This isn’t just the cautionary tale of Boston-born Steward Health Care , which was driven to financial collapse by the controversial actions of CEO Ralph de la Torre and his financial backer, Cerberus Capital Management. It’s also the strikingly similar but less familiar story of Prospect Medical Holdings, a for-profit health care company with hospitals in Rhode Island and Connecticut that was run into the ground by its executives, aided and abetted by private investment firm Leonard Green & Partners.
It’s like déjà vu all over again. A private equity firm acquires a hospital operator, piles on debt, sells off real estate, and pockets a hefty dividend before walking away. Left behind are struggling hospitals, vulnerable patients, and, eventually, bankruptcy.
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In a scathing critique, 11 state attorneys general last June called Prospect Medical “possibly the worst example of private equity greed: enriching investors at the expense of low-income, vulnerable patients.” It’s a damning distinction, given the audacious avarice and mismanagement at Steward chronicled by the Globe.
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The news: Prospect filed for bankruptcy late Saturday in Texas, saying it needs protection from creditors as it continues efforts to sell Roger Williams Medical Center in Providence and Our Lady of Fatima in North Providence.
The Culver City, Calif.-based company is also seeking a deal with Pennsylvania officials to divest Crozer Health, a hospital network outside of Philadelphia, while it holds on to six Southern California facilities, including Los Angeles Community Hospital. In Connecticut, Prospect’s agreement to sell three hospitals to Yale New Haven Health has been stalled for two years by legal disputes between the two parties.
In a court filing, Prospect said it owes hundreds of millions of dollars to its largest creditors, including nearly $61 million to Medical Properties Trust, the very same landlord stiffed by Steward.
Why it matters: As the Globe’s Alexa Gagosz has reported, cash-strapped Roger Williams and Our Lady of Fatima face uncertain futures. Both safety-net hospitals serve many Medicaid and uninsured patients and have struggled with dire conditions — bedbugs, cockroaches, and mice — putting patients at “immediate” risk, according to Rhode Island investigators.
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Under pressure from regulators and nurses unions, Prospect agreed in 2022 to unload the hospitals in an unconventional deal with The Centurion Foundation, a Georgia nonprofit with no experience running medical facilities. Centurion won’t provide funding to the hospitals, instead leaving them to raise money by selling bonds to investors.
Rhode Island Attorney General Peter F. Neronha grudgingly approved the still-pending deal in June with conditions aimed at keeping the hospitals open and solvent. Centurion said it will proceed if the bankruptcy court clears the transaction.
Zoom in: Leonard Green, a Los Angeles private equity firm, acquired control of Prospect in a $363 million deal in 2010, the same year Cerberus bought the Caritas Christi hospitals from the Archdiocese of Boston to create Steward. And like Cerberus, Leonard Green and its investors did well even as Prospect lost money and sunk deeper into debt.
According to a bipartisan Senate Budget Committee report released last week, Prospect borrowed heavily to make $424 million in payouts to its owner and more than $220 million to co-investors, including Prospect CEO Sam Lee and executive David Topper.
Prospect sold most of its hospital buildings and real estate to Medical Properties Trust, saddling the company with high rent payments (just as Cerberus did with Steward’s hospitals).
Leonard Green exited its Prospect investment by selling its stake to Lee and Topper for $12 million, along with the assumption of more than $1 billion in debt.
Leonard Green left Prospect “in severe financial distress,” the committee’s report said.
The big picture: The budget committee opened an investigation into private equity investments in health care in 2023. It found that private investors were “putting their own profits over patients, leading to health and safety violations, chronic understaffing, and hospital closures,” Senator Sheldon Whitehouse, a Rhode Island Democrat and chairman of the panel, said last week.
“The findings of the investigation call into question the compatibility of private equity’s profit-driven model with the essential role hospitals play in public health,” the report said.
Private equity firms own around 460 US hospitals, about 8 percent of all private hospitals and 22 percent of all for-profit hospitals, according to the nonprofit Private Equity Stakeholder Project.
Responding to the Steward crisis, the Massachusetts Legislature late last month approved a bill that would ban hospitals from leasing the land on which their main campuses stand from real estate investment trusts. The legislation, which Governor Maura Healey signed last week, also requires private equity investors and real estate investment trusts to comply with financial reporting requirements, with stiff penalties for submitting late data.
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Congressional efforts to rein in private equity, including legislation backed by Massachusetts Senators Elizabeth Warren and Ed Markey, have so far gone nowhere.
Final thought: The US Department of Justice is investigating Steward, now based in Dallas, for alleged fraud, bribery, and corruption. No charges have been filed.
While Prospect Medical said last June that the department had issued a subpoena for information about its deal with Yale New Haven Health, there have been no reports of a broader probe into its operations.
Will that change now that the company has followed Steward into bankruptcy?
Larry Edelman can be reached at larry.edelman@globe.com.
In Prospect Medical bankruptcy, echoes of Steward
