Prospect Medical explores restructuring

The Wall Street Journal – Wednesday, January 8, 2025
By Soma Biswas and Alexander Gladstone

Hospital operator Prospect Medical Holdings, a large tenant of the biggest hospital landlord in the U.S., is working with restructuring advisers to explore options to address its financial challenges, according to people familiar with the company.

The closely held hospital chain with facilities in states including California, Pennsylvania, Rhode Island and Connecticut has struggled financially for years and recently skipped rent payments owed to landlord Medical Properties Trust, a publicly traded healthcare real-estate investment trust. Prospect faces pressure from regulators in several states over its financial troubles and the deteriorating conditions at its facilities.

Prospect has been working with law firm Sidley Austin and turnaround consultant Alvarez & Marsal to explore options including a possible restructuring for the company, the people familiar with the matter said.

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Representatives for Prospect didn’t respond to a request for comment. Medical Properties Trust had no comment.

Attorneys general of Rhode Island and Pennsylvania sued Prospect in 2023 and 2024, respectively, over conditions at its hospitals in those states. The company has been near insolvency with liabilities exceeding assets by more than $2 billion as of 2023, putting its operations at risk, according to Rhode Island’s attorney general.

Since 2022, Prospect has shut down one of its Pennsylvania hospitals and ceased to provide key services, such as emergency medicine, at another one, according to the Pennsylvania attorney general’s lawsuit, which seeks the appointment of a receiver over the company’s operations in the state.

Rhode Island’s attorney general alleged that federal regulators inspecting Prospect facilities in 2023 found health hazards such as mold and bed bugs, broken equipment and leaking ceilings. The company has had to cancel surgeries, due to a lack of supplies resulting from unpaid bills, according to the Rhode Island lawsuit.

The company has disputed allegations in these states’ lawsuits. It has been trying to sell other assets and in November agreed to sell its California health plan, medical groups in four states and other assets for $745 million to Astrana Health, a deal expected to close by mid-2025.

Prospect’s efforts to sell its Connecticut hospitals, however, have stalled after the buyer, Yale New Haven Health Services, filed litigation seeking to back out of its purchase agreement based on deteriorating conditions at those facilities.

Prospect stopped paying rent to MPT in the third quarter of 2024, according to MPT’s financial reports. MPT said last year that it expected to receive $355 million in cash from Prospect’s sale of assets to Yale New Haven Health, but said it couldn’t ensure the transaction would be completed.

Prospect has fallen behind on property taxes, vendor bills and pension contributions in recent years, according to Yale New Haven Health. In 2023, Prospect also received a civil investigative demand from the Justice Department, according to disclosures the company made as part of the lawsuit with Yale New Haven Health.

The company has also come under scrutiny from U.S. Senate lawmakers who concluded in a report released Tuesday that Prospect’s former private-equity owner, Leonard Green & Partners, put profits ahead of the quality of patient care, and made decisions that resulted in the closure of eight hospitals. A spokesperson for Leonard Green said it disagrees with the Senate report’s findings.

Another major MPT tenant, Steward Health Care, filed for bankruptcy last year and turned over the management of some of its facilities to new operators chosen by the landlord.

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