JOHNSON CITY, Tenn. (WJHL) — Ballad Health posted its first-ever net operating loss for the year that ended June 30, and it was a big one as the system finished with a $40 million deficit after losing $22 million in the fourth quarter.

Higher staff salaries and an end to government relief payments that staved off losses during the COVID-19 pandemic are among the main contributors to a financial hit that CEO Alan Levine said isn’t out of line with the industry as a whole.

Ballad Health averaged positive operating revenue of about $26 million a year in its first four full years of existence before swinging to a $40 million loss in the fiscal year that just ended. (Photo: WJHL)

“There’s no way to sugarcoat this,” Levine told News Channel 11 Wednesday.

“The entire industry is struggling right now, and we’re no different. What I’m encouraged by is that we’re outperforming our peers, and I hope that continues.”

Ballad’s loss amounted to a negative 1.7% operating margin on revenue of more than $2.3 billion. Levine said for hospital systems with the same rating as Ballad, the median operating margin was negative 0.1%. For systems on what he described as the “lower half” of the A level, including Ballad, the median margin was negative 3%. That would equate to a loss of about $69 million for a system Ballad’s size.

Costs for contract labor, known colloquially as travel nurses, exploded at Ballad between fiscal 2019, when they were $32.8 million, and 2022, when they hit $149.1 million. They rose by 62% in 2020, 61% in 2021 and 74% in 2022. In the year that just ended, that increase was only 8%.

“Our biggest single expense increase has been the investments we’ve made in nursing wage increases, and I don’t think there’s anybody that would disagree that was the right thing to do,” Levine said.

But he said the contract labor costs, which reached $161 million in the year just ended, aren’t going to come down quickly, partly because Ballad is being careful about staffing as new local nurses come on board.

“Just cutting off contract labor would be the wrong decision for us, because that would really overwhelm the existing nursing staff,” Levine said.

“So what we’ve chosen to do is to slowly ramp down the contract labor as we continue to hire more nurses, and I think that nets out … a more responsible way of managing it. Our board is aware that that’s our strategy and they’re perfectly good with it.”

Levine also pointed to data from Standard & Poors, a rating agency, that shows Ballad’s cash on hand and other financial health factors — which taken investment performance into account as well — are in good shape.

The system’s overall “earnings before interest, taxes, depreciation and amortization” show margins slightly better than peer systems according to the report, Levine said. That includes a 6.6% EBIDTA operating margin compared to a median of 5.3% and an overall EBIDTA margin of 9.5% compared to a 6.9% median.

Ballad’s full-year report, which is unaudited, shows $55.6 million in “excess of revenue, gains and support over expenses and losses” when nonoperating gains and losses are taken into account.

Levine said that has allowed Ballad to continue making important capital investments.

“We’ve expanded robotics, we’ve updated all of our mammography to three-dimensional mammography, we’ve started orthopedic robotics, the Niswonger Children’s Hospital expansion, the cosmetic improvements we’ve done at Indian Path .. so we’re still spending capital.”

Inflation not just wage-related

A study released by the American Hospital Association in April pointed to 2022 as “the most financially challenging year for hospitals since the pandemic began.” It pointed to average expense increases of 17.5% from 2019 through 2022 — an amount more than double the average 7.5% Medicare reimbursement increase over the same period.

Ballad’s total expenses rose 17.4% from fiscal 2020 through fiscal 2023, according to a News Channel 11 analysis, increasing from $2.04 billion in 2020 to $2.39 billion in 2023. Its total revenues over the same period rose 14.4% and that 3% shift was enough to put the system into the negative.

Total labor costs, meanwhile, rose by a slightly lower amount of 16.7%. Supplies and fees have increased quickly as well.

Ballad gets a higher-than-average percentage of its revenues from government payors (Medicare and Medicaid), at more than 70% combined in fiscal 2023. Levine said those payors can’t react as quickly as the private insurers can when hospitals begin seeing significant strain that puts the entire healthcare system at risk.

If financial numbers continue to be negative long term, the system could face significant challenges in terms of its debt and ongoing operations.

Levine said he doesn’t expect it to come to that given the overall challenges across the industry, but rather anticipates payors, including Medicare, Medicaid and private insurance to find some way to adequately fund hospitals.

“It’s concerning of course when you see your financial, your operating income turn negative,” he said. “If we were alone, I’d be much more worried. But because we’re not alone, I think there’s much more likelihood that the payors and the government will decide this can’t continue.”

In addition to expecting labor costs to rise less quickly as contract labor decreases, Levine said he sees some hopeful signs on the revenue side.

“Our volumes have grown. Our surgeries have grown,” he said. Ballad performed 56,185 surgeries in fiscal 2023 after two straight years at just over 50,000. The system did report 72,588 surgeries in fiscal 2019, the last year before the pandemic hit.

“So I think there’s an opportunity there to rebound. It’s just an issue of the reimbursement not keeping up with the cost of inflation and the wage issue.

“I don’t think it’s going away as long as there’s a shortage, and I don’t think the nursing shortage is going away anytime soon.”