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Steep losses and massive debt are forcing Tower Health to consider selling Philly-area hospitals

The nonprofit went into massive debt to expand and then COVID-19 hit.

Tower Health bought St. Christopher’s Hospital for Children in a 50-50 joint venture with Drexel last year.
Tower Health bought St. Christopher’s Hospital for Children in a 50-50 joint venture with Drexel last year.Read moreMichael Bryant / File Photograph

Tower Health, buckling under a massive debt load and huge losses over the last two years, will consider selling all six Philadelphia-area hospitals that the Berks County nonprofit has acquired since 2017, Tower officials told municipal bond investors Tuesday.

“We as a board will consider any and all strategic options,” with “a very strong preference, if not an obsession, to preserve the mothership, Reading Hospital,” Tower’s chairman Tom Work told investors on a conference call.

Another high priority for the board is maintaining Tower’s academic affiliation with the Drexel University College of Medicine, Work said during a rare appearance by a nonprofit health system board chairman on a call with municipal bond investors. Tower and Drexel are partners in a medical-school campus near Reading Hospital.

The call took place less than two weeks after Standard & Poor’s and Fitch slammed Tower with sharp downgrades, declaring that the health system, based in West Reading, is in “precarious financial position” and “faces a difficult path to recovery.”

» READ MORE: Tower Health’s financial condition called ‘precarious’ in credit downgrade to ‘junk’ status

Three years ago, Tower embarked on a risky expansion, first borrowing money to buy five community hospitals in Southeastern Pennsylvania for $423 million, then paying $24 million for a chain of urgent-care centers, and last year contributing $29 million toward the $58 million purchase of St. Christopher’s Hospital for Children in a 50-50 joint venture with Drexel.

Tower employs about 14,000, including 2,000 at St. Chris. It had an operating loss of $438 million on $1.9 billion in revenue in the year ended June 30.

Reading Hospital itself had an operating profit of $66.6 million on $1 billion in revenue in the year ended June 30, despite a sharp reduction in business when Gov. Tom Wolf ordered hospitals to stop all non-urgent care, such as joint replacements and other elective surgeries.

But the community hospitals acquired from the for-profit Community Health Systems Inc., in Chestnut Hill, Phoenixville, Pottstown, Coatesville, and West Grove, have been a massive financial drain, logging nearly $400 million in operating losses in the last two fiscal years ended June 30.

Work, Tower’s chair and a shareholder at the Stevens & Lee law firm, described Tower’s 2017 community-hospital expansion "as one for which we had the best possible advice and the very best motives and information we could. It was an effort to leverage an excellent clinical platform that Tower had developed.”

The idea was that Reading Hospital, in West Reading, would serve as a hub, attracting community hospital patients from Chester, Montgomery, and Philadelphia Counties, where consumers are used to going to Philadelphia for the most advanced care.

“Trying to change patterns about where people get health care” was a very risky strategy, said Daniel G. Grauman, chief executive of Veralon, a national health-care consulting firm based in Philadelphia.

As to selling Tower’s community hospitals, Grauman and others with knowledge of the Philadelphia-area health-care market said that won’t be easy because some have been troubled for decades and all of them were owned for many years by a for-profit that invested little in them, making it hard for them to compete.

“I think it’s going to be very problematic to try to sell any one of those hospitals,” Grauman said. “Perhaps Chestnut Hill would have more traction because it’s in the more immediate Philadelphia market.”

Daniel Ahern, Tower’s executive vice president for strategy and business development, said Tower is in early stages of discussions about potential transactions, “including certain packages of hospitals and ambulatory assets, as well as individual asset transactions.”

Management expects to make recommendations on potential sales by the end of this year.

Asked by an analyst on Tuesday’s call whether Tower would consider closing any of the hospitals if it can’t find buyers, Ahern said: “We will look at all alternatives.”