CFO Lynn Krutak said the system’s most significant challenge is its payer mix.
Luckily, she says, Virginia’s decision to expand Medicaid will help somewhat in terms of recouping from years of cuts.
Ballad Health also has a $308 million, 10-year spending plan in the works.
Last year, Mountain States Health Alliance (MSHA) and Wellmont Health System, merged to form Ballad Health. The fact that the two rural systems merged was not typical because it formed under a certificate of public advantage (COPA).
This legal agreement governs the merger through joint oversight from both the state of Tennessee and Virginia and also includes “enforceable commitments” to invest in population health, expand patient access, and boost research and education opportunities.
According to the Millbak Memorial Fund, the COPA acts as a “state-monitored monopoly—or a public utility model of healthcare delivery.”
Related: Ballad Health Launches Changes Across Newly Merged Hospital Network
Lynn Krutak, who served as CFO for both MSHA and its corporate parent Blue Ridge Medical Management, was elevated as CFO at Ballad Health. In an interview with HealthLeaders, Krutak emphasized how she implemented effective cost-cutting strategies within a challenging payer mix and low-wage index area.
This transcript has been lightly edited for brevity and clarity.
HealthLeaders: Can you describe the challenges and opportunities for Ballad Health in its provider market?
Krutak: The majority of our hospitals are either in southwest Virginia or northeast Tennessee, so we have high-use rates. From the payer standpoint, as more people move into managed Medicare and managed Medicaid, we know those use rates are going to fall.
Our population growth is flat to even declining; a lot of our counties in southwest Virginia are coal counties that have been hit hard by the [employment] reductions. So, with the use-rates decline, population decline, and the reimbursement decline that we’re all faced with, we know that there are going to be issues going forward.
As far as our payer mix, we’re heavily governmental. Over 70% of our payer mix is Medicare, Medicaid, or self-pay. We can continue to see the payer mix decline as well. We are also faced with high-deductible health plans out there now, with the patient portion of those deductibles being so high our bad debt has increased over 30%.
Fortunately, Virginia has implemented a Medicaid expansion program, so we will get some relief. However, we’ve had years of ACA cuts and this is a small portion. With the cuts that we’ve had versus what we’re going to gain back from Medicaid expansion, we’ll still be in the red.
Our wage index with Medicare is another hurdle we have. We are in the fourth-lowest wage index area in the country; we’re getting about half of what other [systems] are getting. We’ve done a good job of controlling our costs because we have to.
We’re excited about the potential with some of the things that we’re going to be able to do as a merged organization. We have $308 million in spending commitments over the next 10 years, but we have about twice as much in estimated savings. We’ve been able to achieve a lot of that already and we’re working hard on our continued integration.
This merger’s unique and what we’re going to be able to do is take costs out of the system, as far as redundant and duplicative costs go, and then reinvest them back.
HL: Can you describe some initiatives Ballad is looking to pursue in the next few years?
Krutak: As far as the labor costs, we’ve done a great job controlling our labor by not using contract labor for nursing. During the nursing shortage, other systems were using contract labor, it was something that MSHA did not have to do.
We have East Tennessee State University right in our backyard in Johnson City, where we work with them to develop nursing programs and offer scholarships to students in return for a work commitment.
Of the investments through COPA, where we have committed $308 million over a 10-year period, [is] $75 million is going to common health issues facing children. We’ve made a commitment to bring on specialists—specifically pediatrics—and be able to keep these patients and their families in the region and not have to send them elsewhere.
We’ve also committed $140 million to mental health, addiction, or rural health [initiatives] with $85 million going to behavioral health. That’s an issue for our service area in northeast Tennessee and southwest Virginia.
Finally, we have $8 million set for clinical effectiveness and patient engagement mainly related to health information exchange. Wellmont was on Epic, MSHA was on Cerner, so we agreed to convert the whole system to Epic, which will happen in April 2020.
HL: How is Ballad best positioned to navigate the direction healthcare is going while still providing the best quality service to its patients?
Krutak: We’ve been working with our state representatives to craft a fair wage index bill, where Ballad would get some relief and revamp how those calculations are done. In other words, you would not be penalized if you do a good job controlling your costs.
Our CEO, Alan Levine was secretary of health in Florida and secretary of health in Louisiana. We have Tony Keck, who is the executive vice president of our development, innovation, and population health improvement, who was secretary of health in South Carolina. We have a lot of insight on the [governmental] side of things from them.
We’re positioning ourselves to take costs out of the system but also to switch over from fee-for-service plans to looking at risk-based contracts. How do we get paid more for showing better patient outcomes? We’re looking over the next five years to transition into more of that than your traditional payments.
HL: What advice would you give to CFOs from rural systems to make the most of what are sometimes challenging financial situations?
Krutak: As a result of the merger, I’m relieved that we’re going to be able to have these savings to reinvest in rural areas. The largest issue we face with the payer mix shift is that it’s hard to get physicians in rural areas.
My advice to them is just make sure that you are controlling your costs as much as you possibly can and look to partner with other systems that may be near you that could provide physician-sharing arrangements.
For the reimbursement side, it’s always actively looking at how you’re being paid and what you’re being paid. Work with your government officials and partner with your hospital associations, to say, ‘Hey, if we’re going to continue to keep these rural hospitals and provide access, then there’s going to have to be changes as far as how that reimbursement is calculated and how those facilities are compensated.’
On the cost side, make sure that that you’ve situated yourself appropriately and then as things transition to outpatient, be sure the investments that you’re making are being made in the right places.
https://www.healthleadersmedia.com/strategy/verity-healths-deep-pocketed-savior-failed-heres-why
The recent bankruptcy announcement by Verity Health System should worry CEOs and boards at hospitals all over the country that share some of the same characteristics, because they could be the next to fall, one analyst says.
The financial troubles of Verity are part of a trend in healthcare, and the health system’s experience shows that the dramatic arrival of a savior with deep pockets doesn’t guarantee organizational health and stability.
Verity operates six nonprofit hospitals in California, and citing growing losses and debts for the facilities, it filed for bankruptcy. The hospitals will remain open during the bankruptcy, Verity said.
The bankruptcy filing is a public failure for biotech billionaire Patrick Soon-Shiong, MD, a physician and entrepreneur whose privately owned umbrella company NantWorks in 2017 acquired Integrity Healthcare, the company that manages the Verity health system. Soon-Shiong said at the time that his goal was to revitalize the hospitals and improve the care they provided to mostly lower-income neighborhoods.
Though a surgeon and entrepreneur, Soon-Shiong had never operated hospitals before, as reported by STAT. The Verity system’s woes apparently were more than he could fix, with more than $1 billion of debt from bonds and unfunded pension liabilities.
The Verity CEO said at the time Soon-Shiong entered the picture that the system also needed cash to make seismic repairs to aging facilities and also needed hundreds of millions of dollars’ worth of new equipment such as imaging machines and neonatal intensive care units.
Verity’s overall experience is part of a trend in U.S. hospitals, says Ilyse Homer, JD, a partner at the Berger Singerman law firm with experience in hospital bankruptcies.
“There are hospitals all over the country that are not dissimilar in what happened to Verity—large debt, an aging infrastructure, an inability to negotiate contracts,” Homer says. “They have trouble with maintaining pensions and that is very typical in filings in other districts. There are some commonalities throughout the industry, and I can’t say I’m surprised that Verity came to this.”
Nantworks provided more than $300 million in unsecured and secured loans and investments, the Los Angeles Times reported. The money went to operational costs, pension obligations, and capital improvements, and only a third of it was secured by property.
The management company deferred most of the $60 million in management fees Verity was expected to pay over the last year.
Some criticism has been directed at financial decisions by Soon-Shiong’s team, such as providing millions of dollars to health IT vendor Allscripts rather than spending that money on capital improvements. Soon-Shiong has a financial stake in Allscripts. Fully implementing a new Allscripts health IT system could cost from $20 million to more than $100 million, according to estimates from different sources, as reported by POLITICO.
Even without any questions over Soon-Shiong’s strategy, saving Verity would have been a tall order for any investor, Homer says. The challenges were so great that it might have been too late to simply infuse cash and hope for the best, she says.
Once a hospital or system becomes weak in so many areas, it is hard to recover and gain strength again, Homer says.
“What happened to Verity is happening, to some extent, to a significant number of hospitals in the country. They have costs that are rising faster than revenues, and they’re being downgraded by financial analysts,” Homer says. Moody’s recently downgraded the entire hospital sector to negative, which suggests that there could be more bankruptcy in the future, she says.
“I absolutely expect to see more of this down the road,” Homer says.
The healthcare industry, in general, is in flux and the insurance industry uncertainty plays a part in that, Homer says. Struggling hospitals and systems are looking for ways to survive and the siren song of a billionaire like Soon-Shiong can be irresistible.
“I think this case shows that while you will have individuals and groups that want to come in and save or fix these hospitals, particularly nonprofits, it’s not necessarily as easy as adding a flush of cash when you have all these other issues that aren’t going away,” Homer says.
Healthcare CEOs should look at Verity for lessons in how much financial pressures can mount up, Homer says.
“My hope would be that they are looking at these issues as early as possible – renegotiating contracts, upgrading systems, ensuring pensions are funded – before they get to a crisis point,” Homer says. “Clearly this case is a reminder that this can happen, this can be the end result for your hospital system. [CEOS] need to be cautious and act on these issues before they get so far that even a huge influx of cash won’t solve their problems.”
KPC Health is adding four Verity Health-owned hospitals to its growing collection of nonprofit hospitals.
Dr. Kali P. Chaudhuri, chairman of KPC Health, referred to the ruling as an “Important milestone” for the company.
The court-approved deal now goes before California Attorney General Xavier Becerra, who attempted to block the sale of two Verity Health hospitals in January.
KPC Health, a Santa Ana, California-based healthcare company, announced Wednesday that a federal bankruptcy judge approved the $610 million purchase of four hospitals owned by financially-troubled Verity Health System.
KPC Health will take ownership of St. Francis Medical Center, St. Vincent Medical Center, Seton Medical Center, and Seton Coastside in Moss Beach. The company also acquired St. Vincent Dialysis Center as part of the deal.
The deal is the latest development in Verity Health’s ongoing bankruptcy proceedings, which began in August 2018.
“Today marks an important milestone for KPC Heath’s bid to acquire four Verity Health hospitals,” Dr. Kali P. Chaudhuri, chairman of KPC Health, said in a statement. “We look forward to working with Verity Health on a successful acquisition and welcoming these important community hospitals into our integrated healthcare system.”
The acquisition of four Verity Health hospitals adds to KPC Health’s seven acute care hospitals in southern California as well as seven long-term acute care hospitals and two skilled nursing facilities in multiple states.
Verity Health’s board of directors approved the deal on April 15. Due to no other bid exceeding KPC Health’s $610 million bid, no auction was required for the four Verity Health hospitals.
The next step will be submitting the purchase to California Attorney General Xavier Becerra, who has already been involved in handling the sale of two Verity Health hospitals earlier this year.
In January, Becerra blocked the $235 million sale of two hospitals owned by Verity Health, O’Connor and Saint Louise hospitals, to Santa Clara County.
Despite the sale being approved by the U.S. Bankruptcy Court in December, Becerra argued that the County had not agreed to specific conditions related to the deal.
At the end of January, a federal bankruptcy judge denied Becerra’s motion to block the sale, stating that he did not have the authority to regulate the sale. A scheduled federal hearing on Becerra’s motion to block was cancelled in mid-February and the sale closed on March 1.
https://www.healthleadersmedia.com/strategy/megamergers-take-center-stage-ma-activity
73% of healthcare executive respondents will be exploring potential M&A deals during the next 12–18 months, according to a new HealthLeaders survey.
The recent M&A movement toward vertical integration involving nontraditional partners suggests that the healthcare industry is undergoing a major transformation.
Merger, acquisition, and partnership (M&A) activity within the healthcare industry shows no sign of diminishing, with nearly all indicators pointing to continued consolidation, according to a 2019 HealthLeaders Mergers, Acquisitions, and Partnerships Survey. The fundamental need for greater scale, geographic coverage, and increased integration remains unchanged for providers, and this will sustain M&A activity for years to come.
Evidence of the M&A trend’s resiliency is found throughout the HealthLeaders survey. For example, 91% of respondents expect their organizations’ M&A activity to increase (68%) or remain the same (23%) within the next three years, an indication of the trend’s depth. Note that only 1% of respondents expect this activity to decrease.
Likewise, 38% of respondents say that their organization’s M&A plans for the next 12–18 months consist of exploring potential deals, up six percentage points over last year’s survey, and another 35% say that their M&A plans consist of both exploring potential deals and completing deals underway. This means that nearly three-quarters (73%) of respondents will be exploring potential deals during this period.
While steady healthcare industry M&A activity has been with us for some time, a series of new and rumored megamergers and partnerships is capturing the headlines these days. This recent M&A movement toward vertical integration involving nontraditional partners suggests that the healthcare industry is undergoing a major transformation, one that will likely alter the landscape in unanticipated ways.
The majority of respondents in our survey say that they expect significant industry impact from these megamergers, led by CVS Health’s merger with Aetna (68%), Walmart’s potential deal with Humana (57%), and Amazon’s partnership with JPMorgan Chase and Berkshire Hathaway (49%). While information regarding the latter two developments is still in short supply, respondents see the potential for large-scale impact.
Faced with such far-reaching and transformative new relationships, what are healthcare providers to do? As things currently stand, even the largest health systems lack the scale to negotiate on equal footing with most insurers, and these new hybrid organizations combine scale, technology, and innovative structures.
However, there is no need for providers to panic—these megamergers are still in the early stages of implementation, and the fundamental mission of healthcare has not changed.
“I don’t think people fully understand the real business purpose of this type of activity yet, or what these organizations are trying to get out of their connections,” says Kevin Brown, president and CEO of Piedmont Healthcare, a Georgia-based nonprofit health system with 11 hospitals and nearly 600 locations. “Time will tell regarding the impact they will have on the industry landscape and its different segments.”
“I haven’t spent a lot of time thinking or worrying about these new developments. Generally, I spend my time thinking about what we are doing on a day-to-day basis as an organization to fulfill our mission and take care of the communities we serve. I’m certainly aware of these developments, but it’s important not to get distracted from our core purpose,” Brown says.
