PROVIDENCE — Prospect Medical Holdings, the Los Angeles-based private equity firm that operates two Rhode Island hospitals, was sued this month by Attorney General Peter Neronha for a series of violations that Neronha said raise “significant concerns” about the financial viability of the hospitals. Prospect owes tens of millions of dollars to vendors, according to court documents that state Superior Court Judge Brian Stern unsealed on Friday.
Prospect owns Our Lady of Fatima Hospital in North Providence, and Roger Williams Medical Center in Providence, which in 2021, were subject to a set of conditions imposed by Neronha’s office as part of his approval of a deal the company proposed under the Hospital Conversion Act. Prospect, a for-profit parent company, was required to put $80 million in escrow, to ensure that the two hospitals could continue to operate. And the hospitals could not be leased or sold for at least five years.
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On Friday, Neronha said his concern over Prospect is “greater than it has ever been.”
In a 106-page petition that was filed in court on Nov. 8, and unsealed on Friday, Prospect has allegedly failed to comply with a series of conditions of the 2021 sale, including ensuring that vendors are paid on a timely basis. As of Oct. 31, Roger Williams and Fatima together owed more than $24 million to vendors, payments that are 90 days or more past due and which jeopardize “the financial health and stability of the hospitals, and ultimately patient care,” court filings say.
Neronha also received a complaint from a local HVAC vendor who performed multiple repairs at the hospitals and had not been paid for work done from late 2022 through October 2023. The vendor, who was not named in the suit, is owed more than $108,000.
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Documents obtained by the Boston Globe on Friday also allege that Prospect has failed to provide a notice of regulatory investigations, and on “multiple occasions” has delayed providing required information to Neronha’s office.
In Neronha’s Petition to Enforce, he asked the court to order that Prospect comply with all conditions under his 2021 decision, including adequately funding the operations of the two hospitals immediately.
“We need to ensure the continued viability of these hospitals for as long as we can,” said Neronha in a statement on Friday. “They are integral to our community network of care and employ thousands of Rhode Islanders. Prospect needs to fulfill their legal, and frankly ethical, obligations to Rhode Islanders — and our lawsuit is the next step in making sure they do so.”
Attorneys from Neronha’s office and Prospect are expected in court on Nov. 28 for a hearing on the attorney general’s petition for a temporary restraining order seeking immediate compliance with the 2021 decision.
“Prospect’s financial condition continues to deteriorate; they are closing and otherwise disinvesting in their hospitals across the country,” said Neronha. “We saw this train coming in June 2021, which is why we imposed unprecedented financial conditions on our approval of the ownership change, including an $80 million escrow.”
Otis Brown, a Prospect spokesman for Fatima Hospital and Roger Williams Medical Center, declined to comment to the Globe regarding the ongoing litigation. Yet, in a prepared statement, he said Prospect has been working to resolve the impact of a cyberattack that took place in August, which shut down computer systems and disrupted both financial and clinical systems. The FBI is investigated the incident, and the Rhysida ransomware gang ultimately claimed responsibility for the attack. The group, which posted their so-called victory on the dark web, alleged it stole more than 500,000 Social Security numbers and photocopies of the employees’ driver’s licenses and passports, along with “other” legal and financial documents.
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“During this time, we were unable to bill or collect payment for the medical services we continued to provide during the disruption,” said Brown, who alleged that more than $30 million of cash collections were delayed as a result of the cyberattack in Rhode Island alone.
Prospect has long had a tumultuous relationship with state officials. Most recently, on Nov. 9, the Rhode Island Department of Health issued a compliance order against Prospect, alleging the company has been underfunding its two local hospitals to the point where it’s impacting operations and causing patient surgeries to be canceled.
In October, at least 19 elective procedures were canceled at Fatima Hospital and Roger Williams Medical Center. Each of these cancelations was because the proper equipment and supplies were not available because of Prospect’s failure to pay its vendors, according to the health department.
An investigation by the state health department revealed that as of Oct. 24, more than 250 of the hospitals’ approximately 830 vendors were operating with the hospitals on a “cash on demand” basis. That means they deliver supplies only if they are paid at the time of delivery, a policy generally reserved for customers with a history of nonpayment. Fatima Hospital and Roger Williams Medical Center have historically taken more than 90 days to pay vendors, state filings say.
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Hip joints, catheters, endoscopes, and eye lenses are among the supplies for which vendors of Prospect’s Rhode Island hospitals were not paid. The procedures that were canceled included endoscopies, eye surgeries, and a spinal surgery, according to the health department investigation.
Brown has not commented on the health department’s investigation or its compliance order. He did not answer questions as to why Prospect had failed to pay its vendors.
In late 2022 Prospect, a private equity firm, announced that it planned to sell its hospitals to a nonprofit foundation. At the time, it seemed like welcome news for the state’s health regulators and patients who have long worried about low-income Rhode Islanders’ ability to access care.
Prospect and its prospective buyer, The Centurion Foundation, submitted their third Hospital Conversion Act application to state regulators earlier this week. Neronha’s office has twice deemed their application for the sale incomplete, which has prevented the two organizations from completing the first step of the transaction. According to state law, both Neronha and the state health department will have to approve, deny, or approve with conditions, the sale of any hospitals.
In an email to the Globe, Brown said Prospect and The Centurion Foundation believes the application now “meets the statutory requirements and we remain hopeful that it will be deemed complete.”
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Representatives of The Centurion Foundation have not responded to multiple requests for interviews by the Boston Globe. The Centurion Foundation claims on its website to be a private nonprofit offering real estate transactions for medical offices.
Prospect is in the process of trying to unload its other hospitals across the United States.
In Connecticut, three long-struggling Prospect-owned hospitals have been eyed for acquisition by Yale New Haven Health. This week, lawmakers and employees of the Connecticut hospitals rallied at the state Capitol in Hartford, protesting Prospect’s worsening financial situation that has allegedly affected patient care.
Dr. Dushyant Gandhi, a cardiologist and president of the medical staffing group that operates in two of Prospect’s Connecticut hospitals, told Connecticut Public that he and his colleagues are not getting paid for services.
At Crozer Health, the struggling four-hospital system Prospect owns in Pennsylvania, pharmacists told WHYY earlier this year that they’ve run out of equipment to package drugs, and are on a credit hold with a supplier. In October, Prospect agreed to sell Crozer Health in nine months.
For a little over a decade, Prospect’s value has dropped significantly.
In 2021, when the corporate parties that controlled Prospect were selling 60 percent of its ownership of the 17-hospital system at the time, the sale price was just $11.9 million. By comparison, a majority portion of these same shares sold for about $150 million in 2010, court filings say. The drop in value was largely attributable to the decisions of Prospect’s former and current owners, who allegedly leveraged the hospital system with significant amounts of debt, court filings show.
In total, at the time of the 2021 transaction, Prospect held more than $3.1 billion in liabilities due to its owners’ decisions to sell and re-lease a significant amount of hospital real estate in Connecticut, Pennsylvania, and California. At the same time that Prospect took on these liabilities, the company issued a $457 million dividend to shareholders in 2018.
This story has been updated with comments from a Prospect Medical Holdings spokesperson.
Alexa Gagosz can be reached at alexa.gagosz@globe.com. Follow her @alexagagosz and on Instagram @AlexaGagosz.