HEALTHSOUTH CORP -...

HEALTHSOUTH CORP

FORM 10-Q(Quarterly Report)

Filed 07/29/14 for the Period Ending 06/30/14

Address 3660 GRANDVIEW PARKWAYSUITE 200BIRMINGHAM, AL 35243

Telephone 205-967-7116CIK 0000785161

Symbol HLSSIC Code 8060 - Hospitals

Industry Healthcare FacilitiesSector Healthcare

Fiscal Year 12/31

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549 ______________________________

FORM 10-Q

For the quarterly period ended June 30, 2014

OR

Commission File Number 001-10315 ______________________________

HealthSouth Corporation (Exact name of Registrant as specified in its Charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of

1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes � No �

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes � No �

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer � Accelerated filer � Non-Accelerated filer � Smaller reporting company �

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes � No �

The registrant had 87,726,340 shares of common stock outstanding, net of treasury shares, as of July 22, 2014.

� QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

� TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware 63-0860407 (State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

3660 Grandview Parkway, Suite 200 Birmingham, Alabama 35243

(Address of Principal Executive Offices) (Zip Code)

(205) 967-7116 (Registrant’s telephone number)

TABLE OF CONTENTS

NOTE TO READERS

As used in this report, the terms “HealthSouth,” “we,” “us,” “our,” and the “Company” refer to HealthSouth Corporation and its consolidated subsidiaries, unless otherwise stated or indicated by context. This drafting style is suggested by the Securities and Exchange Commission and is not meant to imply that HealthSouth Corporation, the publicly traded parent company, owns or operates any specific asset, business, or property. The hospitals, operations, and businesses described in this filing are primarily owned and operated by subsidiaries of the parent company. In addition, we use the term “HealthSouth Corporation” to refer to HealthSouth Corporation alone wherever a distinction between HealthSouth Corporation and its subsidiaries is required or aids in the understanding of this filing.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STAT EMENTS

This quarterly report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to, among other things, future events, changes to Medicare reimbursement and other healthcare laws and regulations from time to time, our business strategy, our dividend and stock repurchase strategies, our financial plans, our growth plans, our future financial performance, our projected business results, or our projected capital expenditures. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” “predict,” “project,” “target,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties, many of which are beyond our control. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual events or results to differ materially from those estimated by us include, but are not limited to, the following:

i

Page

PART I Financial Information

Item 1. Financial Statements (Unaudited) 1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30

Item 4. Controls and Procedures 46

PART II Other Information

Item 1. Legal Proceedings 47

Item 1A. Risk Factors 47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47

Item 6. Exhibits 48

• each of the factors discussed in Item 1A, Risk Factors , of our Annual Report on Form 10-K for the year ended December 31, 2013 , as well as uncertainties and factors discussed elsewhere in this Form 10-Q, in our other filings from time to time with the SEC, or in materials incorporated therein by reference;

• changes in the rules and regulations of the healthcare industry at either or both of the federal and state levels, including those contemplated now and in the future as part of national healthcare reform and deficit reduction such as the transformation of the current healthcare system to coordinated care delivery and payment models, the reinstatement of the “75% Rule,” or the introduction of site neutral payments with skilled nursing facilities for certain conditions, and related increases in the costs of complying with such changes;

• reductions or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our ability to obtain and retain favorable arrangements with third-party payors;

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements or their effects on the value of our securities.

ii

• increased costs of regulatory compliance and compliance monitoring in the healthcare industry, including the costs of investigating and defending asserted claims, whether meritorious or not, and the potential reputational harm associated with those claims;

• the ability of each of our hospitals to maintain licensure, certification, and accreditation necessary to operate and receive reimbursement;

• our ability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and the impact on our labor expenses from potential union activity and staffing recruitment and retention;

• competitive pressures in the healthcare industry and our response to those pressures;

• our ability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with our growth strategy, including realization of anticipated revenues, cost savings, and productivity improvements arising from the related operations and avoidance of unforeseen exposure to liabilities;

• any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings, including the ongoing investigations initiated by the U.S. Department of Health and Human Services, Office of the Inspector General;

• increased costs of defending and insuring against alleged professional liability and other claims and the ability to predict the costs related to such claims;

• potential incidents affecting the proper operation, availability, or security of our information systems, including unauthorized access to or theft of patient information;

• the price of our common or preferred stock as it affects our willingness and ability to repurchase shares and the financial and accounting effects of any repurchases;

• our ability and willingness to continue to declare and pay dividends on our common stock;

• our ability to attract and retain key management personnel; and

• general conditions in the economy and capital markets, including any instability or uncertainty related to political disputes or impasses over the United States federal budget or similar matters affecting federal spending.

PART I. FINANCIAL INFORMATION

HealthSouth Corporation and Subsidiaries Condensed Consolidated Statements of Operations

(Unaudited)

(Continued)

1

Item 1. Financial Statements (Unaudited)

Three Months Ended June

30, Six Months Ended June 30,

2014 2013 2014 2013

(In Millions)

Net operating revenues $ 604.4 $ 564.5 $ 1,195.6 $ 1,137.1 Less: Provision for doubtful accounts (9.3 ) (7.0 ) (16.8 ) (14.4 )

Net operating revenues less provision for doubtful accounts 595.1 557.5 1,178.8 1,122.7 Operating expenses:

Salaries and benefits 285.3 273.6 571.4 548.2 Other operating expenses 86.3 81.0 170.8 159.1 Occupancy costs 10.3 11.9 20.8 24.1 Supplies 27.8 26.6 55.4 52.8 General and administrative expenses 30.2 29.5 60.9 59.7 Depreciation and amortization 26.4 23.1 52.8 45.2 Government, class action, and related settlements (0.8 ) (2.0 ) (0.8 ) (2.0 )

Professional fees—accounting, tax, and legal 2.0 2.2 3.6 3.6 Total operating expenses 467.5 445.9 934.9 890.7

Interest expense and amortization of debt discounts and fees 27.8 24.4 55.7 48.6 Other income (28.2 ) (1.9 ) (29.9 ) (2.6 )

Equity in net income of nonconsolidated affiliates (2.6 ) (3.3 ) (6.9 ) (6.2 )

Income from continuing operations before income tax expense (benefit) 130.6 92.4 225.0 192.2 Provision for income tax expense (benefit) 36.5 (86.5 ) 69.3 (53.0 )

Income from continuing operations 94.1 178.9 155.7 245.2 Income (loss) from discontinued operations, net of tax 3.8 0.1 3.7 (0.3 )

Net income 97.9 179.0 159.4 244.9 Less: Net income attributable to noncontrolling interests (14.8 ) (13.8 ) (29.6 ) (28.4 )

Net income attributable to HealthSouth 83.1 165.2 129.8 216.5 Less: Convertible perpetual preferred stock dividends (1.5 ) (5.8 ) (3.1 ) (11.5 )

Net income attributable to HealthSouth common shareholders $ 81.6 $ 159.4 $ 126.7 $ 205.0

HealthSouth Corporation and Subsidiaries

Condensed Consolidated Statements of Operations (Continued) (Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

2



2014 2013 2014 2013

(In Millions, Except Per Share Data) Weighted average common shares outstanding:

Basic 86.7 86.1 87.0 90.0

Diluted 100.6 99.8 100.8 103.4

Earnings per common share:

Basic earnings per share attributable to HealthSouth common shareholders:

Continuing operations $ 0.89 $ 1.82 $ 1.40 $ 2.24 Discontinued operations 0.04 — 0.04 —

Net income $ 0.93 $ 1.82 $ 1.44 $ 2.24 Diluted earnings per share attributable to HealthSouth common

shareholders:


Net income $ 0.85 $ 1.66 $ 1.33 $ 2.09

Cash dividends per common share $ 0.18 $ — $ 0.36 $ —

Amounts attributable to HealthSouth common shareholders:

Income from continuing operations $ 79.3 $ 165.1 $ 126.1 $ 216.8 Income (loss) from discontinued operations, net of tax 3.8 0.1 3.7 (0.3 )

Net income attributable to HealthSouth $ 83.1 $ 165.2 $ 129.8 $ 216.5


Condensed Consolidated Statements of Comprehensive Income (Unaudited)


3



2014 2013 2014 2013

(In Millions)

COMPREHENSIVE INCOME

Net income $ 97.9 $ 179.0 $ 159.4 $ 244.9 Other comprehensive income (loss), net of tax:

Net change in unrealized gain (loss) on available-for-sale securities:

Unrealized net holding gain (loss) arising during the period 0.6 (0.9 ) 0.7 (0.8 )

Reclassifications to net income (0.5 ) (1.0 ) (0.5 ) (1.0 )

Other comprehensive income (loss) before income taxes 0.1 (1.9 ) 0.2 (1.8 )

Provision for income tax benefit related to other comprehensive income (loss) items — 0.1 — 0.1 Other comprehensive income (loss), net of tax 0.1 (1.8 ) 0.2 (1.7 )

Comprehensive income 98.0 177.2 159.6 243.2 Comprehensive income attributable to noncontrolling interests (14.8 ) (13.8 ) (29.6 ) (28.4 )

Comprehensive income attributable to HealthSouth $ 83.2 $ 163.4 $ 130.0 $ 214.8

HealthSouth Corporation and Subsidiaries Condensed Consolidated Balance Sheets

(Unaudited)


4

June 30,

2014 December 31,

2013

(In Millions)

Assets

Current assets:

Cash and cash equivalents $ 65.8 $ 64.5 Accounts receivable, net of allowance for doubtful accounts of $24.8 i n 2014; $23.1 in 2013 272.3 261.8 Deferred income tax assets 138.9 139.0 Other current assets 103.9 115.1

Total current assets 580.9 580.4 Property and equipment, net 976.5 910.5 Goodwill 491.7 456.9 Intangible assets, net 103.3 88.2 Deferred income tax assets 276.1 354.3 Other long-term assets 148.0 144.1

Total assets $ 2,576.5 $ 2,534.4

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable $ 55.7 $ 61.9 Accrued expenses and other current liabilities 243.6 249.7

Total current liabilities 299.3 311.6 Long-term debt, net of current portion 1,475.1 1,505.2 Other long-term liabilities 141.1 142.2

1,915.5 1,959.0 Commitments and contingencies Convertible perpetual preferred stock 93.2 93.2 Redeemable noncontrolling interests 12.4 13.5 Shareholders’ equity:

HealthSouth shareholders’ equity

Common stock, $.01 par value; 200,000,000 shares authorized; issued :103,970,478 in 2014; 102,648,302 in 2013 1.0 1.0

Capital in excess of par value 2,841.5 2,849.4 Accumulated deficit (1,971.3 ) (2,101.1 )

Accumulated other comprehensive income (loss) 0.1 (0.1 )

Treasury stock, at cost (16,243,774 shares in 2014 and 14,654,436 shares in 2013) (457.6 ) (404.6 )

Total HealthSouth shareholders’ equity 413.7 344.6 Noncontrolling interests 141.7 124.1

Total shareholders’ equity 555.4 468.7

Total liabilities and shareholders’ equity $ 2,576.5 $ 2,534.4


Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)


5

Six Months Ended June 30, 2014

(In Millions)

HealthSouth Common Shareholders

Number of Common Shares

Outstanding Common

Stock

Capital in Excess of Par Value

Accumulated Deficit

Accumulated Other

Comprehensive (Loss) Income

Treasury Stock

Noncontrolling Interests Total

Balance at beginning of period 88.0 $ 1.0 $ 2,849.4 $ (2,101.1 ) $ (0.1 ) $ (404.6 ) $ 124.1 $ 468.7 Net income — — — 129.8 — — 26.0 155.8 Receipt of treasury stock (0.3 ) — — — — (9.7 ) — (9.7 )

Dividends declared on common stock — — (32.0 ) — — — — (32.0 )

Dividends declared on convertible perpetual preferred stock — — (3.1 ) — — — — (3.1 )

Stock-based compensation — — 14.3 — — — — 14.3 Stock options exercised 0.2 — 6.3 — — — — 6.3 Stock warrants exercised 0.2 — 6.3 — — — — 6.3 Distributions declared — — — — — — (22.3 ) (22.3 )

Repurchases of common stock in open market (1.3 ) — — — — (43.1 ) — (43.1 )

Consolidation of Fairlawn Rehabilitation Hospital — — — — — — 14.0 14.0

Other 0.9 — 0.3 — 0.2 (0.2 ) (0.1 ) 0.2 Balance at end of period 87.7 $ 1.0 $ 2,841.5 $ (1,971.3 ) $ 0.1 $ (457.6 ) $ 141.7 $ 555.4


(In Millions)

HealthSouth Common Shareholders

Number of Common Shares

Outstanding Common

Stock

Capital in Excess of Par Value

Accumulated Deficit

Accumulated Other

Comprehensive Income (Loss)

Treasury Stock

Noncontrolling Interests Total

Balance at beginning of period 95.7 $ 1.0 $ 2,876.6 $ (2,424.7 ) $ 1.4 $ (163.3 ) $ 112.5 $ 403.5 Net income — — — 216.5 — — 25.8 242.3 Receipt of treasury stock (0.3 ) — — — — (5.8 ) — (5.8 )

Dividends declared on convertible perpetual preferred stock — — (11.5 ) — — — — (11.5 )

Stock-based compensation — — 12.8 — — — — 12.8 Stock options exercised 0.2 — 4.0 — — — — 4.0 Distributions declared — — — — — — (20.4 ) (20.4 )

Repurchases of common stock through tender offer (9.1 ) — — — — (234.1 ) — (234.1 )

Other 0.8 — 4.4 — (1.7 ) (0.8 ) — 1.9 Balance at end of period 87.3 $ 1.0 $ 2,886.3 $ (2,208.2 ) $ (0.3 ) $ (404.0 ) $ 117.9 $ 392.7


Condensed Consolidated Statements of Cash Flows (Unaudited)


6

Six Months Ended June 30,

2014 2013

(In Millions)

Cash flows from operating activities:

Net income $ 159.4 $ 244.9 (Income) loss from discontinued operations (3.7 ) 0.3 Adjustments to reconcile net income to net cash provided by operating activities—

Provision for doubtful accounts 16.8 14.4 Depreciation and amortization 52.8 45.2 Equity in net income of nonconsolidated affiliates (6.9 ) (6.2 )

Distributions from nonconsolidated affiliates 6.5 5.0 Stock-based compensation 14.3 12.8 Deferred tax expense (benefit) 62.7 (53.5 )

Gain on consolidation of Fairlawn Rehabilitation Hospital (27.2 ) — Other 6.1 0.3 (Increase) decrease in assets—

Accounts receivable (35.6 ) (38.8 )

Other assets 8.4 (0.7 )

Increase (decrease) in liabilities— Accounts payable 2.7 9.5 Other liabilities (20.0 ) (6.2 )

Net cash used in operating activities of discontinued operations (1.2 ) (0.2 )

Total adjustments 79.4 (18.4 )

Net cash provided by operating activities 235.1 226.8 Cash flows from investing activities:

Purchases of property and equipment (89.5 ) (69.0 )

Capitalized software costs (11.0 ) (11.9 )

Acquisition of business, net of cash acquired (15.9 ) (28.9 )

Other 9.4 8.4 Net cash used in investing activities (107.0 ) (101.4 )

Cash flows from financing activities:

Borrowings on revolving credit facility 65.0 132.0 Payments on revolving credit facility (95.0 ) (59.0 )

Repurchases of common stock, including fees and expenses (43.1 ) (234.1 )

Dividends paid on common stock (31.6 ) — Dividends paid on convertible perpetual preferred stock (3.1 ) (11.5 )

Distributions paid to noncontrolling interests of consolidated affiliates (25.4 ) (23.9 )

Other 6.4 7.0 Net cash used in financing activities (126.8 ) (189.5 )

Increase (decrease) in cash and cash equivalents 1.3 (64.1 )

Cash and cash equivalents at beginning of period 64.5 132.8

Cash and cash equivalents at end of period $ 65.8 $ 68.7

HealthSouth Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements

HealthSouth Corporation, incorporated in Delaware in 1984, including its subsidiaries, is the largest owner and operator of inpatient rehabilitation hospitals in the United States in terms of patients treated and discharged, revenues, and number of hospitals. We operate inpatient rehabilitation hospitals and provide specialized rehabilitative treatment on both an inpatient and outpatient basis.

The accompanying unaudited condensed consolidated financial statements of HealthSouth Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes filed with the United States Securities and Exchange Commission in HealthSouth’s Annual Report on Form 10-K filed on February 20, 2014 (the “ 2013 Form 10-K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in these interim statements, as allowed by such SEC rules and regulations. The condensed consolidated balance sheet as of December 31, 2013 has been derived from audited financial statements, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading.

The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. In our opinion, the accompanying condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state the financial position, results of operations, and cash flows for each interim period presented.

See also Note 2 , Business Combinations .

Net Operating Revenues —

During the three and six months ended June 30, 2014 and 2013 , we derived consolidated Net operating revenues from the following payor sources:

See Note 1, Summary of Significant Accounting Policies , to the consolidated financial statements accompanying the 2013 Form 10-K for our policies related to Net operating revenues, Accounts receivable, and our Allowance for doubtful accounts .

In June 2014, we acquired an additional 30% equity interest from UMass Memorial Health Care, our joint venture partner in Fairlawn Rehabilitation Hospital (“Fairlawn”) in Worcester, Massachusetts. This transaction increased our ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method of accounting to a

7

1. Basis of Presentation

Three Months Ended June 30, Six Months Ended June 30,

2014 2013 2014 2013

Medicare 74.1 % 74.6 % 74.7 % 74.6 %

Medicaid 1.8 % 1.0 % 1.5 % 1.1 %

Workers’ compensation 1.2 % 1.2 % 1.2 % 1.3 %

Managed care and other discount plans, including Medicare Advantage 18.7 % 18.4 % 18.4 % 18.4 %

Other third-party payors 1.7 % 1.7 % 1.6 % 1.7 %

Patients 0.9 % 1.2 % 1.0 % 1.2 %

Other income 1.6 % 1.9 % 1.6 % 1.7 %

Total 100.0 % 100.0 % 100.0 % 100.0 %

2. Business Combinations


consolidated entity. As a result of our consolidation of this hospital and the remeasurement of our previously held equity interest at fair value, Goodwill increased by $ 34.8 million , and we recorded a $ 27.2 million gain as part of Other income during the three and six months ended June 30, 2014. The transaction was funded using cash on hand. See also Note 8 , Income Taxes .

We entered into this transaction to increase our ownership in this profitable hospital and continue to grow our core business by consolidating its operations. None of the goodwill resulting from this transaction is deductible for federal income tax purposes. The goodwill reflects our expectations of our ability to continue to serve the consolidated hospital’s historical patient base as well as favorable growth opportunities based on positive demographic trends in this market.

We accounted for this transaction under the acquisition method of accounting and reported the results of operations of Fairlawn from the date of acquisition. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the cost and income approaches. The cost approach is based on amounts that would be required to replace the asset (i.e., replacement cost). The income approach is based on management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill.

The fair value of the assets acquired and liabilities assumed at the acquisition date were as follows (in millions):

The Company’s reported Net operating revenues and Net income for the three and six months ended June 30, 2014 include operating results for Fairlawn from June 1, 2014 through June 30, 2014. The following table summarizes the results of operations of the above mentioned entity from the date of acquisition included in our consolidated results of operations and the results of operations of the combined entity had the date of the acquisition been January 1, 2013 (in millions):

8

Total current assets $ 12.1 Property and equipment, net 30.4 Identifiable intangible assets:

Noncompete agreement (useful life of 3 years) 0.4 Tradename (useful life of 20 years) 2.5 Certificate of need (useful life of 20 years) 9.7 License (useful life of 20 years) 2.0

Goodwill 34.8 Total assets acquired 91.9 Total current liabilities assumed (7.8 )

Total long-term liabilities assumed (14.1 )

Net assets acquired $ 70.0

Net Operating Revenues Net Income Attributable

to HealthSouth

Acquired entity only: Actual from acquisition date to June 30, 2014 $ 4.5 $ 1.2 Combined entity: Supplemental pro forma from 04/01/2014-06/30/2014 616.3 85.0 Combined entity: Supplemental pro forma from 04/01/2013-06/30/2013 575.7 166.3 Combined entity: Supplemental pro forma from 01/01/2014-06/30/2014 1,218.9 132.7 Combined entity: Supplemental pro forma from 01/01/2013-06/30/2013 1,159.6 218.7


Information regarding the net cash paid for all acquisitions during each period presented is as follows (in millions):

See Note 2, Business Combinations , to the 2013 Form 10-K for information regarding the acquisition completed in 2013.

As of June 30, 2014 and December 31, 2013 , we had $11.0 million and $20.3 million , respectively, of investments in and advances to nonconsolidated affiliates included in Other long-term assets in our condensed consolidated balance sheets. Investments in and advances to nonconsolidated affiliates represent our investments in 9 partially owned subsidiaries, of which 8 are general or limited partnerships, limited liability companies, or joint ventures in which HealthSouth or one of its subsidiaries is a general or limited partner, managing member, member, or venturer, as applicable. We do not control these affiliates but have the ability to exercise significant influence over the operating and financial policies of certain of these affiliates. Our ownership percentages in these affiliates range from approximately 1% to 51% . We account for these investments using the cost and equity methods of accounting.

The following summarizes the combined results of operations of our equity method affiliates (on a 100% basis, in millions):

See also Note 2 , Business Combinations .

9



2014 2013 2014 2013

Fair value of assets acquired, net of $5.1 million of cash acquired in 2014 $ 52.0 $ 15.6 $ 52.0 $ 15.6

Goodwill 34.8 13.7 34.8 13.7 Fair value of liabilities assumed (21.9 ) (0.4 ) (21.9 ) (0.4 )

Fair value of noncontrolling interest owned by joint venture partner (14.0 ) — (14.0 ) — Fair value of equity interest prior to acquisition (35.0 ) — (35.0 ) —

Net cash paid for acquisitions $ 15.9 $ 28.9 $ 15.9 $ 28.9

3. Investments in and Advances to Nonconsolidated Affiliates



2014 2013 2014 2013

Net operating revenues $ 15.0 $ 19.7 $ 36.3 $ 39.2 Operating expenses (8.2 ) (11.0 ) (19.4 ) (22.2 )

Income from continuing operations, net of tax 5.5 7.3 24.0 14.0 Net income 5.5 7.3 24.0 14.0


The following is a summary of the activity related to our Redeemable noncontrolling interests during the six months ended June 30, 2014 and 2013 (in millions):

The following table reconciles the net income attributable to nonredeemable Noncontrolling interests , as recorded in the shareholders’ equity section of the condensed consolidated balance sheets, and the net income attributable to Redeemable noncontrolling interests , as recorded in the mezzanine section of the condensed consolidated balance sheets, to the Net income attributable to noncontrolling interests presented in the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 (in millions):

10

4. Redeemable Noncontrolling Interests


2014 2013

Balance at beginning of period $ 13.5 $ 7.2 Net income attributable to noncontrolling interests 3.6 2.6 Distributions declared (4.7 ) (1.9 )

Contribution to joint venture — 6.2

Balance at end of period $ 12.4 $ 14.1


2014 2013 2014 2013

Net income attributable to nonredeemable noncontrolling interests $ 13.2 $ 12.5 $ 26.0 $ 25.8 Net income attributable to redeemable noncontrolling interests 1.6 1.3 3.6 2.6

Net income attributable to noncontrolling interests $ 14.8 $ 13.8 $ 29.6 $ 28.4


Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):

(1) The three valuation techniques are: market approach (M), cost approach (C), and income approach (I).

In addition to assets and liabilities recorded at fair value on a recurring basis, we are also required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges or similar adjustments made to the carrying value of the applicable assets.

As a result of our consolidation of Fairlawn and the remeasurement of our previously held equity interest at fair value, we recorded a $27.2 million gain as part of Other income during the three and six months ended June 30, 2014. We determined the fair value of our previously held equity interest using the income approach. The income approach included the use of the hospital’s projected operating results and cash flows discounted using a rate that reflects market participant assumptions for the hospital. The projected operating results used management’s best estimates of economic and market conditions over the forecasted period including assumptions for pricing and volume, operating expenses, and capital expenditures. See Note 2 , Business Combinations . During the three and six months ended June 30, 2013 , we did not record any material gains or losses related to our nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis as part of our continuing operations.

11

5. Fair Value Measurements

Fair Value Measurements at Reporting Date Using

As of June 30, 2014 Fair Value

Quoted Prices in Active Markets

for Identical Assets

(Level 1)

Significant Other Observable

Inputs (Level 2)

Significant Unobservable

Inputs (Level 3)

Valuation Technique (1)

Other current assets:

Current portion of restricted marketable securities $ 5.5 $ — $ 5.5 $ — M

Other long-term assets:

Restricted marketable securities 44.4 — 44.4 — M

As of December 31, 2013

Other current assets:

Current portion of restricted marketable securities $ 4.7 $ — $ 4.7 $ — M

Other long-term assets:

Restricted marketable securities 42.9 — 42.9 — M


As discussed in Note 1, Summary of Significant Accounting Policies , “Fair Value Measurements,” to the consolidated financial statements

accompanying the 2013 Form 10-K, the carrying value equals fair value for our financial instruments that are not included in the table below and are classified as current in our condensed consolidated balance sheets. The carrying amounts and estimated fair values for all of our other financial instruments are presented in the following table (in millions):

Fair values for our long-term debt and financial commitments are determined using inputs, including quoted prices in nonactive markets, that are observable either directly or indirectly, or Level 2 inputs within the fair value hierarchy. See Note 1, Summary of Significant Accounting Policies , “Fair Value Measurements,” to the consolidated financial statements accompanying the 2013 Form 10-K.

See also Note 4 , Redeemable Noncontrolling Interests , and Note 7 , Assets and Liabilities in and Results of Discontinued Operations .

In February 2014, we issued 0.6 million of restricted stock awards to members of our management team and our board of directors. Approximately 0.2 million of these awards contain only a service condition, while the remainder contain both a service and a performance or market condition. For the awards that include a performance or market condition, the number of shares that will ultimately be granted to employees may vary based on the Company’s performance during the applicable two-year performance measurement period. Additionally, in February 2014, we granted 0.1 million stock options to members of our management team. The fair value of these awards and options was determined using the policies described in Note 1, Summary of Significant Accounting Policies , and Note 13, Share-Based Payments , to the consolidated financial statements accompanying the 2013 Form 10-K.

In connection with the 2007 sale of our surgery centers division (now known as Surgical Care Affiliates, or “SCA”) to ASC Acquisition LLC, an affiliate of TPG Partners V, L.P. (“TPG”), a private investment partnership, we received an option, subject to terms and conditions set forth below, to purchase up to a 5% equity interest in SCA. The price of the option is equal to the original issuance price of the units subscribed for by TPG and certain other co-investors in connection with the acquisition plus a 15% premium, compounded annually. The option has a term of ten years and is exercisable upon certain liquidity events, including a public offering of SCA’s shares of common stock that results in 30% or more of SCA’s common stock being listed or traded on a national securities exchange. On November 4, 2013, SCA announced the closing of its initial public offering, which was not a qualifying liquidity event.

During the second quarter of 2014, we entered into an amendment to the option agreement that requires us to settle the option net of our exercise price. The addition of this new feature resulted in the option becoming a derivative that must be recorded as an asset or liability on our condensed consolidated balance sheet and marked to market each period. As of June 30,

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As of June 30, 2014 As of December 31, 2013

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Long-term debt: Advances under revolving credit facility $ 15.0 $ 15.0 $ 45.0 $ 45.0 7.25% Senior Notes due 2018 272.3 285.6 272.4 291.4 8.125% Senior Notes due 2020 286.8 312.5 286.6 319.4 7.75% Senior Notes due 2022 252.4 275.0 252.5 275.0 5.75% Senior Notes due 2024 275.0 291.5 275.0 273.6 2.00% Convertible Senior Subordinated Notes due 2043 253.7 352.3 249.5 339.7 Other notes payable 44.6 44.6 47.6 47.6

Financial commitments: Letters of credit — 37.3 — 36.5

6. Share-Based Payments

7. Assets and Liabilities in and Results of Discontinued Operations


2014 , the fair value of this option was $6.7 million and is included in Other long-term assets in our condensed consolidated balance sheet. Income from discontinued operations, net of tax for the three and six months ended June 30, 2014 included a $6.7 million gain resulting from the initial recording of this option as a derivative and its fair value adjustments during the 2014 periods presented.

The fair value of the option and related adjustments were determined using a lattice model. Inputs into the model included the historical price volatility of SCA’s common stock, the risk free interest rate, and probability factors for the timing of when the option will be exercisable, or Level 3 inputs.

For additional information regarding discontinued operations, see Note 15, Assets and Liabilities in and Results of Discontinued Operations , to the consolidated financial statements accompanying the 2013 Form 10-K.

Our Provision for income tax expense of $36.5 million and $69.3 million for the three and six months ended June 30, 2014 , respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rates, which were reduced as a result of the nontaxable gain discussed in Note 2 , Business Combinations , related to our acquisition of an additional 30% equity interest in Fairlawn. As a result of this transaction, we released the deferred tax liability associated with the outside tax basis of our investment in Fairlawn because we now possess sufficient ownership to allow for the historical outside tax basis difference to be resolved through a tax-free transaction in the future.

In April 2013, we entered into closing agreements with the Internal Revenue Service that settled federal income tax matters related to the previous restatement of our 2000 and 2001 financial statements, as well as certain other tax matters, through December 31, 2008. As a result of these closing agreements, we increased our deferred tax assets, primarily our federal net operating loss carryforward (“NOL”), and recorded a net federal income tax benefit of approximately $115 million in the second quarter of 2013. This federal income tax benefit primarily resulted from an approximate $283 million increase to our federal NOL on a gross basis.

Our Provision for income tax benefit of $86.5 million and $53.0 million for the three and six months ended June 30, 2013 , respectively, primarily resulted from the settlement discussed above. It also included an approximate $3 million decrease in our valuation allowance related primarily to our capital loss carryforwards. During the second quarter of 2013, we determined a valuation allowance related to these assets was no longer required as sufficient positive evidence existed to substantiate their utilization. This evidence included our partial utilization of these capital loss carryforwards as a result of realizing capital gains in the current year and the identification of sufficient taxable capital gain income within the available capital loss carryforward period.

We have significant federal and state NOLs that expire in various amounts at varying times through 2031. Our utilization of NOLs could be subject to limitations under Internal Revenue Code Section 382 (“Section 382”) and may be limited in the event certain cumulative changes in ownership interests of significant stockholders over a three-year period exceed 50%. Section 382 imposes an annual limitation on the use of certain carryforward losses to an amount that approximates the value of a company at the time of an ownership change multiplied by the long-term tax exempt rate. At this time, we do not believe these limitations will restrict our ability to use any NOLs before they expire. However, no such assurances can be provided.

The $415.0 million of net deferred tax assets included in the accompanying condensed consolidated balance sheet as of June 30, 2014 reflects management’s assessment it is more likely than not we will be able to generate sufficient future taxable income to utilize those deferred tax assets based on our current estimates and assumptions. As of June 30, 2014 , we maintained a valuation allowance of $30.3 million due to uncertainties regarding our ability to utilize a portion of our state NOLs before they expire. The amount of the valuation allowance has been determined for each tax jurisdiction based on the weight of all available evidence including management’s estimates of taxable income for each jurisdiction in which we operate over the periods in which the related deferred tax assets will be recoverable. It is possible we may be required to increase or decrease our valuation allowance at some future time if our forecast of future earnings varies from actual results on a consolidated basis or in the applicable state tax jurisdictions, or if the timing of future tax deductions differs from our expectations.

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8. Income Taxes


Our reported federal NOL of $266.5 million (approximately $761 million on a gross basis) as of June 30, 2014 excludes $11.3 million related

to operating loss carryforwards resulting from excess tax benefits related to share-based awards, the tax benefits of which, when recognized, will be accounted for as a credit to Capital in excess of par value when they reduce taxes payable.

Total remaining gross unrecognized tax benefits were $0.4 million and $1.1 million as of June 30, 2014 and December 31, 2013 , respectively, none of which would affect our effective tax rate if recognized. A reconciliation of the beginning and ending liability for unrecognized tax benefits is as follows (in millions):

Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. Interest recorded as part of our income tax provision during the three and six months ended June 30, 2014 and 2013 was not material. Accrued interest income related to income taxes as of June 30, 2014 and December 31, 2013 was not material.

HealthSouth and its subsidiaries’ federal and state income tax returns are periodically examined by various regulatory taxing authorities. In connection with such examinations, we have settled federal income tax examinations with the IRS for all tax years through 2010. We are currently under audit by two states for tax years ranging from 2007 through 2011.

For the tax years that remain open under the applicable statutes of limitation, amounts related to unrecognized tax benefits have been considered by management in its estimate of our potential net recovery of prior years’ income taxes. We do not expect a material change in our unrecognized tax benefits within the next 12 months due to the closing of the applicable statutes of limitation.

In conjunction with the initiation of quarterly cash dividends in the third quarter of 2013, we revised our calculation to present earnings per share using the two-class method. The two-class method should have been used during all prior periods. We assessed the materiality of these revisions and concluded they were not material to any previously issued financial statements. The revision for the three and six months ended June 30, 2013 is presented below.

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Gross Unrecognized Income Tax Benefits

Accrued Interest and Penalties

Balance at December 31, 2013 $ 1.1 $ 0.3 Gross amount of increases in unrecognized tax

benefits related to prior periods — 0.1 Gross amount of decreases in unrecognized tax

benefits related to prior periods (0.7 ) (0.3 )

Balance at June 30, 2014 $ 0.4 $ 0.1

9. Earnings per Common Share

Three Months Ended

June 30, 2013 Six Months Ended June

30, 2013

Basic earnings per share attributable to HealthSouth common shareholders, as reported:

Continuing operations $ 1.85 $ 2.28 Discontinued operations — — Net income $ 1.85 $ 2.28

Basic earnings per share attributable to HealthSouth common shareholders as revised using the two-class method:

Continuing operations $ 1.82 $ 2.24 Discontinued operations — — Net income $ 1.82 $ 2.24


The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):

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Three Months Ended June 30, Six Months Ended June

30,

2014 2013 2014 2013

Basic:

Numerator:

Income from continuing operations $ 94.1 $ 178.9 $ 155.7 $ 245.2 Less: Net income attributable to noncontrolling interests included in continuing

operations (14.8 ) (13.8 ) (29.6 ) (28.4 )

Less: Income allocated to participating securities (1.1 ) (2.9 ) (1.6 ) (3.5 )

Less: Convertible perpetual preferred stock dividends (1.5 ) (5.8 ) (3.1 ) (11.5 )

Income from continuing operations attributable to HealthSouth common shareholders 76.7 156.4 121.4 201.8 Income (loss) from discontinued operations, net of tax, attributable to HealthSouth

common shareholders 3.8 0.1 3.7 (0.3 )

Less: Income from discontinued operations allocated to participating securities (0.1 ) — (0.1 ) —


Denominator:

Basic weighted average common shares outstanding 86.7 86.1 87.0 90.0

Basic earnings per share attributable to HealthSouth common shareholders:


Net income $ 0.93 $ 1.82 $ 1.44 $ 2.24

Diluted:

Numerator:

Income from continuing operations $ 94.1 $ 178.9 $ 155.7 $ 245.2 Less: Net income attributable to noncontrolling interests included in continuing

operations (14.8 ) (13.8 ) (29.6 ) (28.4 )

Add: Interest on convertible debt, net of tax 2.3 — 4.5 — Income from continuing operations attributable to HealthSouth common shareholders 81.6 165.1 130.6 216.8 Income (loss) from discontinued operations, net of tax, attributable to HealthSouth

common shareholders 3.8 0.1 3.7 (0.3 )


Denominator:

Diluted weighted average common shares outstanding 100.6 99.8 100.8 103.4

Diluted earnings per share attributable to HealthSouth common shareholders:


Net income $ 0.85 $ 1.66 $ 1.33 $ 2.09


The following table sets forth the reconciliation between basic weighted average common shares outstanding and diluted weighted average

common shares outstanding (in millions):

Options to purchase approximately 0.1 million and 1.2 million shares of common stock were outstanding as of June 30, 2014 and 2013 , respectively, but were not included in the computation of diluted weighted-average shares because to do so would have been antidilutive.

On February 14, 2014, our board of directors approved an increase in our existing common stock repurchase authorization from $200 million to $250 million . The repurchase authorization does not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our board of directors. During the six months ended June 30, 2014, we repurchased 1.3 million shares of our common stock in the open market for $43.1 million using cash on hand.

On February 14, 2014, our board of directors declared a cash dividend of $0.18 per common share that was paid on April 15, 2014 to stockholders of record on April 1, 2014. On May 1, 2014, our board of directors declared a cash dividend of $0.18 per common share that was paid on July 15, 2014 to stockholders of record on July 1, 2014. On July 17, 2014, our board of directors approved an increase in our quarterly dividend and declared a cash dividend of $0.21 per common share payable on October 15, 2014 to stockholders of record on October 1, 2014. As of June 30, 2014 , accrued common stock dividends of $16.0 million were included in Accrued expenses and other current liabilities in our condensed consolidated balance sheet. Future dividend payments are subject to declaration by our board of directors.

As discussed more fully in Note 10, Convertible Perpetual Preferred Stock , to the consolidated financial statements accompanying the 2013 Form 10-K, the agreement underlying our preferred stock includes antidilutive protection that requires adjustments to the number of shares of common stock issuable upon conversion and the exercise price for common stock upon the occurrence of certain events, including payment of cash dividends on our common stock after a de minimis threshold. At issuance, the preferred stock had a conversion price of $30.50 per share, which was equal to an initial conversion rate of 32.7869 shares of common stock per share of preferred stock. Additionally, our convertible notes (see Note 8, Long-term Debt , to the consolidated financial statements accompanying the 2013 Form 10-K) also include similar antidilutive protection that requires adjustments to the number of shares of common stock issuable upon conversion and the exercise price for common stock upon the occurrence of certain events, including payment of cash dividends on our common stock after a de minimis threshold. At issuance, the convertible notes had a conversion price of $39.65 per share, which was equal to an initial conversion rate of 25.2194 shares per $1,000 principal amount of the convertible notes.

The payment in January 2014 of an $0.18 per share dividend on our common stock triggered the antidilutive adjustment for the preferred stock. As of January 3, 2014, the resulting exercise price of each share of preferred stock was $30.17 , and the resulting conversion rate was 33.1455 for each preferred share. The payment in April of an $0.18 per share dividend on our common stock triggered the antidilutive adjustment for the preferred stock and the convertible notes. As of April 2, 2014, the resulting exercise price of each preferred stock and convertible note was $30.01 and $39.23 per share, respectively, and the resulting conversion rate was 33.3222 and 25.4896 for each preferred share and convertible note, respectively. The payment in July of an $0.18 per share dividend on our common stock did not exceed the de minimis threshold as defined in the underlying agreements for the preferred stock and convertible debt. Therefore, it did not trigger an antidilutive adjustment for the preferred stock and convertible notes.

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2014 2013 2014 2013

Basic weighted average common shares outstanding 86.7 86.1 87.0 90.0 Convertible perpetual preferred stock 3.2 11.6 3.2 11.6 Convertible senior subordinated notes 8.2 — 8.1 — Restricted stock awards, dilutive stock options, and restricted stock units 2.5 2.1 2.5 1.8

Diluted weighted average common shares outstanding 100.6 99.8 100.8 103.4


In January 2004, we repaid our then-outstanding 3.25% Convertible Debentures using the net proceeds of a loan arranged by Credit Suisse First

Boston. In connection with this transaction, we issued ten million warrants with an expiration date of January 16, 2014 to the lender to purchase shares of our common stock. The following table summarizes information relating to these warrants and their activity from December 31, 2013 through their expiration date (number of warrants in millions):

The above exercises resulted in the issuance of 0.2 million shares of common stock during the six months ended June 30, 2014. Cash exercises resulted in gross proceeds of $6.3 million during the six months ended June 30, 2014.

See Note 10, Convertible Perpetual Preferred Stock , and Note 17, Earnings per Common Share , to the consolidated financial statements accompanying the 2013 Form 10-K for additional information related to common stock, common stock warrants, and convertible perpetual preferred stock.

We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims, or legal and regulatory proceedings could materially and adversely affect our financial position, results of operations, and cash flows in a given period.

Litigation By and Against Former Independent Auditor—

In March 2003, claims on behalf of HealthSouth were brought against Ernst & Young, LLP in a stockholder derivative lawsuit initially filed in the Circuit Court of Jefferson County, Alabama on August 28, 2002 and captioned Tucker v. Scrushy . The Tucker derivative litigation, including the claims against various other defendants and the $2.9 billion judgment against Mr. Scrushy, our former chairman and chief executive officer, is more fully described in “Derivative Litigation” and “Litigation By and Against Former Independent Auditor” in Note 18, Contingencies and Other Commitments , to the consolidated financial statements accompanying the 2013 Form 10-K. The Tucker complaint alleges that from 1996 through 2002, when Ernst & Young served as our independent auditor, Ernst & Young acted recklessly and with gross negligence in performing its duties, and specifically that Ernst & Young failed to perform reviews and audits of our financial statements with due professional care as required by law and by its contractual agreements with us. The claims further allege Ernst & Young either knew of or, in the exercise of due care, should have discovered and investigated the fraudulent and improper accounting practices being directed by certain officers and employees, and should have reported them to our board of directors and the audit committee. The claims seek compensatory and punitive damages, disgorgement of fees received from us by Ernst & Young, and attorneys’ fees and costs.

On March 18, 2005, Ernst & Young filed a lawsuit captioned Ernst & Young LLP v. HealthSouth Corp. in the Circuit Court of Jefferson County, Alabama. The complaint alleges we provided Ernst & Young with fraudulent management representation letters, financial statements, invoices, bank reconciliations, and journal entries in an effort to conceal accounting fraud. Ernst & Young claims that as a result of our actions, Ernst & Young’s reputation has been injured and it has and will incur damages, expenses, and legal fees. On April 1, 2005, we answered Ernst & Young’s claims and asserted counterclaims related or identical to those asserted in the Tucker action. Upon Ernst & Young’s motion, the Alabama state court referred Ernst & Young’s claims and our counterclaims to arbitration pursuant to a clause in the engagement agreements between HealthSouth and Ernst & Young. In August 2006, we and the derivative plaintiffs agreed to jointly prosecute the claims against Ernst & Young in arbitration.

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Number of Warrants Weighted Average

Exercise Price

Common stock warrants outstanding as of December 31, 2013 2.9 $ 32.50 Cashless exercise (1.8 ) 32.16 Cash exercise (1.0 ) 32.16 Expired (0.1 ) 32.16

Common stock warrants outstanding as of January 16, 2014 —

10. Contingencies and Other Commitments


The trial phase of the arbitration process began on July 12, 2010 before a three-person arbitration panel selected under rules of the American

Arbitration Association (the “AAA”). On December 18, 2012, the AAA panel granted Ernst & Young’s motion to dismiss our claims on the grounds that HealthSouth is not permitted to pursue its claims since certain of its former officers and employees committed fraudulent acts. The panel also denied and dismissed Ernst & Young’s claims against us. On December 18, 2012, we, together with the stockholder derivative plaintiffs, filed a notice of appeal of the panel’s decision in the Circuit Court of Jefferson County, Alabama. On December 28, 2012, we filed a motion to vacate the decision. We assert that the panel’s decision is contrary to the Federal Arbitration Act and the duties of a public accounting firm to its corporate clients, and that the arbitrators exceeded their authority by entering an award contrary to Alabama law. On April 25, 2013, the court denied our motion to vacate. On June 4, 2013, we filed a notice of appeal to the Supreme Court of Alabama seeking review of the circuit court's denial of our motion to vacate the arbitration panel's decision. On June 13, 2014, the Supreme Court of Alabama affirmed the decision by the circuit court. On June 27, 2014, we filed an application for rehearing with the Supreme Court of Alabama. At this time, we do not know when the court will rule on that application.

Based on the ruling of the arbitration panel, we do not believe there is a reasonable possibility of a loss that might result from an adverse judgment or a settlement of this case.

General Medicine Action—

On August 16, 2004, General Medicine, P.C. filed a lawsuit against us captioned General Medicine, P.C. v. HealthSouth Corp. seeking the recovery of allegedly fraudulent transfers involving assets of Horizon/CMS Healthcare Corporation, a former subsidiary of HealthSouth. The lawsuit is pending in the Circuit Court of Jefferson County, Alabama (the “Alabama Action”).

General Medicine’s underlying claim against Horizon/CMS originates from a services contract entered into in 1995 between General Medicine and Horizon/CMS whereby General Medicine agreed to provide medical director services to skilled nursing facilities owned by Horizon/CMS for a term of three years . Horizon/CMS terminated the agreement for cause six months after it was executed, and General Medicine then initiated a lawsuit against Horizon/CMS in the United States District Court for the Eastern District of Michigan in 1996 (the “Michigan Action”). General Medicine’s complaint in the Michigan Action alleged that Horizon/CMS breached the services contract by wrongfully terminating General Medicine. We acquired Horizon/CMS in 1997 and sold it to Meadowbrook Healthcare, Inc. in 2001 pursuant to a stock purchase agreement. In 2004, Meadowbrook, without the knowledge of HealthSouth, consented to the entry of a final judgment in the Michigan Action in favor of General Medicine against Horizon/CMS for the alleged wrongful termination of the contract with General Medicine in the amount of $376 million , plus interest from the date of the judgment until paid at the rate of 10% per annum (the “Consent Judgment”). The $376 million damages figure was unilaterally selected by General Medicine and was not tested or opposed by Meadowbrook. Additionally, the settlement agreement (the “Settlement”) used as the basis for the Consent Judgment provided that Meadowbrook would pay only $300,000 to General Medicine to settle the Michigan Action and that General Medicine would seek to recover the remaining balance of the Consent Judgment solely from us. We were not a party to the Michigan Action, the Settlement negotiated by Meadowbrook, or the Consent Judgment.

The complaint filed by General Medicine against us in the Alabama Action alleges that while Horizon/CMS was our wholly owned subsidiary, General Medicine was an existing creditor of Horizon/CMS by virtue of the breach of contract claim underlying the Settlement. The complaint also alleges we caused Horizon/CMS to transfer its assets to us for less than a reasonably equivalent value or, in the alternative, with the actual intent to defraud creditors of Horizon/CMS, including General Medicine, in violation of the Alabama Uniform Fraudulent Transfer Act. General Medicine further alleges in its amended complaint that we are liable for the Consent Judgment despite not being a party to it because as Horizon/CMS’s parent we failed to observe corporate formalities in our operation and ownership of Horizon/CMS, misused our control of Horizon/CMS, stripped assets from Horizon/CMS, and engaged in other conduct which amounted to a fraud on Horizon/CMS’s creditors. General Medicine has requested relief including recovery of the unpaid amount of the Consent Judgment, the avoidance of the subject transfers of assets, attachment of the assets transferred to us, appointment of a receiver over the transferred properties, and a monetary judgment for the value of properties transferred.

We have denied liability to General Medicine and asserted defenses and counterclaims against General Medicine for fraud, tortious interference with business relations, conspiracy, abuse of process, and other causes of action. In our counterclaims, we alleged the Consent Judgment is the product of fraud and collusion by General Medicine and Meadowbrook and, further, that these parties were guilty of a conspiracy to manufacture a lawsuit against HealthSouth in favor of General

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Medicine. Consequently, we assert that the Consent Judgment is not evidence of a legitimate debt owed by Horizon/CMS to General Medicine that is collectible from HealthSouth under any theory of liability.

In 2008, after we obtained discovery concerning the circumstances that led to the entry of the Consent Judgment, we filed a motion in the Michigan Action asking the court to set aside the Consent Judgment on grounds that it was the product of fraud on the court and collusion by the parties. On May 21, 2009, the court granted our motion to set aside the Consent Judgment on grounds that it was the product of fraud on the court. On March 9, 2010, General Medicine filed an appeal of the court's decision to the Sixth Circuit Court of Appeals. The parties agreed to a voluntary stay of the Alabama Action pending the outcome of General Medicine's appeal to the Sixth Circuit Court of Appeals. On April 10, 2012, the Sixth Circuit Court of Appeals reversed the lower court's ruling and reinstated the Consent Judgment. Due to the conclusion of the appeal in the Michigan Action, General Medicine requested reactivation of the Alabama Action in the Circuit Court of Jefferson County, Alabama. On January 10, 2013, we filed a motion for partial summary judgment in the Alabama Action seeking a declaration that the Consent Judgment obtained by General Medicine is not enforceable against us because, among other reasons, it was the result of collusion. On February 27, 2013, the court denied our motion. The court also indicated it concurred with the Sixth Circuit Court of Appeals that the Consent Judgment did nothing more than establish Horizon/CMS's liability to General Medicine and did not establish the amount of General Medicine’s damages claim against Horizon/CMS or the merits of General Medicine's separate fraudulent conveyance claims against HealthSouth.

On January 9, 2014 and on February 18, 2014, the court in the Alabama Action entered rulings which together provided that the $376 million damages figure contained in the Consent Judgment is not admissible at trial and that the issue of collusion with respect to the amount of the Consent Judgment is now moot. Instead of relying on the Consent Judgment to prove damages against Horizon/CMS, General Medicine will be required to prove the amount of any damages it has against Horizon/CMS. On March 31, 2014, General Medicine filed a motion seeking partial summary judgment and requesting dismissal of our defenses and counterclaims which allege the Consent Judgment was the product of fraud and collusion. On July 15, 2014, the court issued an order denying General Medicine’s motion for partial summary judgment. Accordingly, at trial we will be permitted to present our defenses and counterclaims of fraud and collusion against General Medicine.

On May 3, 2014, the Consent Judgment expired under applicable Michigan law without renewal by General Medicine. Based on the expiration, on July 23, 2014, we filed a motion for summary judgment requesting dismissal of General Medicine’s lawsuit against us on grounds that General Medicine is no longer a “creditor” of Horizon/CMS, which is an essential element of the fraudulent transfer and alter ego claims against us. On August 7, 2014, the court will hear our motion, as well as General Medicine’s motion for partial summary judgment arguing that the Consent Judgment has not expired and that it remains a valid basis for a fraudulent transfer claim. The Alabama Action is set for trial beginning on September 15, 2014.

We intend to vigorously defend ourselves against General Medicine’s claims and to vigorously prosecute our counterclaims for fraud and collusion against General Medicine. Based on the stage of litigation, review of the current facts and circumstances as we understand them, the nature of the underlying claim, the results of the proceedings to date, and the nature and scope of the defense we continue to mount, we do not believe an adverse judgment or settlement is probable in this matter, and it is also not possible to estimate the amount of loss, if any, or range of possible loss that might result from an adverse judgment or settlement of this case.

Other Litigation—

We have been named as a defendant in a lawsuit filed March 28, 2003 by several individual stockholders in the Circuit Court of Jefferson County, Alabama, captioned Nichols v. HealthSouth Corp . The plaintiffs allege that we, some of our former officers, and our former investment bank engaged in a scheme to overstate and misrepresent our earnings and financial position. The plaintiffs are seeking compensatory and punitive damages. This case was consolidated with the Tucker case for discovery and other pretrial purposes and was stayed in the Circuit Court on August 8, 2005. The plaintiffs filed an amended complaint on November 9, 2010 to which we responded with a motion to dismiss filed on December 22, 2010. During a hearing on February 24, 2012, plaintiffs’ counsel indicated his intent to dismiss certain claims against us. Instead, on March 9, 2012, the plaintiffs amended their complaint to include additional securities fraud claims against HealthSouth and add several former officers to the lawsuit. On September 12, 2012, the plaintiffs further amended their complaint to request certification as a class action. One of those named officers has repeatedly attempted to remove the case to federal district court, most recently on December 11, 2012. We filed our latest motion to remand the case back to state court on January 10, 2013. On September 27, 2013, the federal court remanded the case back to state court. We intend to vigorously defend ourselves in this case. Based on

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the stage of litigation, review of the current facts and circumstances as we understand them, the nature of the underlying claim, the results of the proceedings to date, and the nature and scope of the defense we continue to mount, we do not believe an adverse judgment or settlement is probable in this matter, and it is also not possible to estimate the amount of loss, if any, or range of possible loss that might result from an adverse judgment or settlement of this case.

Governmental Inquiries and Investigations—

On June 24, 2011, we received a document subpoena addressed to HealthSouth Hospital of Houston, a long-term acute care hospital (“LTCH”) we closed in August 2011, and issued from the Dallas, Texas office of the U.S. Department of Health and Human Services, Office of the Inspector General (the “HHS-OIG”). The subpoena stated it was in connection with an investigation of possible false or otherwise improper claims submitted to Medicare and Medicaid and requested documents and materials relating to patient admissions, length of stay, and discharge matters at this closed LTCH. We furnished the documents requested and have heard nothing from HHS-OIG since December 2012.

On March 4, 2013, we received document subpoenas from an office of the HHS-OIG addressed to four of our hospitals. Those subpoenas also requested complete copies of medical records for 100 patients treated at each of those hospitals between September 2008 and June 2012. The investigation is being conducted by the United States Department of Justice (the “DOJ”). On April 24, 2014, we received document subpoenas relating to an additional seven of our hospitals. The new subpoenas reference substantially similar investigation subject matter as the original subpoenas and request materials from the period January 2008 through December 2013. Two of the four hospitals addressed in the original set of subpoenas have received supplemental subpoenas to cover this new time period. The new subpoenas do not include requests for specific patient files, but it is expected that such requests will be made for the new group of hospitals.

All of the subpoenas are in connection with an investigation of alleged improper or fraudulent claims submitted to Medicare and Medicaid and requests documents and materials relating to practices, procedures, protocols and policies, of certain pre- and post-admissions activities at these hospitals including, among other things, marketing functions, pre-admission screening, post-admission physician evaluations, patient assessment instruments, individualized patient plans of care, and compliance with the Medicare 60% rule. Under the Medicare rule commonly referred to as the “ 60% rule,” an inpatient rehabilitation hospital must treat 60% or more of its patients from at least one of a specified list of medical conditions in order to be reimbursed at the inpatient rehabilitation hospital payment rates, rather than at the lower acute care hospital payment rates.

We are cooperating fully with the DOJ in connection with these subpoenas and are currently unable to predict the timing or outcome of the related investigations.

Other Matters—

The False Claims Act, 18 U.S.C. § 287, allows private citizens, called “relators,” to institute civil proceedings alleging violations of the False Claims Act. These qui tam cases are generally sealed by the court at the time of filing. The only parties typically privy to the information contained in the complaint are the relator, the federal government, and the presiding court. It is possible that qui tam lawsuits have been filed against us and that those suits remain under seal or that we are unaware of such filings or prevented by existing law or court order from discussing or disclosing the filing of such suits. We may be subject to liability under one or more undisclosed qui tam cases brought pursuant to the False Claims Act.

It is our obligation as a participant in Medicare and other federal healthcare programs to routinely conduct audits and reviews of the accuracy of our billing systems and other regulatory compliance matters. As a result of these reviews, we have made, and will continue to make, disclosures to the HHS-OIG and the United States Centers for Medicare and Medicaid Services relating to amounts we suspect represent over-payments from these programs, whether due to inaccurate billing or otherwise. Some of these disclosures have resulted in, or may result in, HealthSouth refunding amounts to Medicare or other federal healthcare programs.

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Each of the subsidiary guarantors is 100% owned by HealthSouth, and all guarantees are full and unconditional

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11. Condensed Consolidating Financial Information


and joint and several, subject to certain customary conditions for release. HealthSouth’s investments in its consolidated subsidiaries, as well as guarantor subsidiaries’ investments in nonguarantor subsidiaries and nonguarantor subsidiaries’ investments in guarantor subsidiaries, are presented under the equity method of accounting with the related investment presented within the line items Intercompany receivable and Intercompany payable in the accompanying condensed consolidating balance sheets.

The terms of our credit agreement allow us to declare and pay cash dividends on our common stock so long as: (1) we are not in default under our credit agreement and (2) our senior secured leverage ratio (as defined in our credit agreement) remains less than or equal to 1.5 x. The terms of our senior note indenture allow us to declare and pay cash dividends on our common stock so long as (1) we are not in default, (2) the consolidated coverage ratio (as defined in the indenture) exceeds 2 x or we are otherwise allowed under the indenture to incur debt, and (3) we have capacity under the indenture’s restricted payments covenant to declare and pay dividends. See Note 8, Long-term Debt , to the consolidated financial statements accompanying the 2013 Form 10-K.

As described in Note 10, Convertible Perpetual Preferred Stock , to the consolidated financial statements accompanying the 2013 Form 10-K, our preferred stock generally provides for the payment of cash dividends, subject to certain limitations. Our credit agreement and our senior note indenture do not limit the payment of dividends on the preferred stock.

Periodically, certain wholly owned subsidiaries of HealthSouth make dividends or distributions of available cash and/or intercompany receivable balances to their parents. In addition, HealthSouth makes contributions to certain wholly owned subsidiaries. When made, these dividends, distributions, and contributions impact the Intercompany receivable , Intercompany payable , and HealthSouth shareholders’ equity line items in the accompanying condensed consolidating balance sheet but have no impact on the consolidated financial statements of HealthSouth Corporation.

21


Condensed Consolidating Statement of Operations

22

Three Months Ended June 30, 2014

HealthSouth Corporation

Guarantor Subsidiaries

Nonguarantor Subsidiaries Eliminating Entries

HealthSouth Consolidated

(In Millions)

Net operating revenues $ 3.7 $ 434.9 $ 188.2 $ (22.4 ) $ 604.4 Less: Provision for doubtful accounts — (6.5 ) (2.8 ) — (9.3 )

Net operating revenues less provision for doubtful accounts 3.7 428.4 185.4 (22.4 ) 595.1

Operating expenses:

Salaries and benefits 6.2 195.4 87.5 (3.8 ) 285.3 Other operating expenses 5.2 60.5 29.6 (9.0 ) 86.3 Occupancy costs 1.0 14.4 4.5 (9.6 ) 10.3 Supplies — 19.6 8.2 — 27.8 General and administrative expenses 30.2 — — — 30.2 Depreciation and amortization 2.3 18.0 6.1 — 26.4 Government, class action, and related settlements (0.8 ) — — — (0.8 )

Professional fees—accounting, tax, and legal 2.0 — — — 2.0 Total operating expenses 46.1 307.9 135.9 (22.4 ) 467.5

Interest expense and amortization of debt discounts and fees 25.3 2.1 0.7 (0.3 ) 27.8

Other income (0.3 ) (27.2 ) (1.0 ) 0.3 (28.2 )

Equity in net income of nonconsolidated affiliates — (2.6 ) — — (2.6 )

Equity in net income of consolidated affiliates (103.6 ) (7.2 ) — 110.8 — Management fees (27.4 ) 20.8 6.6 — —

Income from continuing operations before income tax (benefit) expense 63.6 134.6 43.2 (110.8 ) 130.6

Provision for income tax (benefit) expense (15.7 ) 40.3 11.9 — 36.5 Income from continuing operations 79.3 94.3 31.3 (110.8 ) 94.1

Income from discontinued operations, net of tax 3.8 — — — 3.8 Net Income 83.1 94.3 31.3 (110.8 ) 97.9

Less: Net income attributable to noncontrolling interests — — (14.8 ) — (14.8 )

Net income attributable to HealthSouth $ 83.1 $ 94.3 $ 16.5 $ (110.8 ) $ 83.1

Comprehensive income $ 83.2 $ 94.3 $ 31.3 $ (110.8 ) $ 98.0 Comprehensive income attributable to

HealthSouth $ 83.2 $ 94.3 $ 16.5 $ (110.8 ) $ 83.2



23

Three Months Ended June 30, 2013





(In Millions)

Net operating revenues $ 2.9 $ 401.6 $ 177.4 $ (17.4 ) $ 564.5 Less: Provision for doubtful accounts — (4.7 ) (2.3 ) — (7.0 )

Net operating revenues less provision for doubtful accounts 2.9 396.9 175.1 (17.4 ) 557.5

Operating expenses:




Other income — (0.7 ) (1.6 ) 0.4 (1.9 )

Equity in net income of nonconsolidated affiliates (1.3 ) (2.0 ) — — (3.3 )



Provision for income tax (benefit) expense (85.6 ) (6.5 ) 5.6 — (86.5 )

Income from continuing operations 164.9 100.8 38.3 (125.1 ) 178.9 Income (loss) from discontinued operations, net of

tax 0.3 0.1 (0.3 ) — 0.1 Net Income 165.2 100.9 38.0 (125.1 ) 179.0




HealthSouth $ 163.4 $ 100.9 $ 24.2 $ (125.1 ) $ 163.4



24






(In Millions)

Net operating revenues $ 7.5 $ 862.0 $ 370.4 $ (44.3 ) $ 1,195.6 Less: Provision for doubtful accounts — (12.0 ) (4.8 ) — (16.8 )

Net operating revenues less provision for doubtful accounts 7.5 850.0 365.6 (44.3 ) 1,178.8

Operating expenses: Salaries and benefits 11.8 392.3 174.8 (7.5 ) 571.4 Other operating expenses 10.1 120.3 58.0 (17.6 ) 170.8 Occupancy costs 2.1 28.8 9.1 (19.2 ) 20.8 Supplies — 39.2 16.2 — 55.4 General and administrative expenses 60.9 — — — 60.9 Depreciation and amortization 5.1 35.9 11.8 — 52.8 Government, class action, and related settlements (0.8 ) — — — (0.8 )



Other income (0.5 ) (28.3 ) (1.6 ) 0.5 (29.9 )

Equity in net income of nonconsolidated affiliates — (6.9 ) — — (6.9 )



Provision for income tax (benefit) expense (36.1 ) 83.0 22.4 — 69.3 Income from continuing operations 126.1 154.3 60.8 (185.5 ) 155.7

Income from discontinued operations, net of tax 3.7 — — — 3.7 Net Income 129.8 154.3 60.8 (185.5 ) 159.4


Net income attributable to HealthSouth $ 129.8 $ 154.3 $ 31.2 $ (185.5 ) $ 129.8 Comprehensive income $ 130.0 $ 154.3 $ 60.8 $ (185.5 ) $ 159.6

Comprehensive income attributable to HealthSouth $ 130.0 $ 154.3 $ 31.2 $ (185.5 ) $ 130.0



25






(In Millions)

Net operating revenues $ 6.0 $ 815.3 $ 350.0 $ (34.2 ) $ 1,137.1 Less: Provision for doubtful accounts — (10.0 ) (4.4 ) — (14.4 )

Net operating revenues less provision for doubtful accounts 6.0 805.3 345.6 (34.2 ) 1,122.7

Operating expenses:




Other income (0.3 ) (0.7 ) (2.3 ) 0.7 (2.6 )

Equity in net income of nonconsolidated affiliates (2.2 ) (4.0 ) — — (6.2 )



Provision for income tax (benefit) expense (104.2 ) 34.8 16.4 — (53.0 )

Income from continuing operations 216.3 161.1 68.2 (200.4 ) 245.2 Income (loss) from discontinued operations, net of

tax 0.2 0.3 (0.8 ) — (0.3 )

Net Income 216.5 161.4 67.4 (200.4 ) 244.9 Less: Net income attributable to noncontrolling

interests — — (28.4 ) — (28.4 )



HealthSouth $ 214.8 $ 161.4 $ 39.0 $ (200.4 ) $ 214.8


Condensed Consolidating Balance Sheet

26

As of June 30, 2014



Nonguarantor Subsidiaries

Eliminating Entries


(In Millions)

Assets

Current assets:

Cash and cash equivalents $ 57.1 $ 0.7 $ 8.0 $ — $ 65.8 Accounts receivable, net — 192.1 80.2 — 272.3 Deferred income tax assets 85.5 34.5 18.9 — 138.9 Other current assets 49.6 13.8 93.2 (52.7 ) 103.9

Total current assets 192.2 241.1 200.3 (52.7 ) 580.9 Property and equipment, net 13.0 738.2 225.3 — 976.5 Goodwill — 279.6 212.1 — 491.7 Intangible assets, net 16.9 46.4 40.0 — 103.3 Deferred income tax assets 224.5 24.5 27.1 — 276.1 Other long-term assets 68.8 25.3 53.9 — 148.0 Intercompany receivable 1,544.5 — — (1,544.5 ) —

Total assets $ 2,059.9 $ 1,355.1 $ 758.7 $ (1,597.2 ) $ 2,576.5

Liabilities and Shareholders’ Equity Current liabilities:

Accounts payable $ 9.1 $ 34.3 $ 12.3 $ — $ 55.7 Accrued expenses and other current liabilities 142.1 69.3 85.0 (52.8 ) 243.6

Total current liabilities 151.2 103.6 97.3 (52.8 ) 299.3 Long-term debt, net of current portion 1,355.8 86.1 33.2 — 1,475.1 Other long-term liabilities 46.0 13.3 81.8 — 141.1 Intercompany payable — 151.3 218.1 (369.4 ) — 1,553.0 354.3 430.4 (422.2 ) 1,915.5 Commitments and contingencies Convertible perpetual preferred stock 93.2 — — — 93.2 Redeemable noncontrolling interests — — 12.4 — 12.4 Shareholders’ equity:

HealthSouth shareholders’ equity 413.7 1,000.8 174.2 (1,175.0 ) 413.7 Noncontrolling interests — — 141.7 — 141.7

Total shareholders’ equity 413.7 1,000.8 315.9 (1,175.0 ) 555.4 Total liabilities and shareholders’

equity $ 2,059.9 $ 1,355.1 $ 758.7 $ (1,597.2 ) $ 2,576.5


Condensed Consolidating Balance Sheet

27

As of December 31, 2013



Nonguarantor Subsidiaries

Eliminating Entries


(In Millions)

Assets

Current assets:

Cash and cash equivalents $ 60.5 $ 2.3 $ 1.7 $ — $ 64.5 Accounts receivable, net — 184.7 77.1 — 261.8 Deferred income tax assets 85.5 34.5 19.0 — 139.0 Other current assets 37.0 15.8 80.8 (18.5 ) 115.1

Total current assets 183.0 237.3 178.6 (18.5 ) 580.4 Property and equipment, net 16.3 698.5 195.7 — 910.5 Goodwill — 279.6 177.3 — 456.9 Intangible assets, net 18.1 49.6 20.5 — 88.2 Deferred income tax assets 288.8 24.5 41.0 — 354.3 Other long-term assets 64.6 27.1 52.4 — 144.1 Intercompany receivable 1,438.8 — — (1,438.8 ) —

Total assets $ 2,009.6 $ 1,316.6 $ 665.5 $ (1,457.3 ) $ 2,534.4

Liabilities and Shareholders’ Equity Current liabilities:

Accounts payable $ 15.1 $ 32.6 $ 14.2 $ — $ 61.9 Accrued expenses and other current liabilities 130.5 71.0 66.7 (18.5 ) 249.7

Total current liabilities 145.6 103.6 80.9 (18.5 ) 311.6 Long-term debt, net of current portion 1,381.7 88.1 35.4 — 1,505.2 Other long-term liabilities 44.5 17.4 80.3 — 142.2 Intercompany payable — 299.2 228.9 (528.1 ) — 1,571.8 508.3 425.5 (546.6 ) 1,959.0 Commitments and contingencies Convertible perpetual preferred stock 93.2 — — — 93.2 Redeemable noncontrolling interests — — 13.5 — 13.5 Shareholders’ equity:

HealthSouth shareholders’ equity 344.6 808.3 102.4 (910.7 ) 344.6 Noncontrolling interests — — 124.1 — 124.1

Total shareholders’ equity 344.6 808.3 226.5 (910.7 ) 468.7 Total liabilities and shareholders’

equity $ 2,009.6 $ 1,316.6 $ 665.5 $ (1,457.3 ) $ 2,534.4


Condensed Consolidating Statement of Cash Flows

28






(In Millions)

Net cash provided by operating activities $ 27.4 $ 137.2 $ 70.5 $ — $ 235.1 Cash flows from investing activities:

Purchases of property and equipment (9.0 ) (63.6 ) (16.9 ) — (89.5 )

Capitalized software costs (2.5 ) (1.5 ) (7.0 ) — (11.0 )

Acquisition of business, net of cash acquired — — (15.9 ) — (15.9 )

Other 1.0 1.9 6.5 — 9.4 Net cash used in investing activities (10.5 ) (63.2 ) (33.3 ) — (107.0 )

Cash flows from financing activities: Borrowings on revolving credit facility 65.0 — — — 65.0 Payments on revolving credit facility (95.0 ) — — — (95.0 )

Repurchases of common stock, including fees and expenses (43.1 ) — — — (43.1 )

Dividends paid on common stock (31.6 ) — — — (31.6 )

Dividends paid on convertible perpetual preferred stock (3.1 ) — — — (3.1 )

Distributions paid to noncontrolling interests of consolidated affiliates — — (25.4 ) — (25.4 )

Other 12.3 (2.0 ) (3.9 ) — 6.4 Change in intercompany advances 75.2 (73.6 ) (1.6 ) — —

Net cash used in financing activities (20.3 ) (75.6 ) (30.9 ) — (126.8 )

(Decrease) increase in cash and cash equivalents (3.4 ) (1.6 ) 6.3 — 1.3 Cash and cash equivalents at beginning of

period 60.5 2.3 1.7 — 64.5

Cash and cash equivalents at end of period $ 57.1 $ 0.7 $ 8.0 $ — $ 65.8


Condensed Consolidating Statement of Cash Flows

29






(In Millions)

Net cash provided by operating activities $ 53.1 $ 137.3 $ 36.4 $ — $ 226.8 Cash flows from investing activities:

Purchases of property and equipment (2.4 ) (52.5 ) (14.1 ) — (69.0 )

Capitalized software costs (4.9 ) (5.5 ) (1.5 ) — (11.9 )

Acquisition of business, net of cash acquired — (28.9 ) — — (28.9 )

Other (0.2 ) (0.7 ) 9.3 — 8.4 Net cash used in investing activities (7.5 ) (87.6 ) (6.3 ) — (101.4 )

Cash flows from financing activities: Borrowings on revolving credit facility 132.0 — — — 132.0 Payments on revolving credit facility (59.0 ) — — — (59.0 )

Repurchases of common stock, including fees and expenses (234.1 ) — — — (234.1 )

Dividends paid on convertible perpetual preferred stock (11.5 ) — — — (11.5 )

Distributions paid to noncontrolling interests of consolidated affiliates — — (23.9 ) — (23.9 )

Other 2.6 (5.3 ) 9.7 — 7.0 Change in intercompany advances 58.1 (43.0 ) (15.1 ) — —

Net cash used in financing activities (111.9 ) (48.3 ) (29.3 ) — (189.5 )

(Decrease) increase in cash and cash equivalents (66.3 ) 1.4 0.8 — (64.1 )

Cash and cash equivalents at beginning of period 131.3 0.3 1.2 — 132.8

Cash and cash equivalents at end of period $ 65.0 $ 1.7 $ 2.0 $ — $ 68.7

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to HealthSouth Corporation and its subsidiaries and should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited) , of this report and our audited consolidated financial statements for the year ended December 31, 2013 and Management’s Discussion and Analysis of Financial Condition and Results of Operations which are included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “ 2013 Form 10-K”).

This MD&A is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. See “Cautionary Statements Regarding Forward-Looking Statements” on page i of this report for a description of important factors that could cause actual results to differ from expected results. See also Item 1A, Risk Factors , to the 2013 Form 10-K.

Executive Overview

Our Business

We are the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated and discharged, revenues, and number of hospitals. While our national network of inpatient hospitals stretches across 28 states and Puerto Rico, we are concentrated in the eastern half of the United States and Texas. As of June 30, 2014 , we operated 103 inpatient rehabilitation hospitals (including one hospital that operates as a joint venture which we account for using the equity method of accounting), 17 outpatient rehabilitation satellite clinics (operated by our hospitals), and 25 licensed, hospital-based home health agencies. In addition to HealthSouth hospitals, we manage three inpatient rehabilitation units through management contracts. For additional information about our business, see Item 1, Business , of the 2013 Form 10-K.

2014 Overview

Our 2014 strategy focuses on the following priorities:

During the three months ended June 30, 2014 , discharge growth of 3.0% coupled with a 4.9% increase in net patient revenue per discharge generated 8.0% growth in net patient revenue from our hospitals compared to the three months ended June 30, 2013 . Discharge growth included a 1.4% increase in same-store discharges. During the six months ended June 30, 2014 , discharge growth of 2.7% coupled with a 3.2% increase in net patient revenue per discharge generated 6.0% growth in net patient revenue from our hospitals compared to the six months ended June 30, 2013 . Discharge growth included a 0.9% increase in same-store discharges. Our quality and outcome measures, as reported through the Uniform Data System for Medical Rehabilitation (the “UDS”), remained well above the average for hospitals included in the UDS database.

30

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

• continuing to provide high-quality, cost-effective care to patients in our existing markets;

• achieving organic growth at our existing hospitals;

• expanding our services to more patients who require inpatient rehabilitative services by constructing and opportunistically acquiring new hospitals in new markets;

• continuing our shareholder value-enhancing strategies such as repurchases of our common stock and common stock dividends; and

• positioning the Company for continued success in the evolving healthcare delivery system. This preparation includes continuing the installation of our electronic clinical information system which allows for interfaces with all major acute care electronic medical record systems and health information exchanges as well as participating in bundling projects and Accountable Care Organizations (“ACOs”).

Our growth efforts thus far in 2014 have included the continued development of the following de novo hospitals:

*A certificate of need has been awarded, but it is currently under appeal.

In April 2014, we signed an agreement with Mountain States Health Alliance to form a joint venture to own and operate a 26-bed, free-standing inpatient rehabilitation hospital in Johnson City, Tennessee. The formation of the joint venture is subject to customary closing conditions, including regulatory approvals. We expect to begin operating the joint venture by the end of 2014.

In June 2014, we acquired an additional 30% equity interest from UMass Memorial Health Care, our joint venture partner in Fairlawn Rehabilitation Hospital (“Fairlawn”) in Worcester, Massachusetts. This transaction increased our ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method of accounting to a consolidated entity. As a result of our consolidation of this hospital and the remeasurement of our previously held equity interest at fair value, we recorded a $27.2 million gain as part of Other income during the three and six months ended June 30, 2014. The transaction was funded using cash on hand. See Note 1 , Basis of Presentation , and Note 2 , Business Combinations , to the condensed consolidated financial statements included in Part 1, Item 1, Financial Statements (Unaudited) , of this report for additional information .

Also in June 2014, we signed an agreement with Memorial Health to form a joint venture to own and operate a 50-bed inpatient rehabilitation hospital to be known as the Rehabilitation Hospital of Savannah in Savannah, Georgia. Initially, the Rehabilitation Hospital of Savannah will operate in the current location of Memorial Health’s 50-bed Rehabilitation Institute on Memorial University Medical Center’s campus. The joint venture plans to build a new, 50-bed replacement inpatient rehabilitation hospital, which is expected to be completed in early 2016. The establishment and relocation of the Rehabilitation Hospital of Savannah are subject to further regulatory review and approval by the Georgia Department of Community Health. In addition, the formation and commencement of operations of the joint venture are subject to customary closing conditions. We expect to begin operating the inpatient rehabilitation hospital at Memorial University Medical Center in early 2015.

We also continued our shareholder value-enhancing strategies by repurchasing 1.3 million shares of our common stock in the open market for $43.1 million and paying a quarterly cash dividend of $0.18 per share on our common stock in the first two quarters of 2014. On July 17, 2014, our board of directors approved an increase in our quarterly dividend and declared a cash dividend of $0.21 per share, payable on October 15, 2014 to stockholders of record on October 1, 2014. See the “Liquidity and Capital Resources” section of this Item. In addition, we further strengthened our balance sheet by purchasing the real estate previously subject to a lease associated with our hospital in San Antonio, Texas.

Business Outlook

We believe our business outlook remains reasonably positive for two primary reasons. First, demographic trends, specifically the aging of the population, should increase long-term demand for inpatient rehabilitative services. While we treat patients of all ages, most of our patients are persons 65 and older (the average age of a HealthSouth patient is 72 years) and have conditions such as strokes, hip fractures, and a variety of debilitating neurological conditions that are generally nondiscretionary in nature. We believe the demand for inpatient rehabilitative healthcare services will continue to increase as the U.S. population ages and life expectancies increase. The number of Medicare enrollees is expected to grow approximately 3% per year for the foreseeable future, creating an attractive market.

Second, we are the industry leader in this growing sector. As the nation’s largest owner and operator of inpatient rehabilitation hospitals, we believe we differentiate ourselves from our competitors based on our broad platform of clinical expertise, the quality of our clinical outcomes, the sustainability of best practices, our financial strength, and the application of rehabilitation technology. We have invested considerable resources into clinical and management systems and protocols that have allowed us to consistently produce high-quality outcomes for our patients while continuing to contain cost growth. Our

31

Location # of Beds Actual / Expected

Construction Start Date Expected

Operational Date

Altamonte Springs, Florida 50 Q4 2013 Q4 2014

Newnan, Georgia 50 Q4 2013 Q4 2014

Middletown, Delaware 34 Q4 2013 Q4 2014

Modesto, California 50 Q4 2014 Q1 2016

Franklin, Tennessee* 40 TBD TBD

commitment to technology also includes the ongoing implementation of our rehabilitation-specific electronic clinical information system. We believe this system will improve patient care and safety, enhance staff recruitment and retention, and set the stage for connectivity with other providers and health information exchanges. Our hospitals also participate in The Joint Commission's Disease-Specific Care Certification Program. Under this program, Joint Commission accredited organizations, like our hospitals, may seek certification for chronic diseases or conditions such as brain injury or stroke rehabilitation by complying with Joint Commission standards, effectively using evidence-based, clinical practice guidelines to manage and optimize patient care, and using an organized approach to performance measurement and evaluation of clinical outcomes. Obtaining such certifications demonstrates our commitment to excellence in providing disease-specific care. Currently, 96 of our hospitals hold one or more disease-specific certifications. We also account for approximately 75% of all Joint Commission disease-specific certifications in stroke nationwide.

We believe these factors align with our strengths in, and focus on, inpatient rehabilitative care. Unlike many of our competitors that may offer inpatient rehabilitation as one of many secondary services, inpatient rehabilitation is our core business. In addition, we believe we can address the demand for inpatient rehabilitative services in markets where we currently do not have a presence by constructing or acquiring new hospitals.

Longer term, the nature and timing of the transformation of the current healthcare system to coordinated care delivery and payment models is uncertain and will likely remain so for some time. The development of new delivery and payment systems will almost certainly take significant time and expense. Many of the alternative approaches being explored may not work as intended. As outlined in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Key Challenges—Changes to Our Operating Environment Resulting from Healthcare Reform” of the 2013 Form 10-K, our goal is to position the Company in a prudent manner to be responsive to industry shifts.

Healthcare has always been a highly regulated industry, and we have cautioned our stakeholders that future Medicare payment rates could be at risk. While the Medicare reimbursement environment may be challenging, HealthSouth has a proven track record of adapting to and succeeding in a highly regulated environment, and we believe we are well positioned to continue to succeed and grow. Further, we believe the regulatory and reimbursement risks discussed throughout this report may present us with opportunities to grow by acquiring or consolidating the operations of other inpatient rehabilitation providers in our highly fragmented industry. We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2018. We have invested in our core business and created an infrastructure that enables us to provide high-quality care on a cost-effective basis. Our balance sheet remains strong. Our leverage ratio is within our target range, we have ample availability under our revolving credit facility, and we continue to generate strong cash flows from operations. Importantly, we have flexibility with how we choose to invest our cash and return value to shareholders including bed additions, de novos, acquisitions of other inpatient rehabilitation hospitals, purchases of leased properties, repurchases of our common and preferred stock, common stock dividends (including the potential growth of the quarterly cash dividend on our common stock), and repayment of long-term debt. Specifically, on February 14, 2014, our board of directors approved an increase in our existing common stock repurchase authorization from $200 to $250 million. As of June 30, 2014, approximately $207 million remained under this authorization. See the “Liquidity and Capital Resources—Authorizations for Returning Capital to Stakeholders” section of this Item for additional information.

For these and other reasons, we believe we will be able to adapt to changes in reimbursement and sustain our business model. We also believe we will be in a position to take action should an attractive acquisition or consolidation opportunity arise.

Key Challenges

Currently, the healthcare industry is facing many well-publicized regulatory and reimbursement challenges. The industry is also facing uncertainty associated with the efforts, primarily arising from initiatives included in the 2010 Healthcare Reform Laws (as defined in Item 1, Business , “Regulatory and Reimbursement Challenges” of the 2013 Form 10-K) to identify and implement workable coordinated care delivery models. Successful healthcare providers are those who provide high-quality, cost-effective care and have the ability to adjust to changes in the regulatory and operating environments. We believe we have the necessary capabilities — scale, infrastructure, balance sheet, and management — to adapt to and succeed in a highly regulated industry, and we have a proven track record of doing so.

As we continue to execute our business plan, the following are some of the challenges we face:

32

• Operating in a Highly Regulated Industry . We are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. These rules and regulations have affected, or could in the future affect, our business activities by having an impact on the reimbursement we receive for services provided or the costs of compliance, mandating new documentation standards, requiring additional licensure or

certification of our hospitals, regulating our relationships with physicians and other referral sources, regulating the use of our properties, and limiting our ability to enter new markets or add new beds to existing hospitals. Ensuring continuous compliance with extensive laws and regulations is an operating requirement for all healthcare providers.

We have invested, and will continue to invest, substantial time, effort, and expense in implementing and maintaining internal controls and procedures designed to ensure regulatory compliance, and we are committed to continued adherence to these guidelines. More specifically, because Medicare comprises a significant portion of our Net operating revenues , it is important for us to remain compliant with the laws and regulations governing the Medicare program and related matters including anti-kickback and anti-fraud requirements. If we were unable to remain compliant with these regulations, our financial position, results of operations, and cash flows could be materially, adversely impacted.

As discussed in Item 1, Business , “Sources of Revenues,” and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview—Key Challenges,” of the 2013 Form 10-K, in connection with United States Centers for Medicare and Medicaid Services (“CMS”) approved and announced Recovery Audit Contractor (“RAC”) audits related to inpatient rehabilitation facilities (“IRFs”), we have received requests to review certain patient files for discharges occurring from 2010 to 2014. To date, the Medicare payments that are subject to these audit requests represent less than 1% of our Medicare patient discharges during those years, and not all of these patient file requests have resulted in payment denial determinations by the RACs. Because we have confidence in the medical judgment of both the referring and the admitting physicians who assess the treatment needs of their patients, we currently plan to appeal substantially all RAC denials arising from these audits.

The contracts awarded to RACs by CMS were set to expire in February 2014 but have been extended briefly pending finalization of new contracts. In late February 2014, CMS announced it will pause the operations of the current RACs until new contracts are awarded. This also means hospitals will not receive any new requests from RACs until new contracts are awarded. However, once the new contracts are in place, RACs will be able to audit claims for dates of service during the time period covered by this pause. CMS has not announced when it expects to finalize the new RAC contracts. While we make provisions for these claims based on our historical experience and success rates in the claim adjudication process, we cannot provide assurance as to our future success in the resolution of these and future disputes, nor can we predict or estimate the scope or number of denials that ultimately may be reviewed.

See also Item 1, Business , “Sources of Revenues” and “Regulation,” and Item 1A, Risk Factors , to the 2013 Form 10-K and Note 10 , Contingencies and Other Commitments , “Governmental Inquiries and Investigations,” to the condensed consolidated financial statements included in Item 1, Financial Statements (Unaudited) , of this report.

In May 2014, CMS released its notice of proposed rulemaking for fiscal year 2015 (the “2015 Rule”) for IRFs under the prospective payment system (“IRF-PPS”). The proposed rule would implement a net 2.1% market basket increase effective for discharges between October 1, 2014 and September 30, 2015, calculated as follows:

The proposed rule also includes other changes that impact our hospital-by-hospital base rate for Medicare reimbursement. Such changes include, but are not limited to, freezing the update to the IRF-PPS facility-level rural adjustment factor, low-income patient factor, and teaching status adjustment factor and updating the outlier fixed loss threshold. Based on our analysis which utilizes, among other things, the acuity of our patients over the

33

• Changes to Our Operating Environment Resulting from Healthcare Reform . Our challenges related to healthcare reform are discussed in Item 1, Business , “Sources of Revenue,” Item 1A, Risk Factors , and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview—Key Challenges,” to the 2013 Form 10-K. Many provisions within the 2010 Healthcare Reform Laws have impacted, or could in the future impact, our business. Most notably for us are the reductions to our annual market basket updates, including productivity adjustments, and future payment reforms such as ACOs and bundled payments.

Market basket update 2.7%

Healthcare reform reduction 20 basis points

Productivity adjustment 40 basis points

12-month period prior to the proposed rule’s release and incorporates other adjustments included in the proposed rule, we believe the 2015 Rule will result in a net increase to our Medicare payment rates of approximately 2.2% effective October 1, 2014.

Additionally, the proposed rule introduces, beginning on October 1, 2015, a new data collection requirement that will capture the minutes of therapy by specialty. CMS plans to use this data to potentially support future rule making in this area. Further, the proposed rule includes revisions to the list of codes used by CMS to presumptively test compliance with the 60% Rule. The proposed post-amputation codes that may be eliminated represent approximately 0.5% of our Medicare discharges. CMS also proposes two new quality measures, beginning January 1, 2015, and proposes to begin validation audits in fiscal year 2016 to ensure the completeness and accuracy of the quality data submitted.

Given the complexity and the number of changes in the 2010 Healthcare Reform Laws, we cannot predict their ultimate impact. In addition, the healthcare industry in general is facing uncertainty associated with the efforts, begun in earnest by initiatives included in the 2010 Healthcare Reform Laws, to identify and implement workable coordinated care delivery models. The ultimate nature and timing of the transformation of the healthcare delivery system is uncertain, and will likely remain so for some time. We will continue to evaluate these laws and position the Company for this industry shift. Based on our track record, we believe we can adapt to these regulatory and industry changes. Further, we have engaged, and will continue to engage, actively in discussions with key legislators and regulators to attempt to ensure any healthcare laws or regulations adopted or amended promote our goal of high-quality, cost-effective care.

See also Item 1, Business , Item 1A, Risk Factors , and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview—Key Challenges,” to the 2013 Form 10-K.

These key challenges notwithstanding, we have a strong business model, a strong balance sheet, and a proven track record of achieving strong financial and operational results. We are attempting to position the Company to respond to changes in the healthcare delivery system and believe we will be in a position to take advantage of opportunities that arise as the industry moves to this new stage. We believe we are in a position to continue to grow, adapt to external events, and create value for our shareholders in 2014 and beyond.

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• Maintaining Strong Volume Growth . Various factors may impact our ability to maintain our recent volume growth rates, including competition and increasing regulatory and administrative burdens. In any particular market, we may encounter competition from local or national entities with longer operating histories or other competitive advantages, such as acute care hospitals with their own rehabilitation units and other post-acute providers with relationships with referring acute care hospitals or physicians. Overly aggressive payment review practices by Medicare contractors, excessively strict enforcement of regulatory policies by government agencies, and increasingly restrictive or burdensome rules, regulations or statutes governing admissions practices may lead us to not accept patients who would be appropriate for and would benefit from the services we provide. In addition, from time to time, we must get regulatory approval to add beds to our existing hospitals in states with certificate of need laws. This approval may be withheld or take longer than expected. In the case of new store volume growth, the addition of hospitals to our portfolio, whether de novo construction or the product of acquisitions or joint ventures, also may be difficult and take longer than expected.

• Recruiting and Retaining High-Quality Personnel . See Item 1A, Risk Factors , to the 2013 Form 10-K for a discussion of competition for staffing, shortages of qualified personnel, and other factors that may increase our labor costs. Recruiting and retaining qualified personnel for our hospitals remain a high priority for us. We attempt to maintain a comprehensive compensation and benefits package that allows us to remain competitive in this challenging staffing environment while remaining consistent with our goal of being a high-quality, cost-effective provider of inpatient rehabilitative services.

Results of Operations

Payor Mix

During the three and six months ended June 30, 2014 and 2013 , we derived consolidated Net operating revenues from the following payor sources:

For additional information regarding our payors, see the “Sources of Revenues” section of Item 1, Business , of the 2013 Form 10-K.

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2014 2013 2014 2013

Medicare 74.1 % 74.6 % 74.7 % 74.6 %

Medicaid 1.8 % 1.0 % 1.5 % 1.1 %

Workers’ compensation 1.2 % 1.2 % 1.2 % 1.3 %

Managed care and other discount plans, including Medicare Advantage 18.7 % 18.4 % 18.4 % 18.4 %

Other third-party payors 1.7 % 1.7 % 1.6 % 1.7 %

Patients 0.9 % 1.2 % 1.0 % 1.2 %

Other income 1.6 % 1.9 % 1.6 % 1.7 %

Total 100.0 % 100.0 % 100.0 % 100.0 %

Our Results

For the three and six months ended June 30, 2014 and 2013 , our consolidated results of operations were as follows:

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Three Months Ended

June 30, Percentage

Change Six Months Ended June

30, Percentage

Change

2014 2013 2014 vs. 2013 2014 2013 2014 vs. 2013

(In Millions, Except Percentage Change) Net operating revenues $ 604.4 $ 564.5 7.1 % $ 1,195.6 $ 1,137.1 5.1 %

Less: Provision for doubtful accounts (9.3 ) (7.0 ) 32.9 % (16.8 ) (14.4 ) 16.7 %

Net operating revenues less provision for doubtful accounts 595.1 557.5 6.7 % 1,178.8 1,122.7 5.0 %

Operating expenses: Salaries and benefits 285.3 273.6 4.3 % 571.4 548.2 4.2 %

Hospital-related expenses:

Other operating expenses 86.3 81.0 6.5 % 170.8 159.1 7.4 %

Occupancy costs 10.3 11.9 (13.4 )% 20.8 24.1 (13.7 )%

Supplies 27.8 26.6 4.5 % 55.4 52.8 4.9 %

General and administrative expenses 30.2 29.5 2.4 % 60.9 59.7 2.0 %

Depreciation and amortization 26.4 23.1 14.3 % 52.8 45.2 16.8 %

Government, class action, and related settlements (0.8 ) (2.0 ) (60.0 )% (0.8 ) (2.0 ) (60.0 )%

Professional fees—accounting, tax, and legal 2.0 2.2 (9.1 )% 3.6 3.6 — %

Total operating expenses 467.5 445.9 4.8 % 934.9 890.7 5.0 %

Interest expense and amortization of debt discounts and fees 27.8 24.4 13.9 % 55.7 48.6 14.6 %

Other income (28.2 ) (1.9 ) 1,384.2 % (29.9 ) (2.6 ) 1,050.0 %

Equity in net income of nonconsolidated affiliates (2.6 ) (3.3 ) (21.2 )% (6.9 ) (6.2 ) 11.3 %

Income from continuing operations before income tax expense (benefit) 130.6 92.4 41.3 % 225.0 192.2 17.1 %

Provision for income tax expense (benefit) 36.5 (86.5 ) (142.2 )% 69.3 (53.0 ) (230.8 )%

Income from continuing operations 94.1 178.9 (47.4 )% 155.7 245.2 (36.5 )%

Income (loss) from discontinued operations, net of tax 3.8 0.1 3,700.0 % 3.7 (0.3 ) (1,333.3 )%

Net income 97.9 179.0 (45.3 )% 159.4 244.9 (34.9 )%

Less: Net income attributable to noncontrolling interests (14.8 ) (13.8 ) 7.2 % (29.6 ) (28.4 ) 4.2 %

Net income attributable to HealthSouth $ 83.1 $ 165.2 (49.7 )% $ 129.8 $ 216.5 (40.0 )%

Provision for Doubtful Accounts and Operating Expenses as a % of Net Operating Revenues

Additional information regarding our operating results for the three and six months ended June 30, 2014 and 2013 is as follows:

We actively manage the productive portion of our Salaries and benefits utilizing certain metrics, including employees per occupied bed, or “EPOB.” This metric is determined by dividing the number of full-time equivalents, including an estimate of full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is determined by multiplying the number of licensed beds by our occupancy percentage.

In the discussion that follows, we use “same-store” comparisons to explain the changes in certain performance metrics and line items within our financial statements. We calculate same-store comparisons based on hospitals open throughout both the full current periods and prior periods presented. These comparisons include the financial results of market consolidation

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2014 2013 2014 2013

Provision for doubtful accounts 1.5 % 1.2 % 1.4 % 1.3 %

Operating expenses:

Salaries and benefits 47.2 % 48.5 % 47.8 % 48.2 %

Hospital-related expenses:

Other operating expenses 14.3 % 14.3 % 14.3 % 14.0 %

Occupancy costs 1.7 % 2.1 % 1.7 % 2.1 %

Supplies 4.6 % 4.7 % 4.6 % 4.6 %

General and administrative expenses 5.0 % 5.2 % 5.1 % 5.3 %

Depreciation and amortization 4.4 % 4.1 % 4.4 % 4.0 %

Government, class action, and related settlements (0.1 )% (0.4 )% (0.1 )% (0.2 )%

Professional fees—accounting, tax, and legal 0.3 % 0.4 % 0.3 % 0.3 %

Total operating expenses 77.3 % 79.0 % 78.2 % 78.3 %

Three Months Ended June 30, Percentage Change Six Months Ended June

30, Percentage

Change

2014 2013 2014 vs. 2013 2014 2013 2014 vs. 2013

(In Millions, Except Percentage Change) Net patient revenue—inpatient $ 569.7 $ 527.4 8.0 % $ 1,128.0 $ 1,064.5 6.0 %

Net patient revenue—outpatient and other 34.7 37.1 (6.5 )% 67.6 72.6 (6.9 )%

Net operating revenues $ 604.4 $ 564.5 7.1 % $ 1,195.6 $ 1,137.1 5.1 %

(Actual Amounts) Discharges 33,620 32,645 3.0 % 66,509 64,775 2.7 %

Net patient revenue per discharge $16,945 $16,156 4.9 % $16,960 $16,434 3.2 %

Outpatient visits 189,540 211,207 (10.3 )% 371,710 411,678 (9.7 )%

Average length of stay (days) 13.1 13.2 (0.8 )% 13.3 13.3 — %

Occupancy % 70.5 % 69.9 % 0.9 % 70.9 % 70.5 % 0.6 %

# of licensed beds 6,884 6,777 1.6 % 6,884 6,777 1.6 %

Full-time equivalents* 16,374 16,180 1.2 % 16,292 16,000 1.8 %

Employees per occupied bed 3.39 3.43 (1.2 )% 3.36 3.37 (0.3 )%

* Excludes approximately 400 full-time equivalents who are considered part of corporate overhead with their salaries and benefits included in General and administrative expenses in our condensed consolidated statements of operations. Full-time equivalents included in the above table represent those who participate in or support the operations of our hospitals and exclude an estimate of full-time equivalents related to contract labor.

transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on our results of operations.

Net Operating Revenues

Net patient revenue from our hospitals was 8.0% higher for the three months ended June 30, 2014 than the three months ended June 30, 2013. This increase was attributable to a 3.0% increase in patient discharges and a 4.9% increase in net patient revenue per discharge. Discharge growth included a 1.4% increase in same-store discharges. Approximately 60 basis points of discharge growth from new stores resulted from the consolidation of Fairlawn effective June 1, 2014, as discussed in Note 2 , Business Combinations , to the condensed consolidated financial statements included in Item 1, Financial Statements (Unaudited) , of this report. The increase in net patient revenue per discharge resulted from price adjustments, higher average acuity for the patients we served, and contributions from hospitals that opened in the second quarter of 2013 and were undergoing Medicare certification. New hospitals are required to treat a minimum of 30 patients for zero revenue as part of the Medicare certification process.

Net patient revenue from our hospitals was 6.0% higher for the six months ended June 30, 2014 than the six months ended June 30, 2013. This increase was attributable to a 2.7% increase in patient discharges and a 3.2% increase in net patient revenue per discharge. Discharge growth included a 0.9% increase in same-store discharges. Discharge growth and net patient revenue per discharge growth for the year-to-date period of 2014 were impacted by the same factors as discussed above for the second quarter of 2014. In addition, winter storms negatively impacted same-store discharges in the first quarter of 2014 by approximately 100 basis points (approximately 50 basis points for the six months ended June 30, 2014). Net patient revenue per discharge was negatively impacted in the first quarter of 2014 by approximately $9 million for sequestration, which anniversaried on April 1, 2014. Excluding the impact of sequestration, net patient revenue per discharge would have increased by 4.1% for the six months ended June 30, 2014.

Decreased outpatient volumes in both periods of 2014 compared to the same periods of 2013 resulted from the closure of outpatient clinics and continued competition from physicians offering physical therapy services within their own offices. We had 17 and 22 outpatient rehabilitation satellite clinics as of June 30, 2014 and 2013, respectively. Outpatient and other revenues for the three and six months ended June 30, 2013 included $1.6 million of state provider tax refunds.

Provision for Doubtful Accounts

Pre-payment reviews focused on medical necessity criteria and conducted by Medicare Administrative Contractors have continued, and substantial delays in the adjudication process at the administrative law judge hearing level remain unabated. Accordingly, our outlook for our Provision for doubtful accounts remains at approximately 1.5% of Net operating revenues for 2014.

Salaries and Benefits

Salaries and benefits increased in the three and six months ended June 30, 2014 compared to the same periods of 2013 primarily due to increased patient volumes, including an increase in the number of full-time equivalents as a result of our 2013 development activities, and a 2.2% merit increase given to all eligible nonmanagement employees effective October 1, 2013.

Salaries and benefits as a percent of Net operating revenues improved by 130 basis points and 40 basis points in the three and six months ended June 30, 2014, respectively, compared to the same periods of 2013 due to increased revenue and the maturation of three new hospitals that opened in the second quarter of 2013. The six months ended June 30, 2014 include the negative impact of sequestration. Without sequestration, Salaries and benefits as a percent of Net operating revenues would have decreased by 80 basis points in the six months ended June 30, 2014 compared to the same period of 2013.

Hospital-related Expenses

Other Operating Expenses

Other operating expenses increased during the three and six months ended June 30, 2014 compared to the same periods of 2013 primarily as a result of increased patient volumes and higher general and professional liability expenses. As a percent of Net operating revenues , Other operating expenses were flat during the second quarter of 2014 compared to the same quarter of 2013. For the six months ended June 30, 2014, Other operating expenses as a percent of Net operating revenues increased when compared to the six months ended June 30, 2013 due primarily to the effects of sequestration experienced in the first quarter of 2014, as well as higher general and professional liability expenses.

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Occupancy Costs

Occupancy costs decreased in total and as a percent of Net operating revenues in the 2014 periods presented compared to the same periods of 2013 due to our purchases of the real estate previously subject to operating leases at certain of our hospitals in the latter half of 2013 and first quarter of 2014.

Supplies

Supplies expense as a percent of Net operating revenues decreased in the second quarter of 2014 compared to the second quarter of 2013, and it remained flat during the six months ended June 30, 2014 compared to the same period of 2013, due primarily to our increasing revenue.

General and Administrative Expenses

General and administrative expenses decreased as a percent of Net operating revenues in the three and six months ended June 30, 2014 compared to the same periods of 2013 due primarily to the deferral and amortization of the gain associated with the 2013 Digital Hospital transaction discussed in Note 5, Property and Equipment , to the consolidated financial statements accompanying the 2013 Form 10-K.

Depreciation and Amortization

Depreciation and amortization increased during the three and six months ended June 30, 2014 compared to the same periods of 2013 due to our increased capital expenditures throughout 2013 and 2014.

Professional Fees—Accounting, Tax, and Legal

Professional fees—accounting, tax, and legal for the three and six months ended June 30, 2014 and 2013 related primarily to legal and consulting fees for continued litigation and support matters discussed in Note 10 , Contingencies and Other Commitments , to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited) , of this report and Note 18, Contingencies and Other Commitments , to the consolidated financial statements accompanying the 2013 Form 10-K.

Interest Expense and Amortization of Debt Discounts and Fees

The increase in Interest expense and amortization of debt discounts and fees during the three and six months ended June 30, 2014 compared to the same periods of 2013 resulted from an increase in our average borrowings outstanding offset by a decrease in our average cash interest rate. Average borrowings outstanding increased in 2014 over 2013 primarily as a result of our issuance of $320 million in aggregate principal amount of newly issued 2.00% Convertible Senior Subordinated Notes due 2043 for 257,110 shares of our outstanding preferred stock in November 2013. Our average cash interest rate approximated 6.5% and 7.0% during 2014 and 2013, respectively.

Other Income

Other income for the three and six months ended June 30, 2014 included a $27.2 million gain related to the acquisition of an additional 30% equity interest in Fairlawn. See Note 2 , Business Combinations , to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited) , of this report.

Equity in Net Income of Nonconsolidated Affiliates

Equity in net income of nonconsolidated affiliates for the six months ended June 30, 2014 included an approximate $1 million gain from the sale of the underlying assets of an equity investment.

Income from Continuing Operations Before Income Tax Expense (Benefit)

Our pre-tax income from continuing operations for the three and six months ended June 30, 2014 included the $27.2 million gain related to the acquisition of an additional equity interest in Fairlawn. Excluding this gain, the increase in our pre-tax income in the periods presented resulted from increased Net operating revenues and continued disciplined expense management.

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Provision for Income Tax Expense (Benefit)

Due to our federal and state net operating loss carryforwards (“NOLs”), we currently estimate our cash income tax expense to be approximately $12 million to $17 million , net of refunds, for 2014. These payments are expected to result from state income tax expense of subsidiaries which have separate state filing requirements, alternative minimum taxes, and federal income taxes for subsidiaries not included in our federal consolidated income tax return. For the three months ended June 30, 2014 and 2013, current income tax expense (benefit) was $3.0 million and $(1.3) million , respectively. For the six months ended June 30, 2014 and 2013, current income tax expense was $6.6 million and $0.5 million , respectively.

Our Provision for income tax expense of $36.5 million and $69.3 million for the three and six months ended June 30, 2014 , respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rates, which were reduced as a result of the nontaxable gain discussed in Note 2 , Business Combinations , to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited) , of this report related to our acquisition of an additional 30% equity interest in Fairlawn. As a result of this transaction, we released the deferred tax liability associated with the outside tax basis of our investment in Fairlawn because we now possess sufficient ownership to allow for the historical outside tax basis difference to be resolved through a tax-free transaction in the future.

Our Provision for income tax benefit of $86.5 million and $53.0 million for the three and six months ended June 30, 2013 , respectively, primarily resulted from the IRS settlement discussed in Note 8 , Income Taxes , to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited) , of this report. It also included an approximate $3 million decrease in our valuation allowance related primarily to our capital loss carryforwards. During the second quarter of 2013, we determined a valuation allowance related to these assets was no longer required as sufficient positive evidence existed to substantiate their utilization. This evidence included our partial utilization of these capital loss carryforwards as a result of realizing capital gains in the current year and the identification of sufficient taxable capital gain income within the available capital loss carryforward period.

In certain state jurisdictions, we do not expect to generate sufficient income to use all of our available NOLs prior to their expiration. This determination is based on our evaluation of all available evidence in these jurisdictions including results of operations during the preceding three years, our forecast of future earnings, and prudent tax planning strategies. It is possible we may be required to increase or decrease our valuation allowance at some future time if our forecast of future earnings varies from actual results on a consolidated basis or in the applicable state tax jurisdiction, or if the timing of future tax deductions differs from our expectations.

We recognize the financial statement effects of uncertain tax positions when it is more likely than not, based on the technical merits, a position will be sustained upon examination by and resolution with the taxing authorities. Total remaining unrecognized tax benefits were $0.4 million and $1.1 million as of June 30, 2014 and December 31, 2013 , respectively.

See Note 8 , Income Taxes , to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited) , of this report and Note 16, Income Taxes , to the consolidated financial statements accompanying the 2013 Form 10-K.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests represents the share of net income or loss allocated to members or partners in our consolidated affiliates. Fluctuations in these amounts are primarily driven by the financial performance of the applicable hospital population each period.

Results of Discontinued Operations

In connection with the 2007 sale of our surgery centers division (now known as Surgical Care Affiliates, or “SCA”) to ASC Acquisition LLC, an affiliate of TPG Partners V, L.P. (“TPG”), a private investment partnership, we received an option, subject to terms and conditions set forth below, to purchase up to a 5% equity interest in SCA. The price of the option is equal to the original issuance price of the units subscribed for by TPG and certain other co-investors in connection with the acquisition plus a 15% premium, compounded annually. The option has a term of ten years and is exercisable upon certain liquidity events, including a public offering of SCA’s shares of common stock that results in 30% or more of SCA’s common stock being listed or traded on a national securities exchange. On November 4, 2013, SCA announced the closing of its initial public offering, which was not a qualifying liquidity event.

During the second quarter of 2014, we entered into an amendment to the option agreement that requires us to settle the option net of our exercise price. The addition of this new feature resulted in the option becoming a derivative that must be

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recorded as an asset or liability on our condensed consolidated balance sheet and marked to market each period. As of June 30, 2014 , the fair value of this option was $6.7 million and is included in Other long-term assets in our condensed consolidated balance sheet. Income from discontinued operations, net of tax for the three and six months ended June 30, 2014 included a $6.7 million gain resulting from the initial recording of this option as a derivative and its fair value adjustments during the 2014 periods presented. If the option becomes exercisable, we believe it will have a strike price below the price of the asset being purchased.

For additional information regarding discontinued operations, see Note 7 , Assets and Liabilities in and Results of Discontinued Operations , to the condensed consolidated financial statements included in Part 1, Item 1, Financial Statements (Unaudited) , of this report, and Note 15, Assets and Liabilities in and Results of Discontinued Operations , to the consolidated financial statements accompanying the 2013 Form 10-K.

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility.

The objectives of our capital structure strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allows us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our unrestricted Cash and cash equivalents and our available borrowing capacity. Maintaining flexibility in our capital structure is a function of, among other things, the amount of debt maturities in any given year, the options for debt prepayments without onerous penalties, and limiting restrictive terms and maintenance covenants in our debt agreements.

We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2018. Our balance sheet remains strong. Our leverage ratio is within our target range, and we have ample availability under our revolving credit facility. We continue to generate strong cash flows from operations, and we have significant flexibility with how we choose to invest our cash and return capital to shareholders.

Current Liquidity

As of June 30, 2014 , we had $65.8 million in Cash and cash equivalents . This amount excludes $45.9 million in restricted cash and $49.9 million of restricted marketable securities ( $5.5 million included in Other current assets and $44.4 million included in Other long-term assets in our condensed consolidated balance sheet as of June 30, 2014 ). Our restricted assets pertain primarily to obligations associated with our captive insurance company, as well as obligations we have under agreements with joint venture partners. See Note 3, Cash and Marketable Securities , to the consolidated financial statements accompanying the 2013 Form 10-K.

In addition to Cash and cash equivalents , as of June 30, 2014 , we had approximately $548 million available to us under our revolving credit facility. Our credit agreement governs the substantial majority of our senior secured borrowing capacity and contains a leverage ratio and an interest coverage ratio as financial covenants. Our leverage ratio is defined in our credit agreement as the ratio of consolidated total debt (less up to $75 million of cash on hand) to Adjusted EBITDA for the trailing four quarters. Our interest coverage ratio is defined in our credit agreement as the ratio of Adjusted EBITDA to consolidated interest expense, excluding the amortization of financing fees, for the trailing four quarters. As of June 30, 2014 , the maximum leverage ratio requirement per our credit agreement was 4.5x and the minimum interest coverage ratio requirement was 2.75x, and we were in compliance with these covenants. Based on Adjusted EBITDA for the trailing four quarters and the interest rate in effect under our credit agreement during the three-month period ended June 30, 2014, if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for that entire period, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements.

We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2018, and our bonds all mature in 2018 and beyond. See the “Contractual Obligations” section below for information related to our contractual obligations as of June 30, 2014 .

We anticipate we will continue to generate strong cash flows from operations that, together with availability under our revolving credit facility, will allow us to invest in growth opportunities and continue to improve our existing core business. We also will continue to consider additional shareholder value-enhancing strategies such as repurchases of our common and preferred stock and common stock dividends, including the potential growth of the quarterly cash dividend on our common

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stock, recognizing that these actions may increase our leverage ratio. And, we will continue to consider further reductions to our long-term debt. See also the “Authorizations for Returning Capital to Stakeholders” section of this Item.

See Item 1A, Risk Factors , of the 2013 Form 10-K for a discussion of risks and uncertainties facing us.

Sources and Uses of Cash

The following table shows the cash flows provided by or used in operating, investing, and financing activities for the six months ended June 30, 2014 and 2013 (in millions):

Operating activities . Net cash provided by operating activities increased during the six months ended June 30, 2014 compared to the same period of 2013 due primarily to increased Net operating revenues and continued disciplined expense management.

Investing activities . The increase in Net cash used in investing activities during the six months ended June 30, 2014 compared to the same period of 2013 primarily resulted from increased capital expenditures. Net cash used in investing activities included $15.9 million and $28.9 million related to the acquisition of Fairlawn and Walton Rehabilitation Hospital, respectively, during the six months ended June 30, 2014 and 2013, respectively.

Financing activities . The decrease in Net cash used in financing activities during the six months ended June 30, 2014 compared to the same period of 2013 primarily resulted from repurchases of our common stock as part of the tender offer completed in the first quarter of 2013. We repurchased 9.1 million shares of our common stock for $232.5 million during the first quarter of 2013. During the first six months of 2014, we repurchased 1.3 million shares of our common stock in the open market for $43.1 million .

Contractual Obligations

Our consolidated contractual obligations as of June 30, 2014 are as follows (in millions):

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2014 2013

Net cash provided by operating activities $ 235.1 $ 226.8 Net cash used in investing activities (107.0 ) (101.4 )

Net cash used in financing activities (126.8 ) (189.5 )

Increase (decrease) in cash and cash equivalents $ 1.3 $ (64.1 )

Total

July 1 through December 31,

2014 2015 - 2016 2017 - 2018 2019 and thereafter

Long-term debt obligations:

Long-term debt, excluding revolving credit facility and capital lease obligations (a) $ 1,384.8 $ 3.3 $ 4.9 $ 274.4 $ 1,102.2

Revolving credit facility 15.0 — — 15.0 — Interest on long-term debt (b) 758.0 45.5 176.7 171.4 364.4 Capital lease obligations (c) 169.3 6.1 27.1 27.0 109.1 Operating lease obligations (d)(e) 247.2 19.9 71.7 52.9 102.7 Purchase obligations (e)(f) 106.9 11.6 48.9 20.6 25.8 Other long-term liabilities (g)(h) 3.8 0.2 0.4 0.4 2.8

Total $ 2,685.0 $ 86.6 $ 329.7 $ 561.7 $ 1,707.0

(a) Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 8, Long-term Debt, to the consolidated financial statements accompanying the 2013 Form 10-K.

Our capital expenditures include costs associated with our hospital refresh program, de novo projects, capacity expansions, technology initiatives, and building and equipment upgrades and purchases. During the six months ended June 30, 2014 , we made capital expenditures of approximately $101 million for property and equipment and capitalized software. These expenditures included $17.3 million for the purchase of the real estate previously subject to a lease associated with our hospital in San Antonio, Texas and approximately $12 million of hospital and technology equipment that was received in 2013 but not paid for until 2014. These expenditures through the first six months of 2014 are exclusive of $15.9 million in net cash related to the increase in ownership of Fairlawn, as discussed in Note 2 , Business Combinations , to the condensed consolidated financial statements included in Item 1, Financial Statements (Unaudited) , of this report. During 2014, we expect to spend approximately $185 million to $230 million for capital expenditures. This estimated range for capital expenditures is exclusive of acquisitions. Approximately $90 million to $100 million of this budgeted amount is considered nondiscretionary expenditures, which we may refer to in other filings as “maintenance” expenditures. Actual amounts spent will be dependent upon the timing of construction projects.

Authorizations for Returning Capital to Stakeholders

On October 15, 2013, we paid the first cash dividend, $0.18 per share, on our common stock, and we have paid the same per share dividend quarterly since. On July 17, 2014, our board of directors approved an increase in our quarterly dividend and declared a cash dividend of $0.21 per share, payable on October 15, 2014 to stockholders of record on October 1, 2014. We expect quarterly dividends to be paid in January, April, July, and October. However, the actual declaration of any future cash dividends, and the setting of record and payment dates as well as the per share amounts, will be at the discretion of our board of directors each quarter after consideration of various factors, including our capital position and alternative uses of

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(b) Interest on our fixed rate debt is presented using the stated interest rate. Interest expense on our variable rate debt is estimated using the rate in effect as of June 30, 2014 . Interest pertaining to our credit agreement and bonds is included to their respective ultimate maturity dates. Interest related to capital lease obligations is excluded from this line. Future minimum payments, which are accounted for as interest, related to sale/leaseback transactions involving real estate accounted for as financings are included in this line (see Note 5, Property and Equipment , and Note 8, Long-term Debt , to the consolidated financial statements accompanying the 2013 Form 10-K). Amounts exclude amortization of debt discounts, amortization of loan fees, or fees for lines of credit that would be included in interest expense in our consolidated statements of operations.

(c) Amounts include interest portion of future minimum capital lease payments.

(d) We lease approximately 16% of our hospitals as well as other property and equipment under operating leases in the normal course of business. Some of our hospital leases contain escalation clauses based on changes in the Consumer Price Index while others have fixed escalation terms. The minimum lease payments do not include contingent rental expense. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. For more information, see Note 5, Property and Equipment, to the consolidated financial statements accompanying the 2013 Form 10-K.

(e) Future operating lease obligations and purchase obligations are not recognized in our condensed consolidated balance sheet.

(f) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on HealthSouth and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Our purchase obligations primarily relate to software licensing and support.

(g) Because their future cash outflows are uncertain, the following noncurrent liabilities are excluded from the table above: general liability, professional liability, and workers' compensation risks, noncurrent amounts related to third-party billing audits, and deferred income taxes. Also, at June 30, 2014 , we had $0.4 million of total gross unrecognized tax benefits. For more information, see Note 9, Self-Insured Risks, Note 16, Income Taxes, and Note 18, Contingencies and Other Commitments, to the consolidated financial statements accompanying the 2013 Form 10-K and Note 8 , Income Taxes , to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited) , of this report.

(h) The table above does not include Redeemable noncontrolling interests of $12.4 million because of the uncertainty surrounding the timing and amounts of any related cash outflows.

funds. Cash dividends are expected to be funded using cash flows from operations, cash on hand, and availability under our revolving credit facility.

The payment of cash dividends on our common stock triggers antidilution adjustments, except in instances when such adjustments are deemed de minimis , under our convertible notes and our convertible perpetual preferred stock. See Note 8, Long-term Debt , Note 10, Convertible Perpetual Preferred Stock , and Note 17, Earnings per Common Share , to the consolidated financial statements accompanying the 2013 Form 10-K and Note 9 , Earnings per Common Share , to the condensed consolidated financial statements included in Item 1, Financial Statements (Unaudited) , of this report.

On February 14, 2014, our board of directors approved an increase in our existing common stock repurchase authorization from $200 million to $250 million. The repurchase authorization does not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our board of directors. Subject to certain terms and conditions, including a maximum price per share and compliance with federal and state securities and other laws, the repurchases may be made from time to time in open market transactions, privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the six months ended June 30, 2014, we repurchased 1.3 million shares of our common stock in the open market for $43.1 million under this repurchase authorization using cash on hand. Future repurchases under this authorization generally are expected to be funded using a combination of cash on hand and availability under our $600 million revolving credit facility.

Adjusted EBITDA

Management believes Adjusted EBITDA as defined in our credit agreement is a measure of our ability to service our debt and our ability to make capital expenditures. We reconcile Adjusted EBITDA to Net income and to Net cash provided by operating activities .

We use Adjusted EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on a consolidated basis is important in analyzing our liquidity because it is the key component of certain material covenants contained within our credit agreement, which is discussed in more detail in Note 8, Long-term Debt , to the consolidated financial statements accompanying the 2013 Form 10-K. These covenants are material terms of the credit agreement. Noncompliance with these financial covenants under our credit agreement—our interest coverage ratio and our leverage ratio—could result in our lenders requiring us to immediately repay all amounts borrowed. If we anticipated a potential covenant violation, we would seek relief from our lenders, which would have some cost to us, and such relief might not be on terms favorable to those in our existing credit agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under our credit agreement from engaging in certain activities, such as incurring additional indebtedness, paying common stock dividends, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to our assessment of our liquidity.

In general terms, the credit agreement definition of Adjusted EBITDA, referred to as “Adjusted Consolidated EBITDA” there, allows us to add back to consolidated Net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated Net income (1) all unusual or nonrecurring items reducing consolidated Net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations and closed locations, (3) costs and expenses, including legal fees and expert witness fees, incurred with respect to litigation associated with stockholder derivative litigation, including the matters related to Ernst & Young, LLP and Richard Scrushy discussed in Note 18, Contingencies and Other Commitments , to the consolidated financial statements accompanying the 2013 Form 10-K and Note 10 , Contingencies and Other Commitments , to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited) , of this report, and (4) share-based compensation expense. We also subtract from consolidated Net income all unusual or nonrecurring items to the extent increasing consolidated Net income .

Under the credit agreement, the Adjusted EBITDA calculation does not include net income attributable to noncontrolling interests and includes (1) gain or loss on disposal of assets, (2) professional fees unrelated to the stockholder derivative litigation, and (3) unusual or nonrecurring cash expenditures in excess of $10 million. These items may not be indicative of our ongoing performance, so the Adjusted EBITDA calculation presented here includes adjustments for them.

Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles in the United States of America, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for Net income or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the

44

policies and procedures described in Note 1, Summary of Significant Accounting Policies , to the consolidated financial statements accompanying the 2013 Form 10-K.

Our Adjusted EBITDA for the three and six months ended June 30, 2014 and 2013 was as follows (in millions):

Reconciliation of Net Income to Adjusted EBITDA

Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA

Growth in Adjusted EBITDA was due primarily to continued revenue growth and disciplined expense management. Adjusted EBITDA for the three and six months ended June 30, 2014 also included a $1.4 million benefit from the increase in ownership and consolidation of Fairlawn. Adjusted EBITDA for the six months ended June 30, 2014 included approximately $2 million from the sale of two investments.

45


30, Six Months Ended June

30,

2014 2013 2014 2013

Net income $ 97.9 $ 179.0 $ 159.4 $ 244.9 (Income) loss from discontinued operations, net of tax, attributable to HealthSouth (3.8 ) (0.1 ) (3.7 ) 0.3 Provision for income tax expense (benefit) 36.5 (86.5 ) 69.3 (53.0 )

Interest expense and amortization of debt discounts and fees 27.8 24.4 55.7 48.6 Professional fees—accounting, tax, and legal 2.0 2.2 3.6 3.6 Government, class action, and related settlements (0.8 ) (2.0 ) (0.8 ) (2.0 )

Net noncash loss on disposal or impairment of assets 1.7 1.7 3.0 1.8 Depreciation and amortization 26.4 23.1 52.8 45.2 Stock-based compensation expense 7.0 6.5 14.3 12.8 Net income attributable to noncontrolling interests (14.8 ) (13.8 ) (29.6 ) (28.4 )

Gain on consolidation of Fairlawn Rehabilitation Hospital (27.2 ) — (27.2 ) —

Adjusted EBITDA $ 152.7 $ 134.5 $ 296.8 $ 273.8


2014 2013

Net cash provided by operating activities $ 235.1 $ 226.8 Provision for doubtful accounts (16.8 ) (14.4 )

Professional fees—accounting, tax, and legal 3.6 3.6 Interest expense and amortization of debt discounts and fees 55.7 48.6 Equity in net income of nonconsolidated affiliates 6.9 6.2 Net income attributable to noncontrolling interests in continuing operations (29.6 ) (28.4 )

Amortization of debt discounts and fees (6.3 ) (2.0 )

Distributions from nonconsolidated affiliates (6.5 ) (5.0 )

Current portion of income tax expense 6.6 0.5 Change in assets and liabilities 44.5 36.2 Net cash used in operating activities of discontinued operations 1.2 0.2 Other 2.4 1.5

Adjusted EBITDA $ 296.8 $ 273.8

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our Internal Control over Financial Reporting during the quarter ended June 30, 2014 that have a material effect on our Internal Control over Financial Reporting.

46

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Information relating to certain legal proceedings in which we are involved is included in Note 10 , Contingencies and Other Commitments , to the condensed consolidated financial statements contained in Part I, Item 1, Financial Statements (Unaudited) , of this report and is incorporated herein by reference and should be read in conjunction with the related disclosure previously reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and our Annual Report on Form 10-K for the year ended December 31, 2013 (the “ 2013 Form 10-K”).

There have been no material changes from the risk factors disclosed in Part I, Item 1A, Risk Factors , of the 2013 Form 10-K. Certain information in those risk factors has been updated by the discussion in the “Executive Overview—Key Challenges” section of Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of this report, which section is incorporated by reference herein.

Purchases of Equity Securities

The following table summarizes our repurchases of equity securities during the three months ended June 30, 2014 :

47

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period

Total Number of Shares (or Units)

Purchased

Average Price Paid per Share (or Unit)

($)

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of

Shares That May Yet Be Purchased Under the Plans or

Programs (1)

April 1 through April 30, 2014 28,451 (2) $ 34.05 25,090 $ 222,830,742 May 1 through May 31, 2014 481,324 (3) 33.88 469,231 206,944,707 June 1 through June 30, 2014 — — — 206,944,707

Total 509,775 33.89 494,321

(1) On October 28, 2013, we announced our board of directors authorized the repurchase of up to $200 million of our common stock. On February 14, 2014, our board of directors approved an increase in this common stock repurchase authorization from $200 million to $250 million. The repurchase authorization does not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our board of directors. Subject to certain terms and conditions, including a maximum price per share and compliance with federal and state securities and other laws, the repurchases may be made from time to time in open market transactions, privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

(2) Employees tendered 1,965 of these shares as payment of tax liability incident to the vesting of previously awarded shares of restricted stock, and 1,396 shares were purchased pursuant to previous elections by one or more members of our board of directors to participate in our Directors’ Deferred Stock Investment Plan. This plan is a nonqualified deferral plan allowing non-employee directors to make advance elections to defer a fixed percentage of their director fees. The plan administrator acquires the shares in the open market which are then held in a rabbi trust. The plan provides that dividends paid on the shares held for the accounts of the directors will be reinvested in shares of our common stock which will also be held in the trust. The directors’ rights to all shares in the trust are nonforfeitable, but the shares are only released to the directors after departure from our board.

(3) Employees tendered 12,093 of these shares as payment of tax liability incident to the vesting of previously awarded shares of restricted stock.

Dividends

On October 15, 2013, we paid the first cash dividend, $0.18 per share, on our common stock, and we have paid the same per share dividend quarterly since. On May 1, 2014, our board of directors declared a cash dividend of $0.18 per share that was paid on July 15, 2014 to stockholders of record on July 1, 2014. On July 17, 2014, our board of directors approved an increase in our quarterly dividend and declared a cash dividend of $0.21 per share, payable on October 15, 2014 to stockholders of record on October 1, 2014. We expect quarterly dividends to be paid in January, April, July, and October. However, the actual declaration of any future cash dividends, and the setting of record and payment dates as well as the per share amounts, will be at the discretion of our board each quarter after consideration of various factors, including our capital position and alternative uses of funds.

The terms of our credit agreement allow us to declare and pay cash dividends on our common stock so long as: (1) we are not in default under our credit agreement and (2) our senior secured leverage ratio remains less than or equal to 1.5x. The terms of our senior note indenture allow us to declare and pay cash dividends on our common stock so long as (1) we are not in default, (2) the consolidated coverage ratio (as defined in the indenture) exceeds 2x or we are otherwise allowed under the indenture to incur debt, and (3) we have capacity under the indenture’s restricted payments covenant to declare and pay dividends. We believe we currently have adequate capacity under this covenant to pursue the dividend strategy described in this report for the foreseeable future based on the capacity as of June 30, 2014 and anticipated restricted payments. See Note 8, Long-term Debt , to the consolidated financial statements accompanying the 2013 Form 10-K.

Our preferred stock generally provides for the payment of cash dividends subject to certain limitations. See Note 10, Convertible Perpetual Preferred Stock , to the consolidated financial statements accompanying the 2013 Form 10-K. Our credit agreement and our senior note indenture do not limit the payment of dividends on the preferred stock.

See the Exhibit Index immediately following the signature page of this report.

48

Item 6. Exhibits

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

49

HEALTHSOUTH CORPORATION

By: /s/ Douglas E. Coltharp

Douglas E. Coltharp Executive Vice President and Chief Financial Officer

Date: July 29, 2014

EXHIBIT INDEX

The exhibits required by Regulation S-K are set forth in the following list and are filed by attachment to this report unless otherwise noted.

+ Management contract or compensatory plan or arrangement.

No. Description

3.1

Restated Certificate of Incorporation of HealthSouth Corporation, as filed in the Office of the Secretary of State of the State of Delaware on May 21, 1998 (incorporated by reference to HealthSouth’s Annual Report on Form 10-K filed with the SEC on June 27, 2005).

3.2

Certificate of Amendment to the Restated Certificate of Incorporation of HealthSouth Corporation, as filed in the Office of the Secretary of State of the State of Delaware on October 25, 2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current Report on Form 8-K filed on October 31, 2006).

3.3

Amended and Restated Bylaws of HealthSouth Corporation, effective as of October 30, 2009 (incorporated by reference to Exhibit 3.3 to HealthSouth’s Quarterly Report on Form 10-Q filed on November 4, 2009).

3.4

Certificate of Designations of 6.50% Series A Convertible Perpetual Preferred Stock, as filed with the Secretary of State of the State of Delaware on March 7, 2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current Report on Form 8-K filed on March 9, 2006).

10.1 Nonqualified 401(K) Plan, as amended and restated June 1, 2014.+

31.1

Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Sections of the HealthSouth Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language), submitted in the following files:

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 10.1


NONQUALIFIED 401(k) plan

As Amended and Restated June 1, 2014

TABLE OF CONTENTS

Page

2.2 Construction 7

I

ARTICLE I PURPOSE AND NATURE OF PLAN 1 1.1 Purpose of Plan 1 1.2 Nature of Plan 1

ARTICLE II DEFINITIONS AND CONSTRUCTION 2 2.1 Definitions 2

2.3 409A Compliance 8

ARTICLE III PARTICIPATION AND VESTING 9 3.1 Eligibility and Participation 9 3.2 Continued Eligibility and Participation 9 3.3 Cessation of Participation 9

ARTICLE IV CONTRIBUTIONS AND ACCOUNTING 10 4.1 Deferral Elections 10 4.2 Company Contributions 10 4.3 Vesting 11 4.4 Plan Benefits 11 4.5 Accounting for Deferred Compensation. 11

ARTICLE V DISTRIBUTION OF BENEFITS 13 5.1 General Rule Regarding Payment of Account 13 5.2 Subsequent Deferrals 13 5.3 Distributions on Death 14 5.4 Distributions on Disability 14 5.5 Unforeseeable Emergency 14 5.6 Time and Form of Payment 15

ARTICLE VI PAYMENT LIMITATIONS 16 6.1 Payment Due an Incompetent 16 6.2 Nonalienation of Benefits 16

ARTICLE VII FUNDING 17 7.1 Funding 17 7.2 Creditor Status 17

ARTICLE VIII ADMINISTRATION 18 8.1 Appointment of Benefits Committee 18 8.2 Committee Powers and Duties 18 8.3 Appointment of Daily Administrator 19 8.4 Daily Administrator Powers and Duties 19 8.5 Claim Procedures 20 8.6 Benefits Committee Procedures 22

II

ARTICLE IX OTHER BENEFIT PLANS OF THE COMPANY 23 9.1 Other Plans 23

ARTICLE X MISCELLANEOUS 24 10.1 Amendment 24 10.2 Termination 24 10.3 Nonguarantee of Employment 25 10.4 Indemnification 25 10.5 Withholding 25 10.6 Expenses 25

APPENDIX A SERVICE CREDITING A-1

APPENDIX B

DOMESTIC PARTNER GUIDELINES FOR THE HEALTHSOUTH CORPORATION GROUP LIFE, AD&D, DISABILITY AND MEDICAL PLAN AND THE HEALTHSOUTH CORPORATION RETIREMENT INVESTMENT PLAN B-1

HEALTHSOUTH CORPORATION NON-QUALIFIED 401(K) PLAN

PREAMBLE

HealthSouth Corporation (the " Company ") adopted the HealthSouth Corporation Nonqualified 401(k) Plan (the " Plan ") effective March 1, 2008, to benefit certain senior executives of the Company. The Plan is intended to operate both in connection with and independent from the Company's qualified section 401(k) plan and will be administered accordingly. However, although participation in the two plans may be coordinated, an election to participate or not participate in the qualified 401(k) plan will satisfy the requirements of section 409A of the Code and the regulations issued thereunder since such a decision will not result in the increase or decrease in elective deferrals to this Plan in excess of the limitations set forth by section 402(g) of the Code and will not create a corresponding increase or reduction in employer matching contributions in excess of such limitation or in excess of the amount of employer matching contributions the participant would have received under the qualified 401(k) plan determined without regard to the limits on such contributions under the Internal Revenue Code.

The Benefits Committee amended and restated the Plan, generally effective December 31, 2008, except as otherwise provided therein, to (i) make certain clarifying amendments to reflect current administrative practices with respect to the benefit election and distribution provisions of the Plan and any changes required to ensure compliance with section 409A of the Code and (ii) expand the Plan's eligibility provisions to include Chief Executive Officers and Chief Financial Officers of each of the Company's hospitals, provided that such officers earn more than the compensation limit set forth in section 414(q) of the Code, effective January 1, 2009. The provisions of this amended and restated Plan were effective December 31, 2008, except as specifically provided therein, in order to comply with applicable law or prior design decisions adopted by the Company.

The Benefits Committee subsequently amended and restated the Plan generally effective March 1, 2013, to (i) amend the Plan to add a definition of “Spouse” to conform to the recent Supreme Court decision on the constitutionality of the Defense of Marriage Act and (ii) make additional clarifying amendments to reflect current plan provisions set forth in the terms of the Plan’s election forms and administrative practices with respect to the benefit election and distribution provisions of the Plan.

By this instrument, the Benefits Committee desires to amend and restate the Plan, generally effective June 1, 2014 to expand the subsequent deferral election provisions to include Termination of Employment distributions.

The Company may adopt one or more domestic trusts to serve as a possible source of funds for the payment of benefits under this Plan.

______________________ End of Preamble

ARTICLE I PURPOSE AND NATURE OF PLAN

1.1 Purpose of Plan

The objective and purpose of this Plan is to attract and retain competent officers and key executives by providing flexible compensation opportunities to officers and key executives of the Company and its affiliates to offer them an opportunity to build an estate or supplement income for use after retirement. In addition to this Plan, the Company sponsors certain broad-based employee benefit plans covering its employees.

Through this Plan, the Company intends to permit the deferral of compensation and to provide additional benefits to a select group of management or highly compensated employees. Accordingly, it is intended that this Plan will not constitute a "qualified plan" subject to the limitations of section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), nor will it constitute a "funded plan", for purposes of such requirements. It is also intended that this Plan will be exempt from the participation and vesting requirements of Part 2 of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the funding requirements of Part 3 of Title I of ERISA, and the fiduciary requirements of Part 4 of Title I of ERISA by reason of the exclusions afforded plans which are unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

____________________ End of Article I

1

1.2 Nature of Plan

ARTICLE II

DEFINITIONS AND CONSTRUCTION

2.1 Definitions When a word or phrase will appear in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase will generally be a term defined in this Section 2.1. The following words and phrases with the initial letter capitalized will have the meaning set forth in this Section 2.1, unless a different meaning is required by the context in which the word or phrase is used.

" Beneficiary " means the person designated by the Participant to receive a distribution of his benefits under the Plan upon the death of the Participant. In the event that a Participant fails to designate a Beneficiary, or if the Participant's Beneficiary does not survive the Participant, the Participant's Beneficiary will be his surviving Spouse, if any, or if the Participant does not have a surviving Spouse, his estate. The term "Beneficiary" also will mean a Participant's Spouse or former Spouse who is entitled to all or a portion of a Participant's benefit pursuant to Section 6.2. Solely for purposes of identifying a Participant’s beneficiary, the term "Spouse" as used in this definition will include a same or opposite sex domestic partner of the Participant, provided the domestic partner satisfies the requirements for domestic partner benefits under the Employer's Domestic Partner Guidelines set forth in Appendix B. Appendix B may be revised from time-to-time by the Daily Administrator without the need for a formal amendment to the Plan.

2

(a) " Account " means one or more of the bookkeeping accounts maintained by the Company or its agent on behalf of a Participant, as described in more detail in Section 4.5.

(b) " Affiliate " means a corporation that is (i) a member of a controlled group of corporations (as defined in section 414(b) of the Code) which includes the Company, (ii) any trade or business (whether or not incorporated) which is in common control (as defined in section 414(c) of the Code) with the Company, or (iii) any entity that is a member of the same affiliated service group (as defined in section 414(m) of the Code) as the Company. In addition, the term Affiliate will also include any related entity (regardless of whether in the Company's controlled group of corporations, as defined above) that the Company has designated for participation in the Plan.

(c) " Benefits Committee " means the administrative committee responsible for the administration of the Plan in accordance with Article VIII.

(d) " Board " means the Board of Directors of the Company.

(e) " Claimant " means a Participant or Beneficiary who files a claim for benefits pursuant to Section 8.5.

(f) " Code " means the Internal Revenue Code of 1986, as amended from time to time, and any regulations or rulings issued thereunder.

(g) " Company " means HealthSouth Corporation or any successor thereto.

(h) " Compensation " means the total of all amounts paid by the Employer to or for the benefit of an Employee for services rendered or labor performed for the Employer

while a Participant and while an Employee, which are required to be reported on the Employee's Federal Wage and Tax Statement, Form W-2 or its successor; provided, however, that Compensation will not include: (i) mileage reimbursements; (ii) severance pay; (iii) termination vacation payouts; (iv) termination paid time-off payouts; (v) relocation reimbursements; (vi) income from the exercise or award of any stock options or stock grants; (vii) imputed income from life insurance; (viii) car allowances; (ix) club dues; (x) housing allowances; (xi) any stock purchase plan match monies, (xii) dividends on Company stock paid in connection with the exercise or award of stock options or stock grants or (xiii) Scheduled In-Service Withdrawals. Further, Compensation excludes:

Compensation will include all of the Employee's Form W-2 earnings defined in the preceding sentences accrued and paid by the last day of the Plan Year.

3

(i) elective contributions made on the Employee's behalf by the Employer that are not includible in income under sections 125, 132(f)(4), 402(e)(3), 402(h), or 403(b) of the Code;

(ii) compensation deferred under an eligible deferred compensation plan within the meaning of section 457(b) of the Code; and

(iii) employee contributions described in section 414(h) of the Code that are picked up by the employing unit and treated as employer contributions.

(i) " Compensation Committee " means the Compensation Committee of the Board of Directors of the Company.

(j) " Compensation Deferral " means the deferral described in Section 4.1 made by a Participant who has elected to defer all or a portion of his Compensation under the Plan including a deferral of Compensation classified as a bonus that is subject to a separate and distinct deferral election.

(k) " Daily Administrator " means the individuals, entity or department designated by the Compensation Committee or the Benefits Committee to handle the day to day administration of the Plan and to make initial claim determinations pursuant to Section 8.5. In the event the Compensation Committee or the Benefits Committee fails to appoint a Daily Administrator, the Benefits Committee will be the Daily Administrator.

(l) " Disability " means that due to a physical or mental condition, the Participant has been determined to be totally and permanently disabled by the Social Security Administration and is eligible to receive Social Security disability benefits.

(m) " Effective Date " means June 1, 2014, except as expressly provided otherwise herein.

(n) " Election Process " means the written forms or on-line processes provided by the Daily Administrator, or delegate thereof, pursuant to which the Participant consents to participation in the Plan, elects to defer Compensation as a Compensation Deferral and specifies the time and form in which such Compensation Deferrals, Employer Matching Contributions attributable to such Compensation Deferrals and any Employer Discretionary Contributions will be paid as provided in Article V. Such Participant consent and elections may be done either in writing or on-line through an electronic signature as determine by the Daily Administrator.

4

(o) " Eligible Employee " means each Employee who holds the position of an Executive Officer, Senior Vice President, Vice President or Director or is the Chief Executive Officer or Chief Financial Officer of one of the Company's hospitals; provided, however, that each such individual must earn more than the compensation limit set forth in section 414(q) of the Code ( i.e. , one hundred fifteen thousand dollars ($115,000) for 2013 (as adjusted under section 414(q)(1) of the Code)).

(p) " Employee " means any person employed by the Employer in the capacity of a common law employee and not in the capacity of an Leased Employee or independent contractor, even if such Leased Employee or independent contractor is subsequently determined by the Employer, the Internal Revenue Service, the Department of Labor or a court of competent jurisdiction to be a common law employee of the Employer. Each such Employee who is currently employed by the Employer or an Affiliate will be referred to herein as an "Active Employee" and each such Employee who is no longer employed by the Employer or an Affiliate but has an Account balance under the Plan will be referred to herein as an "Inactive Employee."

(q) " Employer " means the Company and any other Affiliate which adopts the Plan. An Affiliate may evidence its adoption of the Plan either by a formal action of its governing body or by commencing deferrals and taking other administrative actions with respect to this Plan on behalf of its employees.

(r) " Employer Discretionary Contribution " means discretionary profit sharing contributions made to the Plan on behalf of a Participant.

(s) " Employer Matching Contribution " means the matching contributions made to the Plan on behalf of a Participant.

(t) " ERISA " means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulations or rulings issued thereunder.

(u) " Hour of Service " means each hour for which an Employee is directly or indirectly paid, or is entitled to payment, by the Employer (including any predecessor business of an Employer conducted as a corporation, partnership or proprietorship) or Affiliate for the performance of duties or reasons other than the performance of duties, including but not limited to vacation, holidays, sickness, disability, paid layoff, jury duty, military duty, leave of absence and similar paid periods of nonworking time. An Hour of Service also includes each hour, not credited above, for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Employer or an Affiliate. For all purposes of the Plan, Hours of Service will be credited for any individual considered to be a Leased Employee and for any individual considered an Employee under section 414(o) of the Code and the final regulations thereunder.

(i) Acquired Entities . Service or employment completed by an Employee of an acquired facility or an acquired employee group before such facility became an Affiliate or before the employees of such employee group become Employees will not be credited except to the extent provided in the acquisition agreement, a resolution by the Board of Directors or other governing body of the Employer. Any such prior vesting service credit will be described in Appendix A attached hereto. Appendix A may be revised

from time-to-time by the Daily Administrator without the need for a formal amendment to the Plan.

For purposes of the preceding paragraphs, the Company has elected to determine the compensation of an officer or one percent owner in accordance with section 1.415(c)-2(d)(4) of the Treasury Regulations ( i.e. , W-2 wages plus amounts that would be includible in wages except for an election under section 125(a) of the Code (regarding cafeteria plan elections), section 132(f) of the Code (regarding qualified transportation fringe benefits), or section 402(e)(3) of the Code (regarding section 401(k) plan deferrals)) without regard to the special timing rules and special rules set forth, respectively, in sections 1.415(c)-2(e) and 2(g) of the Treasury Regulations.

The determination of Key Employees will be based upon a twelve (12) month period ending on December 31 of each year ( i.e. , the identification date). Employees who are Key Employees during such twelve (12) month period will be treated as Key Employees for the twelve (12) month period beginning on the first day of the fourth month following the end of the twelve (12) month period ( i.e. , since the identification date is December 31, then the twelve (12) month period to which it applies begins on the next following April 1).

The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code and other guidance of general applicability issued thereunder. For purposes of determining whether an employee or former employee is an officer, a five percent owner or a one percent owner, the Company and each Affiliate will

5

(ii) Licensed Professionals . Service or employment completed by licensed professionals on behalf of professional corporations for which the Company provides payroll services who become Employees will be taken into account for purposes of determining Hours of Service under this Plan.

(v) " Investment Options " means the investment options used under the Plan to measure the investment returns attributable to each Participant's Account. As of the Effective Date, any investment fund offered through the Charles Schwab Trust Company may be selected as an Investment Option under the Plan. The Benefits Committee may revise the Investment Options provided under the Plan from time to time without the need for a formal Plan amendment, in which case the new Investment Options will be communicated to Participants.

(w) " Key Employee " means a key employee within the meaning of section 416(i) of the Code. Specifically, an individual who is:

(i) an officer of the Company or an Affiliate having compensation of greater than one hundred thirty thousand dollars ($130,000) (as adjusted under section 416(i)(1) of the Code) ( i.e. , one hundred sixty-five thousand dollars ($165,000) for 2013 and one hundred seventy thousand dollars ($170,000));

(ii) a five percent (5%) owner of the Company or an Affiliate as defined in section 416 of the Code; or

(iii) a one percent (1%) owner of the Company or an Affiliate as defined in section 416 of the Code having compensation of more than one hundred fifty thousand dollars ($150,000).

be treated as a separate employer ( i.e. , the controlled group rules of sections 414(b), (c), (m) and (o) of the Code will not apply). Conversely, for purposes of determining whether the one hundred thirty thousand dollar ($130,000) adjusted limit on compensation is met under the officer test described in Section 2.1(x)(i), compensation from the Company and all Affiliates will be taken into account ( i.e. , the controlled group rules of sections 414(b), (c), (m) and (o) of the Code will apply). Further, in determining who is an officer under the officer test described in Section 2.1(x)(1), no more than fifty (50) employees of the Company or its Affiliates ( i.e. , the controlled group rules of sections 414(b), (c), (m) and (o) of the Code will apply) will be treated as officers. If the number of officers exceeds fifty (50), the determination of which employees or former employees are officers will be determined based on who had the largest annual compensation from the Company and Affiliates for the Plan Year.

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(x) “ Leased Employee ” means each person who is not an employee of the Employer or an Affiliate but who performs services for the Employer or an Affiliate pursuant to an agreement (oral or written) between the Employer or an Affiliate and any leasing organization, provided that such person has performed such services for the Employer or an Affiliate or for related persons (within the meaning of section 144(a)(3) of the Code) on a substantially full-time basis for a period of at least one (1) year and such services are performed under primary direction or control by the Employer or an Affiliate. In the case of any person who is a Leased Employee before or after a Period of Service as an Employee, the entire period during which he has performed services as a Leased Employee will be counted as Service as an Employee for all purposes of the Plan, except that he will not, by reason of that status, become a Member of the Plan.

(y) " Normal Retirement Age " means the date the Participant reaches age sixty-five (65).

(z) " Participant " means each Eligible Employee who has elected to participate in the Plan by timely completing the Election Process and whose participation in this Plan has not terminated. Each such Participant who is currently employed by the Employer will be referred to herein as an "Active Participant" and each such Employee who is no longer employed by the Employer or is employed by an Affiliate who has not adopted the Plan but has an Account balance under the Plan will be referred to herein as an "Inactive Participant."

(aa) " Plan " means the HealthSouth Corporation Nonqualified 401(k) Plan, as described in this document, and as it may hereafter be amended.

(bb) " Plan Year " means the fiscal year of this Plan, which will commence on January 1 each year and end on December 31 of such year, except that the initial Plan Year will commence on March 1 and end on December 31.

(cc) " Rabbi Trust " means the grantor trust established by the Company to assist with the payment of benefits under the Plan. The Rabbi Trust will be unfunded within the meaning of ERISA and its assets will be subject to the claims of the Employer's and Affiliate's general creditors. Such Rabbi Trust and its assets will conform to the terms of the model trust, as described in Revenue Procedure 92- 64.

(dd) " Scheduled In-Service Withdrawal " means a distribution elected by the Participant pursuant to Section 5.1 for an in-service withdrawal of amounts of Compensation Deferrals, Employer Matching Contributions attributable to such Compensation

Deferrals and any Employer Discretionary Contributions made in a given Plan Year, and earnings or losses attributable thereto, as set forth in the Election Process for such Plan Year.

A distribution on account of Unforeseeable Emergency may only be made to the extent that the Participant's need cannot be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant's assets, to the extent that liquidation of such assets would not cause a severe financial hardship or by cessation of Compensation Deferrals under the Plan. The amount of the distribution cannot exceed the amount necessary to meet the need (plus any taxes resulting from the distribution).

2.2 Construction

If any provision of this Plan is determined to be for any reason invalid or unenforceable, the remaining provisions of this Plan will continue in full force and effect. All of the provisions of this Plan will be construed and enforced in accordance with the laws of the State of Alabama and will be administered according to the laws of such state, except as otherwise

7

(ee) " Scheduled In-Service Withdrawal Date " means the distribution date elected by the Participant for a Scheduled In-Service Withdrawal.

(ff) “ Spouse ” means the legal spouse (as defined by applicable state law) of an Eligible Employee (including, effective September 16, 2013, a same sex spouse recognized as such under state law where the marriage was performed), except that such term will not include a common law spouse unless all documentation of the common law marriage required by the Plan Administrator has been received by the Plan Administrator.

(gg) " Termination of Employment " means the date that such Employee ceases performing services for the Employer and its Affiliates in the capacity of an Employee. For this purpose an Employee who is on a leave of absence that exceeds six (6) months and who does not have statutory or contractual reemployment rights with respect to such leave, will be deemed to have incurred a Termination of Employment on the first day of the seventh (7th) month of such leave, An Employee who transfers employment from an Employer to an Affiliate, regardless of whether such Affiliate has adopted the Plan as a participating employer, will not incur a Termination of Employment.

(hh) " Trustee " means the individual or entity appointed to serve as trustee of any trust established as a possible source of funds for the payment of benefits under the Plan as provided in Section 7.1.

(ii) " Unforeseeable Emergency " means a severe financial hardship to the Participant resulting from (i) an illness or accident of the Participant, his Spouse, his beneficiary, or his dependent (as defined under section 152(a) of the Code), (ii) a loss of the Participant's property due to casualty, or (iii) any other similar extraordinary and unforeseeable loss arising from events beyond the control of the Participant, as determined by the Daily Administrator in its sole and absolute discretion in accordance with the requirements of section 409A of the Code.

(jj) " Year of Vesting Service " means a Plan year in which an Employee is credited with no less than one thousand (1,000) Hours of Service.

required by ERISA, the Code or other applicable federal law. Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of the Plan. The masculine gender, where appearing in this Plan, will include the feminine gender, the singular may include the plural; and vice versa, unless the context clearly indicates to the contrary.

2.3 409A Compliance

The provisions of the Plan will be construed and administered in a manner that enables the Plan to comply with the provisions of section 409A of the Code.

______________________ End of Article II

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ARTICLE III

PARTICIPATION AND VESTING

3.1 Eligibility and Participation

An Employee who is a Participant as of March 1, 2013, will continue as an Active Participant as of such date if such Eligible Employee has timely completed the required Election Process pursuant to Section 4.1. An Employee who becomes an Eligible Employee during a Plan Year, or an Employee hired during a Plan Year who is an Eligible Employee as of his hire date, will become a Participant as of the January 1st of the Plan Year following his initial eligibility to participate in the Plan if such Eligible Employee has timely completed the required Election Process prior to the beginning of such Plan Year. Prior to the beginning of each subsequent Plan Year, each Eligible Employee may elect to defer portions of his Compensation by completing the required Election Process prior to the beginning of the Plan Year.

3.2 Continued Eligibility and Participation

Any Eligible Employee who does not elect to make Compensation Deferrals when he is first eligible, may elect to do so in a subsequent Plan Year by completing the required Election Process prior to the beginning of the Plan Year. Such Eligible Employee will become a Participant as of January 1st of the Plan Year for which he first elects to make Compensation Deferrals. Eligibility to become a Participant for any Plan Year will not entitle an Eligible Person to continue as an Active Participant for any subsequent Plan Year.

3.3 Cessation of Participation

A Participant will cease to be a Participant as of the earlier of:

______________________ End of Article III

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(a) the date on which the Plan terminates, or

(b) the date on which he receives a distribution of all amounts credited to his Account. A Participant under this Plan who incurs a Termination of Employment or who continues employment with the Employer but ceases to be eligible to participate in the Plan, will continue as an Inactive Participant under this Plan until the Participant has received a distribution of all amounts credited to his Plan Account; provided, however, that if a Participant ceases active participation in the Plan because he ceases to be an Eligible Employee, his Compensation Deferrals will continue for the remainder of the Plan Year in which such loss of eligibility occurs, but such Participant will not be eligible to make future Compensation Deferrals until he again qualifies as an Eligible Employee.

ARTICLE IV

CONTRIBUTIONS AND ACCOUNTING

4.1 Deferral Elections

An Eligible Employee may become a Participant by electing to defer Compensation pursuant to the required Election Process. Such Election Process will be completed prior to the first day of the Plan Year for which the election is effective. A Participant's deferral election will only be effective with respect to a single Plan Year and will be irrevocable for the duration of such Plan Year, except as provided in Article V regarding Unforeseeable Emergency distributions. Deferral elections for each subsequent Plan Year of participation will be made pursuant to a new election for such Plan Year.

An Eligible Employee who is an Active Employee may elect to have a sum equal to at least one percent (1%) but not more than one hundred percent (100%) of his Compensation which otherwise would have been paid to him by the Employer deferred under the Plan as a Compensation Deferral. The Daily Administrator may allow such Employee to make a separate and distinct deferral election with regard to any amounts of Compensation classified by the Employer as a bonus if such election is completed prior to the first day of the Plan Year during which the services are performed that give rise to the bonus, regardless of when the bonus would otherwise be paid but for such deferral election. An Eligible Employee's deferral election (including his separate and distinct deferral election with respect to his bonus, if any) must specify, in the format adopted by the Company as part of its Election Process, the time and manner in which his Compensation Deferral for each Plan Year will be paid, in accordance with the benefit distribution options set forth in Article V. An Eligible Employee may make a separate and distinct distribution election with respect to each Plan Year in which he elects to make a Compensation Deferral to the Plan. The Eligible Employee may not modify his election as to the manner in which a Compensation Deferral will be paid.

Compensation Deferrals will be made pursuant to administrative procedures established by the Plan Administrator. Such procedures will provide that Compensation Deferrals will be subject to a "withholding hierarchy" for purposes of determining the amount of such contributions that may be contributed on behalf of a Participant. The Plan Administrator (or its delegates) will determine the order of withholdings taken from a Participant's Compensation ( e.g. , for federal, state and local taxes, social security, wage garnishments, welfare plan contributions, 401(k) deferrals, and similar withholdings) and Compensation Deferrals will be subject to such withholding hierarchy. As a result, Compensation Deferrals may be effectively limited to Compensation available after the application of such withholding hierarchy ( i.e. , the Participant may not be able to defer one hundred percent (100% of his Compensation).

4.2 Company Contributions

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(a) Employer Matching Contribution . Each Plan Year, the Employer will make an Employer Matching Contribution to the Plan for each Participant who makes Compensation Deferrals pursuant to Section 4.1 above. Such Employer Matching Contribution will equal fifty percent (50%) of the first six percent (6%) of the Participant's Compensation contributed to the Plan as a Compensation Deferral offset by any Employer Matching Contributions made to the HealthSouth Corporation Retirement Investment Plan (the "Retirement Plan") on behalf of such Participant ( i.e. , the total of Employer Matching Contributions that a Participant may receive between this Plan and the Retirement Plan will equal fifty percent (50%) of the first six percent (6%) of the Participant's Compensation contributed to both this

Plan as Compensation Deferrals and the Retirement Plan as Salary Deferral Contributions (as defined in the Retirement Plan).

4.3 Vesting

Notwithstanding the foregoing, a Participant will become fully vested in his Employer Matching Contributions when he reaches his Normal Retirement Age, dies or incurs a Disability (in each such case while an Employee), without regard to his Years of Vesting Service. Any portion of a Participant's Account that has not become vested, as herein provided, will be forfeited.

Notwithstanding the foregoing, as provided in Section 7.2, each Participant will be only a general creditor of the Company and/or Employer with respect to the payment of any benefit under this Plan.

4.4 Plan Benefits

The benefits to which a Participant and, if applicable, his Beneficiary are entitled under the Plan will consist of the Compensation Deferrals, Employer Matching Contributions and any Employer Discretionary Contributions credited to such Participant's Account, plus earnings thereon and less losses allocable thereto, if any, attributable to the investment of such amounts pursuant to Section 4.5(c) hereof. Distribution of benefits attributable to a Participant's Account(s) will be made pursuant to the provisions of Article V.

4.5 Accounting for Deferred Compensation.

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(b) Employer Discretionary Contribution . The Employer may elect to make an Employer Discretionary Contribution to the Plan at such time and in such amount as may be determined by the Compensation Committee.

(a) Participant Deferrals . A Participant will be one hundred percent (100%) vested in the Compensation Deferrals credited to his Account, including the earnings and losses thereon.

(b) Employer Matching Contributions . A Participant will become vested in Employer Matching Contributions made on his behalf to the Plan in accordance with the following schedule:

Years of Vesting Service Percentage Vested 2 or fewer years 0%

3 or more years 100%

(c) E mployer Discretionary Contributions . Each Employer Discretionary Contribution may be subject to a vesting schedule, as determined by the Compensation Committee, in its sole discretion, at the time such Employer Discretionary Compensation is elected to be made to the Plan.

(a) Establishment of Accounts . The Daily Administrator will establish and maintain an individual Account under the name of each Participant under the Plan. Further, in the sole discretion of the Daily Administrator, additional Accounts may be established for each Participant to facilitate record keeping convenience and accuracy. Each such Account will be credited and adjusted as provided in this Plan.

Such Account will be maintained until all amounts credited to such Account have been distributed in accordance with the terms and provisions of this Plan. The establishment and maintenance of a separate Account or Accounts for each Participant will not be construed as giving any person any interest in assets of the Company or an Affiliate, or a right to payment other than as provided hereunder. Amounts credited to such Accounts will be held with the general assets of the Employer.

____________________ End of Article IV

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(b) Crediting Accounts . All amounts deferred under the Plan as Compensation Deferrals will be credited to the Participant's Account at the end of the pay period during which such Compensation would have otherwise been paid to the Participant. The amount of Employer Matching Contributions to be contributed to the Plan on the Participant's behalf will be computed on the last day of each month and will be contributed as soon as administratively practicable after such computation. Any Employer Discretionary Contributions made to the Plan will be credited to the Participant's Account at the time such contributions are made.

(c) Adjustment of Accounts . Each Account will be adjusted on each business day that the New York Stock Exchange is open to reflect the Compensation Deferrals, Employer Matching Contributions and any Employer Discretionary Contributions made to the Plan, any earnings credited on such Compensation Deferrals, Employer Matching Contributions and Employer Discretionary Contributions pursuant to this Section 4.5(c), and any payment of such Compensation Deferrals, Employer Matching Contributions and Employer Discretionary Contributions under the Plan.

(i) Participant Investment Recommendations . For purposes of measuring the investment returns of the Participant's Account(s), the Participant may select the Investment Options in which all or part of his Account(s) will be deemed to be invested. The Participant will make his initial investment designation in the Enrollment Process and such an investment designation will remain effective until it is subsequently changed by the Participant pursuant to this Section 4.5(c). The Participant may change his investment designation each Plan Year at the time and manner specified by the Daily Administrator. The Participant may change the investment allocation of his existing Account(s) at the time and manner specified by the Daily Administrator. During the Plan Year, a Participant may elect to make transfers of his Account(s) among the Investment Options by written, telephonic or electronic means at the time and manner specified by the Daily Administrator.

(ii) Benefits Committee Investment Designation . Notwithstanding the foregoing, the Benefits Committee in its sole and absolute discretion may direct the Daily Administrator to disregard the Participant's investment designation and determine that all interests in the Account(s) will be deemed to be invested in one particular or a mixture of the Investment Options. Likewise, if a Participant fails to make any investment recommendations, the Daily Administrator will invest the Participant's Account(s) in any default investment fund established under the Plan by the Benefits Committee or in such other manner as the Benefits Committee deems appropriate in its sole and absolute discretion.

ARTICLE V

DISTRIBUTION OF BENEFITS

5.1 General Rule Regarding Payment of Account

Subject to Section 5.6, Compensation Deferrals made in accordance with Section 4.1 and Employer Matching Contributions and Employer Discretionary Contributions made in accordance with Section 4.2 will be distributed to a Participant (i) upon the Participant's Termination of Employment or (ii) in a future year in which the Participant is still employed by the Employer and that is at least three (3) calendar years after the end of the Plan Year in which the Compensation would have otherwise been paid, but within forty (40) calendar years of the first day of the Plan Year in which such Compensation would have otherwise been paid ( i.e. , as a Scheduled In-Service Withdrawal), subject in each case to the provisions of Section 5.2. Amounts paid by reason of a Termination of Employment will be subject to the six (6) month delay applicable to Key Employees under Section 5.6.

Prior to the Plan Year commencing in 2014, in the event that the Participant elects a Scheduled In-Service Withdrawal and incurs a Termination of Employment before his Scheduled In-Service Withdrawal date, his Scheduled In-Service Withdrawal election will be canceled and of no effect and such amounts will be paid according to the Participant’s distribution election with respect to his Employer Matching Contributions and Employer Discretionary Contributions, if any, for the Plan Year in which his related Compensation Deferrals were made ( i.e. , in accordance with the Participant's Termination of Employment distribution election with respect to such Employer Matching Contributions or Employer Discretionary Contributions), subject to the six (6) month delay applicable to Key Employees under Section 5.6 and the subsequent deferral election rules of Section 5.2. If a Participant does not have a Termination of Employment distribution election on file with respect to the Plan Year in which Employer Matching Contributions and any Employer Discretionary Contributions were made, such amounts will be paid in a single lump sum distribution upon his Termination of Employment (subject to the six (6) month delay applicable to Key Employees under Section 5.6).

Commencing for the 2014 Plan Year and thereafter, in the event that the Participant elects a Scheduled In-Service Withdrawal and incurs a Termination of Employment before his Scheduled In-Service Withdrawal date, his Scheduled In-Service Withdrawal election will be cancelled and of no effect and such amounts will be paid in a single lump sum distribution upon his Termination of Employment (subject to the six (6) month delay applicable to Key Employees under Section 5.6) and the subsequent deferral election rules of Section 5.2.

5.2 Subsequent Deferrals An Active Participant who elects a Scheduled In-Service Withdrawal or Termination of Employment distribution pursuant to Section 5.1 may subsequently elect to delay such distribution, provided that:

13

(a) such distribution is deferred for a period of at least five (5) years from the date such amounts would otherwise be paid,

(b) in the case of a Scheduled In-Service Withdrawal, such distribution election does not defer such distribution more than forty (40) calendar years from the first day of the Plan Year in which such Compensation would have otherwise been paid,

(c) in the case of a Termination of Employment Distribution, such election may also modify the form of payment (e.g., a lump sum to installments or visa versa); provided,

that the lump sum payment or first installment, as applicable, satisfies the five (5) year deferral requirement of Section 5.2(a); and

An Active Participant may elect to postpone his distribution date up to two (2) times pursuant to this Section 5.2. An Active Participant may not modify the form of his Scheduled In-Service Withdrawal pursuant to an election made under this Section 5.2.

If an Active Participant makes a subsequent deferral election within twelve (12) months from the date such amounts would otherwise be paid ( i.e. , within twelve (12) months of the date certain on which such distribution would otherwise be made or within twelve (12) months of his Termination of Employment), such subsequent deferral election will be of no effect and the Participant's Compensation Deferrals subject to such election will be paid according to the Participant's initial deferral election.

5.3 Distributions on Death

In the event of a Participant's death prior to the distribution of all amounts credited to his Account, the Participant's Account balance will be paid in a single lump sum to his Beneficiary within ninety (90) days following the date of the Participant's death. If the Participant had been receiving annual installments from amounts credited to his Account under the Plan, the remainder of such annual installments will continue to be paid to the Participant's Beneficiary. This six (6) month restriction applicable to Key Employees under Section 5.6 will not apply, or will cease to apply, with respect to a distribution to a Participant's Beneficiary by reason of the death of the Participant.

5.4 Distributions on Disability

In the event of the Participant's Disability prior to the receipt of his entire Account, he will receive amounts credited to such Account in accordance with the terms of Section 5.1 ( i.e. , at Termination of Employment or as a Scheduled In-Service Withdrawal). Alternatively, if the Participant elects, he may apply to the Daily Administrator for an Unforeseeable Emergency distribution pursuant to Section 5.5 of the Plan.

5.5 Unforeseeable Emergency

A Participant who is an Active Employee or who has incurred a Disability may submit a written application to the Daily Administrator for an earlier distribution of amounts credited to his Account on account of an Unforeseeable Emergency. The existence of an Unforeseeable Emergency will be determined by the Daily Administrator in its sole and absolute discretion. In the event that the Daily Administrator determines an Unforeseeable Emergency exists, it may permit the Participant to receive a distribution of all or a portion of his Account as necessary to satisfy such Unforeseeable Emergency as provided under the final regulations issued under section 409A. Specifically, the amount distributable on account of an Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay any Federal, state or local income taxes or penalties reasonably anticipated to result from the distribution). The determination of an Unforeseeable Emergency must take into account

14

(d) the Active Participant makes such subsequent deferral election at least twelve (12) months before the date such amounts would otherwise be paid ( i.e. , in the case of the first subsequent deferral election for a Scheduled In-Service Withdrawal before the date certain and in the case of the first subsequent deferral election for a Termination of Employment distribution before the date of his Termination of Employment).

any additional compensation that is available by reason of the cessation of the Participant's Compensation Deferrals to the Plan pursuant to this Section 5.5. However, such determination is not required to take into account additional compensation that could be paid to the Participant, but which has not actually been paid, under any other nonqualified deferred compensation plan in which the Participant is a member or pursuant to the provisions of Article V of this Plan. An Unforeseeable Emergency distribution to an Active Employee will result in the suspension of his Compensation Deferrals to the Plan for the remainder of the Plan Year in which the Unforeseeable Emergency distribution occurs.

5.6 Time and Form of Payment

Prior to the Plan Year commencing in 2014, any Scheduled In-Service Withdrawal distribution will be paid in the form of a single lump sum in March of the year specified by the Participant in accordance with Section 5.1. Effective for the 2014 Plan Year and thereafter, such Scheduled In-Service Withdrawal distribution will be paid in the form of a single lump sum in January of the year specified by the Participant in accordance with Section 5.1

Upon Termination of Employment, the Participant's entire Account balance will be distributed in the form of either (i) a single lump sum or (ii) in a series of between two (2) and fifteen (15) equal annual installments with the final payment being a distribution of one hundred percent (100%) of the Account balance, as elected by the Participant in accordance with Section 4.1 and Section 5.1, subject to the subsequent deferral election rules of Section 5.2..

To the extent that a Participant has elected to receive installment distributions upon his Termination of Employment, such installment distributions will only be paid if the value of the Participant's Accounts upon Termination of Employment exceeds Ten Thousand Dollars ($10,000). If such Accounts equal Ten Thousand Dollars ($10,000) or less, such Accounts will be paid in the form of a lump sum payment. Further, in the event that the Participant elects a Scheduled In-Service Withdrawal and incurs a Termination of Employment prior to the Scheduled In-Service Withdrawal Date, the Participant's Scheduled In-Service Withdrawal election will be cancelled and payable in accordance with Section 5.1 of the Plan, subject to the subsequent deferral election rules of section 5.2.

A lump sum payment of amounts credited to a Participant's Account will be made as soon as administratively possible following the date the Participant is entitled to a distribution under this Article V but in no event more than sixty (60) days following the date entitling the Participant to such distribution. The first annual installment payment of amounts credited to a Participant's Account will be made as soon as administratively possible following the date the Participant is entitled to a distribution under this Article V but in no event more than (60) days following the date entitling the Participant to such distribution. Subsequent installment payments of the Participant's Account will be made in March or, effective January 1, 2014, January of each year thereafter.

As provided in Section 4.1, if the Participant does not specify the time and form of payment with respect to his Account under the Plan, such Account balance will be distributed to the Participant upon his Termination of Employment in a single lump sum.

Notwithstanding the foregoing, distributions under this Plan that are payable to a Key Employee on account of a Termination of Employment will be delayed for a period of six (6) months and one (1) day following such Participant's Termination of Employment. This six (6) month restriction will not apply, or will cease to apply, with respect to a distribution to a Participant's Beneficiary by reason of the death of the Participant.

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_______________________ End of Article V

ARTICLE VI PAYMENT LIMITATIONS

6.1 Payment Due an Incompetent

If a person entitled to any payment under this Plan is, in the sole judgment of the Daily Administrator, under a legal disability, or is otherwise unable to apply such payment to his own interest and advantage, the Daily Administrator, in the exercise of its discretion, may direct the Employer or payor of the benefit to make any such payment in any one (1) or more of the following ways:

(a) Directly to such person;

(b) To his legal guardian or conservator; or

The decision of the Daily Administrator will in each case be final and binding upon all persons in interest.

6.2 Nonalienation of Benefits

To the extent permitted by law, benefits payable under this Plan will not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary except that the Plan will recognize the division of benefits between the Participant and his Spouse in connection with a divorce. However, no benefit awarded to the Spouse pursuant to such divorce will be payable to such Spouse until the time the Participant is entitled to receive a distribution of benefits from the Plan. The benefit payable to the Spouse will be paid in the form of a lump sum cash payment as soon as practicable following the event entitling the Participant to a distribution but in no event more than ninety (90) days after such distribution event.

Any unauthorized attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to benefits payable hereunder will be void. No part of the assets of the Employer will be subject to seizure by legal process resulting from any attempt by creditors of or claimants against any Participant (or beneficiary), or any person claiming under or through the foregoing, to attach his interest under the Plan.

____________________ End of Article VI

16

(c) To his Spouse or to any person charged with the duty of his support, to be expended for his benefit and/or that of his dependents.

ARTICLE VII

FUNDING

7.1 Funding

Benefits under the Plan will constitute general unfunded obligations of the Employer in accordance with the terms of the Plan. No amounts in respect of such benefits will be set aside or held in trust, and no recipient of any benefit under this Plan will have any right to have the benefit paid out of any particular assets of the Employer; provided, however, that the Company may establish a Rabbi Trust to assist with the payment of benefits under the Plan. The assets of any such Rabbi Trust will be subject to the claims of the Employer's and the Affiliate's general creditors. Such Rabbi Trust and its assets will conform to the terms of the model trust, as described in Revenue Procedure 92-64.

7.2 Creditor Status Participants have the status of general unsecured creditors of the Employer and this Plan constitutes the Employer's promise to make benefit payments as described herein. It is the intention of the parties to this Plan and any companion Rabbi Trust that benefits under this Plan be unfunded for tax purposes and for purposes of Title I of ERISA.

_____________________ End of Article VII

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ARTICLE VIII

ADMINISTRATION 8.1 Appointment of Benefits Committee

Responsibility for administration of this Plan will be with the Benefits Committee who will be the named Plan Administrator. The Benefits Committee will be appointed by the Compensation Committee. If the Compensation Committee fails to appoint a Benefits Committee, it will serve as the Benefits Committee. The members of the Benefits Committee will not receive compensation with respect to their services for the Benefits Committee. The members of the Benefits Committee will serve without bond or security for the performance of their duties under the Plan unless the applicable law makes the furnishing of such bond or security mandatory or unless required by the Compensation Committee.

8.2 Committee Powers and Duties

The Benefits Committee will have sole and absolute discretion regarding the exercise of its powers and duties under this Plan. Such powers and duties will include, but not be limited to, the following powers and duties as may be necessary to discharge its responsibilities under the Plan:

(c) to prescribe rules for the operation of the Plan;

(e) to make any necessary filings with the appropriate government agency;

18

(a) to appoint a Daily Administrator to handle the day-to-day administration of the Plan pursuant to Section 8.3, and, if applicable, to appoint the Trustee of the Rabbi Trust;

(b) to construe and interpret the Plan, decide all questions of eligibility, determine the amount, manner and time of payment of any benefits under the Plan and make final determinations regarding all benefit claims;

(d) to receive from the Employer and from Employees such information as will be necessary for the proper administration of the Plan;

(f) to furnish any Employee or Beneficiary, who requests in writing, statements indicating such Employee's or Beneficiary's total Account balances;

(g) to maintain all records necessary for the administration of the Plan;

(h) to select the Investment Options under the Plan;

(i) to report to the Trustee of the Rabbi Trust all available information regarding the amount of benefits payable to each Employee, the computations with respect to the allocation of assets, and any other information which the Trustee may require;

(j) to delegate to one or more of the members of the Benefits Committee the right to act in its behalf in all matters connected with the administration of the Plan and Rabbi Trust;

(k) to delegate to any individual such of the powers and duties as the Benefits Committee deems appropriate; and

Except as provided in Section 10.1, the Benefits Committee will have no power to add to, subtract from or modify any of the terms of the Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any requirements of eligibility for benefits under the Plan. All rules and decisions of the Benefits Committee will be uniformly and consistently applied to all Employees in similar circumstances.

A majority of the members of the Benefits Committee will constitute a quorum for the transaction of business. No action will be taken except upon a majority vote of the Benefits Committee members. An individual will not vote or decide upon any matter relating solely to himself or vote in any case in which his individual right or claim to any benefit under the Plan is particularly involved.

8.3 Appointment of Daily Administrator

The Compensation Committee or the Benefits Committee will appoint the Daily Administrator who will have the responsibility and duty to administer the Plan on a daily basis in a nondiscretionary manner. The Compensation Committee or the Benefits Committee may remove the Daily Administrator with or without cause at any time. The Daily Administrator may resign upon written notice to the Benefits Committee.

8.4 Daily Administrator Powers and Duties

The Daily Administrator will have the following duties:

(a) to direct the administration of the Plan in accordance with its terms;

19

(l) to appoint or employ for the Plan any agents it deems advisable, including, but not limited to, legal counsel.

(b) to adopt rules of procedure and regulations necessary for the administration of the Plan, provided such rules are not inconsistent with the terms of the Plan;

(c) to determine all questions with regard to rights of Employees, Participants, and Beneficiaries under the Plan including, but not limited to, questions involving eligibility of an Employee to participate in the Plan and the value of the Participant's vested Account;

(d) to enforce the terms of the Plan and any rules and regulations adopted by the Benefits Committee;

(e) to review and render decisions respecting an initial claim for a benefit under the Plan;

(f) to furnish the Employer with information which the Employer may require for tax or other purposes;

(g) to engage the service of counsel (who may, if appropriate, be counsel for the Employer), actuaries, and agents whom it may deem advisable to assist it with the performance of its duties;

(h) to prescribe procedures to be followed by distributees in obtaining benefits;

(i) to receive from the Employer and from Employees such information as is necessary for the proper administration of the Plan;

The foregoing list of express duties is not intended to be either complete or conclusive, and the Daily Administrator will, in addition, exercise such other powers and perform such other duties as it may deem necessary, desirable, advisable or proper for the supervision and administration of the Plan.

8.5 Claim Procedures

20

(j) to receive and review reports from the Trustee of the financial condition and receipts of disbursements from the Rabbi Trust;

(k) to establish and maintain, or cause to be maintained, the individual Account(s) described in Section 2.1(a);

(l) to create and maintain such records and forms as are required for the efficient administration of the Plan;

(m) to make all determinations and computations concerning the benefits, credits and debits to which any Participant, or other Beneficiary, is entitled under the Plan;

(n) to give the Trustee specific directions in writing with respect to:

(i) the making of distribution payments, giving the names of the payees, the amounts to be paid and the time or times when payments will be made; and

(ii) the making of any other payments which the Trustee is not by the terms of the Trustee Agreement authorized to make without a direction in writing by the Daily Administrator;

(o) to prepare, or cause to be prepared, an annual report for the Employer, as of the last day of each Plan Year, in such form as may be required by the Employer;

(p) to determine and maintain records of the age and amount of Compensation, Hours of Service, and Service of each Employee;

(q) to comply (or transfer responsibility for compliance to the Trustee) with all applicable Federal income tax withholding requirements for benefit distributions; and

(r) to construe the Plan, in its sole and absolute discretion, and make equitable adjustments for any mistakes and errors made in the administration of the Plan.

(a) Initial Claim . In the event that an Employee, Eligible Employee, Participant or his Beneficiary claims to be eligible for benefits, or claims any rights under this Plan, such Claimant must complete and submit such claim forms and supporting documentation as will be required by the Daily Administrator, in its sole and absolute discretion. Likewise, any Participant or Beneficiary who feels unfairly treated as a result of the administration of the Plan must file a written claim, setting forth the basis of the claim, with the Daily Administrator. In connection with the determination of a claim, or in connection with review of a denied claim, the Claimant may examine this Plan, and any other pertinent documents generally available to Participants that are specifically related to the claim.

A written or electronic notice of the disposition of any such claim will be furnished to the Claimant within ninety (90) days after the claim is filed with the Daily Administrator. Such notice will refer, if appropriate, to pertinent provisions of this Plan, will set forth in writing the reasons for denial of the claim if a claim is denied (including references to any pertinent provisions of this Plan) and, where appropriate, will describe any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary. If the claim is denied, in whole or in part, the Claimant will also be notified of the Plan's claim review procedure, including the Claimant's right to file an action under section 502(a) of ERISA, and the time limits applicable to such procedures following an adverse decision regarding his claim on review as provided below. All benefits provided in this Plan as a result of the disposition of a claim will be paid as soon as practicable following receipt of proof of entitlement, if requested.

The decision of the Benefits Committee will be provided to the Claimant as soon as possible but no later than five (5) days after the benefit determination is made. The decision will be in writing or electronic and will include the specific reasons for the decision presented in a manner calculated to be understood by the Claimant and will contain references to all relevant Plan provisions on which the decision was based. Such decision will also advise the Claimant that he may receive upon request, and free of charge, reasonable access to and copies of all documents, records and other information relevant to his claim and that he may file an action under section 502(a) of ERISA in the case of an adverse decision regarding his claim on review. The decision of the Benefits Committee will be final and conclusive.

21

(b) Request for Review . Within ninety (90) days after receiving the notice of the Daily Administrator's disposition of the claim, the Claimant may file with the Benefits Committee a written request for review of his claim. In connection with the request for review, the Claimant will be entitled to be represented by counsel and will be given, upon request and free of charge, reasonable access to all pertinent documents for the preparation of his claim. If the Claimant does not file a written request for review within ninety (90) days after receiving notice of the Daily Administrator's disposition of the claim, the Claimant will be deemed to have accepted the Daily Administrator's written or electronic disposition, unless the Claimant was physically or mentally incapacitated so as to be unable to request review within the ninety (90) day period.

(c) Decision on Review . After receipt by the Benefits Committee of a written application for review of his claim, the Benefits Committee will review the claim taking into account all comments, documents, records and other information submitted by the Claimant regarding the claim without regard to whether such information was considered in the initial benefit determination. The Benefits Committee will notify the Claimant of its decision by delivery or by certified or registered mail to his last known address. A decision on review of the claim will be made by the Benefits Committee within sixty (60) days following receipt of the written application for review. If special circumstances require an extension of the sixty (60) day period, the Benefits Committee will so notify the Claimant and a decision will be rendered within one hundred-twenty (120) days of receipt of the request for review. In any event, if a claim is not determined by the Benefits Committee within one hundred-twenty (120) days of receipt of written submission for review, it will be deemed to be denied.

8.6 Benefits Committee Procedures

The Benefits Committee may adopt such bylaws as it deems desirable. The Benefits Committee will elect one of its members as chairman and will elect a secretary who may, but need not, be a member of the Benefits Committee.

__________________________ End of Article VIII

22

ARTICLE IX OTHER BENEFIT PLANS OF THE COMPANY

9.1 Other Plans

Nothing contained in this Plan will prevent a Participant prior to his death, or his Spouse or other Beneficiary after his death, from receiving, in addition to any payments provided for under this Plan, any payments provided for under any other plan or benefit program of the Company or an Affiliate, or which would otherwise be payable or distributable to him, his surviving Spouse or Beneficiary under any plan or policy of the Company or an Affiliate or otherwise. Nothing in this Plan will be construed as preventing the Company or any of its Affiliates from establishing any other or different plans providing for current or deferred compensation for employees. Unless specifically provided otherwise in any plan of the Company intended to "qualify" under section 401 of the Code, Compensation deferrals made under this Plan will not constitute earnings or compensation for purposes of determining contributions or benefits under such qualified plan.

____________________ End of Article IX

23

ARTICLE X

MISCELLANEOUS

10.1 Amendment

The Compensation Committee may, by resolution, in its absolute discretion, from time to time, amend, any or all of the provisions of the Plan. In addition, the Benefits Committee may amend the Plan to comply with changes in the law or to implement administrative or design changes that will not materially increase the cost of the Plan to the Company. No such amendment may adversely impact the amount of benefits a Participant has accrued under the Plan at such time except to the extent required by applicable law.

10.2 Termination

The Compensation Committee may, by resolution, in its absolute discretion, terminate the Plan in whole or part at any time; provided, that no such termination may adversely impact the amount of benefits a Participant has accrued under the Plan at such time except to the extent required by applicable law. Any termination of the Plan will comply with the provisions of section 409A of the Code as set forth in this Section 10.2.

The Plan may be terminated and liquidated under the following circumstances:

24

(a) C orporate Dissolution or Bankruptcy . The Compensation Committee may terminate and liquidate the Plan within twelve (12) months of a corporate dissolution taxed under section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A), provided that the amounts deferred under the Plan are included in Participants; gross incomes in the latest of the following years (or if earlier, the taxable year in which the amount is actually or constructively received):

(i) The calendar year in which the Plan termination and liquidation occurs.

(ii) The first calendar year in which the amount is no longer subject to a substantial risk of forfeiture. (iii) The first calendar year in which the payment is administratively practicable.

(b) Change in Control . The Compensation Committee may terminate and liquidate the Plan within the thirty (30) days preceding or the twelve (12) months following a change in control event, as defined in Treasury Regulation section 1.409A-3(i)(5)), provided that all plans or arrangements that would be aggregated with the Plan under section 409A of the Code are also terminated and liquidated with respect to each Participant that experienced the change in control event so that under the terms of the Plan and all such arrangements the Participant is required to receive all amounts of compensation deferred under such arrangements within twelve (12) months of the termination of the Plan or arrangement, as applicable. In the case of a change of control event which constitutes a sale of assets, the termination of the Plan pursuant to this Section 10.2(b) may be made with respect to the Employer that is primarily liable immediately after the change of control transaction for the payment of benefits under the Plan.

(c) Termination of Plan . The Compensation Committee may terminate and liquidate the Plan provided that (i) the termination and liquidation does not occur by reason of a downturn of the financial health of the Company or an Employer, (ii) all plans or arrangements that would be aggregated with the Plan under section 409A of the

Code are also terminated and liquidated, (iii) no payments in liquidation of the Plan are made within twelve (12) months of the date of termination of the Plan other than payments that would be made in the ordinary course operation of the Plan, (iv) all payments are made within twenty-four (24) months of the date the Plan is terminated and (v) the Company or the Employer, as applicable depending on whether the Plan is terminated with respect to such entity, do not adopt a new plan that would be aggregated with the Plan within three (3) years of the date of the termination of the Plan.

10.3 Nonguarantee of Employment

Nothing contained in this Plan will be construed as a contract of employment between the Employer and any Employee, or as a right of any Employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Employees, with or without cause.

10.4 Indemnification

The Company will indemnify each of its Compensation Committee members and Benefits Committee members against any and all claims, loss, damages, expense (including reasonable counsel fees), and liability arising from any action, failure to act, or other conduct in the member's official capacity, except when due to such Compensation Committee or Benefits Committee's member's own gross negligence or willful misconduct.

10.5 Withholding

The Employer or its designee will withhold from any benefit payments made under this Plan, the required amounts of federal, state or local income or other applicable taxes.

10.6 Expenses

The Employer will pay all costs and expenses incurred in operating and administering the Plan. Such costs and expenses will be paid by the Employer from its general assets or the Rabbi Trust.

__________________ End of Article X

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IN WITNESS WHEREOF, the Company has executed this Plan as of this 16th day of June, 2014.

HEALTHSOUTH CORPORATION By: /s/ Cheryl B. Levy Its: Chief Human Resources Officer

APPENDIX A SERVICE CREDITING

Participant Vesting for Certain Acquisitions or Business Transactions

An individual who becomes an Employee of the Employer or an Affiliate and a Participant in the Plan in connection with an acquisition (either stock, partnership interest or assets) or a similar business transaction (such as an outsourcing or employee leasing arrangement) will be given credit for his prior service with the seller, outsourcing entity or leasing company, as applicable, for vesting purposes under the Plan if the terms of the acquisition agreement, business transaction documents or an action of the Employer or an Affiliate so provides. This prior vesting service credit applies with respect to the following acquisitions and business transactions:

No further action except amending this schedule under Appendix A by the Daily Administrator will be necessary to reflect prior service granted to employees of acquired entities or groups by the Company.

This Appendix A may be updated from time to time without the need for formal amendment to the Plan in which case an updated appendix A will be attached hereto.

A-1

Acquisition or Transaction Effective Date

APPENDIX B

DOMESTIC PARTNER GUIDELINES FOR THE

HEALTHSOUTH CORPORATION GROUP LIFE, AD&D, DISABILITY AND MEDICAL PLAN AND THE HEALTHSOUTH CORPORATION RETIREMENT INVESTMENT PLAN

HealthSouth Corporation (" HealthSouth" ) adopts this Domestic Partner Guidelines (the " Guidelines ") to extend group health, dental and vision coverage under the HealthSouth Corporation Group Life, AD&D, Disability and Medical Plan (the " Group Health Plan" or "GHP ") to the " Domestic Partner " (as defined below) of an eligible employee 1 . of HealthSouth (" Employee ") and to the children of a Domestic Partner up to age 26.

The Guidelines also provide that a participant’s Domestic Partner will be the default beneficiary for purposes of the HealthSouth Corporation Retirement Investment Plan (the " 401(k) Plan ") and the HealthSouth Corporation Nonqualified 401(k) Plan (the “ Nonqualified 401(k) Plan ”) in situations where the participant dies without designating a beneficiary in accordance with the requirements of the 401(k) Plan and the Nonqualified 401(k) Plan.

The applicable requirements of the Guidelines are outlined below. Together, the GHP, the 401(k) Plan and the Nonqualified 401(k) Plan are referred to herein as the " Plans ".

PART A - DOMESTIC PARTNERSHIP DEFINED A Domestic Partnership is defined as follows:

For purposes of the Plans, a domestic partner consists of an eligible Employee and one other person of the same or opposite sex (a " Domestic Partner ").

A Domestic Partnership must satisfy the following requirements:

Each partner must be the other's sole domestic partner and must intend to remain so indefinitely. The partners must have an exclusive mutual commitment similar to that of marriage and:

_______________________ 1 Employee eligibility requirements are set forth in the Plan.

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(a) Each partner must be at least 18 years of age or, if lower, the age at which a person may be legally married in the state in which the partners share the same permanent address;

(b) The partners must share the same permanent residence and have done so for at least 12 months;

(c) The partners cannot be related by blood to a degree that would prohibit marriage;

(d) The partners cannot be legally married to each other or anyone else or in a domestic partnership with another individual nor have had another domestic partner within the prior six months;

(e) The partners must share the same permanent address and must be able to provide their driver’s licenses listing the common address;

(f) The partners must share joint financial responsibility for basic living expenses, including food, shelter and coverage expenses;

(g) The partners must each be mentally competent to consent to contract; and

(h) The partners must be financially interdependent, demonstrated by at least two of the following:

ii. Common ownership of a motor vehicle;

iv. Evidence of common household expenses, e.g. utility, phone;

v. Execution of wills naming each other as executor and/or beneficiary; vi. Granting each other durable powers of attorney; or

Notwithstanding the foregoing, the Plans will recognize an individual as a Domestic Partner of an Employee if the Domestic Partnership has been registered with any state or local government registry recognizing domestic partnerships and the Domestic Partnership meets the requirements of such registry or if the domestic partners have entered into a legal civil union in any state recognizing such civil union. 2

Dependent Children of Domestic Partners include the following individuals: For purposes of the GHP, children of a Domestic Partner (" Dependent Children ") are eligible for coverage under any GHP that provides dependent coverage when they are:

(a) A "child" as defined in the GHP ( e.g. , a natural child of the Domestic Partner, step child of the Domestic Partner or adopted child of the Domestic Partner); (b) Unmarried; and

(c) Under the age of 26.

Obtaining Domestic Partner Coverage: In order to obtain Domestic Partner status for purposes of the Plans, the Employee and Domestic Partner must complete and file with Human Resources, the Affidavit Declaring Domestic Partnership (the “ Affidavit ”), attached hereto. For purposes of the GHP , such Affidavit must be filed at annual enrollment. For purposes of the 401(k) Plan and the Nonqualified 401(k) Plan , such Affidavit may be filed at any time. However, if the Affidavit is not filed during an annual enrollment period, GHP coverage for the Domestic Partner will not begin until after the next annual enrollment period, unless the Domestic Partner loses other group health coverage during the plan year and is entitled to a mid-year entry under the plan’s HIPAA special enrollment provisions that apply in the case of a loss of other group health coverage. Note, due to federal law, a same sex Domestic Partner may not be enrolled in a GHP mid-year under the HIPAA special enrollment provisions that apply in the case of acquisition of dependent. Likewise, mid-year enrollment of a same sex Domestic Partner as a “change in status” (as defined in the GHP) is also not permitted by federal law. In the case of an opposite sex Domestic Partner, mid-year enrollment on account of an acquisition of dependent or as a “change in status” is only possible if the Domestic Partner qualifies as the Employee’s Spouse under state law. _______________________ 2 Individuals who have entered into a marriage that is legally recognized in the state in which such marriage took place will be treated as “Spouses” under the Plan and not as “Domestic Partners” pursuant to this Policy.

B-2

i. Ownership of a joint bank account; ownership of a joint credit account; or evidence of joint obligation on a loan;

iii. Joint ownership of a residence; or evidence of a joint mortgage or lease;

vii. Designation of each other as beneficiary under a retirement benefit account.

To the extent that the Domestic Partner has Dependent Children, such children may be enrolled pursuant to the terms of the GHP at the same time the Domestic Partner is enrolled; provided, the children satisfy the definition of Dependent Children above. Dependent Children may also be entitled to mid-year enrollment under the plan’s HIPAA special enrollment provisions that apply in the case of acquisition of a child or a loss of other group health coverage. Dependent Children may also be entitled to mid-year enrollment on account of a “change in status.”

Termination of a Domestic Partnership:

COBRA coverage upon termination of Domestic Partnership:

_______________________ 3 In the event the Domestic Partnership ends because the partners become legally married, then the same sex spouse may be covered under the Plan as a Spouse.

B-3

(a) Each Employee with a Domestic Partner has an obligation to notify “change in status”, by filing the Declaration of Termination of Domestic Partnership (attached hereto), if there is any change in the Domestic Partnership status as attested to in the Affidavit that would terminate such partnership (such as the death of a Domestic Partner, a change in residence of one partner, termination of the relationship, etc.). The Employee must notify Human Resources within thirty-one (31) days of such change in the Domestic Partnership for purposes of the GHP.

(b) Upon termination of the Domestic Partnership, the GHP coverage of the Domestic Partner who is not an employee as well as coverage of any Dependent Children of such Domestic Partner will cease, unless the Dependent Children continue to satisfy the definition of Dependent Children under the GHP ( i.e. , are unmarried and under the age of 26). Termination of such coverage (obtained as a result of completion of the Declaration of Termination of Domestic Partnership ) will be effective on the date the relationship ends as indicated on such form.

(c) In the event a Domestic Partnership is terminated for reasons other than death of a Domestic Partner, an Employee cannot re-enroll for Domestic Partnership coverage under the GHP until six months from the date the Domestic Partnership ended. 3

(d) A Domestic Partner will no longer be the Participant’s default beneficiary under the 401(k) Plan and the Nonqualified 401(k) Plan following the filing of a Declaration of Termination of Domestic Partnership.

(a) Domestic Partner . Under federal law, COBRA is only available to qualifying employees and their qualifying spouses and dependent children. Thus, under the law a Domestic Partner may not elect COBRA in his or her own right. However, an Employee on COBRA may add a Domestic Partner to the GHP in the same manner as is permitted for active employees. In the event an Employee who is a COBRA beneficiary dies or becomes Medicare entitled, or the Domestic Partnership is terminated, the Employee’s Domestic Partner (or former Domestic Partner) may not make an election under the GHP pursuant to COBRA as a second qualifying event.

(b) Dependent Children . If dependent coverage of the Dependent Child of the Domestic Partner ends under the GHP because such a child or children cease to satisfy the definition of Dependent Children under such plan, such children will be eligible to elect COBRA.

PART B - TAX CONSEQUENCES OF GHP COVERAGE Possible Tax Implications of Domestic Partner: There may be federal income tax implications associated with providing coverage under the GHP to Domestic Partners ( i.e. , if the Domestic Partner does not qualify as your dependent under section 152 of the Internal Revenue Code (determined without regard to sections 152(b)(1), (b)(2), and (d)(1)(B)) 4 , the fair market value of the Domestic Partner coverage will be includible in your income as wages for federal income tax purposes). Similar tax implications apply for state income tax purposes. However, GHP coverage provided to your Domestic Partner may qualify for exclusion from income for state income tax purposes based on state law. Exemption from state income tax is often conditioned on the relationship being registered or the parties having entered into a civil union or marriage. It is your responsibility to determine the requirements of your state. The Employee and Domestic Partner should consult with their tax advisor prior to making a declaration of Domestic Partnership.

In addition, an Employee may not obtain reimbursement for medical expenses incurred by the Domestic Partner under the Health Care Flexible Spending Account Program unless the Domestic Partner qualifies as the Employee’s federal tax dependent as described above. 5 The same rules regarding the after-tax treatment of the cost of coverage and premiums under the Plan and the reimbursement of medical expenses under the health care flexible spending account will also apply to the Domestic Partner’s Dependent Child(ren) unless such Dependent Child(ren) are adopted by the Employee. The Employee and Domestic Partner should consult with their tax advisor prior to making a declaration of Domestic Partnership.

Proof of Tax-Qualified Status of Domestic Partnership: Domestic Partner coverage under the GHP (including coverage of the Domestic Partner’s Child(ren)) will be provided on an after-tax basis for both federal and state income tax purposes unless the Employee certifies on the Affidavit Declaring Domestic Partnership Status that such coverage may be provided on a pre-tax basis for federal or state (or both) income tax purposes. The Employee will be required to provide proof of dependent status by submitting a copy of his or her redacted tax return or similar documentation.

PART C- CONSEQUENCES OF COVERAGE ON 401(k) PLAN AND NONQUALIFIED 401(k) PLAN DEFAULT BENEFICIARY

For purposes of the 401(k) Plan and the Nonqualified 401(k) Plan, a Domestic Partner will be the default death beneficiary for an Employee’s account balances under the 401(k) Plan and the Nonqualified 401(k) Plan if the Employee has not completed a beneficiary designation in accordance with the policies and procedures under such plan at the time of the Employee’s death. Any beneficiary designation made by the Employee under the 401(k) Plan and the Nonqualified 401(k) Plan is revoked upon the execution of the Affidavit. A Domestic Partner will cease to be such default beneficiary upon the filing of a Declaration of Termination of Domestic Partnership with HealthSouth.

_______________________ 4 This generally requires that the Domestic Partner receive over half his or support from the Employee and be a member of the Employee’s household. 5 The income of the Domestic Partner who is not the Employee’s federal tax dependent may not be taken into account in determining the maximum contributions by the Employee to the Dependent Care Flexible Spending Account Program and funds may not be used for the care of the Domestic Partner if he or she is incapable of caring for himself or herself.

B-4


Return this Form to Human Resources

AFFIDAVIT DECLARING DOMESTIC PARTNER STATUS

We, _______________________, (the " Employee ") and _____________________, (the " Domestic Partner "), are " Domestic Partners " within the meaning of the HealthSouth Corporation Domestic Partner Benefit Guidelines (the " Guidelines "). Capitalized terms not defined in this Affidavit Declaring Domestic Partner Status (this " Affidavit ") will have the meaning set forth in the Guidelines. We execute this Affidavit as of the date set forth below as part of the requirements for (i) coverage of the Domestic Partner under the medical, dental and vision coverages under the HealthSouth Corporation Group Life, AD&D, Disability and Medical Plan (the " GHP ") provided by HealthSouth or one of its affiliates (" HealthSouth ") and (ii) recognition of the Domestic Partner as the default beneficiary for the Employee’s accounts under the HealthSouth Corporation Retirement Income Plan (the " 401(k) Plan ") and the HealthSouth Corporation Nonqualified 401(k) Plan ( the “Nonqualified 401(k) Plan ”), in accordance with the terms set forth in the Guidelines. We hereby certify as follows:

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1. We acknowledge that we have read and understand the Guidelines, which summarize the eligibility criteria, termination provisions, available benefits, employee responsibilities, taxation, and notification requirements pertaining to Domestic Partner status.

2. We declare that we meet the eligibility requirements for Domestic Partner status as set forth below: [Check a., b. and c. below as applicable]

____ a. We are currently registered as domestic partners with a state or local government (and we meet the requirements of such registry);

____ b. We have entered into a legally binding civil union; or

____ c. We meet the alternative criteria for establishing Domestic Partner status as set forth below:

i. We are both at least 18 years of age or, if lower, the age at which a person may be legally married in the state in which the partners share the same permanent address;

ii. We have lived together for at least the last 12 consecutive months prior to the date of this Affidavit;

iii. The Employee has not had another person enrolled as a Domestic Partner or as a Spouse in any benefit program offered by HealthSouth in the six months prior to the date on this Affidavit;

iv. Neither of us is legally married to another person;

v. We are not related by blood or adoption to a degree that would prohibit marriage in our state of residence;

vi. The Domestic Partner is not eligible for GHP coverage as an employee or as a retiree in any benefit program offered by HealthSouth.

vii. We share the same permanent address and each has a driver’s license listing the common address;

B-7

viii. We share joint financial responsibility for basic living expenses, including food, shelter and coverage expenses;

ix. We each are mentally competent to consent to contract; and

x. We are financially interdependent, demonstrated by at least two of the following: [Check at least two items below as applicable]

____ A. Ownership of a joint bank account; ownership of a joint credit account; or evidence of joint obligation on a loan;

____ B. Common ownership of a motor vehicle;

____ C. Joint ownership of a residence; or evidence of a joint mortgage or lease;

____ D. Evidence of common household expenses, e.g. utility, phone;

____ E. Execution of wills naming each other as executor and/or beneficiary;

____ F. Granting each other durable powers of attorney; or

____ G. Designation of each other as beneficiary under a retirement benefit account.

3. We acknowledge that the Plan Administrator reserves the right, at its discretion, to require that we supply copies of appropriate documentation supporting any of the certifications made in this Affidavit, including certification of Domestic Partner status, Dependent Children status or federal tax dependent status.

4. We understand that obtaining Domestic Partner recognition and coverage and the execution of this Affidavit may affect our liability to each other, to taxing authorities, and to third parties. We understand that we should consult with our respective tax and/or legal advisors regarding these and other potential consequences, and we acknowledge that we have been advised to do so.

5. We understand that HealthSouth may take disciplinary action against us if we misrepresent or falsify any of the information in this Affidavit. Disciplinary action may include termination of employment by HealthSouth and appropriate legal action, such as reimbursement of HealthSouth for the contributions and benefits that were improperly obtained and costs incurred related to such misrepresentation or falsification.

6. We acknowledge that we have read and understand this Affidavit and that all information set forth in this Affidavit is true and correct. We further acknowledge that HealthSouth will rely on this Affidavit and that HealthSouth will not be liable for a false or inaccurate Affidavit.

(Declarations Relating Solely to GHP)

__ Medical Benefit Program

__ Dental Benefit Program

__ Vision Benefit Program

We understand that HealthSouth is not legally required to offer the GHP to Domestic Partners and that due to insurer or other constraints, Domestic Partner coverage may not be available under all health programs offered by HealthSouth.

__ Medical Benefit Program

__ Dental Benefit Program

__ Vision Benefit Program

We understand that HealthSouth is not legally required to offer the GHP to Dependent Children of Domestic Partners and that due to insurer or other constraints, Dependent Children of Domestic Partner coverage may not be available under all health programs offered by HealthSouth.

B-8

7. We seek to obtain Domestic Partner coverage in the following GHP plans or programs offered by HealthSouth: [Check below as applicable]

8. We seek to obtain coverage for the Dependent Children of the Domestic Partner in the following GHP plans or programs offered by HealthSouth: [Check below as applicable]

9. We understand the GHP coverage for the Domestic Partner and the Dependent Children of Domestic Partners (as applicable) will not take effect until the dates set forth in the Guidelines.

10. We further understand that the benefits under the GHP will be provided to the Domestic Partner on an after-tax basis for federal income tax purposes unless the Domestic Partner qualifies as a dependent (within the meaning of section 152 (without regard to sections 152(b)(1), (b)(2), or (d)(1)(B)) of the Internal Revenue Code such that benefits under the GHP may be provided on a pre-tax basis for purposes of federal law. We hereby certify that the Domestic Partner ___ is ___ is not ( select one ) the Employee’s federal tax dependent within the meaning of Code section 152 (determined without regard to Code sections 152(b)(1), (b)(2), and (d)(1)(B)).

11. We further understand that the benefits under the GHP will be provided on an after-tax basis for state income tax purposes, unless such benefits qualify for pre-tax payment or an income tax exclusion under state tax law. We hereby certify that we ___ are___ are not ( select one ) eligible to pay for Domestic Partner health benefits on a pre-tax basis for state tax purposes.

12. We, understand that the benefits under the GHP for the Domestic Partner’s Child(ren) who do not qualify as the Employee’s Child(ren) as defined under the Plan will be provided on an after-tax basis for federal and state law purposes. I certify that we ___ are ___ are not ( select one ) eligible to pay for the Domestic Partner’s children’s health benefits on a pre-tax basis for __ federal and/or __ state tax ( select as appropriate ) purposes.

13. We agree that each year during the annual open enrollment period, or at such time as there is a material change in GHP benefits (or at other times, at the discretion of the Plan Administrator), we will certify to the status of the Domestic Partner (and any enrolled Dependent Children of the Domestic Partner).

(Declaration Relating to 401(k) Plan and Nonqualified 401(k) Plan)

14. We agree to notify HealthSouth within 31 days after the termination of the Domestic Partner relationship for any reason, including death. We understand that, except in cases of death, the Employee will not be eligible to cover another Domestic Partner under the GHP or recognize until six months after notification to HealthSouth of termination of this Domestic Partner relationship.

15. We acknowledge that solely for purposes of the 401(k) Plan and the Nonqualified 401(k) Plan, pursuant to this Affidavit, the Domestic Partner will be the default death beneficiary for the Employee’s account balances under the 401(k) Plan and the Nonqualified 401(k) Plan if the Employee has not completed a beneficiary designation in accordance with the policies and procedures under the 401(k) Plan at the time of the Employee’s death. We further acknowledge that this Affidavit revokes any beneficiary designation made by the Employee under the 401(k) Plan before this Affidavit is signed. We further acknowledge that the Domestic Partner will cease to be such default beneficiary upon the filing of a Declaration of Termination of Domestic Partnership with HealthSouth.

EMPLOYEE:

DOMESTIC PARTNER:

Signed: _________________

Signed: _____________

Printed Name: ____________

Printed Name: ______________

Date: ___________________

Date: _____________________

Subscribed and sworn to me this ______day of ____________, 20____. Witness my hand and official seal. _________________________________ [Seal] My Commission expires: Notary Public:

Subscribed and sworn to me this ______day of ____________, 20____. Witness my hand and official seal. ______________________________ [Seal] My Commission expires: Notary Public:


B-9



DECLARATION OF TERMINATION OF DOMESTIC PARTNERSHIP FORM

I, _______________________________ (the " Employee "), certify and declare that _____________________ (the " Former Domestic Partner ") and I are no longer domestic partners as of __/__/__ (the " Termination Date ").

I understand that medical, dental and vision coverage under the HealthSouth Corporation Group Life, AD&D, Disability and Medical Plan (the " GHP ") for the Former Domestic Partner (and Dependent Children of the Former Domestic Partner) will terminate effective as of the Termination Date.

I further understand that the Former Domestic Partner Domestic Partner will cease to be my default beneficiary under the under the HealthSouth Retirement Income Plan (the " 401(k) Plan ") and the HealthSouth Nonqualified 401(k) Plan (the “ Nonqualified 401(k) Plan ”) as of the Termination Date.

__ Termination of domestic partnership

__ No longer jointly responsible for each other's common welfare and living expenses

__ Death of domestic partner

I understand that with respect to the GHP another Affidavit Declaring Domestic Partnership cannot be filed until six months from the date the relationship ends (as indicated above) except with respect to death of my Former Domestic Partner.

In the event that termination of this relationship is not due to the death of my Former Domestic Partner, I will mail my Former Domestic Partner a copy of this notice to the following address:

___________________________________

___________________________________

___________________________________

(Former Domestic Partner new address)

I affirm, under penalty of perjury, that the above statements are true and correct.


B-10

1. I make and file this Declaration of Termination of Domestic Partnership in order to cancel the Affidavit Declaring Domestic Partnership filed with HealthSouth on __/__/__.

2. Termination of the Affidavit Declaring Domestic Partnership is due to: [Check below as applicable]

____________________________ ____/_____/____ ___/_____/____

Signature of Employee Date of Birth Date

____________________________

Printed Name

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jay Grinney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HealthSouth Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2014

By: /s/ J AY G RINNEY

Jay Grinney

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Douglas E. Coltharp, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HealthSouth Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2014

By: /s/ D OUGLAS E. C OLTHARP

Douglas E. Coltharp

Executive Vice President and

Chief Financial Officer

Exhibit 32.1

CERTIFICATE OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of HealthSouth Corporation on Form 10-Q for the period ended June 30, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jay Grinney, President and Chief Executive Officer of HealthSouth Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

A signed original of this written statement has been provided to HealthSouth Corporation and will be retained by HealthSouth Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This written statement shall not, except to the extent required by the 2002 Act, be deemed filed by HealthSouth Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that HealthSouth Corporation specifically incorporates it by reference.

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HealthSouth Corporation.

Date: July 29, 2014

By: /s/ J AY G RINNEY

Jay Grinney

President and Chief Executive Officer

Exhibit 32.2

CERTIFICATE OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of HealthSouth Corporation on Form 10-Q for the period ended June 30, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas E. Coltharp, Executive Vice President and Chief Financial Officer of HealthSouth Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

A signed original of this written statement has been provided to HealthSouth Corporation and will be retained by HealthSouth Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This written statement shall not, except to the extent required by the 2002 Act, be deemed filed by HealthSouth Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that HealthSouth Corporation specifically incorporates it by reference.

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HealthSouth Corporation.

Date: July 29, 2014

By: /s/ D OUGLAS E. C OLTHARP

Douglas E. Coltharp

Executive Vice President and

Chief Financial Officer

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