The news sent HealthSouth shares tumbling 44 percent on the New York Stock Exchange with a loss of more than $2 billion in market value.

Scott Estes, an analyst at Deutsche Bank Securities, said the shares were hurt by the company's suspension of earnings guidance and its warning that results would be hurt by Medicare and Medicaid reimbursement policies about billing certain patient care at lower group rates rather than individual rates.

The credit-rating agency Moody's Investors Service put $3.5 billion of HealthSouth debt under review for possible downgrade, citing the reimbursement policy changes and the company's plan to spin off its surgery centers unit.

HealthSouth said splitting off its surgery centers would allow that business to grow without concern about harm from government reimbursements for rehabilitation care.

Several top HealthSouth executives, including founder Richard Scrushy, will move to the stand-alone surgery center division. HealthSouth gave no details of the planned tax-free spin-off but said it expects the move to be completed by the first quarter of 2003.

HealthSouth, a provider of rehabilitation services, outpatient surgery and diagnostic imaging, discontinued its earnings guidance for the remainder of the year and for 2003.

While HealthSouth said this is new directive that went into effect July 1, a source at the Centers for Medicare and Medicaid Services (CMS) said there is no change in policy and that it was merely made more clear.

When asked about HealthSouth pointing the finger at CMS, CMS Administrator Tom Scully said, "I know those guys well, I'm astounded by (their claims). We made that decision in May and they never called me. If this were such a big problem for them, Why am I just hearing about this now?"

HEALTHSOUTH CUTS CASH FLOW OUTLOOK

It said the Medicare and Medicaid policy could cut its earnings before interest, taxes, depreciation and amortization (EBITDA) by $175 million annually.

Estes, who rates HealthSouth shares as "strong buy," said his EBITDA estimates were $1.38 billion for 2002 and $1.57 billion for 2003.

Merrill Lynch, in a research note, cut its earnings estimates for HealthSouth to $1 a share for both 2002 and 2003, from $1.14 and $1.30, respectively, excluding one-time items.

Merrill Lynch reiterated an intermediate-term "neutral" rating and a long-term "strong buy" rating on the shares.

On July 1 the government's Centers for Medicare and Medicaid Services changed its reimbursement policies for outpatient rehabilitation services, imposing lower "group therapy" payment rates in many cases where higher "individual therapy" rates previously applied.

HealthSouth, which operates 1,427 outpatient and 118 inpatient rehabilitation facilities, said it believes it will be able to adjust scheduling and staffing patterns to reduce the negative impact of the new policy.

The independent surgery center company will have annual revenue of about $1 billion from 209 facilities, HealthSouth said. HealthSouth reported total revenue of $2.3 billion for the first half of 2002.

"The surgery center business is one of their best business lines," with high cash flow margins, Estes said. As an independent company, the unit would be able to enter joint ventures with hospitals without conflicts of interest in other businesses, he said.

AmSurg Corp. (NasdaqNM:AMSG - News) and United Surgical Partners International Inc. (NasdaqNM:USPI - News) have had some success operating surgery facilities, said Estes.

He said spinning off the surgery centers could boost shareholder value.

Moody's said it would review how the spin-off of such a major asset could diminish credit quality, how the deal is structured, and how cash flow will be affected.

HealthSouth said it had retained UBS Warburg to assist it in evaluating potential divestitures and other strategies.

Scrushy, HealthSouth chairman and chief executive, will move to the surgery center company as chairman. The post of chief financial officer will be filled by Weston Smith, who now holds the same post at HealthSouth.

Larry Taylor, president and chief operating officer of HealthSouth's ambulatory services division, will take the post of chief executive at the new company.

At HealthSouth, President and Chief Operating Officer William Owens will take over as CEO, and Malcolm "Tadd" McVay, executive vice president and treasurer, will become CFO.

HealthSouth shares closed down $5.28, or 44 percent, at $6.69 and were the top percentage loser on the New York Stock Exchange.