JOHNSON CITY, Tenn. (WJHL) — Ballad Health endured a brutal January to March quarter financially, but CEO Alan Levine said the hospital system isn’t experiencing anything different from systems nationwide.

Ballad, which posted an operation loss of about $36 million in the third quarter of its 2022 fiscal year, is refinancing more than $150 million in debt with lower interest rates that will free up close to $5 million in annual cash flow.

That’s fortunate, Levine told News Channel 11 in an exclusive interview, because the next two years look very uncertain for the industry.

“System after system are reporting massive losses right now, some of them nine digits,” Levine said. “We lost $36 million, which is a lot to lose and it has us obviously very concerned.”

The main culprits, aside from COVID-related losses due to the Omicron surge in January and into February, are two factors — one Levine said Ballad is working to control in the near future and another he said is out of the system’s hands.

“$43 million alone is wages and contract labor above prior year and $25 million is supply cost inflation,” he said. “Those are things we can’t really control. If those didn’t exist you’re talking about a pretty big swing in operating income and actually a pretty healthy position.”

Straining to change the labor scenario

Levine said Ballad leaders are trying to influence a labor shortage that has helped push spending on contract labor, primarily travel nurses, to Ballad’s highest level ever this year. Through three quarters, the system had spent $100 million on contract labor, including $41 million in the third quarter alone.

That compares to $60 million through the first three quarters of 2021, $39 million in 2020 and just $24 million in 2019. That’s a quadrupling in contract labor costs in just three years while regular salaries and wages have barely risen over the same period.

“That’s what we’re trying to spend our time on,” Levine said of the labor shortage.

“That’s why we did the wage adjustments. (Levine said Ballad’s hospital nursing wages have risen about 20% the past few years). That’s why we’re trying to work with ETSU and the other schools to fast track new nurses entering the profession. That’s the only way we’re going get through this is to create more supply.”

But Levine said it’s an uphill battle. Even if Ballad was able to cut its travel nursing costs in half and replace those slots with local nurses, the system remains understaffed.

“We have 600 vacancies,” he said. “If we were fully staffed the wage costs would be even higher. It will still be less expensive than contract labor costs, but at the end of the day this is going to be a challenge. I don’t know what else to do other than be transparent about it.”

Levine said many nurses have children and run into childcare difficulties. And he said Ballad “lost a ton of experienced nurses during COVID who just got burnt out and were done.”

The lure of contract nursing, where wages spiked during the pandemic, has made things harder as nurses have left Ballad for more money.

“We didn’t like to see that, but we also understood why they were doing it,” Levine said. “They were putting all kinds of money on the table and in some cases I had nurses saying, ‘look, I don’t want to do this either, however, this is enough money that if I do this for six months I can pay off my car.”

Local housing costs have also risen and Levine said despite the 20% wage increase over the past few years the problem has gotten worse, not better.

“In 30 years of doing this I’ve never seen that kind of wage inflation, and yet it’s not enough to help these people keep up with their expenses,” Levine said. “I don’t begrudge somebody who says, ‘look, I’ve got to go earn more money, and we’re trying to do what we can.”

Levine said some glimmers of hope are appearing, including a recent decrease in use of contract labor and a downturn in turnover rates. “So it’s starting to get better, but it’s slow going.”

The inflation question

Another question has been added to the ongoing big question mark of labor costs. Levine said supply cost inflation is going to be the biggest drag on Ballad’s bottom line for the foreseeable future. Supplies are up $23 million so far this fiscal year.

“I don’t see any thing that’s going to reduce that right now,” Levine said. “In fact, it’s getting worse.”

That will eventually trickle down, or maybe up, to the insurance companies. He said when inflation hits hospitals it doesn’t usually reach insurance premiums for two to three years.

I think you’re going to see healthcare cost inflation that follows all this. It’s going to be pretty dramatic. In our case, our biggest payer’s the government, it’s not the local businesses.”

Levine said that leaves him concerned as well, because while commercial insurance companies can raise premiums and let business deal with the increased cost to them, the government has different factors to weigh.

“What we’re watching right now, Medicare has not come forward and said we’re going to be doing any major upward adjustments,” he said. “That has us concerned.”

Even with all the current questions, Standard and Poors, a bond rating agency, kept Ballad’s credit rating at A-minus. That’s higher than it was prior to the 2018 merger that created Ballad. Back then, the combined systems (Wellmont and Mountain States) had a “cash to debt” ratio of about 75% cash to the total debt. That’s now about 105%.

Levine said the system has been making money through COVID, although COVID relief payments have really skewed financials from one quarter or even one year to the next. For instance, Ballad had high COVID expenses the third quarter due to the Omicron surge but received almost no supplemental funds.

Through the full three quarters the system is $29.8 million in the black. A year ago, even though Ballad had a $16 million third quarter, it had lost $14 million through three quarters.

“Everyone’s saying the same thing,” he said. “We’re still going through the shock of this (nationally) and we’re still recovering. We really don’t know what the new normal is.”

Levine said Ballad has been very transparent with the ratings agencies and “met with them for hours” to discuss everything from labor issues to the region’s slow population growth and high reliance on Medicare, Medicaid and government payors instead of the typically higher-reimbursing commercial insurers.

“We said, ‘here’s the problems. Here’s what we’re planning to do about it. Here’s the steps we’ve taken.'”

Levine said Ballad will need every bit of the savings it gets from refinancing (the system has over $1.4 billion in total long term debt).

“We have a high volume of people that are Medicaid, uninsured and Medicare. That combination of factors creates a headwind and that was not as big a deal two years ago, because on top of it now you have the labor shortages and the wage pressures and the inflation pressures.”