• January 22, 2021

Tower Health may sell former CHS hospitals in Philadelphia area

Nov 12, 2020

Not-for-profit Tower Health is embarking on an aggressive cost-cutting program to stem losses that could include selling its Philadelphia-area hospitals.

West Reading, Penn.-based Tower posted a staggering $439 million operating loss on $1.9 billion in revenue in fiscal 2020, which ended June 30, a -22.9% margin. Executives told bondholders on a Nov. 10 call that the COVID-19 pandemic took a hefty toll on the not-for-profit system’s finances.

Tower had been losing money before the pandemic, however, having posted a -10.2% margin in fiscal 2019. The news that Tower may shed hospitals follows credit downgrades from Fitch Ratings and S&P Global Ratings in October.

Clint Matthews, Tower’s CEO, said on the call that the health system secured a restructuring consultant, Guidehouse, last week. He said Tower has taken a number of steps to cut costs, including shuttering service lines in some areas such as a maternity unit, sports medicine program and detox center. Tower is also suspending strategic projects and laid off about 780 employees in June, Matthews said.

But executives on the call acknowledged those efforts won’t be enough. They said they’re looking at strategic options, including sales, for the five acute-care hospitals Tower bought from for-profit Community Health Systems in 2017 in Chester, Montgomery and Philadelphia counties. Those five hospitals lost a combined $235 million in fiscal 2020.

Executives also referenced the underperformance of St. Christopher’s Hospital for Children in Philadelphia, which it acquired out of bankruptcy under a partnership with Drexel University. That hospital generated $3.2 million in operating income in fiscal 2020. Jessica Belzer, a spokeswoman for Tower, declined to say whether St. Christopher’s is among the hospitals on the chopping block.

Tom Work, Tower’s board chairman, said the health system’s decision to acquire the CHS hospitals and St. Christopher’s was a strategic move made using the “best possible advice and very best motives.”

“There are good decisions, there are bad decisions, there are ones in which you second guess what you have done,” he said.

Tower isn’t alone in struggling to make money off its former CHS hospitals. Nearly 80% of the hospitals CHS has sold in recent years are operating at a loss, bankrupt or closed, according to a Modern Healthcare analysis from February.

Tower’s “mothership” Reading Hospital, a teaching hospital in its West Reading headquarters, is doing well and not on the chopping block, Matthews said. Reading Hospital generated $66.6 million in operating income in fiscal 2020.

Dan Ahern, Tower’s executive vice president of strategy and business development, said Tower is in talks with “several strategic partners” regarding its so-called “Project Phillies” initiative, which could include selling the hospitals. He said his team expects to recommend options by the end of calendar 2020, with deals consummated in the first half of 2021. H2C is serving as Tower’s financial advisor on that project.

If Tower can’t find buyers for the former CHS hospitals, Ahern said the health system will consider all options, including closing or repurposing them.

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