“Private Equity-Owned Prospect Medical Holdings Holds Rhode Island Communities Hostage, Threatens to Close Safety Net Hospitals After Attorney General Asks Owners to Return a Portion of Dividends“
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Prospect Medical Holdings Threatens To Shut Down Its Hospitals In Rhode Island
Safety net hospital chain Prospect Medical Holdings is threatening to shut down its hospitals in Rhode Island in response to conditions imposed by Rhode Island Attorney General Peter Neronha intended to keep the hospitals open.
Prospect is owned by Los Angeles-based private equity firm Leonard Green & Partners. The chain runs 17 hospitals in 5 states, including Roger Williams Medical Center and Our Lady of Fatima Hospital in Rhode Island. Leonard Green is currently attempting to sell its majority stake in Prospect to the minority owners but needs regulatory approval from regulators in Rhode Island to do so.
In their review process for the transaction, the Rhode Island Department of Health and Office of the Attorney General hired national accounting firm PYA to analyze Prospect’s financial statements. PYA’s findings indicate that Prospect faces pronounced financial viability risks.
According to a statement released by Prospect, Neronha is asking Prospect to put between $120 million and $150 million in escrow to ensure the financial viability of the hospitals as a condition of Leonard Green’s exit.
There Would Be Dire Consequences
Rather than seeking redress through the legal process, Prospect delivered an astonishing threat to shutter its Rhode Island hospitals, proclaiming that there would be “dire consequences for Rhode Island’s 3rd largest hospital system if this transaction is not approved.” Both of the hospitals are safety net hospitals, which serve patients regardless of their ability to pay. These services are critical to providing care for low income people in Rhode Island.
Over the course of its ten-year ownership, Leonard Green and Prospect’s minority owners have collected approximately $658 million in fees and dividends from the safety net hospital chain. The dividends were largely funded with debt added to Prospect’s balance sheet.
Leonard Green’s looting of Prospect has drawn scrutiny from lawmakers, regulators, and other stakeholders for siphoning hundreds of millions of dollars out of Prospect while the hospitals suffered poor quality ratings, operational challenges, and deteriorating conditions.
“Given the hundreds of millions of dollars Prospect’s private equity owners have taken from this safety net hospital chain, it is incredibly disturbing that they would rather shut down these hospitals rather than put a portion of the money the money they took into escrow to ensure the hospitals’ long-term financial viability,” said PESP Research Coordinator Eileen O’Grady.
Long Term Financial Viability Risks
While Prospect and its owners claim that it is “well-capitalized,” PYA’s analysis of the company’s financial statements suggest otherwise. In its presentation to the Rhode Island Health Services Committee, PYA wrote that Prospect faces “long term financial viability risks” and that its leverage far exceeds assets: “PMH’s leveraged position has increased to a point where, at September 30, 2020, PMH’s total liabilities exceeded total assets by approximately $1.06 billion.”
According to the PYA analysis, Prospect private equity owner Leonard Green & Partners has not made significant investments in the hospital company since it acquired it in 2010. The proposed transaction “appears to, in effect, release [Leonard Green & Partners] from any portion of existing liabilities and future obligations,” PYA wrote.
PYA also notes that “$387 million in PMH cash at September 30, 2020 includes approximately $276 million associated with Medicare Advanced and Accelerated Payments (MAAP), which repayment is required over a period of up to 17 months.”
This means that the vast majority of Prospect’s cash (71%) is CARES Act stimulus loans Prospect will have to pay back. Prospect has also received at least $187 million in grants through the CARES Act.
“The public provided a $460 million bailout to Leonard Green & Partners’ Prospect Medical Holdings last year to help keep its hospitals open,” said O’Grady. “Now Prospect is turning around and threatening to close those hospitals because the Attorney General is asking the company to ensure the hospitals’ financial viability. Leonard Green & Partners looted Prospect Medical Holdings, siphoning hundreds of millions of dollars out of the hospitals, and are now holding Rhode Island communities hostage with Prospect’s threat to close its hospitals.”
O’Grady applauded Neronha’s office for its bold act to preserve the two Rhode Island hospitals: “The PYA analysis of Prospect’s financials speaks for itself: Prospect faces long term financial viability risk, but its wealthy owners have made a killing. It is encouraging that Neronha’s office is standing up to Prospect’s owners to ensure that the hospitals have adequate resources to stay open and provide quality care in the coming years.”
 PYA presentation, pg. 16.