When private equity firm Prospect Medical Holdings Inc. bought a cash-strapped hospital outside Philadelphia, it promised a return to profitability that would ensure the long-term sustainability of a facility that thousands of people counted on. Seven years later, Delaware County Memorial Hospital is closed, Prospect is in debt and a community group is suing.
(Bloomberg) — When private equity firm Prospect Medical Holdings Inc. bought a cash-strapped hospital outside Philadelphia, it promised a return to profitability that would ensure the long-term sustainability of a facility that thousands of people counted on. Seven years later, Delaware County Memorial Hospital is closed, Prospect is in debt and a community group is suing.
It’s a story playing out across the country as Wall Street’s recipe for making big bucks flipping hospitals collides with labor costs and surging interest rates. Combined with increased scrutiny on private equity tactics, ailing hospitals are finding themselves left without access to buyers of last resort. And that’s threatening to leave low-income communities without critical care such as emergency rooms.
“Private equity is looking at some of these hospitals now saying, ‘I don’t know what my exit is. There’s too many unknown variables. And the one thing private equity guys don’t like is unknown variables,” said Jim Clayton, who leads the private equity advisory practice at consulting firm BDO USA. “They thought that they could pretty them up and sell them to a larger health system. But the larger systems aren’t buying them. Because they don’t want the headache either.”
Private equity owns almost 400 of the approximately 5,100 hospitals – or about 30% of all for-profits – in the US, according to the Private Equity Stakeholder Project, with more than 100 in non-urban areas. Rural and other safety-net hospitals are most at risk of closure because they have fewer privately insured patients, and, in the case of rural facilities, lower patient volumes.
But financial distress is ubiquitous, including in the suburbs. Pipeline Health System, a private equity backed operator of hospitals and clinics serving mostly government-insured patients, closed the 230-bed Westlake Hospital near Chicago in 2019 just months after agreeing to keep it open for at least two years, according to a report by the Private Equity Stakeholder Project and court filings. The community sued, resulting in a $1.5 million settlement, but Pipeline ended up seeking bankruptcy court protection last year, citing pandemic-linked costs and delayed payments.
Previous Closures
Even before Delaware Memorial was shuttered, the Philadelphia region was reeling from other closures, including the private equity-owned Hahnemann University Hospital, which filed for bankruptcy and shut down in 2019.
Private equity often touts its ability to come into an ailing hospital and help make it profitable by deploying its vaunted efficiency to slash costs, and there’s been truth to that, said Atul Gupta, an assistant professor of health-care management at the University of Pennsylvania’s Wharton School and senior fellow at the university’s Leonard Davis Institute of Health Economics.
Private equity firms can negotiate higher prices and boost revenue and discipline, including in the medical sector. But in health care, where labor makes up more than half of costs, cutting can only go so far without affecting care, he said.
Read More: PE-Owned Hospitals Paid Owners Millions and Got Low Care Ratings
But now, some of the industry’s favorite profit-making tools — like selling a hospital’s property for quick cash and then leasing it back — are under scrutiny for piling debt on already-struggling facilities. “They know they can’t just spin off the real estate, sell off the real estate, make money, and then skip town,” Gupta said.
Representatives from Prospect didn’t respond to calls and an emailed list of questions for comment.
Prospect bought the hospitals operating as the nonprofit Crozer-Keystone Health System, including the 168-bed Delaware Memorial, in 2016. Prospect was the only bidder. But so far its investment hasn’t worked out so well for either Prospect or the hospitals. Delaware Memorial and Springfield Hospital closed last year. The remaining ones went up for sale, but Prospect has failed to find a buyer for its assets, including Delaware Memorial’s once-busy emergency room that served low-income patients until shuttering in November.
Legal Fight
A local nonprofit formed in the wake of the sale sued Prospect last year with the county’s backing, saying it wrongly closed Delaware Memorial. Meanwhile, Pennsylvania’s Attorney General at the time, Josh Shapiro, who has since become governor, sued Prospect for contempt over the closure, threatening fines of $100,000 a day.
After some earlier rulings, a trial to decide whether to hold Prospect accountable for the closing won’t likely take place until next year. Prospect has said it wanted to convert the facility to a behavioral-health hospital this year, but there is no sign of activity at the site.
In 2019, Prospect sold Delaware Memorial’s land and buildings to Medical Properties Trust, which buys medical facilities and leases them back to the operators. Delaware County Memorial was part of the $1.55 billion deal that included most of Prospect’s facilities. As a result, Delaware County Memorial began paying $35 million in yearly rent.
MPT announced a restructuring of its agreement with Prospect in May of this year after months of missed rent payments. Under the deal, MPT wound up holding more than $1 billion worth of assets related to Prospect. The health-care company refinanced some debt, but still owes hundreds of millions of dollars to its landlord and other lenders.
Read More: Pennsylvania Fights Hospital Closures With Private Equity Curbs
“Walk Away”
An earlier battle with Rhode Island is also still playing out after Prospect sought to sell two hospitals there. Prospect balked at conditions for approval, even as Leonard Green Partners was seeking to exit its majority stake in the company, according to the state, which expressed concern about Prospect’s financial condition. Leonard Green “wanted to walk away with twelve million dollars more in its pockets and absolved of billions of dollars in debt,” Attorney General Peter Nerohna announced in April 2021. Prospect’s liabilities swelled to exceed assets by more than $1 billion, the state concluded in a probe that year.
An Atlanta nonprofit agreed to buy the facilities last year. In August, Rhode Island deemed the application incomplete.
Leonard Green withdrew $658 million from Prospect over the course of its ownership, including management fees and a $457 million dividend paid to shareholders in 2018, according to an estimate by Private Equity Stakeholder Project’s research director Eileen O’Grady.
A representative for Leonard Green said the company exited its Prospect investment in 2021 and declined to comment on any profits it made on the health-care chain.
Meanwhile, hospitals – even those with more robust financing – continue to wrestle with higher costs, especially for labor., along with new regulations on a state and federal level. Mergers are under more scrutiny, too, with last year’s announced tie-up between Sanford Health and Fairview Health Services recently called off after delays and pushback from Minnesota officials.
Last year, it looked like there would be a savior for Delaware Memorial when Prospect agreed to sell Crozer Health to a nearby company, ChristianaCare Health System. But the parties announced the end of the deal in August 2022, saying “the economic landscape has significantly changed.”
Wait times at nearby Riddle Hospital’s ER ballooned after Delaware Memorial’s closing, Riddle’s president Shelly Buck said. Today, Lecia Brown looks over the vacant hospital from her home across the street. Every day she watches ambulance crews wait for calls in the parking lot, the only part of the hospital they use. A flashing sign — the kind used by highway construction crews — says the sprawling medical campus is closed.
“It’s a huge building,” Brown said of the five-story building. “It looks so empty now.”
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