Prospect Medical Holdings Files for Bankruptcy Amid Private Equity Scrutiny

Prospect Medical Holdings, a California-based health system operating 16 hospitals across four states, filed for Chapter 11 bankruptcy protection on Saturday. The move comes as the company faces mounting financial pressures and increased scrutiny over its previous private equity ownership.

Bankruptcy Filing and Divestiture Plans

Prospect declared between $1 billion and $10 billion in both assets and liabilities, with over 100,000 creditors listed in its initial court filing. The health system aims to use the restructuring process to expedite the sale of its hospitals outside of California, focusing on realigning its portfolio to core operations in its home state.

CEO Von Crockett stated, "Divesting our operations outside of California will ensure that they receive the necessary financial support so that the communities that rely on those facilities will maintain continued access to highly coordinated, personalized and critical healthcare services long into the future."

The company plans to continue working with state regulators in Pennsylvania to find a buyer for the Crozer-Chester Medical Center and expedite the sale of its Rhode Island hospital to Centurion Foundation. Prospect emphasized that it is not going out of business and intends to keep facilities open, maintain uninterrupted care, and continue paying staff and vendors throughout the proceedings.

Private Equity Influence and Financial Struggles

Prospect's bankruptcy filing follows years of financial difficulties and heightened pressure from state and federal regulators over its operating practices. The health system's troubles have been linked to its previous ownership by private equity firm Leonard Green & Partners (LGP) from 2010 to 2021.

A recent bipartisan Senate Budget Committee report accused LGP of extracting value from Prospect at the expense of patient care and financial stability. The report found that Prospect paid out $645 million in dividends and preferred stock redemption to investors during LGP's ownership, with $424 million going directly to LGP investors.

One of the most controversial transactions under LGP's direction was a $1.55 billion sale-leaseback deal with Medical Properties Trust in 2019. This arrangement, which involved selling and renting back Prospect's hospitals, left the health system with annual rent payments of $1 million.

Mary Bugbee, healthcare research and campaign director at the Private Equity Stakeholder Project, commented, "Prospect and Steward are not outliers — they are part of a trend in which over-leveraged private equity-owned healthcare companies are going under, with long-lasting impacts on our nation's healthcare infrastructure."

Broader Implications for Private Equity in Healthcare

Prospect's bankruptcy filing represents the second major health system with private equity roots to seek Chapter 11 protection in the past year, following Steward Health Care's filing in May 2024. These cases have intensified national scrutiny of private equity's role in healthcare.

Senator Sheldon Whitehouse, D-R.I., criticized the impact of private equity on healthcare systems, stating, "Private equity investors have pocketed millions while driving hospitals into the ground and then selling them off, leaving towns and communities to pick up the pieces."

As Prospect navigates its restructuring process, the case continues to fuel debates about the long-term sustainability of private equity investments in healthcare and their potential impact on patient care and community access to medical services.