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Prospect Medical Holdings' Bankruptcy Is Latest Case of Private Equity Ownership Gone Wrong

Analysis  |  By Jay Asser  
   January 16, 2025

The health system's financial unraveling has similarities to the much-maligned collapse by Steward Health Care.

The spotlight on private equity ownership in healthcare is burning even brighter after Prospect Medical Holdings' descent.

The California-based for-profit health system filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Texas after its former private equity owner extracted value and saddled it with significant debt.

In its filing, Prospect declared between $1 billion and $10 billion in assets and liabilities, along with more than 100,000 creditors.

The company, which operates 16 hospitals across California, Connecticut, Pennsylvania, and Rhode Island, said in an announcement on its website that the move will allow it to "refocus on its core strength and return to fulfilling its mission of operating community hospitals in California." Prospect also stated it plans to keep its hospitals, medical centers, and physicians' offices open during the restructuring process.

It's been a struggle for Prospect to divest its hospitals. The system's deal with Yale New Haven Health for three Connecticut facilities has been stuck in a lawsuit due to the buyer's concerns over conditions and missed payments.

Meanwhile, Prospect has seen two separate deals to offload Crozer Health fall apart, with the first coming in 2022 with ChristianaCare Health System and the most recent coming in recent months with CHA Partners.

By filing for bankruptcy, Prospect said it will work with Pennsylvania to find a buyer for Crozer Health and speed up the sale of two Rhode Island hospital to the Centurion Foundation, which has been slowed by worries over mismanagement.

"Divesting our operations outside of California will ensure that they receive necessary financial support so that the communities that rely on those facilities will maintain continued access to highly coordinated, personalized, and critical healthcare services long into the future," Prospect CEO Von Crockett said in a statement.

Another private equity disaster

Prospect has gone down a similar path to the one Steward Health Care received criticism for due to the role private equity ownership played.

Dallas-based Steward filed for Chapter 11 bankruptcy as well and put all 31 of its U.S. hospitals up for sale, with previous private equity owner Cerberus Capital Management receiving much of the blame.

In the case of Prospect, private equity firm Leonard Green & Partners owned the system from 2010 to 2021. A bipartisan report from the Senate Budget Committee released this month highlighted how Leonard Green "wielded substantial influence" over Prospect's financial decision-making and collected $424 million of the $645 million in dividends and preferred stock redemption that Prospect paid out to investors.

The report also outlined how Prospect became financially distressed through a $1.55 billion sale-leaseback with Medical Properties Trust. The maneuver provided the system with immediate capital but left it with debt from rent payments. Medical Properties Trust said in a release that Prospect has not paid any rent since last June.

Leonard Green 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," the Senate report stated.

As Prospect works to "regain its financial footing," according to Crockett, the deterioration of two private equity-backed health systems in the past year is further placing regulation of hospital ownership at the forefront of lawmakers' minds.

Jay Asser is the CEO editor for HealthLeaders. 


KEY TAKEAWAYS

Prospect Medical Holdings has declared bankruptcy due to debt piling up as a result of the ownership by private equity firm Leonard Green & Partners from 2010 to 2021, a Senate report detailed.

The report found that the Leonard Green extracted $424 million in dividends and preferred stock redemption while engaging in a damaging $1.55 billion sale-leaseback deal.

Private equity ownership of hospitals continues to come under fire for its potentially harmful impact on organizations and patient care.


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