Play Chicken with Three Hospitals but Prepare for Bankruptcy

Chris Powell

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What’s going to happen to Waterbury Hospital, Manchester Memorial Hospital, and Rockville General Hospital?

The three hospitals, then nonprofits, were in financial trouble when they were acquired in 2016 by a California company, Prospect Medical Holdings, which said it would invest in them but instead appears to have taken tens of millions of dollars out of them, leaving them even worse off. 

CBS News has reported that in 2018 Prospect borrowed more than a billion dollars and used $457 million of it to pay dividends to its executives and shareholders. The Prospect repaid the loan by selling hospital buildings and land to a real estate investment trust from which Prospect leased the buildings and land back, thereby incurring annual rental costs and leaving the hospitals with far less equity. Indeed, the transaction was essentially looting.   

Waterbury Hospital is said to owe its vendors $40 million. Manchester and Rockville hospitals also are said to be failing to pay their bills. On top of that, a recent devastating attack on the computer systems of the three Prospect hospitals likely cost them a lot of money but they can’t afford to modernize their systems.

Last year Connecticut hospital chain Yale New Haven Health, a nonprofit operation, proposed to purchase the three hospitals from Prospect for $435 million and return them to nonprofit status. But faced with the worsening condition of the Prospect hospitals, Yale now wants Prospect to reduce the price sharply and state government to contribute as much as $80 million to the acquisition. 

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Governor Lamont has fairly criticized Prospect’s management and doesn’t want state government to have to help pay for their purchase by Yale. He thinks Prospect should secure the deal by reducing the price. Meanwhile the hospitals are at risk of abrupt closure or deep cuts in services.

Since Prospect has turned out to be more of an opportunistic financial operator than a health-care company, the governor is right to want to avoid assisting it. The fairest resolution with the three hospitals might be a bankruptcy that eliminated whatever equity Prospect still has in them and sent them to an auction in which Yale or another party might win them with a lower bid. 

But suspension of the hospitals’ services during a bankruptcy would inflict great damage on their communities. State government should ensure that this doesn’t happen, especially since it shares responsibility at least for the decline of Manchester Memorial and Rockville, which began before Prospect acquired them.

While the two hospitals were nonprofits back then, having combined as Eastern Connecticut Health Network, their executives were highly paid even as the hospitals’ finances were declining. ECHN’s Board of Trustees was compromised by self-dealing and conflicts of interest, with some of its members receiving large payments from the company. 

The company’s ultimate authority, its 232 corporators, residents of the communities served by the hospitals, were indifferent to this self-dealing and to the long failure of the Board of Trustees to get expenses under control. Indeed, when the corporators approved the sale of the company to Prospect, 27% of them didn’t even vote.

Meanwhile state government was also indifferent to all this, though the malfeasance at the two ECHN hospitals was reported extensively in the Journal Inquirer. Nonprofit community hospitals were being run more in the private interest rather than the public interest. But state government had let two venerable charitable institutions that had been built up by decades of civic virtue be acquired by what turned out to be a predator.

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Whether they are nonprofit or for-profit, hospitals today are largely creatures of government because of government’s heavy direct regulation of them and its heavy indirect regulation through Medicare and Medicaid insurance.

So let the governor play chicken with Prospect. But his administration should be ready with a plan to assist Yale New Haven Health or another buyer in quickly acquiring the Prospect hospitals out of any bankruptcy so there is no interruption of service and Prospect doesn’t extract more from the hospitals than it already has.

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Chris Powell has written about Connecticut government and politics for many years. (CPowell@cox.net