California-based Prospect Medical Holdings filed for Chapter 11 bankruptcy on Saturday in the U.S. Bankruptcy Court for the Northern District of Texas, following years of financial difficulties and escalating pressure from state and federal regulators over its operating practices.
The health system declared $1 billion to $10 billion in both assets and liabilities and said it had more than 100,000 creditors in its initial court filing.
Prospect, which operates 16 hospitals across California, Connecticut, Pennsylvania and Rhode Island, said it will use the restructuring process to sell hospitals and focus on realigning its portfolio back to its core, home-state operations.
“Divesting our operations outside of California will ensure that they receive the 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,” said Prospect CEO Von Crockett in a statement accompanying the filing.
Prospect says it will use the restructuring period to expedite the sale of its Rhode Island hospital to Centurion Foundation and plans to continue to work with state regulators in Pennsylvania to find a buyer for the Crozer-Chester Medical Center.
The health system has previously tried to sell hospitals across the East Coast to generate cash, however, those sales have stalled. Some would-be buyers cited concerns with operating conditions inside Prospect facilities.
In Pennsylvania, Prospect has had at least two deals for its Crozer Health system fall apart. In Connecticut, Yale New Haven Health sued to get out of buying three Prospect hospitals, citing “severe” neglect of facilities that included failure to maintain basic cybersecurity standards, missed payments to vendors and numerous regulatory violations.
Growing heat on private equity
Prospect is the second large health system with private equity roots to file for Chapter 11 bankruptcy protections in the past year. Steward Health Care, which was previously owned by Cerberus Capital Management, shook the healthcare ecosystem in May when it declared bankruptcy and engaged in a multi-month sale process to unload its 31-hospital portfolio. Four hospitals closed during the process, and more than a thousand were laid off.
Private equity firm Leonard Green & Partners owned Prospect between 2010 and 2021. Last week, a report from the Senate Budget Committee accused the firm of plundering the health system for investors’ gain.
The report found Prospect paid out $645 million in dividends and preferred stock redemption to its investors — $424 million of which went directly to pay Leonard Green investors — while taking on high debt loads.
One of the most contentious deals orchestrated under Leonard Green’s direction was a $1.55 billion sale-leaseback with Medical Properties Trust in 2019, in which Prospect sold and rented back its hospitals. Sale-leasebacks give hospitals quick access to cash to fund expansion projects, however, some experts say the transactions strip hospitals of their value. In Prospect’s case, the transaction left the health system on the hook for $1 million in annual rent payments.
“Prospect’s sale-leaseback rental payments were unsustainable,” Rosemary Batt, a professor at Cornell University School of Industrial and Labor Relations who studies REITs’ role in healthcare delivery, told Healthcare Dive over email. “Hospitals that sell their property to REITs in sale-leaseback agreements are doomed to failure as their net revenues fall precipitously and Medicare and Medicaid payments can’t keep up with the annual escalation in rent that REITs charge.”
Leonard Green has disputed the Senate report’s findings, but did not respond to a request for comment about Prospect’s bankruptcy filing by press time.
Since Leonard Green sold its stake in Prospect, the health system has continued to struggle financially.
“We have been expecting this bankruptcy for the last year and a half, and we have been expecting an imminent bankruptcy since November,” Mary Bugbee, healthcare research and campaign director at the Private Equity Stakeholder Project, a watchdog organization that tracks the impact of private equity on healthcare delivery, told Healthcare Dive by email.
Bugbee said there were a number of warning signs preceding the filing, including a growing pile of unpaid bills. Court documents show the system was behind on payments to vendors and staff, despite receiving liquidity boosts from recapitalization transactions in 2023. Medical Properties Trust said Prospect stopped paying rent last June, and Prospect currently owes the landlord north of $60 million, according to court documents.
Prospect’s filing comes amid national scrutiny of private equity in healthcare.
“Prospect and Steward are not outliers — they are part of a trend in which over-leveraged private equity-owned healthcare companies are going under, with longlasting impacts on our nation’s healthcare infrastructure,” Bugbee said.
