Prospect Medical To Sell Crozer Health To Real Estate Company CHA Partners

Dive Brief:

• Prospect Medical Holdings signed a letter of intent to sell four-hospital system Crozer Health to real estate company CHA Partners, Crozer said Wednesday.
• Crozer said it would work with New Jersey-based CHA Partners, Prospect and a consulting firm, Healthcare Preferred Partners, over the next several months to iron out deal terms. The final transaction is contingent upon a successful completion of a definitive agreement and the standard regulatory approval process. 
• The deal would be a much needed win for Prospect, which has unsuccessfully tried to divest Crozer since February 2022. The Los Angeles-based company is facing similar difficulty selling hospitals in Rhode Island and Connecticut. 

Dive Insight:

Prospect’s history with Crozer is complex.

The health system, which was at the time backed by private equity firm Leonard Green, acquired struggling nonprofit Crozer-Keystone Health System for approximate $300 million in 2016, switching it to a for-profit system.

At the time, the deal was met mostly with enthusiasm. Crozer had posted significant losses since 2014 and had sought a buyer since the same time. As part of the purchase, Prospect had pledged to invest $200 million into the system for capital improvements and keep the hospitals open for at least 10 years, according to a report from the Delco Times.

However, Prospect quickly made a series of financial decisions that saddled the health system with high debt levels, which state and federal lawmakers say diminished its ability to adequately invest in Crozer.

For example, in 2019, credit rating agency Moody’s Ratings downgraded Prospect’s credit outlook to negative after the health system borrowed $440 million to pay a dividend to PE firm Leonard Green. The transaction highly leveraged Prospect to the benefit of its private equity investors, according to Moody’s.

In the same year, Prospect engaged in a series of sale leaseback transactions with Medical Properties Trust that helped Prospect generate liquidity but stuck its hospitals — including its Crozer facilities — with exorbitantly high rental payments.

Crozer-owned Delaware County Memorial Hospital, for example, had to pay $35 million in rent per year to continue operations, according to an investigation into private equity’s impact on hospitals launched by a pair of bipartisan senators in December.

The senators allege Prospect further degraded the quality of care at Crozer by inadequately staffing hospitals, failing to pay vendors on time and, in the case of Delaware County Memorial, violating its asset purchase agreement by shuttering the facility’s emergency department within the 10-year sale window.

Prospect, meanwhile, was attempting to offload the hospitals entirely. In February 2022, ChristianaCare signed a definitive agreement to purchase the hospitals, but negotiations fell apart by August.

Prospect said in September 2022 it would instead close Delaware County Memorial, lay off 334 workers and reopen the facility as an inpatient behavioral healthcare unit.

The move provoked a lawsuit from the state attorney general and the Foundation for Delaware County, a nonprofit representing Crozer’s interests. The watchdog plaintiffs argued a closure would violate Prospect’s purchase obligations.

However, the parties agreed in October last year that the attorney general would suspend litigation for 270 days while Prospect shopped around for a buyer — the foundation wanted a nonprofit system to be the purchaser.

“The Foundation is hopeful that a high quality, nonprofit system or consortium of systems will come forward to acquire a health care system that so many Delaware County residents need and deserve,” the foundation said at the time.

Pennsylvania has shown increased interest in having only nonprofit health systems operate in the state. In 2022, state lawmakers issued a memo stating that for-profit hospital ownership increased by nearly 348% from 1999 to 2020 while nonprofit ownership declined by 18%. 

State lawmakers in Delaware County introduced legislation in 2023 that would eliminate for-profit healthcare systems across the state.  

CHA Partners, which owns and operates some ambulatory surgery centers, medical office buildings and assisted living facilities, is not a nonprofit health system. However, the deal might work if CHA agrees to transition Crozer facilities back to nonprofit hospitals.

In a statement to Healthcare Dive, the Foundation for Delaware County said they are unfamiliar with the company and “haven’t seen a contract or the letter of intent so we can’t comment on the proposal, but are doing our due diligence and looking into all of the information currently.”

The state’s attorney general’s office said it has “been involved in reviewing the operational viability of Prospect Crozer for several years, and we will continue to exercise oversight over any potential sale of the facility to ensure high-quality healthcare options for residents of southeastern Pennsylvania.” 

Prospect, Crozer and CHA have not disclosed a deal price, whether employees will be kept on through the sale or how the deal might impact Crozer leadership.

In other markets, Prospect is also struggling to sell hospitals. 

Prospect is immersed in a lengthy legal battle with Yale New Haven Health over a three-hospital deal valued a $435 million.

On Medical Properties Trust’s earnings call Thursday, CEO Edward Aldag said he had “quit trying to guess” a year ago about when and whether the Yale deal might close. He told investors, “We don’t have any update [and we’re] not going to make any guesses.”

Prospect’s troubles similarly extend to Rhode Island. The health system received approval from the state’s attorney general to sell two hospitals in June, however, before that transaction closes Prospect must address a laundry list of concerns, including outstanding vendor bills.