Prospect Medical Holdings filed for bankruptcy protections late Saturday, a move the financially strapped health system said will streamline divestitures outside of its home state of California.
In an online announcement, the for-profit company stressed that the voluntary Chapter 11 proceedings “does not mean that Prospect Holdings is going out of business.”
The company also plans to keep its facilities open and care uninterrupted throughout the proceedings, it said. Prospect also intends to pay vendors in full for goods and services provided going forward and provide paychecks to its staff.
Prospect, which runs 16 hospitals and over 160 outpatient sites across four states, filed for Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Texas. Bankruptcy documents outline between $1 billion and $10 billion of estimated assets and estimated liabilities, as well as more than 100,000 creditors.
The company’s efforts in recent years to sell off several facilities in Rhode Island, Pennsylvania and Connecticut have faced roadblock after roadblock.
Yale New Haven Health, for instance, cited concerns surrounding the conditions of three Connecticut hospitals in a lawsuit it filed to back out of a sale. Two different deals in Pennsylvania regarding Prospect’s Crozer Health also ran aground, one in 2022 and another just a few months back. Another ongoing arrangement in Rhode Island with nonprofit The Centurion Foundation has been moving at a snail’s pace amid concerns from the public and other complications.
The weekend’s filing will help Prospect “expedite” its agreement in Rhode Island and help push along its work with the Commonwealth of Pennsylvania to divest Crozer Health, according to the company.
The bankruptcy filing represents “an important step forward in our longstanding commitment to best serve the interests of our patients, physicians, employees and communities,” CEO Von Crockett said in a release. “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.”
In November Prospect also announced a $745 million definitive agreement to offload its California licensed healthcare service plan; medical groups in California, Texas, Arizona and Rhode Island; a management service organization; a pharmacy asset and a 177-bed California hospital to Astrana Health (formerly Apollo Medical Holdings). That deal is unaffected by the bankruptcy and is still expected to wrap up sometime this year, Prospect said.
Of note, Prospect now stands as another high-profile example of private equity’s healthcare investments resulting in financial struggles. The system was majority-owned by private equity firm Leonard Green & Partners (LGP) from 2010 to 2021, with media reports noting facility closures, service suspensions and deteriorating conditions at Prospect locations near the end of the firm’s involvement or shortly after its exit.
Just last week, a bipartisan Senate Budget Committee report noted that LGP “wielded substantial influence” over Prospect and its financial decisions during that period. The firm’s investors received hundreds of millions in dividends and preferred stock redemption during that period, according to the report.
Prospect also acquired 16 hospitals during just four years of the firm’s majority ownership, per the report, which helped fuel a $1.55 billion sale-leaseback deal in August 2019 that stripped ownership of the hospitals’ real estate from the company—an arrangement that quickly raises capital but left Prospect with hefty rent payments.
The Senate’s report noted that LGP-led discussions during board and committee hearings “centered around profits, cost cutting, acquisitions, managing labor expenses and increasing patient volume—with little to no discussion of patient outcomes or quality of care. During LGP’s majority ownership, several [Prospect] hospitals suffered form the effects of labor cuts, decreased patient capacity, inadequate and unsafe building maintenance and financial distress.”
The current leadership of Prospect has overseen eight hospital closures, six of which occurred “during or directly after LGP’s majority ownership.”
The bankruptcy filing and broader picture painted in the Senate’s report evoke Steward Healthcare, another private equity-backed health system that collapsed last year. Employees, researchers, local government officials and other policymakers have pointed to the value-extracting practices of its private equity backer, Cerberus Capital Management, as a prime example of “corporate greed in healthcare.”
“While Prospect Medical Holdings paid out $645 million in dividends and preferred stock redemption to its investors—$424 million of which went to Leonard Green shareholders—it took out hundreds of millions in loans that it eventually defaulted on,” Sen. Sheldon Whitehouse, D-R.I., said last week in a statement accompanying the report. “Private equity investors have pocketed millions while driving hospitals into the ground and then selling them off, leaving towns and communities to pick up the pieces.”
Prospect said that it will be working “as expeditiously as possible” to complete the sales and restructuring process so it can “return to fulfilling its original mission” in California. It also said it is working with “key stakeholders” to finalize the funding needed to sustain the Chapter 11 proceedings.
“Through this process, Prospect Holdings will regain its financial footing as we rededicate ourselves to our original mission of serving the community,” Crockett said. “We look forward to working alongside our stakeholders to implement these strategic transactions, and are confident that through these actions, Prospect Holdings will be better positioned to prioritize and execute its core strengths.”