Waterbury Hospital still seeks right partner after Prospect bankruptcy, Yale lawsuit. How it got here

CT Insider – Friday, May 23, 2025
By Paul Hughes

WATERBURY — A proposed sale to Yale New Haven Health had been the latest promise of rescue for floundering Waterbury Hospital, but, like all the other times before, this most recent hope for deliverance has faded from the horizon.

A bankuptcy court auction could now decide the future of Waterbury Hospital along with the two other Connecticut hospitals owned by Prospect Medical Holdings that are part of a negotiated $435 million packaged sale to Yale New Haven Health.

The sale of Waterbury Hospital, Manchester Memorial Hospital and Rockville General Hospital in Vernon had been teetering on the brink of collapse for a year when Prospect Medical Holdings filed for federal bankruptcy protection overnight on a mid-January weekend.

Yale New Haven Health has made abundantly clear that it wants out of the deal that was signed in October 2022. Yale sued to get out of purchase agreement last May just six weeks after state regulators approved the three-hospital sale following 16 months of review, and Yale officials in late February declared the sale “impossible” now.

“I think they just soured on it,” Waterbury Mayor Paul K. Pernerewski Jr. said.

In March, Gov. Ned Lamont all but gave up on the deal that he had personally intervened to make happen, stating, “I think it is over.”

Uncertainty once again clouds the future of Waterbury Hospital as the bankruptcy case plays out in the Northern District of Texas in Dallas 1,640 miles from Waterbury.

It was much the same way a decade ago when Waterbury Hospital and corporate parent Waterbury Health were verging on insolvency. Then, Prospect Medical Holdings arrived from California to purchase the health system for $100 million in 2016.

The Prospect sale at that time was seen as the salvation of Waterbury Hospital after earlier proposed mergers and sales dating back to 2006 had all failed. Initially, that appeared to be the case.

Waterbury Hospital bounced back financially. Operating deficits turned into operating surpluses until the profit-making streak ended three years ago. The hospital’s books are once again awash in red ink.

As Waterbury Hospital declined financially and operationally under Prospect’s ownership, disillusionment increased over the Los Angeles-based private equity firm’s long-distance management of the hospital and its business practices.

In the eyes of many in Waterbury, Prospect had gone from the hoped-for hero coming to the rescue to a greedy corporate bad guy robbing the hospital of resources to fill its investors’ pockets.

After the disappointment of Prospect, Yale appeared to finally be the right partner that Waterbury Hospital had sought to secure its long-term sustainability, but now this proposed sale looks like one more in a succession of dashed hopes for the future dating back almost 20 years.

Talks with Saint Mary’s Hospital

In 2006, Waterbury and Saint Mary’s hospitals discussed the possibility of an affiliation, but the collaboration never materialized. A year earlier, Waterbury Hospital had hired health care management consultant Kaufman Hall to evaluate the economics of consolidating, and the evaluation concluded that even a consolidated institution would struggle financially.

In 2007, the state Office of Health Care Access had conducted a special study on the status of health care in Waterbury that identified two options: consolidate the city’s two hospitals, or close Saint Mary’s Hospital. Waterbury Hospital posted a budget deficit of $2.5 million for its 2006 fiscal year, and Saint Mary’s Hospital recorded a net loss of $6.3 million that year, too.

In 2008, Waterbury and Saint Mary’s hospitals submitted a merger plan to state officials after two years of on-and-off discussions, but both sides subsequently dropped the attempt.

Hospital officials said then that neither institution had the financial resources to underwrite a merger at that time amid a deep economic recession, and the estimated $180 million cost of the joint venture at that time was untenable without substantial state aid. The merger would have created the state’s fourth largest hospital at that time, behind Yale-New Haven Hospital, Hartford Hospital and St. Francis Medical Center in Hartford.

Officials from the two hospitals formally ended those merger talks in February 2009, citing the difficult economy and the escalating costs of a consolidation. But they left open the possibility of resuming discussions in the future, and two years later they were back talking about partnering again.

A new consolidation plan emerges

A new merger proposal emerged after Saint Mary’s first announced plans to form a partnership with Texas-based LHP Hospital Group Inc. in March 2011. Five months later, those two partners proposed adding Waterbury Hospital to the deal.

The two nonprofit hospitals and LHP originally proposed building a $400 million, 800,000-square-foot medical center in Waterbury. The new full-service hospital would accommodate at least 300 adult, acute-care patients, and it would also be a for-profit, tax-paying business.

In 2012, the proposed joint venture fell apart in large part because of an impasse over medical services that run counter to Catholic doctrine, including abortions, contraceptive care, vasectomies and tubal ligations, a surgical procedure that permanently prevents pregnancy in women.

As part of the proposed joint venture, the three parties had agreed to adhere to the Ethical and Religious Directives for Catholic Health Care Services outlined by the U.S. Conference of Catholic Bishops. The Archbishop of Hartford would interpret how they would apply to the provision of health services.

Conflict and tensions arose over the application of the ethical and religious directives that would sink the deal.

The administration of then-Gov. Dannel P. Malloy had threatened to withhold state assistance to the joint venture if the new hospital failed to offer the full array of women’s services, including tubal ligations and abortions.

Waterbury Hospital and LHP had explored eight options for providing reproductive health services while adhering to the Catholic Church’s ethical and religious directives, including the possibility of building a separate surgical center to offer health services that run counter to Catholic doctrine.

But none of the proposed solutions were universally embraced by the Catholic church, state officials and LHP, and three prospective partners gave up because of the impasse.

Enter Tenet Healthcare Corp.

After the LHP sale collapsed, Waterbury Hospital signed a letter of intent later in November 2012 to develop a joint venture with a new capital partner, Vanguard Health Systems Inc. of Nashville, Tenn. In 2013, the Dallas-based Tenet Healthcare Corp. acquired Vanguard for about $1.8 billion.

In 2014, Tenet Healthcare Corp. proposed to acquire Waterbury Hospital, Saint Mary’s Hospital, Bristol Hospital and Eastern Connecticut Health Network’s Manchester Memorial and Rockville General hospitals.

Tenet backed out in December 2014 when state regulators recommended 68 conditions for the Waterbury Hospital deal. The company said it found many of the proposed conditions too onerous. Plans to seek individual approvals for acquiring the four other hospitals were dropped.

Prospect Medical Holdings arrives in Waterbury

Two years later, the decade-long effort to secure the future of Waterbury’s two hospitals appeared to culminate in success.

In 2016, state regulators separately approved the sale of Waterbury Hospital to Prospect Medical Holdings and the acquisition of Saint Mary’s Hospital by Trinity Health-New England.

The two deals were causes for celebration and relief in Waterbury and the surrounding region the hospitals had both long served. Prospect committed to spend $55 million in capital improvements to Waterbury Hospital as part of its $100 million purchase. Trinity pledged $100 million in investments to Saint Mary’s, plus another $20 million if profitability targets were met.

Waterbury Hospital saw a financial turnaround. The hospital had reported deficits of $9.6 million for the 2015 fiscal year and $16.5 million for 2016, but then recorded a $37.1 million surplus for 2017, followed by four consecutive annual surpluses totaling $85.7 million.

A $10.7 million operating loss in the 2022 fiscal year ended the profit-making streak under Prospect’s ownership. Waterbury Hospital then lost $27.9 million in 2023, and it posted a $23.8 million loss in 2024, according to state filings.

The state Office of Health Strategy stated in a January report that the available data suggests that Prospect and its Prospect Connecticut affiliate are both in “a concerning financial position.”

The financial losses have been blamed on Prospect siphoning off tens of millions of dollars from Waterbury Hospital, including through a costly real estate deal.

Private equity firm Leonard Green & Partners owned Prospect between 2010 and 2021 before selling its ownership stake. In 2018, Prospect took out a $1.1 billion loan to fund a $457 million dividend for its executives and investors. To pay back the loan, Prospect sold the land and buildings from hospitals it owns in Connecticut, California and Pennsylvania to Medical Properties Trust for $1.4 billion, and then leased back those hospitals from the Alabama-based real estate investment trust.

Medical Properties Trust specializes in hospital real estate, and the publicly traded company is one of the world’s largest owners of hospital real estate with total assets in excess of $15 billion.

The MPT deal is widely seen as contributing to the financial struggles of the three Prospect-owned hospitals because they were paying tens of millions in monthly rent while Prospect remained current.

It is also greatly complicating the proposed sale to Yale because MPT has been expecting to receive $355 million of the Prospect proceeds from the sale, which is 80% of the negotiated $435 million purchase price.

MPT is a creditor in the Prospect bankruptcy, and the publicly traded REIT and Yale have been battling in state court over Yale’s demand for business records relating to Prospect to support its legal claims that Prospect violated the terms of the purchase agreement, including by failing to pay its bills and other financial obligations.

Prospect and MPT signed a non-binding agreement that will enable Prospect to sell its three Connecticut hospitals and their related real estate with MPT’s cooperation. MPT said it agreed to the deal to help Prospect sell the hospitals as soon as possible. The bankruptcy court approved that deal and a new plan for selling the for-profit company’s hospitals that would allow Connecticut pension plan representatives and state officials, among others, to sit in on an auction process.

Yale New Haven Health and two other unnamed Connecticut-based health systems submitted proposals to buy the three hospitals when Prospect issued a request for proposals from potential buyers in 2021.

Yale and Prospect signed a letter of intent to explore the sale in February 2022, and then Yale executed a purchase agreement in October 2022 for Waterbury Hospital and the two Eastern Connecticut Health Network hospitals. The $435 million package deal was the most sweeping transaction to be proposed in the state’s hospital industry since Tenet’s five-hospital proposal in 2014.

In October 2022, MPT also announced a two-part agreement to sell the hospital buildings and grounds back to Prospect, and Yale agreed to buy the hospitals in a contemporaneous transaction.

Yale told state regulators while seeking state approval of the proposed sale that it estimated that the three hospitals could be operating in the black by 2025. That estimate turned out to be overly optimistic.

The three Prospect hospitals were victims of a costly cyberattack in August 2023 that crippled their operations for six weeks, and it also set the struggling hospitals back even further financially. Yale had its own financial challenges, including recording its first financial loss in 50 years in the 2022 fiscal year.

The state Office of Health Strategy approved a certificate of need for the sale last March 27 that set 46 regulatory conditions on the transaction. By then, though, Yale and Prospect had what would turn out to be a fatal falling out over the sales price.

Two months earlier, Yale sought a $265 million reduction, but Prospect only offered a $20 million discount. The Yale offer was $55 million less than Prospect paid for the three hospitals.

Prospect purchased Waterbury Hospital and corporate parent Waterbury Health for $100 million in 2016, and it paid $105 million for Manchester Memorial and Rockville General hospitals and corporate parent Eastern Connecticut Health Network that same year.

Yale sued Prospect in state court last May to get out the $435 million deal alleging that Prospect had violated the terms of the purchase agreement due to its irresponsible financial practices, severe neglect and general mismanagement that left the three hospitals a shell of what they were when Yale agreed to acquire them. Prospect countersued to compel Yale to complete the sale as negotiated.

The consolidated case was headed to trial in April when Prospect filed for Chapter 11 bankruptcy protection overnight on Saturday Jan. 11.

The bankruptcy filing came a month before a scheduled hearing in state court on Yale’s motion for a summary judgment that claimed it is entitled to win the case without a trial as a matter of law.

The federal bankruptcy filing put a hold on the state lawsuit. In the Chapter 11 proceeding, Yale is now seeking to keep the ligation in Connecticut courts, and Prospect is seeking to add it to its bankruptcy case.

In a bankruptcy court filing, in February Prospect outlined an 11-week auction process for its Connecticut assets that would end with a June 5 sale. Any sale of Prospect’s assets in both Connecticut and California depends on the company first making a deal with MPT, the filing stated.

Pernerewski, the Waterbury mayor, said he continues to believe Waterbury Hospital is a viable operation and a financially attractive investment, and he remains hopeful that the court-supervised auction process will produce a purchaser that will secure its future.

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