R.I. attorney general approves sale of Roger Williams and Fatima hospitals, with conditions

The owner of the two facilities must put $80m in escrow, cannot lease or sell them for five years, and must keep them “open and operational.”

Rhode Island Attorney General Peter Neronha speaks at a press conference.Edward Fitzpatrick

PROVIDENCE — More than a month after the owner of Roger Williams Medical Center and Our Lady of Fatima Hospital threatened to shut down the two facilities after a dispute with state officials, Attorney General Peter Neronha said he is approving its hospital conversions act application, and with a reduced set of conditions.

Neronha said Prospect Medical Holdings, the Los Angeles-based for-profit parent company owner of the two Rhode Island hospitals, will be required to put $80 million in escrow, to ensure that the two hospitals could continue to operate. And the hospitals cannot be leased or sold for at least five years under these conditions. In addition, the hospitals have to remain “open and operational.”

Otis Brown, a spokesman for the two Rhode Island hospitals told the Globe Tuesday afternoon that it completed the transaction, accepting Neronha’s terms.

“Prospect Medical is grateful to everyone who has supported our company in this process, particularly our physicians, nurses, technicians, and other caregivers and operational staff for their consistent hard work and unwavering commitment to our patients in the communities we serve throughout an extraordinarily challenging year,” said Brown in an emailed statement.

“They’ve got to keep doing what they’re doing,” said Neronha, who said his office will monitor his conditions on Prospect through 2026. “The money is in the bank to make sure that they do.”

Neronha initially required Prospect to keep $120 million to $150 million in escrow after reviewing the company’s application and its finances. Prospect spokesman Bill Fischer called the original escrow stipulation “unreasonable, unacceptable, and unprecedented.”

Neronha said he initially required a larger sum since Prospect was not cooperating with his office.

“If you want to talk to me about a resolution, I need to understand your numbers,” Neronha said. “Don’t tell me it’s all rosy and fine when I know it’s not.”

In late April, after Prospect received Neronha’s escrow demands, its lawyers filed an emergency petition for a temporary restraining order, preliminary injunction, and a declaration judgement against Neronha. This came the morning that the hospital system withdrew its hospital conversion application.

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.

“Every hospital has to make investments every year,” said Neronha in a press conference Tuesday afternoon. The escrow, he said, “ensures accountability.”

Prospect has had majority stake in the two hospitals for the last seven years. Prospect is controlled by Leonard Green & Partners, a private equity firm that last year sought state approval to sell its ownership of Prospect. Like any major hospital transaction in the state, both the state health department and the attorney general’s office has to approve of the transaction.

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.

Together, the two hospitals employ about 2,800 people. The company also pays state and city taxes in both Providence and North Providence.

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.”

To get to this point, Neronha said the state took statements under oath of 16 people, including Lee and Topper, in addition to receiving thousands of pages of documents. The initial review of the company’s HCA application took more than a year.

Roger Williams and Fatima hospitals have been and remain financially dependent on Prospect, Neronha said.

The acceptance of this transaction may be a surprise to some who are privy to Prospect’s financial health.

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.

“As PMH goes, so don’t Roger Williams and Fatima,” said Neronha.

Prospect also previously charged the Rhode Island hospitals an annual $7 million management fee. Neronha is asking Prospect to stop charging the hospitals.

Prospect, Roger Williams and Fatima hospitals received hundreds of millions of dollars in federal CARES Act funds, and some of those funds will have to be paid back, said Neronha.

“They are not in a position to pay back $27 million,” said Neronha.

Governor Daniel J. McKee said he supports Neronha’s decision.

“I’m pleased because that is what I asked – that the conversation would continue and we would arrive at a good place because the patients, the jobs, the health care (are) all very important,” he said. “I think the general did a great job on this. He held his ground on behalf of the people of the state of Rhode Island.”

While the escrow requirement has been lowered to $80 million, Neronha “got what he believes he needs,” McKee said.

Globe Staff Writer Edward Fitzpatrick contributed to this report.