Tower Health suffers rating downgrade as it strives to recover

Even as Tower Health works to dig out from its financial troubles, there’s skepticism about the organization’s prospects.

Tower Health's credit rating has been downgraded by Fitch Ratings, citing continued financial losses. Tower Health says it's moving toward profitability. (Image credit: ©Kalafoto - stock.adobe.com)

Fitch Ratings downgraded Tower Health’s credit rating this week, citing concerns about the Pennsylvania hospital system’s continued financial losses.

Fitch lowered Tower’s rating from “CCC+” to “CCC”, which indicates a substantial credit risk. Fitch noted that the organization typically doesn’t provide outlooks to organizations in that category.

For its part, Tower Health says it’s making progress toward profitability.

Fitch noted that Tower is making some gains, but says there’s a difficult road ahead.

“Tower's pathway to demonstrated financial stability still remains challenged, with additional operational improvement needed to overcome their current trajectory of liquidity losses,” Fitch says.

Tower continues to suffer from a “precipitously weak” cash-to-total debt ratio of 13.4%, Fitch says, estimating that the system has 39 days cash on hand. For perspective, Fitch said in a July report that the median cash-on-hand figure for nonprofit hospitals was 216 days.

Fitch also cited Tower’s “notable operational losses'' in the 2023 fiscal year. Fitch noted that most of those losses were reported in the first three quarters, with some improvement in the fourth.

Tower Health reported $1.9 billion in revenue in the 2023 fiscal year. Tower had a $142 million operating loss in 2023, which was down from $212 million in 2022.

• Read more: Hospitals can expect weaker margins for the rest of 2023, and into 2024

Rebounding from flawed expansion

Tower is based just outside Reading, Pa., about an hour from Philadelphia. Tower includes its flagship Reading Hospital, along with Phoenixville Hospital and Pottstown Hospital. Tower operates St. Christopher’s Hospital for Children in partnership with Drexel University. Several Philadelphia health systems donated more than $50 million in 2022 to help sustain St. Christopher’s.

Tower has been working to rebound from an ill-fated expansion plan several years ago. In 2017, the Reading Health System, anchored by Reading Hospital, acquired five hospitals in the Philadelphia area and formed the Tower Health organization. Tower paid $423 million for the hospitals but the move proved to be calamitous financially.

Since then, Tower has taken steps to downsize the system and steady the ship. Tower sold Chestnut Hill Hospital to Temple University Health System.

Tower Health also shut down two hospitals, Brandywine Hospital and Jennersville Hospital, at the end of 2021. ChristianaCare, based in Delaware, bought the shuttered Jennersville Hospital last year. In July 2023, Tower Health signed a letter of intent to sell Brandywine Hospital to Penn Medicine.

Penn Medicine, the Philadelphia-based system, and Tower Health had explored a strategic alliance of the two systems, but they announced in February that those plans had been abandoned.

Kevin Holloran, senior director at Fitch Ratings, told Chief Healthcare Executive® in a December 2022 interview that the expansion did lasting damage.

“It was the expansion that didn’t work,” Holloran said, adding, “They were expanding at the exact wrong time.”

‘We are optimistic’

In a statement sent to Chief Healthcare Executive®, Tower says that it is on track to becoming profitable this year.

Tower noted that it ended its fiscal year with the best four-month period in years, with positive cash flow in the fourth quarter.

“As the Fitch report notes, Tower Health ended fiscal year 2023 with its strongest performance in years, stabilizing our operations and achieving cash positive results for the final quarter,” Tower Health said in the statement.

“This turnaround is a testament to the unwavering commitment and hard work of our entire team. We are optimistic about maintaining this upward momentum, especially as our performance improvement initiatives gain traction.”

Tower notes that it has moved to right-size the system and is focusing on a core service area of Berks County, and portions of Chester and Montgomery counties in the Philadelphia suburbs, along with St. Christopher’s Hospital for Children.

“Importantly, our clinical care and support teams have remained steadfast in our mission to provide high-quality care to the communities we serve,” Tower said in a statement. “Reading Hospital, Phoenixville Hospital and Pottstown Hospital have each been recognized with accolades for clinical quality and safety.”