Tower Health faces critical choices in the coming weeks, months

Apr. 18—West Reading-based Tower Health, an entity less than five years old in a desperate financial situation, has major decisions ahead.

The anchor of the nonprofit system, Reading Hospital, has been the moneymaker for the network while the five hospitals closer to Philadelphia that Reading acquired in 2017 to form the system have been struggling, records show.

Tower's debt is now measured in 10 figures, and the whole operation is up for sale — even Reading Hospital — with more than 10 interested parties, interim CEO and President Sue Perotty said last week.

It is not clear whether those parties will submit formal expressions of interest.

The deadline for bidders is April 23.

The bids are so-called "expressions of interest" in the financially troubled nonprofit system. The board will select as many as three bidders to conduct deeper due diligence, officials said.

Changes are coming whether or not a buyer or buyers are found.

Perotty acknowledged that bankruptcy is "always a risk."

"My goal is to avoid it at all costs," she said, noting that nonprofits cannot be forced into bankruptcy.

Earlier this year, Tower tried to sell off the other hospitals — Pottstown Memorial Medical Center, Pottstown; Brandywine Hospital, Coatesville; Phoenixville Hospital, Phoenixville; Jennersville Regional Hospital, West Grove; and Chestnut Hill Hospital, Philadelphia — but that was a nonstarter.

Perotty said a previous bid process did not include Reading Hospital, and some potential bidders expressed that they would bid if Reading Hospital was included in the package.

So this second go-round includes Reading.

Consultant H2C, Hanlon Hammon Camp LLC, a New York-based health-care-focused investment banking firm, is handling the process.

It's the same company that advised Tower on its purchase of the five Community Health System hospitals in 2017 and Tower's sale-leaseback deal with a Chicago investment firm last year.

If there are formal expressions of interest, the process of due diligence and government approvals is projected to 90 to 120 days, said Perotty, a retired banking executive and former Tower board member with experience in mergers and acquisitions.

The system could be sold as one, depending on the bids.

Many components

Tower is much more than just hospitals.

It encompasses a home health care agency, an ambulance service, insurance, a large medical group and urgent cares.

Tower also has a joint venture with Acadia Healthcare to run a facility in Bern Township and partners with Drexel University to run St. Christopher's Hospital for Children in Philadelphia. Drexel is also Tower's partner in a medical school in Wyomissing.

Perotty said St. Christopher's is on a separate track, and would not be a part of the system sale. She said Tower takes the Philadelphia hospital's mission in serving the very poor as an important consideration in a sale.

Perotty will stay as interim CEO and president until the process is completed.

Meanwhile, Perotty said she is focused on stabilizing losses in the system and enabling it to compete in the changing health care landscape in the next five to 10 years.

Grim finances

In March, S&P Global noted Tower Health has generated a steep system loss of $148.8 million relative to the budgeted $131.1 million loss, which, while better than the very negative margin at year-end, is below expectations and represents negative earnings before interest, depreciation and amortization.

Tower has approximately $2 billion in operating revenue and $1.3 billion in debt.

The COVID pandemic has exacerbated the financial troubles that had already been brewing.

Analysts from S&P and Fitch noted that the system's cost-saving efforts are not enough to turn around the finances and Perotty agreed. She said the system has to grow its revenue.

The bond rating agencies have said the health system needs to cut losses quickly as it notched $14 million a month in losses.

In its rating report in March, S&P said it was uncertain "as to Tower Health's ability to execute on a partnership or divestiture of assets in a timely manner."

Tower has insisted on moving methodically and deliberately.

Even a nonprofit needs to generate revenue to continue, and Tower will not be able to borrow money to finance changes, Perotty said.

It will need revenue to reinvest in its future, she said.

"To be able to invest in yourself you need to be able to generate capital," she said.

Layoffs and more

Perotty said the system continues to evaluate nonperforming assets and she acknowledged there will be more layoffs, though not as many as in July.

Perotty wants layoffs to be in one step, so the system's remaining 14,000 employees won't be under continuing stress.

She said any layoff is significant to the people it effects and acknowledged that the bankruptcy and subsequent attempts at selling the former Community Health System hospitals has been tough on staff in those facilities.

Last month, Tower laid off laid off 15 people at St. Christopher's, including four doctors.

Tower has renegotiated insurance payer contracts in the last five weeks, Perotty said.

And, it has put new people in charge of revenue cycle, a problem that has dogged the health system as it integrated the hospitals it purchased in 2017.

Revenue cycle in health care is the process of identifying patient services and the management and collection of patient service revenue.

Perotty said in 2021 revenue in the entire system has rebounded. She did not have specifics available.

The near future

Tower is forging ahead with its joint venture Drexel University College of Medicine at Tower Health. It is set to welcome its inaugural class of 40 first-year medical students in August.

Drexel said the recruitment cycle for students and campus assignments have not been finalized. Applications to the College of Medicine have increased 24% over last year for 300 slots.

Drexel President John Fry stepped down from the Tower Health board recently to avoid any conflicts of interest as Tower Health reviews all its options for addressing its financial challenges.

Another rating agency, Fitch, hit Tower with a three-notch downgrade on Monday. The ratings are well into high-risk junk bond territory.

If a hospital is sold and a new owner intends to operate a health care facility, the state Department of Health is responsible for issuing a hospital license or transferring an existing license.

The department determines whether the new operator is a responsible entity through review of responses to a series of questions that are submitted with the change of ownership application.

Hospitals must give the department 90 days notice and publish a public notice prior to shutting down.

According to the regulations, a hospital is required to give 90 days written notice to the department of its intent to close, and as part of that notification submit a closure plan that addresses financial stability; changes in the governing body, administration and medical staff; staffing changes; transition plan; status of payments; policies and procedures and a communication plan.

More Coverage

— Tower Health bonds downgraded by S&P

— Tower Health, hit by another credit downgrade, looks for a buyer

— Tower CEO to step down

— Tower Health executives to take pay cuts

— Tower Health CEO tells staff no decision in sale of hospitals

— Tower Health might sell off hospitals in 2021; except for the 'mothership' of Reading Hospital

— Rating agency says Reading Hospital is the only profitable part of Tower Health system

— Agencies downgrade Tower Health to junk bond status

— Tower Health posts loss of $246 million in three months of the coronavirus pandemic, $378 million for the fiscal year

— Tower Health fights to weather the pandemic storm