Mar. 2—Tower Health has been hit with another bond downgrade as its losses continue.
On Monday, Fitch Ratings Inc. downgraded the West Reading-based health system to B+, a highly speculative junk bond. The outlook remained negative.
Tower has $1.3 billion in long-term debt, which is secured by a pledge of gross revenues from Tower Health, Reading Hospital and five Philadelphia area hospitals acquired from Community Health System in 2017. Monday's downgrade follows one in November in which Tower saw its debt downgraded three notches by Fitch and Standard & Poor's.
Fitch said Monday that despite Tower's efforts to improve its finances, "operational challenges and a lack of sufficiently rigorous expense cuts have put Tower's balance sheet on an inevitably downward path."
Fitch previously anticipated that Tower would return to a stable financial footing and gradually improve its balance sheet, but said Tower needed to do more to stem the recent average monthly losses of $14 million.
"They've got some tough decisions to make coming up," said Kevin Holloran, senior director, U.S. Public Finance Fitch Ratings.
Last week, Tower told staff it is looking for a "partner" to buy the whole system.
"We are compelled to pursue every possible avenue available to protect and preserve the future of care at all of our hospitals and facilities," Tower said in a statement to Reading Eagle. "As part of this process, we will examine potential partnerships for the entire Tower Health system with likeminded health systems that share our same values and passion for clinical excellence."
In November, Tower had said it was considering selling or closing hospitals as early as the end of 2020, but it had not found a buyer.
Tower had combined operating losses of over $415 million in fiscal 2020, which ended June 30, Fitch noted. The system expects an operating loss of approximately $160 million in fiscal 2021, Fitch said. It posted unaudited losses of $124 million in the last two quarters.
The pandemic exacerbated the system's losses as it has struggled to integrate five acute care hospitals in Chester, Montgomery, and Philadelphia counties it bought in 2017.
Tower has implemented strategies recommended by a health care consultant it hired last year, but Fitch said it is not enough to change the trajectory.
"The Negative Outlook reflects Tower's significant short-term financial strain and uncertainty about longer-term operational performance," Fitch said. "Further multi-notch downgrades are possible if Tower is unable to execute on or adjust their current strategy and financial trajectory."
Also Monday, Tower filed a grim quarterly financial report as it prepares to update investors on Tuesday.
Tower said operating performance from July to December 2020 reflects a decline over the same period the previous year, particularly with the five Philadelphia area hospitals. Although total revenue increased by 7.2% compared with the previous year, the system had an operating margin of negative 13.6% in comparison to a 2019 operating margin of negative 4%.
The health system has seen volumes start to recover in 2021. Admissions are up 3.1%, ER inpatient visits are up 7 % and outpatient ER visits are down 4.0%. Inpatient surgeries are down 6.8% while outpatient surgeries are up 5.5%.
Reading Hospital continued to generate significant operating income, according to Tower's quarterly report. Reading Hospital produced $71.4 million in operating income for the six month period ended Dec. 31.
"While much of the financial disruption in fiscal 2020 can be attributed to the impact of the coronavirus, residual integration and volume challenges continue to hamper the organization," Fitch wrote.
Fitch expects improvement in operating margins over the longer term, not only from historically strong Reading Hospital but also from the addition and development of new service lines, most notably Tower's transplant services.
Fitch said it could take years for Tower to recover.
"Significant strategic and operational improvements will be needed to rebuild balance sheet strength over the longer term," Fitch said. "With so much depending on the progress of the vaccine and economy over the next several months, there is a large degree of uncertainty around our scenario."
Tower called the Fitch downgrade "sobering."
"Tower Health is in the midst of a careful, thorough and diligent turnaround process, and is already seeing positive results from initiatives now underway," Tower said in an email statement. "The Fitch report is sobering but also recognizes positive indicators. Importantly, our revenue, admissions, and surgeries are recovering as we had planned, and in some cases, better than we planned. Under the leadership of our interim CEO P. Sue Perrotty and our board of directors, we continue to explore a variety of opportunities and potential partnerships to build a strong, sustainable future for Tower Health. We are moving forward as a unified health system, guided by our mission to provide high-quality, affordable and accessible care for each community we serve."
— 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