Prospect Medical Signs Temporary Deal to Avert Hospital Closures

Bankrupt health system Prospect Medical Holdings Inc. won court approval to hand operations of its Pennsylvania hospitals to a state-backed receiver, a last minute deal that averts potential closures of critical health centers.

The agreement approved Thursday by Judge Stacey Jernigan transfers operation of the hospitals from Prospect to advisory firm FTI Consulting Inc., which has been tapped by Pennsylvania Attorney General Dave Sunday as a private trustee to oversee hospitals in the state. Prospect is facing “dire liquidity” problems and the deal is a temporary measure that will keep the hospitals open while Prospect searches for new owners, Jernigan said.

“We’ve got to keep these facilities open, somehow,” the judge said.

The agreement with state authorities came together after a proposed sale of the Pennsylvania hospitals to a nonprofit organization was paused. FTI will also oversee $20 million in funding to support the hospitals which is scheduled to come in the coming weeks, Prospect lawyer Thomas Califano said during Thursday’s court hearing.

Pennsylvania authorities last year sued Prospect and its private equity investor Leonard Green and Partners. The lawsuit claims Prospect distributed $457 million in dividends to investors through a $1.12 billion loan.

The complaint also criticized the sale of Prospect’s properties in California, Connecticut and Pennsylvania to landlord Medical Properties Trust Inc., which leased the facilities back to company. The leases saddled Prospect with excessive rent liabilities, the lawsuit alleged.

Prospect filed for Chapter 11 in January, becoming at least the third health system to seek court protection in the past two years. Former Medical Properties Trust tenant Steward Health filed for Chapter 11 last year and also had to strike a series of rescue deals to keep its hospitals from closing.

Leonard Green and Partners’ ownership of Prospect Medical has been criticized by members of Congress. A bipartisan Senate report released earlier this month said the private equity firm “wielded substantial influence” over Prospect’s financial decisions and that while it was owner of the hospital operator, it collected $424 million of the $645 million the company paid out in dividends and preferred stock redemptions.

The case is Prospect Medical Holdings, Inc., 25-80002, in the U.S. Bankruptcy Court Northern District of Texas.

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