Wednesday, May 6, 2020

Ballad Health Announces Third-Quarter Results

Reports top-decile quality measures in the nation, lower cost for patients and improved patient satisfaction in the wake of losses tied to COVID-19

Ballad Health today announced third-quarter results from its 2020 fiscal year. Excluding the impact of coronavirus disease 2019 (COVID-19), the results demonstrate significant reductions in the cost of healthcare; substantially higher quality, now showing top-decile performance in certain measures; and improved patient satisfaction.

“Prior to the impact of COVID-19, and despite the major challenges facing rural health systems, Ballad Health was contributing to major reductions in the cost of healthcare for our region, while also showing that lower costs can also lead to better quality and satisfaction,” said Ballad Health Chairman and Chief Executive Officer Alan Levine.

“Ballad Health has been recognized by the largest payers in America for its success in value-based care, and I’m proud of our more than 15,000 team members and physicians who work every day to deliver that result.”

Quality of care

Ballad Health’s latest quality measures, which reflect the period before the COVID-19 impact, show 13 of the 17 targeted quality measures prioritized by the State of Tennessee and federal government have improved, relative to the period prior to the merger creating Ballad Health. Among these measures, Ballad Health is now performing among the top 10% of hospitals in the nation in five of the measures.

Although quality measures can vary from month to month, and Ballad Health cautions against the use of data at any particular point in time, the examples of positive trends emerging from the latest quality report demonstrate year-over-year or baseline improvements as follows:

Clostridioides difficile (C. Diff) decreased by 44%.
Catheter-associated urinary tract infections (CAUTI) decreased by 41%.
Methicillin-Resistant Staphylococcus aureus (MRSA) down by 45%.
Iatrogenic Pneumothorax rate decreased by 66%.
In-hospital fall with hip fracture rate decreased by 50%.
Postoperative acute kidney injury (AKI) decreased by 50%.
Postoperative wound dehiscence rate decreased by 28%.
Sepsis bundle compliance increased to an all-time high of more than 64%, making Ballad Health one of the top performers in the nation in this domain.

In October 2019, Ballad Health, with the support of the Board of Directors and Medical Staff Clinical Council (composed of nearly 40 physicians from throughout the region), implemented a national best-practice safety huddle process, which engages team members at every level of the organization each morning to focus on patient and team member safety. This initiative, led by Chief Clinical Officer Dr. Amit Vashist, has created a physician/team member/administrative partnership that is demonstrating results.

“Our focus has been, and will always be, the best care for our patients,” Dr. Vashist said. “We honor those we serve by focusing on their safety and providing the best possible care.”

Patient satisfaction

Highlights from Ballad Health’s patient satisfaction surveys are also showing positive trends. In the most recent reporting, Ballad Health’s inpatient experience and emergency department ratings reached the highest level in more than six months, and the ratings continue to climb. Ratings showing improvement include: nurses treated the patient with courtesy and respect, patients who rated one of Ballad Health’s hospitals a score of 10 out of 10, those who would “strongly” recommend the hospital to a friend or family member and cleanliness of the hospital.

“The patient satisfaction journey is one that never ends,” said Levine. “We know each experience is unique, and we have to be relentless in our pursuit of ensuring we meet the needs of each patient and family. A single failure is a 100% failure rate for that patient, and that will never be acceptable to us.”

“We are particularly pleased by some of the words our patients have used in the surveys to describe their experiences,” said Chief Nursing Executive Lisa Smithgall. “Words like ‘helpful,’ ‘kind,’ ‘courteous,’ ‘clean,’ ‘loving,’ and ‘caring,’ really do describe what our nurses, support staff and doctors strive for. And so I’m pleased that as we recognize the heroic work of nurses and healthcare workers generally, we are able to report what most of our patients are saying. This is a relentless effort on our part, and we will continue working to be even better.”

Financial results

Financial highlights for the quarter ended March 31, 2020

On March 10, Ballad Health executed its disaster plan, which includes the activation of its Corporate Emergency Operations Command (CEOC) to coordinate efforts across the system and around the region to rapidly plan for, and execute, ongoing response to the issues resulting from the COVID-19 pandemic. The policy establishing the CEOC is established and authorized by the Board of Directors, and it follows guidelines established by the Federal Emergency Management Agency (FEMA) and the CDC. CEOC is led by an incident commander appointed by the Chief Executive Officer – in this instance, the Chief Operating Officer. The CEOC is composed of key leaders overseeing essential functions of the health system, including logistics, supply chain, communications, operations, finance, government relations and clinical services. The CEOC acts as the clearinghouse for all organizational planning and decision-making related to the event, and it continues its responsibilities under the oversight of, and until discontinued by, the Chief Executive Officer.
Ballad Health’s third-quarter financial results, and therefore, its year-to-date results, were materially impacted by the national outbreak, and response to, the global SARS-CoV-2 pandemic. Beginning on or about March 17, Ballad Health began experiencing an organic and material slowing of elective procedures and diagnostic services. Effective March 23, Ballad Health complied with the federal and state guidance to cease all non-emergent, elective procedures. Beyond the deferral of these procedures and diagnostic testing, Ballad Health experienced a decline in other types of medical treatment similar to that experienced by most health systems and physician organizations – physician practice, urgent care and other routine medical service visits declined precipitously.
Due to the unusual and ongoing nature of the financial impact of the pandemic, Ballad Health is approaching the reporting of its quarterly and year-to-date financials such that the nine-month period will effectively serve as “year-end” related to normal business operations, with the exception that Ballad Health will attempt to articulate the impact of the pandemic on March results. The remaining three month results for the fourth quarter of 2020 will likely reflect the negative impact of a major loss in volumes during the month of April, the ongoing volume impact of “ramp-up” of procedures, the unknown impact of the major trends toward unemployment and business closures on the payer mix and consumer capacity to pay deductibles and other out-of-pocket costs, as well as the as-yet undetermined effect from federal stimulus and other actions intended to mitigate the financial effects of the pandemic. Ballad Health normally provides a fourth-quarter adjustment for one-time and extraordinary items, which are included in its annual audited results. These adjustments that are calculable through the nine-month period are being included in the reporting for the nine-month period. The results to be reported after the fourth quarter will reflect the annual results, inclusive of the known effects of the pandemic on Ballad Health’s financial report, and will be subject to audit in the normal course.

Results from operations

Ballad Health’s decline in overall volume was accelerated due to the pandemic, with acute discharges in the quarter declining by 7.0%. As a result of compliance with federal and state guidance to cease all non-emergent, elective procedures, surgeries performed in the hospital setting decreased by 7.1% to 13,625 cases in the quarter. Inpatient surgeries decreased by 10.7% and outpatient surgeries decreased by 5.2%. Ambulatory surgery volumes decreased by 82% as a result of Ballad Health taking a minority stake in surgery centers and no longer including the volume in Ballad Health’s consolidated surgery count. Outpatient emergency department visits declined by 14.8%.

Net patient revenue of $483.7 million was $30.9 million, or 6%, below the same period prior year. Of the $30.9 million revenue decline for the quarter, approximately 80% is attributable to the COVID-19 pandemic. Essential access reimbursement and prior year cost report settlement revenue of $10.2 million was included in the net revenue for the quarter as compared to $4.1 million in the prior year. Prior to the pandemic, in the months of January and February, volume trends remained similar to those experienced in the second quarter. The effort by Ballad Health, in partnership with physicians and payers, to engage in value-based initiatives to reduce the cost of healthcare resulted in continued reductions in lower-acuity admissions, a shift from inpatient surgery toward outpatient settings and the utilization of lower-cost alternatives for care, which then decrease hospital-based utilization. In the absence of population growth and economic expansion, these reductions in hospital use rates result in real declines in volume and revenue. Certain payment policies and economic factors outside the control of Ballad Health and which disproportionally impact rural and non-urban health systems compound the appropriate impact of these value-based initiatives, and they also include the continued major shift of individuals enrolled in Medicare Fee for Service toward Medicare Advantage and the decreasing share of business covered by commercial insurance. The share of revenue from Medicare Fee for Service shifted from 25.9% in the third quarter of the prior year to 23.9% in the current year, while Medicare Advantage grew from 28% to 30.3%. Commercially insured revenue decreased from 22.5% to 21.6% - the lowest such mix ever recorded by Ballad Health or its predecessor organizations.
Other operating revenue of $26.3 million exceeded the prior year by $12.2 million (86.7%). The overage is comprised of incentives tied to higher quality of care and reduced cost of care provided by various payers in the value-based payment programs in which Ballad participates. These incentives are typically included in the fourth quarter reporting, but they have been brought into the nine-month period.
Total expenses of $521.3 million were favorable to prior year by $0.4 million (0.1%). The favorable variance is tied primarily to reduced labor and supply cost, as these costs were adjusted to the lower volumes in March. While these costs were reduced, they could not be reduced rapidly enough to accommodate the unprecedented sudden and dramatic volume reductions. Ballad Health was not in a position to decrease contract labor costs in the quarter, due to commitments to fund the contract labor at levels commensurate with the volumes that had been expected. Through February, labor productivity on a year-to-date basis was slightly better than the prior year period, with productivity at 113.6 man-hours per adjusted discharge. Salaries, Wages and Benefits on a year-to-date basis through February were 50.9% of total revenue, versus 51.7% in the same period prior year. To provide context on the impact of the March volume fluctuations, the man-hours per adjusted discharge for the quarter were 117.9, and Salaries, Wages and Benefits for the quarter were 55% of total revenue.
Net Operating Loss for the quarter was ($11.2) million compared to prior year income of $7.1 million. Ballad Health is providing guidance that: (1) this operating loss includes one-time revenue items that were brought into the quarter based on Ballad Health’s desire to treat the nine-month period as a “year-end” related to normal business operations, and (2) Ballad Health expects significant losses in the fourth quarter, the extent of which could be mitigated by efforts taken in the fourth quarter to reduce operating costs and take advantage of federal or state relief efforts intended to assist hospitals and health systems. As described in more detail below, cost reduction efforts taken in the fourth quarter so far include, but are not limited to: furlough of staff due to low volumes, deferral of certain expenses, including retirement contributions and Paid Time Off accruals for management, suspension of certain provisions of the Terms of Certification of the Certificate of Public Advantage (COPA) in Tennessee and the Letter Authorizing the Cooperative Agreement (CA) in Virginia and reductions in salaries of executive leadership. Ballad Health will not be making any public representations at this time with respect to the expected results of these steps, and it will defer to its fourth quarter reporting once management has more clarity on the impact to operations of the various issues affecting the operating results.
Non-operating income (excluding unrealized gains/losses on investments and change in fair value of derivatives) of $20.2 million for the quarter was favorable to prior year by $31.7 million. The favorable variance is related to the required accounting treatment for unrealized gains and losses for the non-wholly owned entities – Johnston Memorial Hospital and Smyth County Community Hospital. Other noteworthy items for the quarter include a gain of $2.7 million attributable to the sale of an interest in a homecare affiliate. During the quarter, with the approval of the Executive Committee of the Board of Directors, management terminated certain constant maturity swaps (CMS). These swaps were terminated due to major volatility introduced to the market during the month of March, in which Ballad Health was at risk of future negative cash outflows and potential collateral posting risk. The termination of these swaps resulted in significant mitigation of risk – risk that was well in excess of the $2.4 million loss reflected for extinguishment of derivatives. Financial markets have experienced unprecedented turbulence in the recent weeks. The global investment markets, and U.S. domestic debt capital markets, have encountered substantial volatility in the wake of the COVID‐19 pandemic. While Ballad Health is not immune to the market fluctuations, the diversified and conservative approach to both the investment and debt programs have complemented one another to assist in the loss mitigation. For the quarter, Ballad Health experienced an unrealized loss on investments of $144.1 million.
Operating EBITDA for the quarter of $34.9 million was $20.6 million, or 37.1%, below the same quarter in the prior year. The COVID-19 impact reduced Operating EBITDA by approximately $20 million for the quarter. Additionally, one-time and extraordinary items normally accrued in the fourth quarter were included in the results for the third quarter, compared to $4.1 million of one-time and extraordinary items being recognized in the same quarter prior year.
EBITDA for the quarter was $57.5 million, compared to a prior year of $44.1 million. Due to accounting requirements related to minority interest due to the unrealized losses on investments for the non-wholly owned entities, EBITDA adjusted for the minority interest provisions is $39.8 million compared to a prior year actual of $53.4 million, a 25% decrease from the same period prior year.

Financial position

From a balance sheet perspective, total assets declined $134 million, and net assets decreased by $162 million as compared to Dec. 31, 2019. As of the quarter ended March 31, 2020, Ballad Health’s assets exceeded liabilities by $1.565 billion. Total Net Assets decreased over prior year end by $138.2 million or 8.1%.

Capital investment

Significant capital investment related to information technology infrastructure and a common electronic health record, building improvements, diagnostic and treatment equipment totaled $24.8 million in the third quarter. Apart from the ongoing conversion to a common electronic health record, a project that remains underway even during the response to the pandemic, capital spending has been suspended unless the expenditures are related to pandemic response, and they must be approved by the Chief Executive Officer.

Debt compliance

The global investment markets and U.S. domestic debt capital markets, encountered substantial volatility in the wake of the COVID‐19 pandemic. While Ballad Health was not immune to the market fluctuations, the diversified approach to both the investment and debt programs complemented one another to assist in the loss mitigation. As of March 31, Ballad Health had $1.377 billion in debt outstanding, an increase of $32.7 million over the prior year end. Total debt outstanding increased due to the adoption of the Accounting Standards Update No. 2016-02, Leases, which requires balance sheet recognition of a liability and right-to-use asset for substantially all leases. The total additional debt recognized as a result of the new accounting treatment as of March 31 was $31.4 million. Total debt outstanding consisted of (1) fixed-rate serial, term, capital appreciation and revenue bonds, (2) variable rate term bonds, (3) variable rate equipment leasing and (4) capital lease obligations. Several of the real estate transactions made by Ballad Health after Feb. 1, 2018, were intended to reduce the lease liability through conversion to ownership.

Credit ratings

Ballad Health carries underlying ratings of (1) Fitch Ratings: “A,” (2) Standard & Poor’s:

“A-,” and (3) Moody’s Investor Service: “Baa1.”

Days cash on hand

Pursuant to the Master Trust Indenture (MTI), Ballad Health is required to maintain 100 days cash on hand. For the quarter ended March 31, Ballad Health’s days cash on hand was 237, more than sufficient to meet the covenant requirements under the MTI.

Debt service coverage

Revenues were sufficient to pay debt service. Based on a pro forma annualized quarterly income, debt service coverage was 2.8. Based on rolling twelve-months of income, debt service coverage was 4.4.

Certificate of Public Advantage and Cooperative Agreement compliance

Ballad Health is in compliance with the terms of both the COPA and CA. In response to the federal and state declarations of emergency, the Tennessee Department of Health and the Virginia Department of Health decided to temporarily suspend certain provisions of the Terms of Certification of the Certificate of Public Advantage in Tennessee and Cooperative Agreement in Virginia to allow Ballad Health to fully focus its staff and resources on responding to the challenges presented by the COVID-19 pandemic.

Forward-looking information

The following commentary contains information that might be considered forward-looking. While these statements reflect management’s best judgment on what the future might hold, they are subject to risk and uncertainty that may cause actual results to differ materially. The reader should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date of this publication. Ballad Health is not obligated to revise or publicly release revisions to these forward-looking statements in light of new information or future events.

Due to the unknown duration or extent of the outbreak, Ballad Health is unable to predict when patient volumes will return to historically normal levels or predict the amount of COVID-19 related care it might ultimately provide. Ballad Health cannot presently quantify or estimate the immediate or long-term cumulative impact of this pandemic.
Ballad Health has received approximately $200 million in advanced payments from the Centers for Medicare and Medicaid Services (CMS). These accelerated funds are a six-month interest-free advance on payments from Medicare and are required to be paid back, starting 120 days from receipt over a one-year period. Because of the payment “lag” from third-party insurers that typically results in a 45-60-day gap between provision of service and payment, the massive reductions in volume that began in the middle of March will begin to show a cash impact in the coming weeks.
The payment advance from Medicare will help mitigate the immediate pressure on cash, although management expects the combination of the repayment commencing in 120 days with the payment lag from insurers just beginning to impact cash to result in the need to acquire secured lines of credit and potential for liquidation of investments.
The Chief Executive Officer has appointed a recovery team, led by the Chief Administrative Officer, to commence work in partnership with the operations and clinical leadership for planning the resumption of services at the appropriate time. The recovery team is also charged with identifying various provisions of federal and state support intended to provide relief to hospitals and health systems. Ballad Health intends to participate meaningfully in efforts to seek the appropriate relief intended in law.