Pennsylvania Attorney General Sues Prospect Medical for ‘Corporate Greed’

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Brief description of the dive:

Attorney General of Pennsylvania filed the lawsuit Tuesday against Prospect Medical Holdings and its former parent company, alleging that mismanagement of the hospital network caused the closure of two hospitals and massive disruptions in patient care.
The suit alleges that Prospect breached the terms of its 2016 purchase agreement for the four-hospital Crozer Health system, which a perspective is needed for all acute care hospitals to be open for at least 10 years.
in a suit Attorney General Michelle Henry is asking for a preliminary injunction preventing Prospect from closing any more hospitals and asking the official receiver to step in and take over Crozer Health.

Dive Insight:

Prospect unsuccessfully tried to spin off Crozer Health starting in 2022 after the Pennsylvania hospital chain proved financially unsuccessful.

Prospect sought to recoup its losses by restructuring Crozer by indefinitely suspending inpatient and emergency services at Springfield Hospital, layoffs and the closing of Delaware County Memorial Hospital — much to the dismay of the state attorney general, who filed suit challenging closing.

Delaware-based ChristianaCare signed a definitive agreement to buy Crozer in 2022, but negotiations broke down.

Henry pressed Prospect to find new buyers last October, offering the health system one year put the litigation on hold to explore sale options. New Jersey-based CHA Partners signed on optional letter of intent to acquire a network of hospitals in August.

However, that deal also did not materialize by the state’s trial deadline, according to the lawsuit, which also names private equity firm Leonard Green, former parent of Prospect, as defendant.

Crozer, meanwhile, remains financially unstable. Providers are not being paid, employee pension funds are underfunded and Prospect plans to close the trauma, maternity and burn units at Crozer Chester Medical Center after Nov. 20, according to the complaint filed Tuesday.

“We are taking legal action against a company that agreed to prioritize affordable health care, but instead broke its promise, with years of carelessly self-serving practices that put lives at risk,” Henry said in a statement, accusing Crozer of “corporation.” avarice”.

The lawsuit concerns Prospect’s financial operations — as sale-leasing — contributed to Crozer closure of services, inability to maintain certain lines of service, and loss of surgical residency program accreditation.

In the case of a leaseback, hospital owners sell their real estate to access quick liquidity, but must then pay rent for the space. Under typical “triple net” leases like Crozer’s, the hospital system assumes all costs, including maintenance, repairs, utilities, taxes and insurance, in addition to rent.

Prospect pays $35 million annually to Medical Properties Trust, a firm that has become a national name this year for its involvement in the landmark Steward Health Care bankruptcy.

Prospect’s set of “sophisticated” financial transactions, including leasebacks, allowed the health system to divert more than $450 million to enrich private investors, including Leonard Green, while Crozer struggled, the complaint alleged.

The Prosecutor General is also asking the court for a third-party firm, FTI Consultingto watch over Crozer until a new owner is found. If appointed, the firm would have the authority to declare Crozer bankrupt, according to court documents.

A spokesman for Prospect dismissed the lawsuit as “hasty” in an emailed statement.

“For the past few months, we have been working hard on the transmission Crozer Health to the non-commercial owner,” said the spokesman. “In addition, we are working on an agreement with the governor’s office for the state to provide additional funding stabilization.”

Delaware County’s House and Senate delegation released a statement Wednesday supporting the Prosecutor General’s lawsuit. They also called on state lawmakers to increase oversight of the role of private capital in managing health care, a move that is gaining traction across the country.

In Pennsylvania, lawmakers proposed law in May it would require health systems to submit notices and documentation before the sale is complete, and would give the attorney general more power to block leveraged buyouts.