Rhode Island's attorney general on Tuesday approved Prospect Medical Holdings' purchase of two hospitals in the state, noting the new owner's commitment to keeping the safety-net hospitals financially viable.
Prospect Medical Holdings purchased the remaining ownership in Roger Williams Medical Center and Our Lady of Fatima Hospital from PMH's financial backer, Leonard Green & Partners. Prior to the sale, Leonard Green owned 60% of the hospitals, and PMH owned the remaining 40%.
Rhode Island Attorney General Peter Neronha said he wanted to ensure the safety-net hospitals continued to provide essential health services, paid off their debts and would invest in their communities. His office's year-long review found that PMH is in a "significantly weakened" financial place with large annual losses, liabilities that exceed assets by over $1 billion and a looming liquidity crisis.
As a condition the purchase, Nehrona asked PMH to contribute $80 million in escrow as a form of security to cover the hospitals' operating and capital expenses.
"That was a requirement I needed to make sure that Rhode Islanders could sleep at night knowing that money is going to be there to keep those hospitals going over the next five years," Nehrona said.
In addition, Leonard Green must make a financial commitment of $34.8 million before transferring owndership and PMH must make a capital investment of at least $72 million to the hospitals between 2020 and 2026. The attorney general will monitor PMH to submit until 2026 and cannot charge management fees.
In an email statement, a PMH spokesperson said the company is grateful to Leonard Green for its past leadership, as well as the Rhode Island Health Council, Department of Health and the Attorney General's office for reviewing and approving the application.
"We look forward to continuing our mission to deliver high-quality healthcare and enhanced patient and provider experiences, at a lower cost of care, in Rhode Island and every community we serve," the spokesperson said.
Rex Burgdorfer, a partner at Juniper Advisory, said typically regulators look at hospital mergers and acquisitions through a lens of fairness when considering the purchase price, the assumption of debt obligations and the long-term financial commitment.
"Large escrows are atypical," Burgdorfer said. "Usually, a legally binding agreement to spend capital in the future is sufficient."
Joe Lupica, chairman of Newpoint Healthcare, said while Lee has been "the heart and soul" of PMH and worked hard for years, the attorney general is justified in questioning the stability of the company once the private equity banker is gone.
He said it is important to have "good people" in hospitals to create the living fabric of the community serving the vulnerable.
"There have been a lot of fly by night hospital companies that come in and take the cash out of a hospital and leave a smoldering wreckage behind," Lupica said.
Burgdorfer said it is understandable why people are concerned about the fate of medical institutions as private equity firms have historically had a higher risk tolerance for helping struggling hospitals, and have been met with financial challenges even before the COVID-19 pandemic.
"When you're dealing with a for-profit healthcare system, particularly one where private equity is involved, as a regulator you have to be very careful," Nehrona said. "We wanted to make sure that before [Leonard Green] walked away, we had the money in hand to make sure that these hospitals were going to be okay."
