PROVIDENCE — As Lifespan Corporation and Care New England move forward with their merger, Prospect Medical Holdings, the owner of Roger Williams Medical Center in Providence and Our Lady of Fatima Hospital in North Providence, announced Friday morning that it has formally withdrawn its hospital conversions act and change in effective control applications from the state of Rhode Island.
The withdrawals end the regulatory review process to which Prospect had objected Thursday, prompting them to threaten to close both hospitals. Attorney General Peter F. Neronha was set to release his decision on the application Friday, which would have included details about Prospect Medical’s financial health.
Observers note that there are lessons here that can be applied to the highly anticipated Lifespan Corporation-Care New England merger.
“Out-of-state investors holding a gun to Rhode Island’s head by threatening to shut down hospitals is exactly why out-of-state ownership is so dangerous and why CNE/Lifespan merger is so important,” Senator Sheldon Whitehouse tweeted Friday.
On Friday afternoon, Prospect Medical’s lawyers filed an emergency petition for a temporary restraining order, preliminary injunction, and a declaration judgement against Rhode Island Attorney General Peter F. Neronha.
This comes after Prospect Medical, and their lawyers, asked for an additional “short window of opportunity” to convince the attorney general’s office that they were prepared to provide the guarantees of financial security for the two Rhode Island hospitals that are necessary under the attorney general’s conditions. Neronha said he will grant Prospect Medical a “limited opportunity” to prove to the state that they can meet his conditions.
It’s unclear how long Prospect Medical has to provide the information.
Prospect Medical requested the court enter temporary, preliminary or permanent injunctive relief that would prohibit the attorney general from reviewing, approving, denying, deciding, reporting on, or exercising any authority whatsoever over the company’s withdrawn application, including the final decision.
The company, which received the embargoed decision from the attorney general’s office on Thursday, said in the court filing that the decision contains “confidential information and numerous factual inaccuracies that — if publicly disclosed — would cause irreparable harm to the hospitals, their employees, their health care providers, and their patients.”
Neronha said Friday that the owners’ withdrawal of their application “is telling.”
“It reflects the owners’ unease with the public receiving a full and complete picture of the rationale behind this office’s insistence that they provide adequate and reliable financial commitment to ensure that these hospitals continue to operate at the levels they do today,” said Neronha. “Put another way, they do not want the public to know what has gone on here, and why.”
Neronha said his office’s year-long review of the transaction revealed a national company whose “principals and investors extracted hundreds of millions of dollars from the hospitals and services they own.” He said Prospect Medical now faces risks to its financial viability, which is required to respond to challenges that may arise in the health care market.
He said that could potentially put “every hospital in its system — including our Rhode Island hospitals — at risk of a reduction in services, sale, or closure.”
Tensions between Prospect and the state Attorney General office quickly escalated when Prospect threatened to close Roger Williams Medical and Fatima Hospital because Attorney General Peter F. Neronha allegedly required that Prospect put $120 million to $150 million in escrow, to ensure that the two hospitals could continue to operate.
Prospect spokesman Bill Fischer called the escrow stipulation “unreasonable, unacceptable, and unprecedented.”
The attorney general’s office would not confirm if the escrow was part of, or his entire, condition of approval.
Prospect, based in Los Angeles, is the for-profit parent company of CharterCARE Health Partners. In 2009, both Fatima Hospital and Roger Williams Medical Center merged under the CharterCARE name, which was purchased by Prospect in 2014; the company’s Rhode Island operations are now known as Prospect CharterCARE. Prospect is controlled by Leonard Green & Partners, a private equity firm.
Together, the two hospitals employ about 2,800 people. The company also pays state and city taxes in both Providence and North Providence. In 2020, a lawyer for Prospect Medical said the company paid $2.8 million to the city of Providence and approximately $875,000 in taxes to North Providence.
This isn’t the first time Prospect has been in hot water in Rhode Island.
A ProPublica investigation questioned Leonard Green & Partner’s ownership of Prospect, saying the firm profited while the hospitals lacked resources needed to care for patients and had a history of patient care violations, including some that “posed immediate jeopardy to patients.”
Leonard Green owns about 60 percent of Prospect. The firm announced in Oct. 2019 that it planned to sell its stake to Prospect Medical CEO Sam Lee and Lee’s business partner, hospital marketing executive David Topper, for $12 million plus $1.3 billion in lease obligations. Prospect Medical would pay Leonard Green the $12 million, not Lee or Topper.
The transaction was approved in Connecticut, New Jersey, Pennsylvania, and California, which accounts for 15 of Prospect Medical’s hospitals. But in Rhode Island, where any major hospital transaction requires approval from the state health department and the attorney general, the deal has been subject to intense scrutiny, and state health officials repeatedly delayed their decision.
“The people of Rhode Island deserve the truth,” Neronha said Friday. “It is a hard truth: that those who claimed to care about healthcare here in Rhode Island and around the country cared much more — orders of magnitude more — about lining their own pockets than about the people they purported to serve.”
According to a report prepared by Pershing Yoakley & Associates PC, an independent consultant, the two Rhode Island hospitals had accumulated net operating losses of $88.1 million from Fiscal Year 2015 to Fiscal Year 2020. The report also said that health company’s liabilities exceeded its assets by more than $1 billion as of September 2020.
Still, Prospect Medical’s application for control was approved by Rhode Island’s Health Services Council in early April.
Senate President Dominick J. Ruggerio, whose district of North Providence includes Fatima, issued a joint statement with Oversight Committee Chairman Louis P. DiPalma, a Middletown Democrat, at the time, expressing “extreme disappointment” with the Council’s vote.
“There have been a number of very concerning red flags, including several serious issues raised by the consultant hired by the Council to advise them on the proposed transaction. These issues should have given the Council pause,” read the statement. “Unfortunately, the warning signs were ignored, which could impact the future of the hospitals, including access, quality, and affordability. We are also very concerned about the potential impact to the dedicated staff who continue to provide exemplary service to their patients.”
Ruggerio and DiPalma demanded that state health director Dr. Nicole Alexander-Scott and her staff conduct a comprehensive review of the consultant’s report. The attorney general stipulated that Prospect Medical must put $120 million to $150 million in escrow to “ensure the financial viability of the hospitals,” according to Prospect Medical spokesman Bill Fischer.
On Thursday, Prospect’s lawyer Patricia K. Rocha sent a six-page letter to Neronha and Alexander-Scott that called the escrow stipulation “unreasonable and unacceptable,” saying it would adversely affect Prospect operations throughout the U.S. and would leave the company “very little choice” but to start the process of selling the Rhode Island hospitals to a third party.
“And if the sale process is unsuccessful, to ultimately close them,” she wrote.
Rocha said prior to Prospect’s acquisition of CharterCARE, both Fatima and Roger Williams Medical were “struggling financially and would have likely been forced to close had they not been acquired by Prospect.” She said during the six-month period ending in March 2014, prior to the acquisition, CharterCARE suffered a loss of $9 million.
It’s unclear what Prospect’s withdrawal from the regulatory process will mean for the future of the two Rhode Island hospitals.
Neronha said Prospect’s owners have a “simple choice”: move forward with the proposed change in ownership under his conditions, or maintain their current ownership structure.
“Ultimately it comes down to this. Under the proposed transaction, majority owner Leonard Green, having made its money at the expense of the financial health of the hospitals, now wants out. So be it,” said Neronha. “But that choice comes at a price: Remedy the malady you have created.”
He added, “You chose to get into healthcare. Act like you believe in it.”