Ballad, age three: System CEO points to successes, acknowledges challenges at midpoint of fourth year

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System record mixed on meeting state requirements

With COVID-19’s worst effects fading, Ballad Health still faces significant additional challenges related to revenues, expenses and one special ingredient most systems endure much less of — state regulation. News Channel 11 sat down with CEO Alan Levine to discuss Ballad’s present and future as the region’s only hospital system nears the midpoint of its fourth year in existence.

JOHNSON CITY, Tenn. (WJHL) – How do you pay employees more, invest a mandated $30 million a year in new money to improve people’s health, keep rural hospitals open and meet quality benchmarks — all while shifting to payment models that risk revenue losses, not gains?

Those questions face Ballad Health as the state-regulated hospital system emerges from the fight against COVID-19 battling some financial headwinds — including a need to increase nursing salaries to combat labor shortages.

“We’ve got to solve this problem, and it’s going to cost us a lot of money,” Levine said.

Layered over that challenge are looming financial commitments related to state regulation that began with Ballad’s creation in early 2018, which gave it a virtual monopoly on inpatient care over a large swathe of Northeast Tennessee and Southwest Virginia.

Ballad Health CEO Alan Levine says the hospital system — which is strongly regulated by two states — faces a broad array of challenges as it emerges from COVID.

Ballad must spend about $35 million annually — over and above any previous ongoing spending amounts — through 2028 on things like children’s, rural and behavioral health. Required amounts were much lower in 2019 and 2020 ($4 million and a pro-rated $12 million), but state documents show that before COVID caused a temporary suspension of them, Ballad was falling short.

“Ballad Health did not spend $12 million in fiscal year 2020 as required by the TOC,” Tennessee’s “COPA monitor” Larry Fitzgerald wrote in his latest annual report on Ballad dated March 24.

Fitzgerald, who was referring to the “Terms of Certification” (TOC) governing Ballad in Tennessee, also wrote that “the fiscal year 2019 monetary obligation was not met by Ballad Health.”

Fitzgerald, a former hospital finance officer for the University of Virginia hospital system, is contracted with the Tennessee Department of Health (TDH) to help oversee Ballad’s many state requirements.

That oversight is required because the states granted “immunity” from antitrust action when they allowed Mountain States Health Alliance and Wellmont Health System to become Ballad.

And that antitrust action almost certainly would have come. The Federal Trade Commission (FTC) staunchly opposed the merger, claiming it wouldn’t — as required — produce enough consumer benefits to outweigh disadvantages created by the lack of competition.

Wellmont and Mountain States said as a single entity, they could improve health care cost, quality and access by, among other things:

  • Using merger savings to invest $308 million in health-improving efforts.
  • Leading improvement of overall “population health” in the region.
  • Keeping rural hospitals open and maintaining services to rural areas where those services were at risk of closing.
  • Collaborating with East Tennessee State University and other institutions to spur health research and help produce new doctors and nurses.
The document governing the merger from the Tennessee side runs to 100-plus pages.

They said they’d do it all even while reducing hospital admissions — the financial lifeblood of hospital systems — and adapting to new payment models. That’s begun happening, as evidenced by declining inpatient and emergency room numbers (even pre-COVID) and a recent decision driven by the market to change Ballad diagnostic centers from higher-margin “hospital-based” status to “freestanding.”

“We will lose probably $20 to $30 million a year in revenue,” Levine said of that decision. Staying the course, as this article details later, may have simply meant few to no patients showing up with cheaper competing options nearby.

Why all the oversight?

The states of Tennessee and Virginia okayed the merger, but that approval came with a whole lot of ongoing regulation and an “absolute” requirement from Tennessee to spend $308 million over 10 years.

“There is no health system in America that has more scrutiny than we do,” Levine said of the “active supervision” Tennessee and Virginia are required to provide.

“We have three monitors, two states, two health departments, two attorneys general and you (the media) watching everything we do. We don’t complain about that. We’re okay with the scrutiny, we want to be good at what we do.”

“What they do” includes some requirements most hospital systems don’t have, because most aren’t state-regulated monopolies.

Ballad’s additional layer of challenge and scrutiny results from Tennessee and Virginia’s regulatory oversight — the “COPA” (Certificate of Public Advantage) in Tennessee and a similar “Cooperative Agreement” in Virginia.

To get that immunity from antitrust enforcement, Mountain States and Wellmont had to prove to the states — on paper, anyway — that health care access, quality and cost would be better with the merger than without it. They also had to prove “population health” would improve through Ballad partnerships and initiatives — that the region’s people as a whole would become healthier over time.

After more than a year of negotiation — with the FTC weighing in regularly in opposition — the states approved the merger and set up a regulatory structure to “actively supervise” it. That active supervision means Ballad must prove year after year that its benefits still outweigh any anti-competitive disadvantages that might exist.

COPA monitor Fitzgerald is just one among a small army of people in two states keeping an eye on Ballad in an effort to make sure it’s delivering as promised.

So yes, all systems, not just Ballad, need to pay enough to attract and retain good doctors, nurses and other staff.

All systems face changes from “value-based payment models.” Those are driving much care away from inpatient settings — a hospital system’s traditional bread and butter — and insisting providers find cheaper ways to deliver care without sacrificing quality.

Ballad’s challenges in those areas don’t make it unique, but thanks to the COPA, several things do. They include the spending commitments, limits on what services it can consolidate over the first five years of its existence, limits on employed doctors and hospital quality benchmarks tied to potential monetary penalties if Ballad doesn’t meet them.

High bond rating, low revenue margin

Despite the high bar set by state regulation, Ballad has some positive financial signs.

The bond rating agencies Moody’s and Standard & Poor’s recently gave the system, which has over $1 billion of debt, its highest ratings in years.

That’s a sign of fiscal strength. And in its first full fiscal year, from July 2018 through June 2019, Ballad had $36 million in operating income.

But with spending commitments set to resume soon and pressures to continue increasing pay for nurses, Ballad is by no means guaranteed smooth financial sailing.

The system was headed toward another positive year in fiscal 2020, running close to 2019’s numbers when COVID hit in March 2020. Only $82 million in CARES Act and other relief funding prevented a huge loss as revenues ended the year down more than $110 million from 2019.

Ballad Health lost $14.4 million through the first three quarters of the current fiscal year — even with significant federal relief funding.

Three-quarters of the way through FY2021, Ballad had lost $14.4 million — even with federal relief that actually exceeded its reported “incremental expenses associated with COVID-19 pandemic.”

Surgical cases, a crucial revenue generator for hospitals, were down nearly 11,000, or 25 percent, from the prior year.

The current April-June period has seen not just a return to normal patient volume but a major influx of patients who’d been delaying care. That’s bound to increase revenues, but it’s also strained staffing and highlighted one of Ballad’s big challenges.

Laboring to reach competitive pay

Labor shortages coming out of COVID are confronting lots of systems, Ballad included.

Levine said it’s difficult to gauge Ballad’s ability to meet all its obligations and achieve its goals once the high-volume period ends and “normal” returns.

“We don’t know where we’re going to end up financially once all these moving parts stop moving,” Levine said.

“The volumes we’re seeing now, I think it’s a surge and I think at some point it’ll settle. Then we’ll have better clarity on what the volumes are, what the revenue will look like relative to what the expense structure needs to look like, but I don’t think there’s any doubt that our expense structure’s going to increase on a recurring basis because we’ve got to make some more investments in nursing.”

Levine said without other expense reductions or revenue increases, the salary investments will eat into Ballad’s bottom line significantly.

A recent Ballad job fair.

“Fifty percent of every revenue dollar that comes in goes right out to labor cost,” Levine said. “And because we operate on less than a 2 percent operating margin, if the labor costs go up to 52 percent of our revenue, we’re now losing money.”

Indeed, a look at the last “normal” year, fiscal 2019, shows 50.4 percent of Ballad’s $2.06 billion in total expenses went to labor.

And Levine is right — pushing that percentage to 52.4 percent would have cost Ballad $41 million and turned its $36 million gain that year into a $5 million loss.

Put another way, just a 5 percent overall raise in Ballad’s FY 2019 salaries and wages line would have cost $33.7 million, nearly erasing the system’s margin. That excludes physician salaries and wages as well as employee benefits.

But Levine said staffing shortages aren’t likely to completely disappear once the glut of patients ebbs, “we’ve got to solve this problem and it’s going to cost us a lot of money.”

It isn’t Ballad’s only looming expense.

‘Absolute and unconditional’ monetary commitments

As the states pondered whether to approve a merger in 2016 and 2017, proponents of the Wellmont-Mountain States marriage repeatedly trumpeted one giant regional benefit with a clear price tag — $308 million worth of spending commitments over 10 years.

So far, Ballad has faced just a sliver of that commitment — $4 million for fiscal 2019 and another $12 million for the pre-COVID portion of fiscal 2020 — and records show even then it fell short in a couple categories.

“Even though the spending commitments were suspended, we’ve spent money during this period,” Levine said. “I think when you actually count through the end of June (2020), you’ll find that we are spending what we said we would.”

Those commitments got included in the Terms of Certification the system agreed to with TDH when it signed the COPA.

‘The Monetary Obligations set forth in these Terms of Certification are absolute and unconditional commitments’

Terms of certification governing ballad health

They include $140 million to expand access to care: $85 million for behavioral health services, $27 million for children’s services and $28 million for rural services.

Another $85 million is slated for “health research and graduate medical education” — think residency slots for newly minted doctors and research partnerships with East Tennessee State University and other higher education institutions.

Population health improvement spending totals $75 million, with the other $8 million earmarked for a regionwide “health information exchange” or electronic medical record platform.

As they pushed for the merger, Wellmont and Mountain States argued a merged system could pay for those through efficiencies the merger would create. The benefits would flow to Northeast Tennesseans and Southwest Virginians.

A consultant for Wellmont and Mountain States predicted $120 million in annual savings when the merger was being proposed in 2015.

An inauspicious beginning

A TDH letter to Ballad dated Sept. 29, 2020 showed the system had actual FY 2019 spending of just $33,000 in children’s services and $412,000 for rural health, though it was obligated to spend $1 million on each.

The system was barely off the $1 million mark for behavioral health services and spent well over the $1 million requirement for population health improvement ($1,650,000).

‘The Monetary Obligations … shall be fulfilled regardless of, the amount of any profits or other savings of the New Health System (Ballad)…’

Terms of certification governing ballad health

The letter gave Ballad a temporary pass for the two big shortfalls.

It noted Ballad’s Children’s Health Plan wasn’t approved until just two-and-a-half months remained in the fiscal year and required Ballad to escrow a pro-rated $239,000.

And because the rural health plan wasn’t approved until after FY 2019 ended, that shortfall “does not constitute a Noncompliance at this time,” TDH wrote.

But the reprieve was just temporary. TDH Commissioner Dr. Lisa Piercey and Attorney General Herb Slatery concluded their letter with this:

“TDH and the Attorney General reiterate the requirement that for Ballad Health to ultimately be in compliance with the TOC, the entire spending required for each plan category from FY 2019 through FY 2021 must be fulfilled by June 3(0), 2021.”

The spending commitments for FY 2020 were temporarily suspended during the COVID-19 emergency. But the total commitment for fiscal 2020, two-thirds of which was complete before COVID struck, was $18 million.

Correspondence from the Tennessee Department of Health referencing Ballad’s spending commitment shortfall for fiscal 2019.

Fitzgerald wrote in his FY 2020 annual report dated March 24, 2021, that Ballad was on the hook for $12 million in pre-COVID spending.

But the system wasn’t on track to make it and Levine said so in an Oct. 14, 2020 letter to Piercey that also addressed the FY 2019 shortfalls.

That gap, Levine wrote, “is forecast in three (3) of the six (6) plans.” That’s the same gap he told News Channel 11 Ballad was on track to bridge.

But in his latest report, Fitzgerald said of Ballad’s shortfall in its $12 million partial FY 2020 commitment, “(T)he action required by Ballad Health to cure the noncompliance with the fiscal year 2020 monetary obligation is under consideration by the State at this time.”

Fitzgerald also noted Ballad’s FY 2019 shortfall “has not been cured” because a revised Children’s Health Plan hadn’t been submitted yet to TDH. Ballad had said in its October 2020 letter to TDH it would submit a revised plan by November 30, 2020.

Asked about the shortfalls and the large commitments coming due ($34 million for the fiscal year starting July 1 and around $37 million for each of the following six years), Levine talked about the spirit behind the agreement.

“If we want to be a health improvement organization, those aren’t mere spending commitments to us,” he said. “We’ve pivoted to become a health improvement organization and we mean it.

“It’s not like we went and said, ‘if you let us merge, we’ll spend this money.’ It’s ‘if you let us merge we will evolve and become something that will over time improve the overall health of our region.’

“We’re not less committed to that no matter what happens financially.”

But from his end, Levine did leave wiggle room for Ballad.

“The scale and scope (of spending) obviously would be limited by whether or not we are generating enough cash flow to make that investment plus capitalize our facilities,” he said.

That’s wiggle room the TOC doesn’t allow for in its current form.

Section 3.01 (c) of Article III in the Terms of Certification says the spending commitments are “absolute and unconditional” and that they “shall be fulfilled regardless of, the amount of any profits or other savings of the New Health System…”

Levine said he didn’t “want to speak for the states,” but hinted at a potential openness at the highest levels to acknowledge the difficult reality Ballad faces.

“The COPA monitors are focused on the language of the COPA, and that’s their job,” he said. “Their job is to take the language that’s there and make sure we’re complying with it.”

But he said the COPA flows from “policy issues” that were set by the legislature when it passed the law paving the way for a COPA.

The section of the Terms of Certification dealing with Ballad’s monetary commitments.

“I do believe that the commissioners understand what are the policy issues behind this, and I do believe they’re focused on that,” Levine said.

He also said Piercey and her Virginia counterpart, Dr. Norman Oliver, “understand the complexities of the challenges we have in a rural region.”

That extends beyond monetary requirements, Levine said, referencing what he called particularly successful efforts to reduce hospital readmissions that still need to be put in context.

“They understand that reducing readmissions in a region where you have the social determinant issues that we have is very different than when the Cleveland Clinic brags about reducing readmissions.

“When your patients are flying to you in their private jets, you’re going to have a different outcome than patients who have to take Uber two hours to get to you.”

Oliver served as Virginia’s deputy commissioner for population health before becoming commissioner, while Piercey hails from rural west Tennessee and completed medical school at ETSU.

“I think the states do have an understanding of those unique challenges and frankly, the commissioner of health in Tennessee came from a rural region and delivered her children in our hospital here.

“So she understands the challenges that we have, and I’m grateful for the work she has focused on over the last year for the state, but I’m also grateful that she actually comes from a rural area and understands these issues.”

Not a monopoly? Outpatient competition, payment model changes add yet more pressure

Mention the word monopoly and Levine says it’s more complicated than that.

“There’s this misperception that we’re a monopoly,” he told News Channel 11. “We are not. Only 40 percent of our revenue is from our inpatient services.”

The rest comes from outpatient services, where according to Levine, Ballad’s market share is less than 40 percent. “So it is highly competitive,” he said.

The “outpatient space,” as Levine puts it, is indeed competitive. It’s also where care is provided to a greater and greater degree — something reflected in small but steady declines in Ballad’s hospital admissions in the couple years leading up to the pandemic.

Levine has frequently said while that trend challenges hospital systems financially, it’s a good thing for health care consumers as it lowers costs while maintaining a focus on quality.

Ballad commented on the impact to its business model in quarterly reports to bondholders leading up to the pandemic.

A repeated refrain, here from its report for the first three months of 2019, went something like this:

“Ballad Health continues to experience a decline in overall volumes, with acute discharges in the quarter declining by 5.5 percent. The discharge decline is being driven by a reduction in lower acuity admissions, a result of focused efforts by Ballad Health and primary care physician groups to reduce unnecessary admissions and utilize lower cost outpatient services where possible.”

Levine said the results have been good for patients’ health and for their pocketbooks. He has frequently said Ballad has “reduced the cost of health care in this region by $200 million” over the past several years.

While its financial reports don’t show a $200 million drop in revenue, they do show declines in hospital discharges and emergency room visits starting the year Ballad was formed and continuing up until COVID hit.

Discharges dropped by 5.4 percent in the fiscal year that ended June 30, 2019 compared to the previous year. From June-December 2019 they were down another 2.8 percent compared to the same period a year earlier.

ER visits were down 3.8 percent Ballad’s first full year and a further 3.8 percent the last half of 2019.

“When you have 16,000 fewer discharges annualized because you’re better managing people upstream of hospitalization,” Levine said. “You reduced your readmissions to below the lowest we’ve ever had, we’ve reduced lower acuity admissions. ER visits were down substantially.

“Employers, taxpayers, insurance companies are all saving money because of the things we’ve done.”

Diagnose this — Ballad shifts diagnostic approach despite major revenue hit

Why would an insurance company pay $2,000 for a patient’s MRI or CT scan when it could get the same thing for $700? And why would a patient pay whatever higher co-pay is left over?

More and more often the answer is, they wouldn’t. And that’s impacting Ballad, too, leading to its decision to convert its hospital-based diagnostic centers in Johnson City and Greeneville to freestanding ones.

Ballad wields a lot of market power, but so do Medicare and insurance companies. Those payors continue to adopt “value-based” models of paying providers.

It basically works like this: If a patient is getting a knee replacement or a stent for their heart, the insurance companies have set a target total cost for that care.

The main provider — a physician or physicians’ group — is the “quarterback” of this process. Every cost that results from the entire journey of care impacts whether the quarterback gets paid a standard amount, a decreased amount or a higher amount in the end. Quality measures also play an important role in this model.

“Now you’ve got primary care doctors saying, ‘wait, if I’m referring a patient for a diagnostic test, I can send them to the hospital-based one where it’s going to cost more, or I can send them to the freestanding one where it costs less,'” Levine said. “‘And if I drive that overall spending down, I get to keep the money.’ So it’s not just the insurance companies. It’s large primary care groups saying ‘we’re moving our volume to wherever the cost is lower.’” 

For years, hospital systems have used a higher pricing structure for hospital-based diagnostic facilities.

Levine said that premium has helped defray the cost of “taking all comers,” including lower-reimbursing and even uninsured patients.

He said freestanding outpatient centers, such as those operated by Holston Medical Group or State of Franklin Healthcare Associates, have traditionally been able to pick and choose, declining services to patients with lower or no reimbursement ability such as those on TennCare or uninsured.

“The hospital-based reimbursement was established to help hospitals recover what they’re losing from all of that ‘self-selection’ from the private marketplace,” he said.

The hospital-based premium was significant. United Healthcare, a major insurer, issued a news release in May 2020 citing an internal study showing a “dramatic difference” in cost: an average of $1,855 for MR and CT scans at hospitals compared to $682 at freestanding facilities.

“The insurance companies are saying for outpatient diagnostics and outpatient services, ‘we will not authorize if you go to a hospital-based diagnostics,'” Levine said.

So why not just close those centers if leaving them open is going to cause Ballad to “lose $20 to $30 million a year” from the previous revenue? Remember that 60 percent of Ballad’s revenue Levine said comes from outpatient services?

“It’s important for us to compete and be able to generate volume, because the more volume you’re covering more of your fixed costs,” he said. “There’s still some margin — it’s not as high.”

State determined to stave off ‘monopoly creep’

‘When the Department granted the Certificate of Public Advantage (COPA) to create Ballad Health, the practical effect was to award Ballad a monopoly on inpatient beds. There was a concern that over time, such a monopoly would lead to unintended opportunities for monopolies in other areas such as outpatient and physician services. If the Department were to allow these monopolies, it would reduce the COPA’s public advantage.’

Dr. Lisa Piercey, Dec. 21, 2020 letter to Alan Levine

TDH Commissioner Piercey may understand challenges facing rural hospitals, but she’s not in lockstep with Levine when it comes to regulating the COPA.

In the letter referenced above, Piercey denied a Ballad request to lift the cap that limits Ballad-employed cardiologists practicing at Johnson City Medical Center (JCMC) to 47 percent of the total with privileges to practice there.

That 47 percent is higher than the blanket COPA cap on specialists, but Ballad wanted its CVA cardiologists to have privileges not just at their legacy hospital, Kingsport’s Holston Valley, but at JCMC.

The spirit behind the employment cap, Piercey wrote in her denial letter, was to prevent, as the TOC states, “the number of employed physicians in any specialty reach(ing) a level that would materially and adversely affect existing competition.”

She added that “In my opinion, and in the opinion of others with whom I have consulted, granting the waive would violate this provision.”

Levine himself admitted Ballad needs to compete well in outpatient services. And the system saw visits to Ballad-owned outpatient physicians jump more than 20 percent in its first year of existence and continue climbing until COVID struck.

Thus the decision to suck it up and convert the diagnostic centers.

“Even though it’s a hit in one respect, overall long-term it’s positioning Ballad to compete in the outpatient market,” Levine said.

So would getting its way when it asks for advantageous tweaks to the TOC and the COPA — perhaps even including a reprieve from aspects of the spending commitments if, as Levine put it, the system isn’t “generating enough cash flow to be able to make that investment plus capitalize our facilities.”

All that is speculation about a very uncertain future. But Levine said given the macro changes in health care, he believes the region is better off with Ballad – and some of the unpopular changes it’s brought to the region such as closure of Holston Valley’s Level I trauma center and neonatal ICU.

“If we’d have lost $200 million a year because of all this external activity and didn’t reduce to one Level 1 trauma center, didn’t reduce to one Level 3 NICU, didn’t consolidate the hospitals in Greeneville, didn’t consolidate the hospitals in Wise County, didn’t eliminate 200 corporate (jobs) when we merged – if we hadn’t done all that we’d be bankrupt.” 

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