California-based Prospect Medical Holdings Inc. filed for bankruptcy after being burdened by rising costs, declining revenues, and a precarious liquidity position.
The holding company runs 16 hospitals across four states—California, Connecticut, Pennsylvania, and Rhode Island. These hospitals together serve 2,500 people daily and employ roughly 12,500.
Supply issues and surging labor costs resulted in “significant cost increases,” while outpatient visits remained depressed compared to pre-pandemic levels, thus reducing revenues.
The medical system is looking to sell Roger Williams Medical Center and Our Lady of Fatima Medical Center in Rhode Island to Centurion Foundation Inc., according to a Jan. 11 statement from the company.
The company is also working with the state of Pennsylvania to agree on terms related to divesting its interest in the Crozer-Chester Medical Center in Upland.
“Throughout the Chapter 11 process, Prospect Holdings’ hospitals, medical centers, and physicians’ offices will remain open, and patient care and services will continue uninterrupted,” the company said.
Prospect said it was working to finalize funding to continue operations for the duration of the Chapter 11 process.
Once secured, these funds, together with cash from ongoing operations, are expected to provide enough liquidity to support the company while it carries out the sale of hospitals and considers future actions.
Private Equity Investments
The U.S. Senate Committee on the Budget issued a report this month highlighting issues related to private equity (PE) investments in hospitals.The report detailed the impact of private equity entity Leonard Green & Partners (LGP) on Prospect. LGP acquired a 61 percent majority stake in the company in 2010, holding these shares until it exited in 2021.
During LGP’s ownership, Prospect acquired 16 additional hospitals over four years, the report said. LGP incentivized Prospect’s management “to satisfy LGP’s financial goals (regardless of patient outcomes),” according to the report.
LGP was found to have redeemed stocks valued at $88 million without approval from Prospect’s board of directors, forcing the company to take out a $325 million loan. The company gave stock options to Prospect employees based on hitting earnings goals while no such incentives were offered to improve patient care and safety, the report said.
LGP and Prospect’s “primary focus was on financial goals rather than quality of care at their hospitals, leading to multiple health and safety violations as well as understaffing and the closure of several hospitals,” it said.
Dr. Ellana Stinson, an emergency medicine physician and president of the New England Medical Association, said that PE buyouts were taking place in more than 30 percent of U.S. hospitals.
Eileen O’Grady, health care research and campaign director for the nonprofit watchdog Private Equity Stakeholder Project, said that PE takeover of hospitals usually involves leveraged buyouts that end up leaving hospitals in debt. A leveraged buyout is the purchase of a company using borrowed funds.
“That kind of high leverage can divert cash away from operations to paying interest on the debt and leave companies more at risk for restructuring or bankruptcy,” O'Grady said.
“We’re acutely seeing the effects of this now, as private-equity-owned companies are struggling under mountains of debt in a high-interest rate environment.”
