Tower Health’s plans were small before expanding big-time into the Philly area

In early 2016, Tower Health was sitting on a pile of cash and even contemplated building two small hospitals, according to internal documents obtained by The Inquirer.

The goal was to expand Tower’s reach and avoid being swallowed by one of the larger competitors surrounding it and encroaching on its territory.

The Berks County nonprofit made a flurry of moves from 2016 to 2018, including a near fatal one: the purchase of five money-losing community hospitals in the tough Philadelphia-area hospital market.

Now, after massive losses at those hospitals, the entire system is for sale, and the Tower Health board is scheduled to meet next week to review bids — if any came in by last Friday’s deadline.

Tower declined to comment on specifics regarding bids. “The board is reviewing and analyzing multiple indications of interest and it would not be appropriate to comment on that process at this time,” a Tower spokesperson said Tuesday.

» READ MORE: St. Christopher’s future at risk again as Tower Health looks to sell hospitals

In early 2016, Tower, then called Reading Health System, wanted to build two hospitals in Gilbertsville and Orwigsburg for a total cost of $170 million, a relatively small sum in the world of hospital construction.

The 2016 strategic plan, which extended to 2020, focused on defending Tower’s core market. Its cost would total about $350 million and include large outpatient sites and multiple urgent care centers, records show.

But that plan never materialized. At the same time, the overall strategy in early 2016 — reinforced by McKinsey & Co. consultants later that year — was to form partnerships that would expand its reach and prepare it for a time when doctors and hospitals are financially on the hook if they don’t provide good care to the patients they treat.

Tower’s board and management wanted the organization to avoid being an afterthought in a rapidly consolidating industry and to hold its own against the likes of the University of Pennsylvania Health System, Jefferson Health, St. Luke’s University Health Network, Lehigh Valley Health Network, and Penn State Health.

The trick was to reduce risk by forming those partnerships without spending a lot of money. Tower stuck with that plan — up to a point.

In a swirl of activity from late 2016 though late 2018, Tower formed joint ventures to sell health insurance, built a psychiatric hospital, opened a branch campus of Drexel University’s medical school, and developed outpatient surgical centers. It strayed slightly from the script when in 2018 it paid $24 million for a chain of 19 urgent care centers.

None of those moves were big financial lifts.

» READ MORE: Tower Health and its Philly area hospitals are for sale. Is anyone interested?

But early in Tower’s push to become a bigger player, board and management, led by former chief executive Clint Matthews, completely broke with their goal of not spending much money.

That happened after Community Health Systems Inc. put five Southeastern Pennsylvania hospitals up for sale in 2016. This offered Tower a faster route to expanding its reach than building the smaller hospitals that had been on the drawing board.

In May 2017, Tower agreed to pay more than $400 million for five money-losing community hospitals in Chestnut Hill, Coatesville, Jennersville, Phoenixville, and Pottstown, banking on patients from those areas traveling to Reading Hospital for high-end specialty care.

A one-hospital system buying five in one fell swoop is an extraordinary move, without considering the particular problems with Tower’s acquisition.

The real cost for those long-neglected hospitals, which Tower management had little access to before buying them, soared to more than half a billion dollars counting desperately needed repairs and $125 million for a new medical records system.

What’s more, the public’s perception of those hospitals was far worse than Tower expected. In some cases, Tower officials learned, consumers preferred to go anywhere else besides the local hospital Tower just bought.

» READ MORE: Money-losing Tower Health replaces CEO after sustaining big losses in Philly and suburban hospitals

Since Tower bought them, the hospitals, sometimes called the CHS hospitals after the former owner, Community Health Systems, have done nothing but lose money. The total operating loss through December for those five hospitals is $457 million.

Tower has defended the deal, pointing to rising patient counts before COVID-19 struck last year, shutting hospitals to all but urgently needed care.

“The decision to acquire the CHS hospitals was consistent with strategic recommendations from McKinsey and others that Tower Health should seek to quickly expand its market share in southeastern Pennsylvania,” a Tower spokesperson said.

Tower’s board chair Tom Work likes to say that Tower “had the best possible advice.”

Other advisers on the deal, besides McKinsey, included investment bank Hammond Hanlon Camp, which is also handling the sale; law firm Stevens & Lee, where Work is a shareholder; FTI Consulting, where former chief executive Matthews worked before taking over at Reading; and accounting firm KPMG.

As losses mounted and Tower’s credit rating sustained sharp downgrades into junk-bond status, attempts to sell the community hospitals last fall went nowhere. Tower added its flagship Reading Hospital to the mix to see if that made a deal more attractive to potential acquirers. Experts say there’s little chance of a deal without a bankruptcy to reduce Tower’s massive $1.5 billion debt load.

It’s possible that St. Christopher’s Hospital for Children, a North Philadelphia safety-net facility that Tower bought in a 50-50 joint venture with Drexel, could be sold separately.

Meanwhile, building a hospital in Orwigsburg, Schuylkill County, seemed like a good idea to Tower’s competitors: St. Luke’s and Geisinger. They spent $72 million on a new hospital that opened in November 2019.

Despite opening just a few months before the pandemic struck, the hospital’s president, Gabe Kamarousky, said the hospital is running ahead of projections and has seen strong demand.