“The rating reflects our opinion of the organization’s strong enterprise profile, with a solid business position covering a wide geographic region, robust size and scale, and experienced management team,” S&P Global Ratings reported in early November. “While the integration plans continue, we recognize there have been some challenges, including normal operating pressures and softer-than-expected business volume that has contributed to slower revenue growth than originally projected.”
Mountain States Health Alliance and Wellmont Health System, the two hospital systems that merged to create Ballad Health, had received the same rating from S&P Global Ratings.
S&P Global Ratings noted Ballad Health’s previous fiscal year was relatively breakeven with a slight $428,000 deficit, but rebounded in fiscal 2019, with a $27.7 million gain (a 1.3% operating margin) as management overcame the revenue loss with expense reductions and efficiencies.
“Liquidity remains consistent with the current rating and mitigates, to some extent, the continued operating and industry challenges,” S&P Global Ratings said. “However, we would expect improved operating results in fiscal 2020 and beyond as the benefits from integration accelerate, providing the expected cost savings identified at the onset of the merger.”
Ballad Health noted a major highlight in the improved performance was the financial turnaround of Kingsport’s Holston Valley Medical Center, which turned nearly a decade of continual operating losses into an operating gain in fiscal 2019.
“We are pleased that S&P has taken the time to evaluate our financial results and that they feel comfortable with the higher debt ratings they awarded Ballad Health last April,” said Ballad Health Chairman and CEO Alan Levine. “While we have maintained a disciplined operating approach, we have invested in the recruitment of nearly 200 new providers to the region since the merger closed, an investment that will lead to even greater access for our communities. We have reduced pricing for our hundreds of physician access points and urgent care centers, invested in a new addiction medicine fellowship program at East Tennessee State University and a new dental residency program in Southwest Virginia, and we announced our intent to bring the first residential addiction treatment facility to the region to serve women who are pregnant or homeless and suffering from substance use disorder. We opened a new urgent care center recently in Lee County, Virginia, a prelude to the opening of America’s newest rural hospital — a hospital which was previously closed. The synergies from the merger are allowing us to stabilize our operating results and make these important (Certificate of Public Advantage or COPA) related investments, all while reducing the overall cost of healthcare for our region’s employers.”
S&P said it will meet with Ballad Health management in the coming months for an update on the operating and financial plans.
“Other credit factors include an ongoing lawsuit, which is now in the appellate phase following a ruling against Ballad Health,” S&P added. “On Dec. 18, 2018, a jury ruled in favor of Highlands Physician Incorporated in a dispute with Wellmont Health System. The dispute originated in 2016, prior to the merger with Mountain States Health Alliance and the formation of Ballad Health. The jury verdict was for a sum of $58 million. Ballad Health is actively appealing the verdict. Management believes there were numerous errors and issues that occurred during the trial, and remains confident the decision will be overturned. Ballad Health established a reserve of $10 million (in fiscal year 2018) related to this litigation. While we do not anticipate it during the two-year outlook period, a higher rating is possible if Ballad Health successfully integrates the two health systems as planned while staying in compliance with COPA guidelines, sustains strong cash flow, improves unrestricted reserves to levels commensurate with a higher rating, and does not issue additional debt, as debt metrics are slightly elevated for the rating level.”