DAILY NEWS CLIP: January 27, 2025

Prospect’s deal to sell Connecticut hospitals in flux after bankruptcy filing


CT Insider – Sunday, January 26, 2025
By Liese Klein

The deal to sell three Connecticut hospitals to Yale New Haven Health is on hold as owner Prospect Medical Holdings begins the bankruptcy process.

A judge will have to decide when and if the lawsuits will resume, and in what courtroom.

On Wednesday, Prospect filed a “notice of removal” in Hartford Superior Court to transfer the case to the U.S. Bankruptcy Court for the Northern District of Texas in Dallas. That’s the same district where Prospect filed its Jan. 11 bankruptcy claim.

As the process unfolds, Waterbury, Manchester Memorial and Rockville General ‒ beset by financial woes along with allegations of declining maintenance and nonpayment of bills ‒ could end up on the auction block as part of what is called a “363 sale,” said Thomas S. Marrion, a professor at UConn Law School and partner at Hinckley, Allen & Snyder LLP.

With a 363 sale, a company can sell its assets quickly to pay off creditors under a process outlined in the U.S. Bankruptcy Code. As for Prospect’s number of creditors, the California-based company ticked the box next to “more than 100,000” in its bankruptcy filing and estimated its total debts as $1 billion to $10 billion.

The sale price for the three hospitals ‒ either as a group or individually ‒ would be determined by the prospective purchasers, Marrion said. “There would be at least the opportunity for a competitive auction with competitive bids,” he said.

Any deal for the hospitals struck as part of the bankruptcy would still have to be approved by state regulators through the Certificate of Need process, Marrion said. “The bankruptcy filing does not override that regulatory approval requirement,” he said.

“We will closely monitor the proceedings and determine what steps, if any, YNHHS will take as part of this process,” Yale New Haven Health said in a statement after the bankruptcy announcement.

A 363 sale for a hospital has happened before in Connecticut: Saint Francis Care bought Johnson Memorial for $32.9 million in 2015 after the Stafford Springs hospital filed for bankruptcy. Marrion, who was involved in Johnson Memorial’s bankruptcy, said there were no other bidders for the hospital. Trinity Health of New England acquired Saint Francis later in 2015.

The stalled deal relating to Prospect’s Connecticut hospitals was not mentioned in the company’s announcement of its filing, although it did assert it is “taking steps to pursue an agreement to sell the Roger Williams Medical Center and Our Lady of Fatima Medical Center in Rhode Island.” Prospect also said it was working with Pennsylvania on “divestiture” of Crozer-Chester Medical Center, a struggling hospital south of Philadelphia.

Connecticut and the three hospitals that Prospect owns here were not mentioned.

Legal costs mount amid court battle

Even with the bankruptcy hold, legal bills are piling up for both sides in Prospect’s fight with Yale New Haven Health.

“Everybody’s losing except for the lawyers,” Gov. Ned Lamont said in November when asked about the dueling lawsuits related to the Yale New Haven Health bid.

Yale New Haven Health and Prospect Medical Holdings of California have been trading barbs in court and in the media since May, when Yale sued to get a better price on a $435 million deal to purchase Prospect’s three Connecticut hospitals. Prospect countered with its own claim insisting on the original sale price, and the two systems have been busy in the months since adding to their legal teams and exchanging testy court filings.

Local and state lawmakers were eager for the court cases to be settled and for the sale to go forward, but attempts at mediation had failed as of the bankruptcy filing.

“I worked my heart out to get these guys together to get a deal done ‒ you know, we had a signed purchase agreement two years ago,” Lamont said at a conference on health care affordability at Quinnipiac University on Nov. 22. “Circumstances have changed a little bit.”

Legal costs mount at nonprofit health system

Yale New Haven Health System’s tax forms reflect the cost of the court fight, among other legal issues the system has dealt with: The nonprofit system reported $16.5 million in fees for non-employee legal services in fiscal 2022, the most recent period available. That compares to $8.2 million for the same line item reported on tax forms for fiscal 2021. The system reported an average of about $5.6 million a year in non-employee legal fees in the period from fiscal 2012 to 2020.

“The Prospect process – including the initial agreement, the CON (state approval) process and, more recently, litigation – have contributed to our legal costs in recent years,” Yale New Haven Health spokesperson Dana Marnane said. “It is important to note that Prospect negotiations are not solely responsible for these costs – we’ve made a number of other investments and business decisions that have required legal support,” she added.

The surge in non-employee legal expenses came in the same fiscal year that Yale New Haven Health reported a $162 million operating loss, attributed to inflation and rising labor costs. After several years of losses in the wake of the COVID-19 pandemic, the health system reported a $46 million operating gain in fiscal 2024, according to Marnane.

Marnane said the health system felt it didn’t have a choice in pursuing its legal battle with Prospect over the sale price. In the months since the initial deal was signed, Prospect has racked up more than $100 million in tax debt and shortchanged its Connecticut pension plan, in addition to neglecting the three hospitals, according to the amended complaint.

Prospect’s bills are also mounting: Los Angeles law firm Sheppard Mullin Richter & Hampton LLP was named in Prospect’s list of its top 30 creditors in its bankruptcy petition, with an estimated $3,155,885 owed the firm for its legal services. At least seven Sheppard Mullin attorneys have been involved in the Yale New Haven Health court battle, according to filings.
Conditions at hospitals

As billable hours in the lawsuit with Yale New Haven Health multiply, financial strains are mounting at Prospect Medical’s Connecticut hospitals, according to state reports.

As a system, Prospect ranked below the statewide median for fiscal 2022 in its total margin, or income from all sources minus total expenses.

The Office of Health Strategy is scheduled to present hospital financial data for fiscal 2023 at a meeting of the state’s Health Care Cabinet on Tuesday.

Prospect owes millions in back rent and loans on its hospitals nationwide, according to recent financial filings by its landlord, Medical Properties Trust. Yale’s lawsuit and the delayed sale of the Connecticut hospitals is intensifying the financial pain, MPT said in a recent earnings statement. According to its Jan. 11 bankruptcy filing, which listed MPT as its second-largest creditor, Prospect owes $60.8 million to MPT in lease obligations on its hospitals and other holdings nationwide.

Prospect’s largest listed creditor was medical technology company Cerner Corporation of Kansas City, Missouri, which was owed $129 million for “promissory note/litigation,” according to the bankruptcy filing.

Prospect was also the target of a lawsuit filed by Pennsylvania Attorney General Michelle Henry in October alleging mismanagement and neglect at the company’s Crozer Health System.

“We are taking legal action against a company which agreed to prioritize affordable, accessible healthcare — but instead broke their promise with years of neglectful, self-serving practices that have put lives at risk,” Henry said in announcing the lawsuit. The lawsuit is ongoing.

Waterbury workers look for relief

Prospect’s woes around the country are reflected in the atmosphere on the wards at Waterbury Hospital, according to unionized workers.
“I would say the feeling is deflated,” said Ed Gadomski of Connecticut Health Care Associates District 1199.

Waterbury Hospital nurses recorded a vote of “no confidence” in the hospital’s nursing director in late September. Nurses described staffing shortages and ineffective leadership, according to the amended complaint.

Of the 138 Waterbury Hospital nurses who participated in the union-sponsored vote, 133 nurses voted “no confidence,” with 131 saying they had considered leaving the hospital in the past six months, according to industry site Becker’s Hospital Review.

Waterbury Hospital was hit with a $60,000 penalty from the state Department of Public Health as part of a consent order that also requires the hiring of an independent monitor to oversee operations at the 357-bed hospital. State officials offered no details on what the inspectors found during the inspections but called for the monitor to observe at the hospital at least 32 hours a week and submit monthly reports to regulators.

In the consent order, released on Nov. 22, the state Department of Public Health asked Waterbury Hospital to review and revise its policies on staffing, abuse prevention, emergency department triage, patient restraints and anesthesia services, among other items, relating to five surprise inspections starting in July 2023.

Prospect bought Waterbury Hospital in 2016 and initially invested in staff and equipment, Gadomski said. But since the deal with Yale New Haven Health was announced in 2022, administrators have told workers that there is no money for more staffing or improvements, he said.

Prospect responded to questions about staffing and equipment by citing 2024 “Year in Review” reports that listed new equipment and employees at Waterbury, Manchester and Rockville General hospitals.

Waterbury Hospital acquired new laboratory chemistry analyzers and a new security camera system among other investments in 2024, in addition to hiring 14 new providers. Prospect’s Eastern Connecticut Health Network, which includes Manchester and Rockville Memorial hospitals, added a rapid blood transfuser, treadmill for cardiac rehab and renovated its labs and ICU, among other improvements. A total of 12 new providers were hired, according to the report.

In a statement in response to the consent order, Waterbury Hospital spokesperson Lauresha Xhihani said, “Waterbury Hospital is committed to providing safe, high-quality care to our patients and the community we serve.” The hospital is in compliance with Department of Health rules and has corrected conditions that led to the Health Department fine, she added.

“We, along with our dedicated physicians, nurses and other caregivers, remain committed to continuous improvement, operational excellence and maintaining the confidence of the patients and families who trust us with their care,” Xhihani said.

Prospect argued in a document filed with the court on Dec. 6 that it is working with regulators on the issues uncovered in the Health Department inspections and is currently in full compliance with government regulations. The company added that its patient volume and earnings have recovered from an August 2023 cyberattack that Yale cited as a prime example of mismanagement.

Hospital sale likely a top priority, expert says

Regardless of the outcome of the legal battle with Yale New Haven Health, the three Connecticut hospitals are likely to be sold soon due to their parent company’s ballooning debt, bankruptcy expert Marrion said. Prospect said in its bankruptcy announcement that it wants to focus on its hospitals in California and shed its holdings in other states.

“Prospect Holdings is prioritizing its core strength ‒ focusing on operating community hospitals in California, providing vital care to underserved communities, and promoting patient and physician continuity ‒ while ensuring these hospitals outside of California continue operations with proper financial support,” the company said in its Jan. 11 statement.

The company has promised it is committed to clinical excellence at Waterbury, Manchester Memorial and Rockville General, and state officials have vowed increased vigilance to ensure patient safety at the Connecticut hospitals.

“Prospect’s goal here, I’m sure, is to sell these hospitals, just as it was before they filed for bankruptcy,” Marrion said. “I’m sure they still want to sell.”

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