Rhode Island AG Slams Leonard Green & Partners for Raiding Hospitals and Requires Firm to Give Some Money Back

Last week Rhode Island Attorney General Peter Neronha approved the sale of Prospect Medical Holdings, a safety net hospital chain majority-owned by private equity firm Leonard Green & Partners, after a year-long investigation into the company’s finances. As a condition of the sale, the Leonard Green-led ownership group will commit $80 million into an escrow account to ensure that the company’s two Rhode Island hospitals open.[i]

Alongside his announcement of the sale and conditions, AG Neronha issued a highly critical report highlighting how Leonard Green and the minority owners raided the hospital chain of over half a billion dollars even as the hospitals suffered declining financial health. Their decisions, Neronha notes, reveal “a focus on wealth that puts at risk the well-being of institutions and people who communities in five states rely upon for care, often (as is the case with healthcare) at the time of greatest need.”[ii]

Prospect runs 17 hospitals in 5 states, including two hospitals in Rhode Island. Leonard Green has been trying to sell its stake in Prospect to the minority owners for over a year but has been unable to fully exit without regulatory approval in Rhode Island. The review process to approve the sale was held up in part due to concerns about how the Leonard Green-led ownership group has enriched itself at the expense of the hospitals’ stability and quality of care.[iii]

Neronha’s approval of the transaction comes after a heated battle with Prospect’s owners over the proposed escrow conditions and decision to publicize the findings of his investigation into the company’s finances. He had reportedly planned to issue a decision in April but was delayed when Prospect threatened to close the hospitals in response.[iv]

The 70-page report explains why Neronha deems the $80 million commitment by the Leonard Green-led ownership group to be critical to keep the Rhode Island hospitals open:

“Our investigation revealed a company whose principals and investors have issued millions of dollars in dividends from a business responsible for the safety-net hospitals and services they own, which has translated into debt held by the entire system, such that liabilities now exceed assets by over $1 billion. In an ever-changing healthcare market, this debt-to-asset ratio raises a concern for the Attorney General that the national company that owns these Rhode Island Hospitals can become unstable, disrupting and even threatening Rhode Island’s third largest hospital system. In other words, PMH is a system that is at risk of developing a lack of financial ability to respond to the volatility of the healthcare market, putting every hospital in its system including our Rhode Island Hospitals at risk of reduction in services, sale, or closure.”[v] (emphasis added)

In particular, Neronha highlighted how the dividends collected by Leonard Green and others and subsequent selling-off of almost all of Prospect’s real estate added to the hospitals’ distress:

“All told, from 2012 to 2020, Leonard Green, Lee, and Topper have together paid themselves over half a billion dollars in cash from debt that went onto PMH’s books—this while the company took the aforementioned $603 million cumulative comprehensive loss from Fiscal Year 2015 to Fiscal Year 2020.”[vi]

Questions remain about the future of Prospect’s hospitals in California, Connecticut, Pennsylvania, and New Jersey, the Leonard Green-led ownership group has not yet committed to return dividends or put money into escrow to ensure the stability of Prospect’s 15 other safety net hospitals, despite the hospital system’s high liabilities and precarious finances. 

Prospect shuttered its hospitals in Texas in late 2019.

Selected Coverage:

• Wall Street Journal (6/1/21): “Rhode Island Regulator Approves Hospital Sale”
• Los Angeles Business Journal (6/1/21): “Leonard Green Receives OK to Sell Rhode Island Hospitals”
• Boston Globe (6/1/21): “R.I. attorney general approves sale of Roger Williams and Fatima hospitals, with conditions”
• Providence Journal (6/1/21): “Neronha says he will sign off on hospital sale with conditions”
• WPRI (6/2/21): “’A focus on wealth’: AG paints owners of Roger Williams, Fatima hospitals as greedy and irresponsible”
• Becker’s Hospital Review (6/2/21): “Rhode Island regulators approve sale of 2 hospitals, averting closure”

[i]https://www.wsj.com/articles/rhode-island-regulator-approves-hospital-sale-11622591539

[ii]http://www.riag.ri.gov/documents/Prospect_Chamber_Ivy_AG_HCA_Decision.pdf

[iii]https://pestakeholder.org/update-leonard-green-led-ownership-collected-658-million-from-safety-net-hospital-company-despite-challenges-commitment-to-regulators-to-forgo-dividends/

[iv]https://www.beckershospitalreview.com/finance/owner-threatens-to-close-2-rhode-island-hospitals-over-ag-s-escrow-demands.html

[v]http://www.riag.ri.gov/documents/Prospect_Chamber_Ivy_AG_HCA_Decision.pdf

[vi]http://www.riag.ri.gov/documents/Prospect_Chamber_Ivy_AG_HCA_Decision.pdf