Tower Health reviewing its options

Health system taking to mid-July to review its options

West Reading-based Tower Health aims to complete its review of potential suitors by mid-July as it continues to post losses.

Tower lost nearly $80 million from January through March, according to its quarterly disclosures to bondholders. That’s an improvement over the previous quarter when the seven-hospital system lost near $111 million.

Meanwhile, in April, Tower received multiple indications of interest in response to a request for proposals issued on behalf of Tower Health by its consultant H2C, Tower told investors.

Consultant H2C, Hanlon Hammon Camp LLC, is a New York-based health care-focused investment banking firm. H2C advised Tower on its purchase of five Community Health System hospitals in 2017 and Tower’s sale-leaseback deal

with a Chicago investment firm last year.

“(The indication of interests) covered several permutations and combinations of transactions and assets,” Tower wrote. “Tower’s board has authorized H2C to continue to pursue strategic options, which may result in more than one transaction. The Tower board has set mid-July as our goal for completing the review of these indications of interest and working with the interested parties.”

In mid-July Tower’s board will announce a decision to pursue a nonbinding letter of intent with a potential partner, or an alternative path for the system, interim CEO P. Sue Perrotty said in a staff memo in May.

Perrotty said that in the memo because the health system is on a path to fiscal stability. It is not preparing for bankruptcy. Perrotty said in an interview with the Reading Eagle in April that bankruptcy was always a risk and her goal was to avoid it at all costs. Nonprofits cannot be forced into bankruptcy.

“The fact is, we have met and continue to meet all our financial obligations for payroll, pensions, debt payments and vendors,” Perrotty said in the May memo. “Your hard work has given the board more confidence that we are on the right path towards financial stability.”

In its disclosure, Tower said it had 112 days of cash available for payroll and to pay vendors on March 31, down from 147 days on June 30. Tower said about 25 days of Medicare cash advances would begin in April.

The Medicare repayment would bring the days of cash on hand to 87.

A Moody’s Investors Service study of nonprofit hospitals during the pandemic showed hospitals saw an increase of cash on hand by 44 days in fiscal 2020 to 246 days, mostly due to advance Medicare payments, the deferral of payroll taxes, halted capital projects and a suspension of retirement contributions.

Moody’s said in the March 25 study that hospitals generated a median operating margin of 0.50% in fiscal 2020. Tower’s operating margin was a minus 13.2% for the first three months of 2021, which is better than the minus 19.3% in the previous quarter.

The financial picture

Tower said it saw visits decline due to multiple snowstorms in February with admissions down 3.2% over the previous quarter. Emergency room visits were down 8.8%, and inpatient surgeries were down 5.2%.

Yet revenue increased by 1.8%, Tower said.

March, Tower said, was its best in the last 12 months, with record volumes for admissions, surgeries, outpatient registrations, physician visits and Home Health visits. Total gross revenues were $61.6 million over budget while outpatient revenues were $35 million over budget versus the two previous months being $53 million under budget.

Reading Hospital continued to generate significant operating income, Tower said. In the last quarter Reading Hospital produced $26.9 million in operating income, compared with $17.8 million the previous quarter.

In addition to anchor Reading Hospital, Tower operates six hospitals in the Philadelphia region, including the five it bought from the Franklin, Tenn.-based Community Health Systems in 2017.

The other, St. Christopher’s Hospital for Children, was purchased in partnership with Drexel University in Philadelphia in 2019.

Since last year, executives have been eying a sale of the hospital or other assets in Chester, Montgomery and Philadelphia counties. Even before the pandemic, Tower struggled to integrate the hospitals.

Tower also operates 28 urgent cares, a home health care subsidiary, ambulance service and a behavioral health center with partner Acadia Healthcare and a new medical school partnership with Drexel University.

The former Community Health hospitals generated an operating loss of $55.2 million for the first three months of 2021, compared with the previous quarter with a $45.7 million loss.

The first three months of 2021 saw several changes, including the unexpected retirement of CEO Clint Matthews and resignation of CFO Gary Conner; pay cuts to executives; and most recently a restructuring of its medical group, impacting nearly 200 doctors and other staff in a move to improve its troubled finances.

The consolidation was expected to save $70 million by the end of June, and the pay cuts to 400 executives were expected to save $11 million.

‘We do have a future’

Perrotty said in the May memo to staff that Tower was transitioning to recovery mode from COVID-19 and from a difficult financial situation made worse by the pandemic.

“We are not yet fully recovered, however,” Perrotty wrote. “We still have hard work and tough decisions ahead — and we will face those challenges with the same sense of both urgency and thoughtfulness that has brought us this far.”

In a May video to staff, Perrotty said improvements continued into the present quarter.

“In the first week of May we’ve seen an improvement in cash collection, and we are exceeding our collections by almost 20%,” Perrotty said.

She praised employees for finding and implementing solutions:

“Constant process improvement is the only way to ensure our long-term future — and we do have a future.”

BEN HASTY — MEDIANEWS GROUP Filings of formal interest in all or parts of Tower Health are due later this month. After that, the medical entity will take a closer look at the offers.