Tower Health restructures amid operating losses
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Tower Health plans to sell and close two of its seven acute-care hospitals as the Pennsylvania not-for-profit health system continues to lose money.
The board approved a non-binding letter of intent to sell Chestnut Hill Hospital and more than a dozen urgent care centers to Trinity Health Mid-Atlantic, the Reading, Pennsylvania-based system announced Tuesday. Board members also signed off on closing Jennersville Hospital by the start of next year.
Tower acquired five hospitals, including Chestnut and Jennersville, from Community Health System in 2017. The health system’s operating income has waned since 2017, reporting operating losses since 2019.
“Tower Health is the classic example of how an M&A strategy focused on growth for the sake of growth will fail,” said Jordan Shields, a partner at Juniper Advisory.
After Tower purchased the CHS hospitals, it acquired St. Christopher’s Hospital for Children with Drexel University as it tried to keep pace with Jefferson Health, University of Pennsylvania Medical Center and Temple Health.
Ideally, Tower’s growing portfolio could boost its negotiating leverage with the two dominant insurers in the area. But those acquisitions weren’t sufficient, said Lawton Robert Burns, professor of healthcare management at University of Pennsylvania’s Wharton School.
“Buying up hospitals in Southeastern Pennsylvania is a sure-fire way to lose money,” he said, noting the overlooked lessons from the $1.3 billion bankruptcy of Allegheny Health, Education and Research Foundation in 1998. “You have a concentrated buyer market and you’re not going to get much bargaining leverage with those kinds of properties. The mantra in the hospital C-suite is to grow by buying up other pieces on the Monopoly board—you are playing a very risky strategy if you are going to grow by buying lower quality properties.”
Tower will continue to operate St. Christopher’s Hospital for Children while working with local and state agencies and organizations to secure its long-term future, executives said in a news release, adding that they are also evaluating what to do with Brandywine Hospital.
“These decisions were made after an intensive process by which Tower’s Board sought to balance long-term sustainability and impact upon our team and the communities we serve. Opportunities for our employees to work at other Tower Health facilities or at Penn Medicine were important to the Board and leadership,” Tom Work, chair of Tower’s board, said in the release.
The restructuring will help Tower refocus on its core market, anchored by Reading Hospital, and streamline operations, analysts said.
“This is moving into a nuts-and-bolts approach that one can put numbers to and see a hard positive impact,” said Kevin Holloran, senior director at Fitch Ratings. “Certainly the affiliation with Penn Medicine was well received, but if completed as proposed, would move the dial in a more easily quantifiable way.”
Tower and Penn Medicine formed a strategic alliance in July, aiming to jointly develop and improve clinical operations. While Tower reported a $243.8 million operating loss in 2021, executives noted the improvement from a $415.3 million operating loss in 2020. There was a $39.3 million one-time expense related to an education grant for Drexel and Epic implementation. There may be a non-cash impairment charge related to the restructuring, according to Tower’s latest earnings report.
Chestnut and Jennersville racked up more than $23 million in operating losses in 2021 after accounting for COVID-19 relief funding. They accounted for around $171 million of Tower’s $2.19 billion in 2021 revenue. Brandywine Hospital recorded a $35.5 million operating loss in 2021.
Tower Health recorded a $178.8 million operating loss in 2019, down from a $7 million operating income in 2018.
“Bigger isn’t always better, and those acquisitions didn’t transpire as expected given the significant weakening of the financial profile of Tower. But this transaction will help pave the way to focus on their core geography and streamline operations,” said Anne Cosgrove, a credit analyst for S&P Global Ratings, noting that Chestnut and Jennersville represent about 8% of Tower’s revenue while Reading is close to half.
S&P downgraded Tower’s credit rating three notches last year to BB+ from BBB+ and kept its outlook at negative, citing “severe loss from operations and negative cash flow resulting in inadequate debt service coverage ratios.”
While the restructuring isn’t a panacea, Tower is in compliance with its debt service coverage covenant and it has adequate cash on hand, Cosgrove added.
Fitch Ratings said in a March report that Tower’s leverage and liquidity remains weak, even for the lower rating category. Negative pressure will remain until operational issues and non-performing assets are successfully resolved, analysts said.
Guidehouse, which is helping the reorganization, identified $163 million in operational efficiencies related to revenue cycle, physician services, 340B pharmacy and supply chain, according to the 2021 financial statement.
“This announcement is likely just the first from Tower,” Shields said, noting that potential acquirers have been interested in certain assets like Reading Hospital, but not the system as a whole. “Divesting Chestnut Hill and closing Jennersville will help stabilize Tower, but these moves are almost certainly not enough.”
Trinity Health Mid-Atlantic is committed to retaining employees and providers of Chestnut Hill Hospital and acquired urgent care centers “who are in good standing,” James Woodward, CEO of Trinity Health Mid-Atlantic, said in a news release.