Ballad using debt to protect cash reserves into autumn


by Scott Robertson

The COVID-19 pandemic has played havoc with the revenue stream at Ballad Health, but administrators are using a pair of no- to low-interest debt instruments to protect the company’s cash reserves, at least for now.

As the crisis began in March and April, Ballad Health received and utilized $200 million in advance payments on Medicare claims through the Medicare Accelerated and Advance Payment Program, a $100 billion national effort designed to increase cash flow to Medicare providers and suppliers during the volume disruption caused by the crisis.

Those advance payments resulted in an offsetting liability, however, with repayment required over a 12-month period beginning 120 days after disbursement, and the bill has come due. “We’ve started paying back on that,” Ballad Executive Chairman, President and CEO Alan Levine told the Business Journal in late August. “The way it works is, every Medicare patient that comes in, we bill Medicare and they zero-pay us. So, we’re not getting paid right now for any Medicare patients that we see until that $200 million is accounted for, which really (stinks).”

An intense lobbying effort by the hospital industry to have those advances forgiven looked promising as recently as late July, but the impasse in Washington over additional funding for COVID- related relief efforts has scuttled that effort.

“The good news is, there was a whole combination of steps we took back in March,” Levine said. “No.1, we did the furloughs and took a lot of steps to reduce our cost structure. We knew we were going to face a massive decrease in revenue. We did get some of the CARES Act money (ed. Note: roughly $82.5 million). We also secured, early on, a $130 million line of credit at a very low interest rate. We were fortunate to get it when we did. Our timing was right. Three different banks stepped up to help us.”

“We did all that to shore up cash because we knew there was going to possibly be some disruption,” Levine said.

“Some possible disruption” has turned out to be a bit of an understatement. According to Ballad’s year-end results for the fiscal year ending June 30, 2020:

• Revenues for the 12 months ended June 30, 2020, totaled $1.993 billion, compared to $2.104 billion in the same period of 2019.

• Net operating income (prior to the expenses associated with the implementation of a new electronic medical record system and the COVID-19 pandemic) was a $38.5 million loss compared to $44.1 million in the prior year.

• Adjusted net operating income was $18.9 million, compared to a prior year income of $36.5 million – a 48 percent decrease.

• Operating EBITDA of $205.9 million was $22.2 million, or 9.7 percent, below the prior year. EBITDA of $246.3 million was $8.2 million, or 3.2 percent, below the prior year. Excluding stimulus funds, operating EBITDA was $123.4 million, and EBITDA was $163.8 million compared to a prior year of $228.1 million and $254.5 million respectively.

Alan Levine discusses Ballad’s financials with Business Journal editor Scott Robertson.

With the advance funds used, Ballad has begun examining when to begin utilizing the $130 million line of credit. Levine said he believes that point will come sooner rather than later.

“Our cash issue really is going to come in the fall. Now that we’re paying back the $200 million – our days cash actually went up; We got up to about 300 days cash – but it’s all now, going to come down very fast.

“All of that was sort of knowing when we had to start paying it back, when we’re going to see the dip in cash receipts, and then when we would start to see it pick back up again. But even with our volumes where they are, we’re still not going to pick up our weekly cash receipts like they used to be.”

“So, doing that forecast and figuring out at what point will we need to use that line of credit, the reality is we may choose to use some of the line of credit to fund our capital,” Levine said. “Under our capital for this year, our plan is to spend about $120 million. For about $80 million of that, we’ll have to dip into cash and you know, the reality is that the interest rate on the line of credit is lower than the returns we’re getting in the market. So, it’s probable that we’ll look seriously at using line of credit and not sacrificing any of our cash reserves.”

While an argument could be made that with Wall Street having recovered nicely from its March downturns, using cash from the investment side might make sense, Levine said that’s really not the case. “Most of our cash is invested in low-risk. We have a pretty strict investment policy where some of it’s put into real estate and some of it’s put into the market. Most of it’s in funds and index funds because we don’t play games with our cash.

“We have diversity,” Levine said. “Frankly, when the market was diving, our debt strategy and our cash strategy worked perfectly well together…our whole strategy related to cash is designed to mitigate risk. When the market’s going up really high, we don’t do generally as well as the market. When the market goes down, we generally don’t do as badly as the market, and that’s by design.”

The crisis has hit Ballad at a particularly bad time, Levine said, because the transition from fee-for-service to value-based reimbursement models has not been kind to Ballad.

“If you go back to 2018, we did 103,000 discharges. This year, we’ll do 87,000. To a large measure, we did that to ourselves with all the value-based arrangements and risk-benefit. If we collect $10,000 per admission, which is close, we’ve lost $160 million per year in revenue.” While that can translate to lower costs when patients choose to utilize urgent care facilities in place of emergency departments, there’s another negative effect on Ballad’s bottom line. “When we lowered our prices on urgent care and physician practices by 17 percent, that was part of a strategy to make it much less expensive for people to go to an urgent care instead of going to an ER,” Levine said. “Now, our ER visits have dropped substantially and the net result is we’ve lost about $50 million of revenue. So, over $200 million a year has been lost simply because we’re trying to reduce the cost of care and the financial model, the business model, doesn’t reward us for that.”

Levine said the cost savings realized by moving to value-based systems and pushing urgent care out of emergency departments simply don’t make their way back upstream to Ballad. “This gets way in the weeds because of how attribution of patient lives works, but the insurance company saves the money. They share it with doctors, but the hospitals get penalized. I would think if we reduce readmissions we ought to be rewarded for that, but we actually get financially penalized.”

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