🔒State policymakers say for-profit hospital ownership model isn’t dead, but reforms needed

Even with Prospect Medical Holdings’ growing financial problems, state legislators say they aren’t ready to prohibit the for-profit hospital ownership model in Connecticut.

Since 2016, when it finalized deals totaling $355 million, the for-profit Los Angeles-based healthcare services company Prospect Medical Holdings has owned Waterbury Hospital and the two facilities that make up Eastern Connecticut Health Network (ECHN) — Manchester Memorial and Rockville General hospitals.

Of the state’s 27 acute-care hospitals, these three are the only facilities owned by a for-profit company.

Waterbury Hospital in particular was in dire financial distress at the time it was acquired, and nearly eight years later it still faces a shaky future as Prospect has descended into massive debt, owing more than $100 million to public and private entities, including $67 million in taxes to the state.

In fiscal year 2023, Prospect reported a $66.1 million operating loss and $82.9 million overall loss, according to records it filed with the state.

Its financial difficulties expanded to critical levels last year following a cyberattack that affected operations at all three hospitals for weeks, and are among the reasons Yale New Haven Health (YNHH) wants to be let out of its contract to buy Prospect’s facilities.

In 2022, YNHH announced a deal with Prospect to acquire the three hospitals for $435 million. It has since sought to reduce the purchase price, given the revelations about the financial difficulties, but negotiations have stalled.

Earlier this month, YNHH filed a lawsuit in Hartford Superior Court asking to void the deal, charging that Prospect breached the sale contract by defaulting on rent and tax liabilities, allowing its facilities to deteriorate, mismanaging assets, “driving away” physicians and vendors, and engaging in “a pattern of irresponsible financial practices.”

The on-again, off-again deal between Prospect and YNHH also focused new attention on the state’s Certificate of Need (CON) regulatory review process, which took the Office of Health Strategy (OHS) nearly two years to complete, before it approved the sale.

State policymakers tried to address some of these issues during the recent legislative session that ended on May 8. A bill introduced by the governor’s office, Senate Bill 9, aimed to strengthen regulation on private equity ownership of healthcare facilities by requiring hospitals to disclose more financial information and obtain state permission when they are seeking to sell 10% or more of their assets, including real estate.

Hospitals, meantime, pushed for an overhaul of the regulatory review process for approving mergers, opening new healthcare facilities or purchasing equipment, to make it quicker and more efficient.

All those legislative efforts failed this year.

In response to a question from the Hartford Business Journal about the for-profit model, OHS acknowledged that recent “experiences,” both in Connecticut and nationwide, “highlight certain problematic financial practices that have been employed by select healthcare entities.”

The “adverse results” of those actions, it added, “clearly demonstrate that greater insight into potentially harmful financial practices is necessary” to ensure that “the viability of our healthcare systems is not jeopardized.”

‘A complete disconnect’

The failure of Senate Bill 9 led House Speaker Matthew Ritter (D-Hartford) to suggest after the session ended that the legislature needs to take the lead on hospital reform, “because there’s just a lack of trust right now in the executive branch” and OHS from hospitals and the CHA.

“I think this has to be legislative led,” Ritter said.

Rep. Vincent Candelora (R-North Branford), the House Republican leader, told the Hartford Business Journal that he agrees.

“It appears that the legislature is going to have to have a much stronger involvement because the OHS really failed this year in getting anything over the finish line,” Candelora said. “It’s frustrating. There is a complete disconnect between the hospitals and our state agencies. I just don’t think the state is listening to our hospital systems.”

In fact, he says Prospect Medical isn’t the only one to blame for the three hospitals’ financial difficulties.

“I’m not as quick to say that the for-profit model needs to be eliminated,” Candelora said, while conceding there is a “concern” when corporate profits are “elevated above health care.”

“But in Connecticut, we have a lot of problems regardless of whether it’s for-profit or nonprofit,” he said, “and I think we need to broadly evaluate it because even nonprofits are going to get into the same trouble if we continue the road we’re going on.”

Both for-profit and nonprofit hospitals, in fact, have been hurt financially in recent years, due in part to the COVID-19 pandemic, which eliminated most elective surgical procedures that produce the widest margins. Hospitals are also no longer receiving pandemic-related federal aid.

In Candelora’s view, the state is also responsible for hospitals’ financial issues because Medicaid reimbursement rates are too low.

Connecticut hospitals recorded a collective $206 million operating loss in fiscal year 2022, largely due to the rising costs of drugs, contract labor, and salaries and wages for medical personnel.

And more specifically with the Yale-Prospect deal, Candelora said OHS “took far too long to approve that merger, and we knew that Waterbury was on life support.”

The lengthy regulatory review “really slowed down the process, to the detriment of the survival of Waterbury Hospital,” he said. “And that points to the overall acknowledgment that we have to address the issue of the Certificate of Need process in the state, and how long that process takes.”

In a statement, OHS said it “met its statutory deadlines throughout its review of the Yale/Prospect transaction and provided a draft agreed settlement that would have granted approval in October 2023.”

It noted that CON reviews and settlement processes often involve multiple parties, and that delays are sometimes caused by the applicant.

“More than five months elapsed between the time OHS offered the settlement and the date the Agreed Settlement was ultimately signed,” the agency said. “The parties are still negotiating terms.”

‘We need a bill like this’

State Sen. Saud Anwar (D-South Windsor), a physician who co-chairs the legislature’s Public Health Committee, is less forgiving of Prospect’s management of the three hospitals than Candelora.

“I think what Prospect has done from the private-equity model has shown one of the worst things that can happen to a healthcare system,” he said in a recent interview. “Their prime purpose in functioning is to maximize their financial benefit, at the cost of people’s well-being.”

Given that, he said, “everybody who cares about the health and well-being of their citizens would be very skeptical” of another private equity firm acquiring a hospital in the state.

Still, he notes that “all for-profits are not private equity,” so he would not “close the door” to the for-profit model.

“But they will have to go through scrutiny,” Anwar said. “They would have to go through the regulatory process (to provide) clear protection from the financial abuses that at times happens in the industry.”

To that end, Anwar, who serves as chairman of ECHN’s Department of Internal Medicine, said the state must strengthen its oversight powers.

He co-authored a bill during the session that required OHS to develop a plan regarding private equity firms acquiring or holding an ownership interest in licensed healthcare facilities.

The bill didn’t pass.

“To me, when you have such a bad actor do what [Prospect] has done to our citizens, it is malpractice to not pass a law to protect something like that from happening again,” he said.

‘A better way’

The Connecticut Hospital Association, which represents the state’s acute-care hospitals and has about 90 members overall, also agrees that the for-profit model needs greater scrutiny.

Paul Kidwell, CHA’s senior vice president for policy, said the state is “primarily a not-for-profit hospital and health system sector,” but there has been “inflows of for-profit investment” here, particularly in physician practices and surgical centers.

“Fundamentally, the interest is making sure that whomever wants to participate in delivering care in the state is really committed to the patients, to the communities, and then to the state, and that we’ve got a regulatory system that is a level playing field for all of those providers,” Kidwell said.

CHA went into the legislative session “enthusiastic” about producing a regulatory reform bill, and was disappointed it couldn’t get it done. But Kidwell believes there is “an ongoing commitment” from both the legislature and Lamont administration “to keep working at this.”

He said reforming the regulatory review process must include making it more clear and faster.

“We think that there are administrative processes that could be streamlined, so we’re not giving up on adequate review of the transaction, but making sure it’s done in a more timely fashion,” Kidwell said.