Whoever buys Waterbury, Manchester Memorial and Rockville General hospitals will have to deal with the structural legacy of its prior private equity ownership — for better or worse.
That was the lesson of a hearing Thursday in bankruptcy court concerning efforts by hospital owner Prospect Medical Holdings to pay down at least $1 billion in debt by selling its assets.
Not a single mention was made of a potential buyer for Prospect’s Connecticut hospitals on Thursday, despite the bankrupt company’s top lawyer promising to secure a deal by Aug. 22. It was yet another blown deadline in Prospect’s efforts to sell the three struggling hospitals, starting with a vow soon after the Jan. 11 bankruptcy filing to strike a deal by June 5.
Thousands of employees, city officials and patients across central Connecticut are anxiously awaiting news of the hospitals’ fate, with Prospect’s lawyers admitting the process is taking much longer than anticipated.
California hospitality buyer under scrutiny
Even though Connecticut’s situation was ignored on Thursday, the obstacles facing the hospital sales in the state were highlighted at the hearing, live-streamed from North Texas Bankruptcy Court in Dallas.
In seeking to sell its six mostly profitable hospitals in California, Prospect had only two bidders, both for-profit firms with private equity funding, according to the company’s lawyers.
The winning bidder was a months-old shell company called NOR Healthcare Systems Corp. with no assets, no balance sheet and no track record. The company was asked to put down only $8.5 million in cash toward a basket of Prospect’s California assets worth more than $600 million — a deposit of only 1.4%.
NOR’s main selling point, according to Prospect’s investment banker, is its parent company’s deep ties to Prospect and its landlord, Medical Properties Trust. Prospect sold the land under its hospitals nationwide to MPT in 2019 as part of a “sale-leaseback” deal that netted $1.5 million for shareholders and executives but saddled the hospitals with high rent payments.
The actions of private-equity-backed health systems like Prospect have come under increasing fire from lawmakers at the national and state level, with Connecticut’s U.S. Senators issuing reports and urging reform. MPT’s role in the financial woes of Steward Health Care and Prospect has also been singled out for criticism.
The fact that MPT still owns the land under Prospect hospitals gives it an outsized role in the sale process, attorneys said on Thursday.
“MPT is very involved in this transaction,” said Andrew Turnbull, managing director of investment banker Houlihan Lokey, at Thursday’s hearing. Turnbull’s company has been paid $3.7 million through June 30 to help Prospect sell its assets, with failed efforts in Pennsylvania resulting in the closure earlier this year of two safety-net hospitals.
NOR’s sole listed executive, Michael Sarian, is a former Prospect vice president and has a “longstanding relationship” with MPT, Turnbull said.
When asked about whether NOR and its parent company had enough cash to keep the California hospitals afloat in times of financial stress, Turnbull replied, “It’s a relative world.”
Creditors object to buyer’s parent company
NOR’s parent company — known both as Healthcare Systems of America and American Healthcare Systems, depending on the market — drew strong objections from several creditors at Thursday’s hearing, who highlighted a history of unpaid debts and cash-flow problems in recent years. A Louisiana lawmaker has also criticized the company for deferring maintenance at a hospital in his district.
“There’s a bit of an elephant in the room with respect to … Healthcare Systems of America,” said Charles Persons, an attorney representing the court-appointed Committee of Unsecured Creditors. He went on to cite a series of court documents outlining the company’s failure to make payments on debt obligations related to earlier hospital purchases out of bankruptcy.
One of the creditors, a facility management company called Compass Group, challenged the financial viability of NOR’s parent company based on its failure to pay a $2.7 million debt for services at its hospitals. Prospect owes Compass Group an additional $17.8 million, according to court documents.
“We’re potentially walking into a train wreck,” said Compass attorney Andrew Sherman, citing NOR’s lack of a track record and unclear financing sources. He asked the judge to require more financial reporting from the buyers to insure Prospect’s thousands of creditors get paid.
A lawyer who represents both NOR and its parent company countered that the hospital operator was dealing with the legacy of the collapse of Steward Health Care. Once based in Massachusetts, Steward imploded last year in the wake of sale-leaseback deals with MPT. NOR’s parent company bought five former Steward hospitals in Florida.
“It’s not that we just didn’t decide to pay,” said Chief Legal Officer Faisal Gill. “There’s been several areas of litigation with us and Steward of monies that we were supposed to get that we didn’t get. So there’s a myriad of issues … that thankfully do not exist here.”
At the end of Thursday’s hearing, bankruptcy court Judge Stacy Jernigan approved the sale of the California hospitals to NOR, but said that she was watching for signs of financial issues with the buyer.
Bankrupt companies are increasingly breaking legal agreements to pay creditors citing cash-flow issues, similar to the Steward case, Jernigan said.
“You know, we’ve heard it said in this case from day one that we don’t want this to be Steward 2.0, so I have carefully heard everything that was said today,” Jernigan said. “We just don’t want that to happen.”
Landlord issues limit market for hospitals
Steward and Prospect are similar in that individual hospitals once part of the chain will be dealing with the legacy of private-equity-backed ownership for the long term, said Erin Fuse Brown, an expert on health-care financing at the Brown University School of Public Health.
“One of the things that we know about private equity is that even though it tends to invest in companies and hold them for relatively short periods of time, the revenue strategies, or the sort of financial strategies that are put in place, are hard to undo after the sale,” Brown said.
The MPT sale-leaseback deals in particular at both Prospect and Steward will have long-term impact on the viability and marketability of their hospitals, she added.
“It’s hard to restore that asset to the hospital system,” Brown said of the real estate. “It is now a liability, and so the hospital moving forward is just in much of a weaker financial position.”
As both companies make their way through bankruptcy, individual hospitals are also impacted by the dismantling of large, interconnected health-care systems, Brown said. “You have to wonder what happens to all of those efficiencies and economies of scale when these entities are spun back out in smaller bits and pieces.”
Prospect’s Connecticut hospitals are facing daunting obstacles, but some hospitals caught up in private-equity-linked bankruptcies have managed to recover under new ownership, Brown said.
“It’s not necessarily a death sentence for the hospital, but it definitely puts them in a very financially precarious position such that I wouldn't be surprised if there were additional closures,” Brown said.