JOHNSON CITY, Tenn. (WJHL) — Ballad Health’s financial picture in the second half of 2022 hasn’t been pretty, and CEO Alan Levine said multiple factors leave hospital systems facing a very challenging near future.

Ballad posted a $9.5 million operating loss in the quarter from July 1 through Sept. 30, which is officially its first quarter of fiscal year 2023. The figures, reported to bondholders in November, are some of the first to show the state of hospital finances coming out of COVID-19, with federal relief money largely out of the picture.

A recent Health Affairs article noted that U.S. hospitals “are on track for their worst financial year in decades,” and that “a rapid recovery seems unlikely for a number of reasons.”

Many hospital systems, including Ballad, showed operating gains through the pandemic. Ballad had operating revenue of $18.9 million in FY 2020, which ended June 30, 2020, and then $28.7 million in FY 2021 and $26.3 million in FY 2022.

But Levine said that people often drew the wrong conclusions about COVID-era revenue figures. Ballad’s own reports repeatedly advised against “conclusions from current financial statements” due to many COVID-related factors that made those quarterly statements unpredictable.

Federal COVID relief helped hospitals keep healthier bottom lines the past three years than the underlying reality would have shown, including Ballad. (WJHL photo)

For those full 2020 through 2022 fiscal years, Ballad received $82 million, $97 million and $63 million respectively in CARES Act and other COVID relief funds. In the first quarter of fiscal ’23, that total was $109,000.

“When you had all that relief money come in and it flowed to the bottom line, everybody said ‘oh my gosh, look at all the money the hospitals are making this year,'” Levine said. “But that’s not what was happening. That money was to help offset losses from the previous two years.

“People got misinformed about what hospitals were earning and now what you’re seeing, even the for-profit hospital companies like HCA just reported a 40% decline in earnings.”

Indeed, calendar year-to-date HCA’s net income of $3.6 billion is 34% lower than 2021’s, and their July-September figure was just half the previous year’s.

Ballad situation better than some — but still worrisome

Levine said some things are getting better at Ballad, including nursing turnover rates that pushed contract labor costs (for travel nurses mostly) in FY 2022 to almost triple their FY 2020 level and created significant operational weaknesses that plenty of patients noticed.

And he said because Ballad was able to create efficiencies after it was formed out of the 2018 merger of former rival systems Mountain States Health Alliance and Wellmont Health System, it has already cut some costs that other systems hadn’t yet — but may be forced to in coming years.

Some of the most noticeable of those changes included shuttering one of two Level I trauma centers (Holston Valley in Kingsport) and consolidating some hospital services in Greeneville and parts of Southwest Virginia where there was overcapacity. Ballad transitioned Greeneville’s Takoma hospital to a center for expectant mothers with substance use disorders, for instance.

“These are problems that we’ve identified that we can solve, and the intent was to use the efficiencies from all this other stuff so instead of having two hospitals losing money in Greeneville you have one that’s sustainable (the former Laughlin) and the other one’s now providing a service that wasn’t available before.”

Levine said his recent reviews of comparable systems have shown many are in even worse financial straits than Ballad.

“Our situation right now would be substantially worse and would look a lot more like some of those other systems had we not done some of those things,” he said.

Ballad CEO Alan Levine hopes the system is near the apex of what has been a rapid increase in contract labor costs over the past three years. (WJHL photo)

That’s part of the good news. Another part, Levine said, is that about $100 million put toward pay hikes for nurses and other clinical staff has helped finally reduce turnover rates from about 30% during COVID to about 15%.

Levine said he expects those improvements to start becoming apparent to patients in the near future.

“We’re aware of the problem,” Levine said of the emergency room backlogs, waits for rooms and surgeries and other issues patients have encountered as Ballad’s dealt with staffing shortages. “We own it, we have to deal with it. Whether we created it or not doesn’t matter to somebody who shows up in the emergency department. What they expect is that they’re going to be taken care of.”

For now, he said, Ballad is continuing to keep a cushion of travel nurses despite extremely high costs for that contract labor.

We’re trying to use that labor to make the environment better for our team members,” Levine said. “So as we hire more people and we have more consistent staffing, then we start letting the contract labor go.”

The bad news is that Ballad’s pay increases for nursing staff and the amount it’s shelled out for travel staff have sent expenses up, but revenues haven’t risen — and could take a hit if Congress doesn’t do something to avert a 4% Medicare cut slated for early 2023.

In the first quarter of fiscal 2022 (July 1-Sept. 30, 2021), Ballad spent a combined $265.5 million on salaries, wages, benefits and contract labor while gaining $543.0 million in patient service revenue.

In the first quarter of fiscal 2023, the system spent $278.1 million on those costs — a $12.6 million increase — on $547.4 million in patient service revenue, an increase of just $4.4 million from the previous year.

That means those labor costs increased by $8.2 million more than revenues, which is close to the quarterly operating loss amount.

“I don’t think we have an expense problem right now,” Levine said. “I think we have more of a per unit revenue problem and that’s what we’ve got to focus on. So I don’t worry about it, I don’t think our board is worried about it. I think we’ve very focused on what is the solution.”

Tension with payors, hospital struggles on the horizon

Levine said inflation, primarily but not only in wages, isn’t yet being covered by Medicare, Medicaid and private insurance companies. The proposed Medicare cut, which Levine said he’s still hopeful can be averted, would whack another $40 million off of Ballad’s bottom line.

Even if that doesn’t come to pass, Levine said the way Medicare and Medicaid are set up, their adjustments for inflation tend to run about three years behind the reality of what hospitals and other providers are spending.

“The insurance companies and Medicare should pay their share of that inflationary increase,” Levine said. “The entire system collapses if they’re not paying their share of it. But right now, Medicare’s not paying its share.”

That sets up a likely showdown between hospital systems and the private insurers. Those with good market share in growing areas may be able to exert leverage on insurers. Levine said Ballad has talked with those private insurance companies “about paying their share of the inflationary pressure we’ve experienced.”

The insurance companies “understand there’s an expectation” they will need to pay more, but Levine doesn’t expect the final outcome to be without plenty of the “natural tension” he said exists between those who pay and those who perform.

“The insurance companies are not going to want to pay one penny more than they have to and the hospitals are going to want to extract every dime out of them that they can, particularly since Medicare is not paying for its share,” Levine said.

The Health Affairs article includes a section about hospital systems needing to gain efficiencies. Levine said much of that work’s already been done in Ballad’s case. He thinks the coming few years will hit hospitals hard.

“I think you’re going to see a lot of rural hospitals close, I think you’re going to see a lot of non-urban hospitals close or struggle, and there will get to be a point where there’s a fever pitch,” he said. “And at that point Congress’ll do something. It’s typical that that’s what it takes. When people see their hospitals failing that’s when they say, ‘well we’ve got to do something.’”

Ballad prepared for rocky times

Levine said Ballad could gain even more efficiencies, but he’s not sure people would take those decisions well. As an example he spoke of the Sycamore Shoals Hospital intensive care unit in Elizabethton. It’s not very busy — it’s average daily census is about five patients.

He said the system wrestles with questions about lower-efficiency locations and lines of service all the time, but he knows “if you live in Elizabethton, you’re going to say, ‘well sure we want an ICU locally.'”

But more specialty support at a place like nearby Johnson City Medical Center “means there’s a better likelihood of a better outcome. That’s an example of a logical question about efficiencies.

“Those are the types of questions you have to ask. The difficult balance is, you want to provide everything that the community needs and what the community’s willing to pay for.”

Those questions are likely to come to the fore frequently as the financial pressures mount, Levine said.

He believes Ballad is prepared to weather the storm, but he also said people need to know what the industry is facing to help them “manage expectations.”

“I think this is an important enough issue that people need to understand the context and need to understand this is a two to four-year problem and this isn’t going to go away overnight.”