Dive Brief:

• Pennsylvania’s attorney general sued Prospect Medical Holdings and its former parent company, alleging mismanagement by the hospital chain caused two hospital closures and widespread disruptions to patient care.
• The lawsuit Tuesday argues Prospect broke the terms of its 2016 purchase agreement of four-hospital system Crozer Health, which required Prospect to keep all acute care hospitals open for at least 10 years.
• In the suit, Attorney General Michelle Henry asks for a preliminary injunction barring Prospect from closing more hospitals and requests an official receiver step in and manage Crozer Health.

Dive Insight:

Prospect, which operates facilities in four states, has been unsuccessfully attempting to divest Crozer Health since 2022 after the Pennslyvania-based hospital chain proved a financial drain.

Prospect has attempted to recoup its losses by restructuring Crozer, indefinitely suspending inpatient and emergency services at Springfield Hospital, conducting layoffs and closing Delaware County Memorial Hospital — much to the chagrin of the state’s attorney general, which filed a lawsuit contesting the closures.

In 2022, Delaware-based ChristianaCare signed a definitive agreement to purchase Crozer, but negotiations fell apart.

Henry put pressure on Prospect to find new buyers last October, offering the health system a one-year pause on litigation to explore sale options. New Jersey-based CHA Partners signed a non-binding letter of intent to purchase the hospital chain in August.

However, that deal also failed to materialize by the state’s litigation deadline, according to the lawsuit, which also names private equity firm Leonard Green, Prospect’s former parent company, as a defendant.

Meanwhile, Crozer remains financially unstable. Vendors have gone unpaid, employees’ pension funds are underfunded and Prospect has plans to close trauma, maternity and burn units at Crozer Chester Medical Center after Nov. 20, according to Tuesday’s complaint.

“We are taking legal action against a company which agreed to prioritize affordable, accessible healthcare — but instead broke their promise with years of neglectful, self-serving practices that have put lives at risk,” Henry said in a statement accusing Crozer of “corporate greed.”

The lawsuit alleges Prospect’s financial transactions — like sale-leasebacks — contributed to Crozer’s shuttering of services, inability to maintain certain service lines and the loss of accreditation of its surgical residency program.

In sale-leasebacks, hospital owners sell their real estate to gain access to quick liquidity, but are then required to pay to lease the space. Under typical “triple net” leases like Crozer’s, the hospital system is on the hook for all expenses — including maintenance, repairs, utilities, taxes and insurance — in addition to rent.

Prospect pays $35 million annually to real estate investment trust Medical Properties Trust, a firm that became a national name this year due to its involvement in the landmark bankruptcy of Steward Health Care.

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

The attorney general is also asking the court for a third party firm, FTI Consulting, to supervise Crozer until a new owner is found. If appointed, the firm would have authority to put Crozer into bankruptcy, according to court documents.

A spokesperson for Prospect dismissed the suit as “hasty” in an emailed statement.

"We have been working diligently over the past several months to transfer Crozer Health to a not-for-profit owner,” the spokesperson said. “In addition, we have been working toward an agreement with the Governor's Office for the state to provide some additional stabilization on funding.”

Delaware County’s House and Senate delegation released a statement Wednesday supporting the attorney general’s suit. They also called for state lawmakers to increase oversight into private equity’s role in healthcare administration, a move that is gaining traction nationwide.

In Pennsylvania, lawmakers proposed legislation in May that would require health systems to file notice and documentation before completing a sale, and give the attorney general more power to block leveraged buyouts.