company had received from the SEC a wide-ranging request for the

production of documents on the matter, including document s

concerning reports filed with CMS, the sales of HealthSouth

shares by Defendant Scrushy and the disclosures contained in the

August 27 Press Release .

163 . On February 26, 2003, HealthSouth issued a press

release (the "February 26 Press Release") in response to a

"number of news media" reports on the SEC investigation . In that

press release, the Company

confirm[ed] that it has recently learned that

the SEC has issued an "Order DirectingPrivate Investigation and Designating

Officers to Take Testimony" - commonly

referred to as a "formal order ofinvestigation" -- in connection with the

investigation . The company understands thatthe SEC is investigating possible violations

of Section 11(a) of the Securities Act of1933 and Sections 10(b), 13(a) and13(b)(2)(A) and (B) of the Securities

Exchange Act of 1934 and Rules 10b-5, 12b-20,

13a-13, 13b2-1 and 13b2-2 thereunder .

1730 / CMP / 00060147 .WPD v1 68

The February 26 Press Release was filed by HealthSouth with the

SEC as part of a Form 8 -K, dated February 27, 2003 .

The Ratings Downgrades and Other Adverse Business Developments

164 . Following the announcement of the SEC investigation ,

Standard & Poor's ("S&P"), the ratings agency, slashed its

ratings on HealthSouth bonds to junk status and said it might

lower the ratings even further . Specifically, S&P lowered

HealthSouth senior unsecured debt two notches to "BB", its

second-highest junk grade, from "BBB-" . The Company had

approximately $3 .3 billion of debt at the end of June . As

further disclosed in the financial press, a downgrade raises

HealthSouth's borrowing costs . In response to the foregoing

additional adverse disclosures and others concerning HealthSouth

and its executives, Company shares declined to the $3 .00 per

share range .

165 . On October 16, 2002, HealthSouth announced that it was

suspending the planned spinoff of its surgery center division .

In a cryptic explanation, Defendant Scrushy stated : "Based on

comments we have received from some of our investors and lenders

and conditions in the debt and equity markets, we have determined

that it does not make economic sense at this time to proceed

with" the transaction .

166 . On November 5, 2002, HealthSouth announced that its net

income for the third quarter of 2002 had plunged to $53 .6

million, or $ .13 per share, from $79 .1 million, or $ .20 per

1730 / CMP / 00060147 .WPD v1 69

share, in the comparable quarter of the prior year . Defendants

Scrushy and Owens acknowledged during a conference call that day

with investors and securities analysts to discuss the quarterly

results that compliance with the Government's Medicare billing

regulations had caused the decline by reducing the Company's

revenues and increasing expenses . Owens further acknowledged

that "there will be some ongoing costs related to therapist

retraining in light of [Transmittal] 1753" and the Company would

have to make "meaningful" cost reductions "across the board" as

HealthSouth struggled to improve its financial condition and

performance .

167 . On November 14, 2002, HealthSouth filed with the SEC a

Report on Form 10-Q for the quarter ended September 30, 2002 (the

"Third Quarter 10-Q") . That report was signed by Defendant

Owens, as President and Chief Executive Officer ; and the

Company's then Chief Financial Officer . In the Third Quarter

10-Q, Defendants belatedly acknowledged that HealthSouth's

results of operations had been "significantly affected" by the

Company's compliance with CMS Transmittal 1753 . Although

continuing falsely to portray Transmittal 1753 as a "new" or

"change[d]" Government policy, Defendants described the adverse

impact of the Company's compliance with the operative rules and

regulations as follows :

[P]roviders of outpatient therapy

services are required to use the so-called"group therapy" procedure code for billing

Medicare when a therapist provides servicesto more than one patient during a single tim e

1730 / CMP / 00060147 .WPD v1 7 0

period, rather than using individual

procedure codes to reflect the specific

services provided to the patients . The group

therapy code provides for significantly lower

reimbursement to therapy providers than do

individual procedure codes . During the

quarter, we announced that we expected the

impact of this change to reduce our pretax

earnings by approximately $175,000,000 per

year, taking into account our estimates of

diminished Medicare revenue and diminishedrevenue from other payors who follow Medicare

payment policies . . . .

As a result, in part, of the demands on

management resources brought about by theseevents, the confusion among our therapists on

scheduling and staffing requirements under

the new Medicare policy, and the efforts ofcompeting providers to use the substantial

adverse publicity surrounding these events to

divert business from our facilities, we saw a

decline in volumes in our outpatient

rehabilitation line of business during thequarter . When compared to the second quarterof 2002, we saw a decrease in reimbursement

of approximately $23,000,000 in our

outpatient rehabilitation business, primarily

attributable to the impact of Transmittal1753, and an additional $34,000,000 decrease

in revenues in our outpatient rehabilitation

business attributable to a decline in patient

volumes . We also saw an increase of about

$39,000,000 in operating unit expenses ascompared to the second quarter, primarily

attributable to field training for therapists

in the new Medicare policy, increased

recruiting and labor costs, higher insurancepremiums and new market initiatives aimed at

restoring patient volumes .

168 . HealthSouth provided further particulars in the Thir d

Quarter 10-Q on the extent to which the Company's bottom line had

been adversely affected : net income for the quarter had declined

to $53,614,000, from $79,126,000 for the third quarter of 2001 .

And, net income for the first nine months of 2002 was basicall y

1730 / CMP / 00060147.WPD vi 7 1

flat with the results reported the prior year : $135,704,000 a s

compared to $134,489,000 the prior year .

169 . On November 26, 2002, HealthSouth announced that i t

will be reducing its workforce by up to 2% as part of a Company-

wide cost-cutting response to the impact of Transmittal 1753,

i .e ., complying with Medicare's long-standing group therapy

billing requirements . Defendant Scrushy explained the layoffs as

needed "to respond to the current dynamics of our business . "

The Government Commences a Criminal Investigation

170 . On February 6, 2003, HealthSouth issued a press releas e

announcing that it had received a subpoena from the United States

Attorney's Office for the Northern District of Alabama seeking

production of various documents . The Company further stated that

"the types of documents requested suggest that the investigation

may focus on transactions by individuals in HealthSouth common

stock . "

171 . That same day the Federal Bureau of Investigation (th e

"FBI") confirmed that it had opened a criminal investigation into

"possible securities laws violations" at the Company . The FBI

spokesman further said that the FBI had conducted a series of

interviews of HealthSouth executives over the prior two days in

connection with the investigation, but declined to disclose any

particulars . The Wall Street Journal reported in its February

10, 2003 edition that William Horton, HealthSouth Executive Vice

President and Corporate Counsel, had stated that the FBI ha d

1730 / CMP / 00060147 .WPD vl 72

questioned approximately 10 current or former employees who had

traded HealthSouth shares last summer . According to the Journal,

Mr . Horton declined to identify the individuals, but stated that

they were not senior executives .

The Company Reports a Staggering

Loss for the Fourth Quarter and Yea r

172 . On March 3, 2003, HealthSouth issued a press release

(the "March 3 Press Release" ) reporting that the Company had lost

$405,800,000 for the fourth quarter of 2002 and $202,400,000 for

the year . In that Press Release, defendants summarized

HealthSouth's abysmal performance as follows :

For the 2002 quarter, the company incurred a

net loss of ($405 .8) million, compared to net

income for the 2001 quarter of $67 .9 million .Operating income for the 2002 quarter was

$18 .6 million, compared to operating incomeof $88 .6 million for the 2001 quarter . The

company incurred a net loss per share

(assuming dilution) of ($1 .03) for the 2002quarter, compared to earnings per share

(assuming dilution) for the 2001 quarter of

$0 .17 . Operating earnings per share(assuming dilution) were $0 .05 for the 2002quarter, compared to $0 .22 for the 2001

quarter . . . .

The company incurred a net loss of ($270 .1)million for 2002, compared to net income for

2001 of $202 .4 million . Operating income for2002 was $267 .3 million, compared tooperating income of $326 .1 million for 2001 .

For the year, the company incurred a net lossper share (assuming dilution) of ($0 .68),

compared to earnings per share (assumingdilution) of $0 .51 for 2001 . Operating

earnings per share (assuming dilution) for2002 were $0 .67, compared to $0 .82 for 2001 .

1730 / CMP / 00060147.WPD vi 73

173 . Consequently, HealthSouth operated at a massive loss

for 2002, not the $1 .14 per share profit defendants had

repeatedly represented during the Class Period (e .g ., 11 104-113

and 121, supra) would be earned . And, although defendants

attempted in the March 3 Press Release to obscure the causes of

the losses, a material portion of the staggering losses was

caused by the reduced revenues and profits and increased expenses

occasioned by the Company's belated efforts to comply with the

Government's long-standing Medicare billing requirements ; the

need to retrain HealthSouth employees to comply with those

Government mandates ; the legal fees incurred and reserves

established to respond to the claims asserted by the Government

and the relators in the aui tam actions ; and the costs associated

with the SEC and FBI investigations . As described in the March 3

Press Release, these charges included :

Restructuring charges of approximately $255 .5million ($175 .7 million net of taxes)relating to the company's decision to close,consolidate or sell approximately 220facilities, primarily outpatientrehabilitation facilities . This decision wasmade primarily in response to the impact ofdecreased Medicare reimbursement foroutpatient rehabilitation services . . . .

Asset impairment charges . . . of approximately$55 .6 million ($34 .1 million net of taxes) .The impairment charges . . . primarily relateto the adverse impact of decreases inMedicare reimbursement for outpatientrehabilitation services .

Goodwill impairment charges . . . ofapproximately $80 .5 million ($62 .5 millionnet of taxes ) . . . . Again, the impairment isprimarily related to diminished expecte d

1730 / CMP / 00060147.WPD v1 7 4

future cash flows primarily relating to theadverse impact of decreases in Medicarereimbursement for outpatient rehabilitation

services . . . .

Other Unusual Charges : In addition to the

amounts described above as "Restructuring and

Other Charges ", during the fourth quarter the

company incurred certain additional unusual

charges , the effects of which are reflected

in other line items on the company's income

statement . These items aggregated

approximately $194 .8 million ($119 .3 net of

taxes ) . The cash portion of such charges was

approximately $175 .8 million ($107 .7 million

net of taxes ) . Those items include the

following :

The company ' s results of operations includethe effects of a change in estimate relatingto the valuation of accounts receivable andbad debt expense as a result of a detailedanalysis of the collectibility of accountsreceivable . . . . The results of this change inestimate are reflected as a reduction ofapproximately $100 .0 million ($61 .3 millionnet of taxes) in revenues and an increase ofapproximately $10 .0 million ($6 .1 million netof taxes ) in bad debt reserves .

In addition to the foregoing, the companyincurred significant expenses in the fourth

quarter relating to legal, consulting and

audit fees incurred in connection with the

proposed tax-free separation of the company'ssurgery center operations and legal,

consulting and other professional feesrelating to litigation, internal and external

investigations and related matters .

Emphasis added .

174 . Also on March 3, HealthSouth hosted a conference cal l

for investors and securities analysts during which Defendants

Scrushy and Owens were the principal Company spokespersons .

Defendant Scrushy began the presentation "by stating that 2002

1730 / CMP / 00060147 .WPD vl 7 5

was a very difficult year for our company . . . due to Transmittal

1753 . . . .' He and Defendant Owens then provided further

financial and other particulars on the fourth quarter charges and

losses, including the costs and disruption of retraining Company

personnel and otherwise complying with the Government's Medicare

billing requirements ; and the $6 million "substantial expense for

attorneys, consultants related to the litigation and the SEC

investigation ." In response to an inquiry from a participant,

Scrushy also disclosed that over the next few weeks the Company's

senior management will be questioned by the SEC in connection

with its investigation .

SCIENTER

175 . Numerous facts confirm that Defendants had actua l

knowledge of the misrepresentations and materially incomplete

statements of material facts set forth herein, or acted with

reckless disregard for the truth in that they failed to ascertain

and to disclose such facts, even though such facts were availabl e

to them .

176 . First, the applicable Government rules and regulations

governing the appropriate method of billing for group therapy

sessions had been in effect since 1994 and had been repeatedly

restated in both Government and industry periodicals (see 19[ 31-

48, supra) .

177 . Second, as detailed in paragraphs 49-75, supra, the

Company received extensive internal communications from numerous

1730 / CMP / 00060147.WPD v1 7 6

employees over a period of years questioning, among other

improper actions, the Company's practice of upcoding and the fact

that the Company's computer claims program did not even allow

coding for group therapy . Instead of appropriately addressing

these issues, Defendants chose to "stonewall" the inquiries in

order artificially to boost the Company's revenues, earnings, and

stock price .

178 . Third, the complaints filed in the qui tam actions by

former patients and a former employee against HealthSouth (11 76-

101, supra) provided considerable detail demonstrating that

HealthSouth's billing practices were improper and that,

accordingly, its revenues and income were being overstated .

These disclosures and the Government's Complaint in intervention

in the Devage Action were ignored as well .

179 . Fourth, the extensive audit of numerous HealthSout h

facilities by Cahaba on behalf of the Government (a% 82-91,

supra) revealed numerous improprieties in HealthSouth's billing

practices and procedures, including substantial upcoding ; billing

by unqualified personnel ; and billing for services not performed .

These extensive improprieties were ignored as well by Defendants .

180 . Fifth, Defendant Scrushy and HealthSouth director

Strong (personally and through trusts he had established)

collectively sold or disposed of about $101 million worth of

HealthSouth stock at prices ranging from $10 .06 per share to

$14 .05 per share . These sales and the disposition were unusual

in both timing and amount, far exceeding the insiders' previous

1730 / CMP / 00060147 .WPD v1 77

sales . The following chart details the insiders' sales durin g

the Class Period :

INSIDER SALES DURING THE CLASS PERIOD

Price

Transaction # of Per

Filer ' s Name Date Description Shares Share Proceeds

Scrushy, Richard 5/14/02 Sale 5,275,360 $14 .05 $ 74,118,80 8

Scrushy, Richard 7/31/02 Disposition 2,506,770 10 .06 25,218,10 6

Strong, George 2/13/02 Sale 7,000 12 .26 85,82 0

Strong, George 2/14/02 Sale 445 12 .27 5,46 0

Sale 2,100 12 .28 25,78 8

Sale 14,300 12 .26 175,31 8Sale 16,000 12 .26 196,16 0

Strong, George 2/15/02 Sale 6,680 11 .90 79,49 2

Strong, George 6/7/02 Sale 52,125 13 .78 718,54 8

Strong, George 6/11/02 Sale 17,216 14 .28 245,84 4

TOTALS 7,897,996 $100,869,34 4

181 . Finally, the Company' s statements in response to the

disclosures concerning the SEC and FBI investigations into the

insider trading involving HealthSouth strongly suggest that there

were other sales by HealthSouth executives, employees or insiders

that have not yet been publicly disclosed ( 51 162-63 and 170-71,

supra) . All of the foregoing facts support the conclusion that

Defendants acted knowingly or recklessly in committing the

wrongful acts alleged herein .

NO SAFE HARBOR

182 . The statutory safe harbor provided for forward-looking

statements under certain circumstances does not apply to any o f

1730 / CMP / 00060197.WPD vi 7 8

the allegedly false statements pleaded in this Complaint . The

statements alleged to be false and misleading herein all relate

to then-existing facts and conditions . In addition, to the

extent certain of the statements alleged to be false may be

characterized as forward looking, they were not identified as

"forward-looking statements" when made, there was no statement

made with respect to any of those representations forming the

basis of this Complaint that actual results "could differ

materially from those projected," and/or there were no meaningful

cautionary statements identifying important factors that could

cause actual results to differ materially from those in the

purportedly forward-looking statements . In the alternative, to

the extent that the statutory safe harbor is intended to apply to

any forward-looking statements pleaded herein, Defendants are

liable for those false forward-looking statements because at the

time each of those forward-looking statements was made, the

speaker had actual knowledge that the forward-looking statement

was materially false or misleading, and/or the forward-looking

statement was authorized or approved by an executive officer of

HealthSouth who knew that the statement was false or misleading

when made .

1730 / CMP / 00060147 .WPD v1 79

FIRST CLAIM FOR RELIEF

For Violations of Section 10(b) of the ExchangeAct and SEC Rule 10b-5 Promulgated Thereunder

( Against All Defendants )

183 . Plaintiffs repeat and reallege each and every

allegation contained above, as if fully set forth herein .

184 . During the Class Period, Defendants carried out a plan ,

scheme and course of conduct which was intended to and did :

(i) deceive the investing public, including Plaintiffs and other

Class members, as alleged herein ; (ii) artificially inflate and

maintain the market price of HealthSouth shares ; and (iii) cause

Plaintiffs and other members of the Class to purchase HealthSouth

shares at artificially inflated prices . In furtherance of this

unlawful scheme, plan and course of conduct, Defendants, and each

of them, took the actions set forth herein .

185 . Defendants (a) employed devices, schemes, and artifice s

to defraud ; (b) made untrue statements of material fact and/or

omitted to state material facts necessary to make the statements

made not misleading ; and (c) engaged in acts, practices, and a

course of business which operated as a fraud and deceit upon the

purchasers of HealthSouth shares in violation of Section 10(b) of

the Exchange Act and Rule 10b-5 . All Defendants are sued as

primary participants in the wrongful and illegal conduct charged

herein .

186 . In addition to the duties of full disclosure imposed on

Defendants as a result of their making of affirmative statement s

1730 / CMP / 00060147 .WPD v1 8 0

and reports, or participation in the making of affirmative

statements and reports to the investing public, Defendants had a

duty to promptly disseminate truthful information that would be

material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S-

X (17 C .F .R . Sections 210 .01 et seq .) and Regulation S-K (17

C .F .R . Sections 229 .10 et seq.) and other SEC regulations,

including accurate and truthful information with respect to the

Company's operations, financial condition and earnings, so that

the market price of HealthSouth's shares would be based on

truthful, complete and accurate information .

187 . Defendants , individually and in concert, engaged and

participated in a continuous course of conduct to misstate and

conceal adverse material information about the business,

operations and future prospects of HealthSouth as specified

herein .

188 . The Individual Defendants' primary liability, and

controlling person liability, arises from the following facts :

(i) these Defendants were high-level executives and/or directors

at the Company throughout the Class Period ; (ii) Defendants were

privy to and participated in the creation, development and

reporting of the Company's internal budgets, plans, projections

and/or reports ; (iii) Defendants directed the Company's

dissemination of information to the investing public, which

information they knew or recklessly disregarded was materially

false and misleading ; and (iv) Defendants personally mad e

1730 / CMP / 00060147 .WPD vl 81

materially false and misleading statements to the financial

community .

189 . During the Class Period, Defendants materially misle d

the investing public, thereby inflating the price of HealthSouth

shares, by publicly issuing false and misleading statements and

omitting to disclose material facts necessary to make Defendants'

statements, as set forth herein, not false and misleading . Said

statements and omissions were materially false and misleading in

that they failed to disclose material adverse information and

misrepresented the truth about the Company, its business and

operations, including, the adverse facts alleged herein .

190 . The material misrepresentations and materiall y

incomplete statements particularized in this Complaint directly

or proximately caused or were a substantial contributing cause of

the damages sustained by Plaintiffs and other members of the

Class . As described herein, during the Class Period, Defendants

made or caused to be made a series of materially false or

misleading statements about HealthSouth's business, prospects and

operations . These material misstatements and materially

incomplete statements had the cause and effect of creating in the

market an unrealistically positive assessment of HealthSouth and

its business, prospects and operations, thus causing the

Company's shares to be overvalued and artificially inflated

throughout the Class Period . Defendants' materially false and

misleading statements during the Class Period resulted in

Plaintiffs and other members of the Class purchasing HealthSout h

1730 / CMP / 00060147 . WPD vl 82

shares at artificially inflated prices, thus causing the damages

complained of herein .

191 . Defendants had actual knowledge of the

misrepresentations and materially incomplete statements of

material facts set forth herein, or acted with reckless disregard

for the truth in that they failed to ascertain and to disclose

such facts, even though such facts were available to them . The

material misrepresentations and/or materially incomplete

statements were made knowingly or recklessly and for the purpose

and effect of concealing HealthSouth's operating condition and

future business prospects from the investing public and

supporting the artificially inflated price of HealthSouth shares .

192 . Plaintiffs and the other members of the Class purchased

HealthSouth shares during the Class Period in ignorance of the

fact that the prices of shares were artificially inflated, and

relied directly or indirectly on the false and misleading

statements made by Defendants, or upon the integrity of the

market in which the shares trade, and/or upon the absence of

material adverse information that was known to or recklessly

disregarded by Defendants but not disclosed in public statement s

by Defendants during the Class Period .

193 . At the time of said misrepresentations and omissions ,

Plaintiffs and other members of the Class were ignorant of their

falsity, and believed them to be true . Had Plaintiffs and the

other members of the Class and the marketplace known of the true

financial condition and business prospects of HealthSouth, which

were not disclosed by Defendants, Plaintiffs and other members of

1730 / CMP / 00060147 .WPD vl 8 3

the Class would not have purchased their HealthSouth shares, or,

if they had purchased such securities during the Class Period,

they would not have done so at the artificially inflated prices

that were paid .

194 . By virtue of the foregoing, Defendants have violated

Section 10(b) of the Exchange Act, and SEC Rule lob-5 promulgated

thereunder .

195 . As a direct and proximate result of Defendants'

wrongful conduct, Plaintiffs and the other members of the Class

suffered damages in an amount to be proved at trial .

SECOND CLAIM FOR RELIEF

For Violations of Sections 20(a ) of The Exchange Act

( Against the Individual Defendants )

196 . Plaintiffs repeat and reallege each of the precedin g

paragraphs as if fully set forth herein .

197 . This claim is brought against each of the individua l

Defendants .

198 . Each of the Individual Defendants was a control perso n

of HealthSouth within the meaning of Section 20(a) of the

Exchange Act .

199 . By virtue of his high-level positions described herein,

and his participation in and/or awareness of the Company's

operations and/or intimate knowledge of the statements filed by

the Company with the SEC and disseminated to the investing

public, each of the Individual Defendants had the power t o

1730 / CMP / 00060147 .WPD vl 84

influence and control and did influence and control, directly or

indirectly, the decision-making of the Company, including the

content and dissemination of the various statements that were

materially false and misleading . Further, each of the Individual

Defendants was provided with or had unlimited access to copies of

the Company's reports, press releases, public filings and other

statements alleged by Defendants to be misleading prior to and/or

shortly after these statements were issued and had the ability to

prevent the issuance of the statements or cause the statements to

be corrected .

200 . As set forth above, Defendants violated Section 10(b )

of the Exchange Act, and Rule lob-5 promulgated thereunder, by

their acts and omissions as alleged in this Complaint . By virtue

of their positions as control persons, each of the Individual

Defendants is also liable to Defendants and the Class pursuant to

Section 20(a) of the Exchange Act .

201 . As a direct and proximate result of the Individual

Defendants' wrongful conduct, Plaintiffs and the Class suffered

damages in connection with their purchases of Company shares

during the Class Period in an amount to be proved at trial .

PRAYER FOR RELIEF

WHEREFORE , Plaintiffs, on behalf of themselves and all other

Class members , pray for judgment as follows :

1730 / CMP / 00060147 .WPD v1 85

A . Determining that this action is a proper class action

and certifying the Class under Rule 23 of the Federal Rules of

Civil Procedure ;

B . Awarding compensatory damages in favor of Plaintiffs

and the other Class members against all Defendants for damages

sustained as a result of Defendants' wrongdoing, together with

interest thereon ;

C . Awarding Plaintiffs and the Class their reasonable

costs and expenses incurred in this action, including counsel

fees, expert fees and other disbursements ; and

D . Granting Plaintiffs and the Class such other and

further relief as the Court may deem just and proper .

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by j y .

Dated : March 12, 2003

Respectfullyi Xu4nitted ,

Joe R . WhaVl k-ly , Jr . (WHAO03)

Russell Jackson Drake (DRA008)G . Douglas Jones (JON012)

Othni J . Lathram (LAT016)WHATLEY DRAKE, LL CP .O . Box 1064 7Birmingham, AL 35202-0647Tel : 205-328-957 6Fax : 205-328-966 9

Liaison Counsel on behalf of theLead Plaintiffs and the ProposedClas s

1730 / CMP / 00060147 .WPD v1 8 6

Neil L . SelingerRichard BemporadLOWEY DANNENBERG BEMPORAD

& SELINGER, P .C .

The Gateway-11th FloorOne North Lexington AvenueWhite Plains, NY 10601-1714Tel : 914-997-050 0Fax : 914-997-0035

Lead Counsel on behalf of theLead Plaintiffs and the ProposedClass

1730 / CMP / 00060147.WPD v1 87

A

CERTIFICATE OF SERVICE

I hereby certify that I have served a copy of the above an d

foregoing pleading on the following counsel of record by

depositing same in the U . S . Mail, postage prepaid on thi s

day of March, 2003 .

J . Michael Rediker

Thomas L . Krebs

Patricia C . Diak

Michael K . K . Choy

HASKELL, SLAUGHTER, YOUNG & REDIKER, LLC

1901 Sixth Avenue Nort h

Suite 1200 AmSouth/Harbert Plaza

Birmingham, AL 354203-261 8

N . Lee Cooper

Patrick C . Cooper

Scott S . Brown

MAYNARD, COOPER & GALE, P .C .

1901 Sixth Avenue North

2400 AmSouth/Harbert Plaza

Birmingham, AL 35203-260 2

Peter Q . Bassett

Susan E . Hurd

ALSTON & BIRD, LL P

1201 West Peachtree StreetAtlanta, GA 30309-342 4

Lanny J . Davis

PATTON BOGGS LLP

2550 M Street, NW

Washington, DC 20037

ADDITIONAL COUNSEL FOR PLAINTIFFS

Mark G . Gardy, Esq .

Nancy Kaboolian, Esq .

Abbey Gardy, LLP

212 East 39th StreetNew York, NY 10016

Tel : 212-889-3700

Fax : 212-684-5191

James V . Bashian, Esq .

Law Offices of James V .

Bashian, P .C .

500 Fifth Avenue, Ste . 2700New York, NY 10110Tel : 212-921-4110Fax : 212-921-424 9

Douglas M . McKiege, Esq .

Bernstein Litowitz Berger

& Grossman, LLP1285 Avenue of the AmericasNew York, NY 1001 9Tel : 212-554-1400Fax : 212-554-144 4

John L . Chalif, Esq .

The Galleria International Bldg

301 Clematis Street, Ste . 3000

West Palm Beach, FL 3340 1

Tel : 561-820-9488Fax : 561-366-111 6

Martin Chitwood, Esq .

Chitwood & Harley1230 Peachtree Street, NE

Promenade II, Ste . 2900

Atlanta, GA 3030 9

Tel : 404-873-3900Fax : 404-876-447 6

Steven J . Toll, Esq .

Cohen, Milstein, Hausfeld

& Toll, P .L .L .C .1100 New York Avenue,

West Tower, Ste . 500

Washington, DC 20005Tel : 202-408-4600

Fax : 202-408-4699

David J . Guin, Esq .

Donaldson & Guin, Esq .

2 North 20th Street, Ste . 1100

Birmingham, AL 3520 3

Tel : 205-226-2282

Fax : 205-226-2357

John G . Emerson, Jr ., Esq .

Emerson Poynter LL P

P .O . Box 16481 0Little Rock, AR 72216-4810

Tel : 501-907-255 5

Fax : 501-907-255 6

Andrew J . Entwistle, Esq .

Entwistle & Cappucci LLP

299 Park Avenue, 14th Fl .

New York, NY 1017 1

Tel : 212-894-7207Fax : 212-894-727 2

Nadeem Faruqi, Esq .

Faruqi & Faruqi

320 East 39th Street

New York, NY 10016

Tel : 212-983-9330

Fax : 212-983-933 1

Richard R . Rosenthal, Esq .

Garrison, Scott, Gamble & Rosenthal

2224 1st Avenue North

Birmingham, AL 35203Tel : 205-326-3336Fax : 205-326-333 2

Ira M . Press, Esq .

Kirby, McInerney & Squire

830 3rd Avenue

New York, NY 10022

Tel : 212-371-6600

Fax : 212-751-254 0

N .W. John Halebian, Esq .Lovell Stewart Halebian, LLP

500 Fifth Avenue, Ste . 5800

New York, NY 1011 0

Tel : 212-608-1900

Fax : 212-719-467 7

1730 / MISC / 00060351 .WPD v1 8 8

Mark McNair, Esq .

Law offices of mark McNair1101 30th Street, NW, Ste . 500Washington , DC 20007Tel : 877-511-4717Fax : 202 -872-4718

Michael C . Spencer, Esq .

Carlos F . Ramirez, Esq .

Milberg, Weiss, Bershad,

Hynes & Lerach

One Pennsylvania PlazaNew York, NY 10119

Tel : 212-594-5300

Fax : 212-868-122 9

James L . North Esq .James L . North & Associates

Title Building, Ste . 700

300 N . 21st StreetBirmingham, AL 3520 3

Tel : 205-251-0252Fax : 205-251-025 5

Charles J . Piven, Esq .Law Offices of Charles J . PivenWorld Trade Center-Baltimore401 East Pratt Street, Ste . 2525Baltimore, MA 2120 2Tel : 410-986-0036

Fax : 410-685-1300

M . Clay Ragsdale, Esq .Law Offices of M . Clay Ragsdale

1929 3rd Avenue North, Ste . 550Birmingham, AL 3520 3Tel : 205-251-4775

Fax : 205-251-477 7

Andrew M . Schatz, Esq .

Schatz & Nobel, P .C .

330 Main Street, 2nd FloorHartford, CT 0610 6Tel : 860-493-6292Fax : 860-493-6290

Jules Brody, Esq .

Stull, Stull & Brody6 East 45th Street

New York, NY 10017

Tel : 212-687-7230

Fax : 212-490-2022

Robert Roden, Esq .Shelby, Roden & Cartee, LLC

2956 Rhodes CircleBirmingham, AL 3520 5Tel : 205-933-8383

Fax : 205-933-2299

Curtis V . Trinko, Esq .

Law Offices of Curtis V . Trinko16 West 46th Stree t

New York, NY 10036Tel : 212-490-9550Fax : 212-986-015 8

Robert I . Harwood, Esq .Wechsler Harwood, LLP

488 Madison Avenu e

New York, NY 10022Tel : 212-935-7400Fax : 212-753-363 0

Joseph H . Weiss, Esq .

Weiss & Yourman

551 Fifth AvenueNew York, NY 10176Tel : 212-682-3025Fax : 212-682-301 0

Fred T . Isquith, Esq .

Wolf Haldenstein Adler Freeman& Herz

270 Madison Avenue

New York, NY 10016Tel : 212-545-4600

Fax : 212-686-011 4

1730 / MISC / 00060351 .WPD v1 8 9

SCHEDULE 1

1 . Smith, et al . v . HealthSouth, et al . , CV-02-BE-2105-2

2 . Epstein, et al . v . HealthSouth, et al . , CV-02-C-2147-W

3 . Epps, et al . v . HealthSouth, et al . , CV-02-JEO-2161 S

4 . Pollock, et al . v . HealthSouth, et al . , CV-02-BE-2175-W

5 . Burke, et al . v . HealthSouth, et al . , CV-02-BE-2178-S

6 . Stark, et al . v . HealthSouth, et al . , CV-02-AR-2193-S

7 . Strauss, et al . v . HealthSouth, et al . , CV-02-Be-2194-S

8 . Mizzaro, et al . v . HealthSouth, et al . , CV-02-BE-2195-S

9 . Herman, et al . v . HealthSouth, et al . , CV-02-S-2232-S

10 . Minker, et al . v . HealthSouth, et al . , CV-02-TMP-2252-S

11 . Klein, et al . v . HealthSouth, et al . , CV-02-PNPG-2259-5

12 . Bower, et al . v . HealthSouth, et al . , CV-02-N-2264-S

13 . White, et al . v . HealthSouth, et al . , CV-02-S-2309-S

14 . Gerstle, et al . v . HealthSouth, et al . , CV-02-S-2349- S

1730 / MISC / 00060352 .WPD v1

SCHEDULE 2

1 . The Louisiana Municipal Police Employees' Retirement

System

2 . Bunny Davis Ayers

3 . Michael T . Burke

4 . Cecil Duke

5 . V.E . Epps as Trustee for the Ed Epps Trust

6 . Mark G . Epstein

7 . John Mizzaro

8 . John G . Snelling

9 . Gail Lynn Stark

10 . David R . Vial

1730 / MISC / 00060352 .WPD vl