Neronha OKs Prospect hospital plan with $80M escrow provision

Updated at 4 p.m. on June 1, 2021

PROVIDENCE – Attorney General Peter F. Neronha has given the go-ahead for an ownership change of two Rhode Island hospitals owned by Prospect Medical Holdings Inc. as long as the company puts up $80 million in an escrow account.

Neronha’s decision, announced during a Tuesday press conference, revives the ownership change proposed from California-based Prospect, which owns 17 hospitals in five states, including the Roger Williams Medical Center and Our Lady of Fatima Hospital. The proposal to let two partial owners of the company buy out the private equity firm that has a 60% stake requires approval from the attorney general and R.I. Department of Health under the state Hospital Conversions Act.

Earlier this year, Prospect withdrew its application and threatened to close or sell both of its Rhode Island hospitals after Neronha said the deal could only go forward if the company put $120 million in escrow.

A Prospect spokesperson said at the time that amount was “anomalous, if not unprecedented” and sought to have Neronha’s final decision, which includes details about its finances, blocked by filing an injunction in R.I. Superior Court. 

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Asked why he agreed to lower the set-aside from $120 million to $80 million, Neronha said the company originally refused to cooperate or negotiate but has since come to the table to make its case. 

When you’re cooperating, I will talk to you about the right number,” Neronha said. “If you’re not cooperating, I am going to err on the side of caution.”

The $80 million will provide enough money for five years of operating costs and capital expenditures at both hospitals, as well as $27 million in Coronavirus Aid, Relief and Economic Security Act funds that will have to be repaid. Prospect also cannot sell or lease either hospital for five years.

Otis Brown, a spokesman for Prospect, in a statement issued Tuesday afternoon confirmed the transaction has been completed, indicating the company agrees to the state conditions and has deposited the money in the escrow account. Brown did not comment specifically on the escrow or other conditions of the approval.

Under the proposed ownership change, private equity firm Leonard Green & Partners will sell its share to minority owners Sam Lee, Prospect chairman and CEO, and David Topper, Prospect senior vice president. Lee and Topper would then form a new parent company to operate the hospitals.

Neronha on Tuesday framed the financial requirements as a protection for the state and its hospital services, which resulted from a yearlong review of the company and recommendations from independent financial experts.

We have an obligation to ensure the health care system in Rhode Island delivers quality, accessible and affordable health care to our residents,” he said. 

Prospect, which took over Fatima and Roger Williams Medical Center in 2014, has posted significant operating losses and taken on increasing debt in recent years that jeopardizes its financial position, selling and leasing back some of its other hospitals to benefit shareholders while weakening its balance sheet. In 2017, the company had $67 million more in assets than liabilities. Within three years, its liabilities outstripped assets by $1 billion, Neronha said.

“That’s a crisis on our doorstep,” Neronha said of the possibility the company would have no cash available within 18 to 24 months.

The escrow money cannot be accessed even if the company goes bankrupt, and if it fails to meet any or all of the conditions set by the state, it will not get its money back. That includes $34 million, which Leonard Green & Partners is required to contribute to the escrow as a condition of the approval even though the firm is selling its ownership.

“I thought it was important they have skin in the game,” Neronha said.

The R.I. Department of Health, which did not attend the press conference, released a statement Tuesday afternoon saying it has also issued conditional approval for Prospect’s ownership change proposal, subject to similar conditions as what Neronha outlined. However, RIDOH’s approval required that there be no layoffs at either hospital for one year, whereas the Attorney General’s approval only required written notice for layoffs or workforce reductions of 30 or more people.

(This story has been updated to include comment from the R.I. Department of Health and a statement from a Prospect spokesman.)

Nancy Lavin is a PBN staff writer. You may reach her at Lavin@PBN.com.