Prospect Medical Holdings Inc. was seen as a hero a decade ago, swooping in to prop up the struggling Roger Williams Medical Center in Providence and Our Lady of Fatima Hospital in North Providence.
Prospect, a California-based private equity firm, purchased the health care facilities associated with CharterCARE Health Partners in 2014, including the two hospitals that were drowning in millions of dollars of debt.
Among the employees at Roger Williams and Fatima, there was a sense of relief as Prospect initially invested in the facilities and didn’t seek substantial changes to job benefits or staffing.
But the hero status has long since worn away.
The two hospitals are in financial danger again – losing millions of dollars annually – and some health care workers say the facilities are suffering from a severe lack of investment. Prospect is looking for the escape hatch.
The for-profit entity started putting its assets across the U.S. up for sale in December 2021 and says that in more than two years, the only viable buyer it has found for the two Rhode Island-based hospitals is The Centurion Foundation Inc., an Atlanta-based nonprofit that lacks a track record in operating hospitals.
The proposed $193 million deal – which includes a $160 million purchase for the hospitals, as well as other physician groups and offices that CharterCARE operates – contains positives.
Centurion says it will hire 200 additional workers and place $80 million on the hospitals’ balance sheets to be invested in improvements. But not everyone is sold on the potential transaction.
The United Nurses and Allied Professionals, a union representing 1,000 health care workers at the two hospitals, has made it clear it opposes Centurion’s bid, raising red flags about the nonprofit’s management inexperience in the sector and its vague plans to turn around the fortunes of Fatima and Roger Williams.
“Because things have been so bad with Prospect, we were optimistic about a new owner,” said Lynn Blais, president of UNAP and registered nurse at Fatima. “But as we looked into Centurion’s proposal … it was a real eye-opener.”
Centurion’s strategy fully depends on debt to finance the deal. It plans to issue $93 million in tax-exempt bonds and $40 million in taxable bonds and will take out a $60 million long-term loan. At the same time, it expects the hospitals – which lost a combined $37.2 million in 2022 – will be $22.3 million in the black annually by 2028, according to Centurion’s Hospital Conversion Act application.
State regulators who either must approve the deal, deny it or approve it with conditions by June 11 have questions of their own.
Attorney General Peter F. Neronha said he has “substantial questions” about Centurion’s debt financing plans and whether it’s a viable way to pay for the hospitals.
The R.I. Department of Health also raised concerns in a letter to Centurion, questioning its commitment to improve and sustain the financial situation at the hospitals, as well as ensure they provide safe and adequate health care services.
Other stakeholders acknowledge that Centurion’s plan has some issues but say it’s the best option for the hospitals to survive.
Dr. Joseph Espat, director of the Cancer Center at Roger Williams Medical Center, says the move to nonprofit alone offers financial benefits. And he notes that Centurion wants the hospital to be overseen by a local board of directors and local executives, unlike what’s being done by the current owner.
“The whole point of this is to remove us from Prospect,” Espat said.
‘ENORMOUS STRAIN’
Whatever the decision by regulators, there is a lot riding on the outcome.
The 220-bed Roger Williams Medical Center in the Elmhurst section of Providence and the 312-bed Our Lady of Fatima located 2 miles away in North Providence account for more than 20% of the state’s total hospital bed capacity.
In addition, the hospitals combined have recorded more than 10,000 annual admissions and 53,000 emergency department visits in recent years. And they treat largely underserved communities, and about 70% of patients rely on Medicare or Medicaid, a rate higher than at Lifespan Corp. and Care New England Health System hospitals.
The two hospitals also employ about 2,400 employees.
“Rhode Island can’t easily handle a situation where two hospitals close,” Neronha said.
Other state leaders agree.
“Our hospital system is already under enormous strain, causing lengthy emergency room wait times and difficulty for patients accessing the services they need,” Senate President Dominick J. Ruggerio, whose district includes Fatima Hospital, said in a statement to Providence Business News. “Ensuring the future viability of these hospitals … is of the utmost importance.”
Sen. Pamela J. Lauria, D-Barrington, a nurse practitioner at Coastal Medical Inc. in Rhode Island, says that whenever a rescue vehicle responds to an emergency, the first questions asked by the response team are what facilities are open and whether they offer the kind of treatment a patient needs.
“Every time we lose a facility, that answer becomes a no,” Lauria said during a panel discussion at PBN’s 2024 Spring Health Care Summit in April. “It’s imperative that we keep those hospitals going the best that we can.”
Centurion has pressed its case, touting the organization’s background in financing health care transactions – more than 25 of them totaling more than $1 billion that financed 36 health care facilities nationwide, according to Centurion executives.
In one case, according to the HCA application, Centurion was involved in an acquisition-leaseback transaction with Texas nonprofit health care system Ascension Seton.
After buying the 156,000-square-foot offices Ascension Seton had been renting from a previous for-profit owner, Centurion set up a new lease with Ascension that saved the hospital group $1.4 million annually, according to the application.
The scenario had “strong parallels with the proposed CharterCARE transaction,” Centurion said in its application.
“We are experienced and have a proven track record ensuring other charities and charitable institutions advance their mission through our work,” said Centurion President Benjamin M. Mingle at a public hearing in March. “We have very closely analyzed the services and finances of these hospitals and put together a strong plan that shows the pathway for financial viability for both Roger Williams and Our Lady of Fatima to be independent.”
In its HCA application, Centurion says it will honor the labor agreement Prospect already has with unionized workers at the two hospitals, but it acknowledges that insurance and benefit packages have not yet been negotiated because it is too early to do so. (Union leaders have complained that Centurion won’t commit to an agreement that would protect against closures or layoffs).
Also, Centurion touts that it will implement a localized leadership structure, with CharterCARE System CEO Jeffrey H. Liebman staying on as chief of the new CharterCARE system and other departments such as human resources and information technology being based in Rhode Island.
But whether Centurion’s proposal will be better for the hospitals in the long run is the key question.
“We know what it would be under Prospect, but we’re less clear about Centurion,” Neronha said.
[caption id="attachment_466375" align="aligncenter" width="1024"]
BY THE NUMBERS
(Losses in parentheses) / source: the Hospital conversion application[/caption]
MONEY ISSUES
Blais remembers those early days after Prospect purchased Fatima in 2014 and the sense of stability the company brought to the financially strapped hospital.
Within a year, Blais says, troubling signs began to appear. Leaks developed in the hospital roof and potholes grew in the parking lot.
Prospect also started cutting expenditures on medical equipment and supplies. Blais, a nurse with 40 years of experience, says the hospital tried to maintain a 60-day inventory of medical supplies, but it often dropped to as low as 10 days.
Then word spread to patients, who sometimes would ask nurses if they had enough supplies to perform their procedures.
“That’s not normal,” Blais said. “It’s a very difficult question to answer.”
Blais learned that the same deterioration was happening at Roger Williams Medical Center.
Meanwhile, Prospect’s financial position was sinking, too.
In 2017, the value of the company’s assets nationwide exceeded its liabilities by about $67 million, according to Neronha. By 2020, Prospect was in dire straits, with liabilities exceeding assets by $1 billion, Neronha says.
The R.I. Office of the Attorney General first learned of Prospect’s troubles when Leonard Green & Partners, a California-based private equity firm that had a 60% stake in the company, was looking to sell in 2019. A hospital transaction of that size had to be approved by regulators.
After delays and intense scrutiny from state regulators, the transaction was eventually approved in 2021 but with several conditions, including that Prospect put up $80 million in escrow and keep the hospitals “open and operational” for five years, ending in 2026.
But the hospitals’ financial woes have persisted. Now Prospect wants out and is seeking to sell its 17 hospitals nationwide.
[caption id="attachment_466373" align="aligncenter" width="1024"]
A WAY OUT? Roger Williams Medical Center in Providence has been losing millions of dollars annually in recent years under Prospect Medical Holdings Inc., but stakeholders are divided over whether The Centurion Foundation Inc.’s plan will get the hospital back on track.
PBN PHOTO/MICHAEL SALERNO[/caption]
GOING NONPROFIT
Observers say that simply converting the for-profit hospitals to nonprofit would be a step in the right direction, freeing the organization from acting in service of a company’s profit goals.
“Relying on profit in health care is a fatal mistake,” said Alan Sager, a professor at Boston University’s School of Public Health.
Case in point: Steward Health Care, the embattled for-profit Dallas company that operates eight hospitals in Massachusetts, including Morton Hospital in Taunton and St. Anne’s Hospital in Fall River.
Severe financial woes have threatened the future of those hospitals as Steward struggles to make debt payments. It filed for bankruptcy protection on May 6, and the hospitals continue to operate.
While the Prospect situation is on a much smaller scale, the similarities are there: Both Prospect and Steward are private equity firms that have been accused of extracting money out of the hospitals to benefit investors at the expense of health care.
“Private equity should never be let into health care systems,” Neronha said.
Christoper M. Whaley, associate professor in the Department of Health Services, Policy and Practice at the Brown University School of Public Health, says nonprofit hospitals can benefit from tax advantages on bonds that are not available to private equity.
While adding debt to the already struggling hospitals is not ideal, he says, it’s likely any entity purchasing them will need to borrow more money, so it’s better for them to be acquired by a nonprofit.
When determining the feasibility of Centurion’s proposal, Sager says, it’s also important to consider whether the hospitals’ projected financial performance will be strong enough to pay off the debts.
According to the application, Centurion plans to issue about $40 million in taxable and $93 million in tax-exempt bonds with Barclays Inc. as the underwriter. Centurion expects the taxable bonds would be sold at par value with a 7.28% interest rate amortized over 10 years and the tax-exempt bonds would go for a premium with 6.03% interest over 30 years.
Assuming annual payments and both bonds are sold at par, the total interest owed on the bonds would be approximately $197.3 million, with about $2.91 million in interest owed each year on the taxable bonds and $5.6 million owed each year on the tax-exempt bonds. Centurion spokesperson Otis Brown says the nonprofit expects the bond process will take about four to six weeks to complete.
According to Centurion’s application, the hospitals would see their financial performance improve immediately after the ownership changed hands, with a combined operating profit rising to $22.3 million by fiscal 2028.
By converting the hospitals to nonprofits, Centurion says it expects $17 million in “economic benefits” in the form of reduced expenses and increased capital from grants and research funding.
“All savings and additional capital will remain and be used in the Rhode Island market,” Centurion said in its application.
This is what’s appealing to Espat.
Not only is Centurion looking to put the hospitals under local control, but the nonprofit would open the door to avenues of funding and give the hospital more freedom in recruiting doctors out of medical school, he says.
But many UNAP members, still smarting from their experience with Prospect, are skeptical of Centurion’s proposal, especially because it calls for 100% debt financing.
“The notion that somehow you’re going to turn around two failing hospitals by going to the bond market – assuming the bond market will touch them with a 10-foot pole in the first place … is absurdity,” said Chris Callaci, general counsel for UNAP.
Callaci says the union wants Centurion to put its own money into the transaction. State regulators could encourage this by attaching conditions to their decision for Centurion to invest its own capital, UNAP says. Brown did not respond to questions on whether this is something the nonprofit would consider.
Callaci also points out that the application says mortgages may have to be taken on facilities if market conditions don’t allow for bonds.
“It’s a house of cards,” Callaci said.
OPTIONS OPEN?
But what’s the alternative?
If the Centurion proposal isn’t approved and it doesn’t take ownership of the hospitals, state leaders say, the next actions are up to the state Department of Health.
In a statement to PBN, a RIDOH spokesperson declined to comment on that scenario, calling it “speculative.”
There is about $45 million left of the $80 million in escrow Prospect put up to keep the hospitals open through 2026, officials say. And observers say there are a few potential solutions for keeping the doors open beyond that, should the transaction fall through.
One option, Whaley says: Cutting the number of Medicaid patients the hospitals admit and reducing services that are less profitable while investing in those that generate the most revenue.
“The challenge here is that there’s not a perfect solution and there’s going to have to be tradeoffs made along the way,” Whaley said.
Another possibility is receivership, a situation in which a court-appointed special master would be tasked to manage the hospitals until a buyer could be found.
Asked if receivership was an option for the hospitals, a RIDOH spokesperson said in a statement that anything affecting the standing of the hospitals could lead to receivership, but the department is focusing on reviewing Centurion’s application.
Two hospitals in Rhode Island have entered receivership because of financial problems in recent years, both of which were eventually purchased by out-of-state hospital groups.
The financially distressed Landmark Medical Center in Woonsocket had a special master appointed to oversee the facility in 2008 while it sought buyers. Several suitors – including Steward – got cold feet, but five years later, Landmark was sold to Prime Healthcare Services of Ontario, Calif. While at first Landmark was a for-profit entity, Prime converted it to a nonprofit in 2017.
And Westerly Hospital entered receivership in 2011 and was eventually purchased by Lawrence + Memorial Corp. in 2013, which then merged with Yale New Haven Health Services Corp. in 2016, and it is still operating as a nonprofit now.
What’s the prognosis for CharterCARE?
Neronha says he is concerned but is hoping hospital closures can be avoided.
While Massachusetts state leaders are scrambling to avoid shuttering Steward hospitals, Neronha says Rhode Island’s hospitals are in arguably a more difficult place because of the state’s lower Medicaid and Medicare reimbursement rates.
A recent report commissioned by the Rhode Island Foundation found that 74.2% of Rhode Island’s acute hospitalized patients rely on Medicare and Medicaid, compared with 67.6% in Massachusetts and 69.4% in Connecticut. Yet reimbursement rates are still lower in Rhode Island than in the neighboring states.
“You can see the storm we’ve created,” Neronha said. “Until we fix the problems with reimbursement rates, we’ll continue to see signs of a failing health care system.”
