A U.S. Senate investigation of health care systems funded by private equity blasted Prospect Medical Holdings, owner of three financially troubled hospitals in Connecticut. Meanwhile, efforts to better regulate private equity in the state fell short last legislative session.
Less than two years after the private equity firm Leonard Green & Partners (LGP) acquired Prospect in 2010, Prospect paid out $188 million in dividends to LGP’s investors, according to the Senate report.
The Senate investigation also said that nationally, six Prospect-owned hospitals shut down when LGP exited after extracting more than $424 million in dividends and saddling Prospect hospitals with more than $3 billion in liabilities.
Investigators alleged that Sam Lee, co-owner and chairman of Prospect, upgraded one of his properties in Aspen, Colorado, valued at millions of dollars, at a time when Prospect emergency departments across the country were shutting down because Prospect ran out of money to run them.
“This report has one inescapable conclusion: private equity’s sole purpose of fattening its bottom line is inherently incompatible with quality health services,” U.S. Sen. Richard Blumenthal, a Connecticut Democrat, said in a statement. “As the report reiterates, Prospect Medical, which owns a number of facilities in Connecticut, used its hospitals as its personal piggy banks.”
In a statement, Prospect said it was “disappointed by the committee report’s false conclusions and apparent omissions of key facts.”
“The Committee drew general conclusions about the quality of care at our hospitals without ever reviewing information from those hospitals, which is where the focus on care takes place, rather than at the corporate level,” the statement reads.
“Nearly all the hospitals Prospect acquired were cash-starved, neglected, in disrepair and on the verge of closure or bankruptcy,” the statement continued. “In nearly every instance, no one else wanted to acquire them, and many were headed to closure. Prospect invested more than $750 million in its hospitals [nationwide].”
Prospect’s Connecticut hospitals in jeopardy
In 2016, Prospect purchased Waterbury Hospital and its assets for $31.8 million, and Rockville General Hospital and Manchester Memorial Hospital and its assets for $105 million. The acquisitions included 51 outpatient facilities and clinics.
Financial documents reviewed by the Senate committee showed Rockville and Manchester hospitals combined generated a net income of $2.8 million in 2017, but slid to a net loss of $3.1 million the next fiscal year, “beginning the hospitals’ downward trend and leading to a net loss of $49.8 million in fiscal year 2023,” the report stated. Waterbury Hospital incurred a loss of $34.2 million in fiscal year 2022 after the exit of LGP in 2021.
Since its acquisition by Prospect, the hospitals have been hit by citations for health and safety violations, a decline in the number of staffed beds, and “immediate jeopardy” identified by state inspectors at Manchester Memorial Hospital for failing to provide adequate quality of care to a high-risk pregnant patient, which resulted in the patient’s death, the senate report also stated.
The report cited Connecticut Public’s reporting on staffing shortages at Waterbury Hospital. Connecticut Public also reported on patient abuse, rusty operating room equipment, and unpaid bills at Prospect-owned hospitals. Prospect said it put corrective actions in place after being cited by the state and has since passed subsequent state inspections.
Connecticut legislation stalled
State legislatures are closing loopholes in private equity investments in health care, but in Connecticut last year, a bill directing state officials to develop a plan for how private equity firms acquire or hold ownership interest in state health care facilities was never called for a vote.
Mary Bugee, of the nonprofit Private Equity Stakeholder Project, said state legislatures across the country are working to address private equity in health care.
“Unfortunately, Connecticut's attempt this past year didn't make it across the finish line,” she said, “but hopefully there's still appetite among legislators to address private equity, especially given the unfolding situation with Prospect Medical Holdings in the state.”
In Massachusetts, Gov. Maura Healey signed into law a bill Jan. 8 that would would ban the future sale of acute care hospitals’ real estate to real estate investment trusts (REITs).
New Mexico has also taken steps to address the problem, Bugbee said.
“They passed an emergency measure [last year] that's going to expire in July of this year, but they did it because they wanted to act now and protect patients and protect workers,” she said. “And in the meantime, they've been holding town halls and doing research so that they can draft a bill.”
Bugbee said Indiana, too, passed a “pretty substantial bill” that increases disclosure requirements around mergers and acquisitions in the health care space.
“Any law that grants power to the attorney general or another regulator in the state to impose conditions on an acquisition or a merger, on investors' exit from a health care system, those laws can be really powerful because it can allow the state to intervene in ways that it's really difficult for them to do right now with current policy,” Bugbee said.