Yale New Haven Health calls deal to buy Prospect hospitals ‘impossible.’ Here’s how an auction could work

CT Post – Thursday, February 27, 2025
By Liese Klein

Calling a deal “impossible,” Yale New Haven Health signaled this week that it would end efforts to buy Prospect Medical Holdings’ three Connecticut hospitals.

A 2022 pact to buy Manchester Memorial, Rockville General and Waterbury hospitals has been tied up in a legal fight since last May, when Yale New Haven Health sued Prospect over a 2022 deal to buy the hospitals for $435 million.

Tuesday’s Yale New Haven Health statement echoed the lawsuit, alleging that Prospect’s mismanagement has greatly reduced the value of the hospitals and rendered the deal unworkable.

“While YNHHS (Yale New Haven Health System) had hoped to acquire these assets and enhance the clinical care for the impacted communities, Prospect’s failure over several years to pay vendors and state and local taxes and to fund their pension obligations have made this transaction impossible,” spokesperson Dana Marnane said.

A Prospect Medical Holdings spokesperson declined to comment Wednesday on Yale’s statement.

Prospect countersued Yale New Haven Health later last year over its reluctance to complete the purchase, then filed for bankruptcy in January. In filings last week in Texas, Prospect blamed Yale’s legal action for helping to push the California-based hospital chain into bankruptcy. The court battle related to the deal, known as an asset purchase agreement, continues in federal district court, with Yale seeking to keep the litigation in Connecticut and Prospect seeking to add it to its bankruptcy case.

Marnane pointed to the chain’s current financial morass as evidence of Yale’s allegations.

“The bankruptcy filing is proof of their disinvestment and mismanagement,” Marnane said. “As we have been saying for almost 18 months, and detailed in our lawsuit, Prospect has never been in a position to close the transaction on the terms set out in the October 2022 asset purchase agreement.”

Marnane would not confirm if Yale is completely out of the running to buy Prospect’s three Connecticut hospitals, which lost a combined $86.4 million in fiscal 2023, the most recent data available.

“We continue to closely monitor the bankruptcy proceedings,” Marnane said. “Our statement is all I have to share on the matter,” she added on Wednesday.

Gov. Ned Lamont, who has taken an active role in trying to bring the two sides together over the past year, was in India on a trade mission and not available for comment on Wednesday. Lamont spokesperson David Bednarz said: “We can only confirm that we continue to have conversations with possible buyers. Aside from that, we cannot comment further at this time.”

Hospitals on the auction block

Regardless of Yale New Haven Health’s statement this week, the hospital system can still take part in a future auction to bid on Prospect’s Connecticut holdings as part of the bankruptcy process, said Thomas S. Marrion, a professor at UConn Law School and partner at Hinckley, Allen & Snyder LLP with expertise in bankruptcy.

In addition, due to Prospect’s counter-suit in the legal action over the sale price, Yale can’t step away from dealing with the bankrupt company any time soon. “Yale will not be at liberty to simply drop out of the process,” Marrion said. “That’s the whole point of the lawsuit.”

Prospect proposed an auction schedule in filings in bankruptcy court last week, with a sale coming as soon as June 5. Such a speedy process is not unusual in Chapter 11 bankruptcies, Marrion said. Chapter 11 bankruptcy allows a debtor to continue operating while reorganizing its finances.

“Debtors in bankruptcy want to complete this process as quickly as they can,” Marrion said. The sooner creditors are paid, the sooner a company can start efforts to reorganize, he said. “Time is not on the side of the debtor in a situation like this.”

Even so, bankruptcy-related auctions are often rescheduled as debtors look around to find an eligible buyer, Marrion said. “If it takes a little bit longer to find the best buyer, then Prospect will want to extend the process,” he said.

Prospect also needs to find a “stalking horse bidder,” a party willing to make a first bid in an auction to set a floor on the price of its Connecticut hospitals.

In the absence of other bidders, the stalking horse may end up owning the hospitals at a bargain price. That’s what happened with the sale of Johnson Memorial Hospital in Stafford Springs in 2015: Acting as a stalking horse bidder, Saint Francis Care bought Johnson Memorial for $32.9 million. There were no other bidders, Marrion said.

Judging by Prospect’s bankruptcy filings so far, it was unlikely the company had yet found a stalking horse bidder, Marrion said. Yale New Haven Health could conceivably emerge to bid at an auction.

The fact that Prospect’s Connecticut hospitals sit on land that is owned by Medical Properties Trust as part of a controversial 2019 sale-leaseback deal could discourage bidders, Marrion said. Prospect owed MPT, now its landlord, $56 million in back rent as of May 2023 and discusses working out a settlement with the company before a sale in its filing on the auction schedule.

“There’s a very limited number of eligible parties to bid for hospitals,” Marrion said.

For-profit chains shop for assets

Without Yale New Haven Health in the picture, who would want to buy Prospect’s Connecticut hospitals?
Given the financial struggles of nonprofit hospital systems nationwide, for-profit chains have emerged as buyers of some of Prospect’s other hospitals in the Northeast.

Michigan-based for-profit Insight Health was named in Prospect’s bankruptcy filings as a potential purchaser of two of the company’s hospitals in Pennsylvania, Crozer-Chester Medical Center and Taylor Hospital.

Pennsylvania officials this year have allocated $20 million in state funding and appointed a temporary manager to keep the two Prospect hospitals open for at least 30 days pending a sale.

Hattis said another potential for-profit bidder could be Dallas-based Tenet Healthcare, which owns three hospitals in Massachusetts and 49 acute-care hospitals nationwide.

For-profit hospitals have come under increased scrutiny in the region after the collapse and bankruptcy of for-profit Steward Healthcare, which has resulted so far in the closing down of Carney Hospital in Dorchester and Nashoba Valley Medical Center in Ayer.

Massachusetts ended up helping three nonprofits in the state to buy three of Steward’s ailing hospitals, an effort estimated to cost state taxpayers as much as $700 million by 2027, according to documents obtained by the Boston Globe.

“While they prevented all but two of the Steward hospitals from immediately closing, it’s not for sure that those institutions are going to make it long term,” said Paul Hattis, senior fellow at the Lown Institute, a health-care think tank in Massachusetts.

Connecticut’s state government will likely have to take a more active role to facilitate a sale and keep Prospect’s hospitals here open, Hattis said. “I’d say the state of Connecticut is unlikely to find the solution will come with them just standing idly by.”

Hospital woes persist with cuts looming

Any buyer of Prospect’s Connecticut hospitals will face an increasingly troubled New England health-care landscape, said David Storto, a Massachusetts-based consultant and former executive at Tufts Medicine.

The region’s hospitals are still recovering from the COVID-19 pandemic, with many reporting ongoing losses and escalating costs. In addition, pivotal academic medical centers like Mass General Brigham in Boston and Yale New Haven Health are likely to be impacted on a major scale by President Donald Trump’s proposed cuts to research funding, Storto said. Mass General Brigham announced hundreds of layoffs earlier this month as part of efforts to cut $250 million in expenses.

Plans to further privatize Medicare could add to New England hospitals’ challenges considering its older demographics, Storto said. “Everybody’s kind of fearful about all of that stuff,” he said. “It’s a real source of concern.”

On the other hand, proposed actions by Trump to scale back on antitrust enforcement could make buying a hospital easier, Storto said. “There will be providers that take advantage of that,” he said.

Connecticut House lawmakers are also seeking to encourage hospital purchases, passing a bill this week that would speed up the Certificate of Need process, in which state health regulators scrutinize prospective changes of ownership. The Legislature’s Public Health Committee worked with the Lamont administration to craft the bill, which creates an emergency approval process for hospitals that have filed for bankruptcy and found a willing buyer, said Rep. Cristin McCarthy Vahey, chair of the committee.

“When there is an approved buyer by the court, we are ready to get that sale going as quickly as possible,” said McCarthy Vahey, D-Fairfield. “It’s really about making sure that we can help provide stability for the hospitals that are community centers, employers, and obviously, most of all, taking care of all of us when we’re at our most vulnerable.”

Regardless of state efforts, older facilities — if they haven’t been maintained or improved in recent years — would be a tough sell in an uncertain market, Hattis said. State regulators said earlier this month that they were unable to assess Prospect’s spending on its hospitals due to incomplete reporting.

“Not only do you have to have enough cash to cover the deficits … but since you have such a poor physical plant, you’re going to have to put in hundreds of millions of dollars to reinvest in that,” Hattis said.

Looming cuts in Medicaid coming from the Trump administration will also hit New England’s hospitals especially hard due to their ongoing losses and patient mix, Hattis said.

“I think people are wondering ‒ not only for those hospitals, but the whole hospital sector ‒ where is it all going?” Hattis said.

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