(Bloomberg) -- Troubled Pennsylvania hospital chain Tower Health is eyeing a turnaround after struggling even before the pandemic hit.

It is essentially undoing the ill-fated 2017 merger that transformed it into a six-hospital system. But its plan hit a snag last week when the sale of its shuttered 171-bed Brandywine Hospital to Penn Medicine fell through. 

“In hindsight, management lacked the experience to grow that big that fast,” said Dora Lee, director of research at Belle Haven Investments, adding that the pandemic made integration of systems like patient records more difficult. “They’re trying to turn themselves back to Reading Hospital.” 

Despite losing about $1.4 billion since the tie-up, Tower Health has been cash-flow positive for the past two quarters, Kristin Boyd Edwards, a spokesperson for the system, said in an emailed statement. New management was also put in place after CEO and President Sue Perrotty started in early 2021.

“While there is still more work ahead, this consistent upward trajectory is a testament to our effective cost management strategies, expansion of service lines, volume increases and our steadfast commitment to system-wide performance improvement,” Edwards added. 

The latest setback is a continuation of what has been a difficult year for the system. There was the dissolution of a previously-announced alliance with Penn Medicine early last year and major credit rating downgrades from Fitch Ratings and S&P Global Ratings. 

Last week, Penn Medicine backed out of buying Brandywine Hospital, a facility west of Philadelphia that Tower Health closed in 2022. Penn had planned to use it for veterans’ treatment.

“After an intensive due diligence process, we have determined that we would be unable to build out the infrastructure for the project in the space available on the Brandywine campus and will terminate our letter of intent with Tower to purchase the property,” Penn Medicine said in a statement on its website.

Penn is instead searching for another nearby property, the statement said. “We look forward to continuing our close work with community stakeholders to listen to your ideas and feedback and share plans as these efforts continue.” 

Tower said it’s received “significant interest” in Brandywine and “will reengage in discussions with these companies, along with others, to secure a new owner for the property.”

Since 2021, Tower has closed two — Brandywine and Jennersville — of the five hospitals it acquired, and sold Chestnut Hill Hospital in Philadelphia to an alliance of Temple Health, Redeemer Health and the Philadelphia College of Osteopathic Medicine at the beginning of last year. A local health system acquired Jennersville in 2022 and converted it to a primary-care campus.

Tower Health currently operates Reading, Phoenixville and Pottstown hospitals, along with St. Christopher’s Hospital for Children, which it bought in partnership with Drexel University in 2019.

The system has $990 million in outstanding municipal debt, according to data compiled by Bloomberg, including $580 million from 2017. In September, Fitch lowered its rating on Tower Health to CCC from CCC+, indicating a strong chance of default.

Though Tower Health narrowed its loss to about $171 million in the fiscal year ended June 30, Fitch analysts flagged its precarious finances, including eroding liquidity. In its most recent two-notch downgrade to CCC+ of the system, S&P cited significant operating losses expected to continue this year “and a steep decline in unrestricted reserves to a level that we view as highly vulnerable.”

The ratings firms “have noted that we have bolstered our operations through enhancements in revenue cycle management, effective cost control and by successfully right sizing the organization,” Tower Health’s Edwards said. “We are committed to building on this positive momentum.”  

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