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Powerful landlord could play key role in deal between Prospect Medical and Yale

Yale New Haven Hospital in New Haven, Connecticut 16 October 2014.
Tim Clayton
Yale New Haven Hospital in New Haven, Connecticut.

A seemingly unrelated event occurred Wednesday when the state approved the sale of three troubled Connecticut hospitals owned by a Los Angeles-based company to Yale New Haven Health.

The stock price of another company, Medical Properties Trust (MPT), headquartered in Birmingham, Alabama, climbed 18.6%.

MPT’s stock surge followed a deal struck in Massachusetts allowing it to be paid rent owed by the struggling Steward Health Care, its largest tenant.

The Massachusetts deal was a key example of how private equity is extracting wealth out of health care and local hospitals across New England, including in Connecticut.

As a result of the deal, Steward will potentially sell its network of doctors to the for-profit insurance giant UnitedHealth Group, whose deeper pockets can take on its rent dues.

In Connecticut, rent owed to MPT, a for-profit real estate investment trust, has also been presenting hospitals with financial headaches.

MPT is the landlord for 439 hospital properties in nine countries, including Rockville General Hospital, Manchester Memorial Hospital and Waterbury Hospital in Connecticut, which are owned by Prospect Medical Holdings.

On Wednesday, the state approved Yale’s potential purchase of these hospitals from Prospect. But that approval doesn’t mean the deal is done. A major wrench in the deal’s closure is Prospect’s accumulating debt – due, in part, to its looming rent payments to MPT.

Mary Bugbee, an analyst at the nonprofit Private Equity Stakeholder Project, said it's a relief that the state approval is now in place after 16 months of scrutiny. “But I’m a little worried about the remaining terms of the deal that have to be finalized,” she said.

“Medical Properties Trust has been a key player in how various private equity firms have been able to extract wealth out of hospital chains,” Bugbee said.

MPT did not immediately respond to multiple requests for comment.

Selling hospital land can make private equity money

Sale-leaseback arrangements with groups like MPT can allow investors at private equity firms, like Prospect, to make money. Prospect buys up hospitals across the country and sells the real estate of those facilities to real estate investment trusts like MPT.

Investors can then take revenue from those sales to pay themselves dividends, Bugbee said.

“Those hospitals then have to pay the monthly rent on real estate they used to own and it can really cut into operations; money that's available to go toward very critical aspects of running a hospital,” Bugbee said. “Prospect and Steward especially, both of these systems are very much struggling right now. And a lot of that struggle has to do with the legacy of those sale-leaseback arrangements.”

In 2023, some Prospect hospitals were unable to pay rent for many months. In May 2023, MPT provided them a loan and facilitated a recapitalization transaction for the company.

The near-term cash infusion was helpful, but accumulating interest on those loans can prove to be an especially harmful long-term strategy for “safety-net hospitals [like Rockville-General and Waterbury hospitals] who have thin margins as it is while investors extract so much wealth from the system,” Bugbee said.

The sale-leaseback deal between Prospect and Medical Properties was signed in 2019 for $1.55 billion, which included real estate of Prospect-owned hospitals in Connecticut, Pennsylvania, and California.

In Rhode Island where Prospect operates, both the Department of Health and the state attorney general’s office cautioned regulators of the interest-rate burden of sale-leaseback models as part of a 2021 analysis of Prospect’s finances.

Prospect sale is not yet a done deal in CT

With the proposed sale of the Connecticut hospitals to Yale, MPT is expected to get $355 million from the $457 million that Yale initially agreed to pay Prospect.

But the deal is still in negotiation in the aftermath of accumulating debt and cyberattacks that weakened Prospect’s already shaky finances.

“While [the Office of Health Strategy] OHS’ approval is an important milestone in this transaction, this process is not yet complete,” Dana Marnane, a Yale spokesperson, said in a statement. “As a next step, we are working with Prospect to reach agreement on several outstanding details that must be resolved to allow the transaction to close. We are hopeful that these details can be addressed, so we can extend the benefits of nonprofit, academic medicine to more patients across our region.”

State officials are optimistic the sale will go through, including providing Prospect with a $12 million tax cut, according to the Connecticut Mirror.

“We are confident that we’ve come to an agreement that is in the best interest of the residents of Connecticut, which has been our priority since receiving this application” Dr. Deidre Gifford, executive director of the Connecticut Office of Health Strategy, said.

The state agreement requires Prospect to resolve its Connecticut debts, including $55 million in back taxes. If the acquisition goes through, Yale will add 700 beds and gain nearly 4,400 employees.

Lawmakers who have shepherded the deal are waiting for its closure.

“As the agreement stands, I'm confident that this long-awaited acquisition will reach its next steps," state Sen. Saud Anwar, D-South Windsor and chair of the Public Health Committee, said.

Dan Champagne, mayor of the town of Vernon where Rockville General Hospital is located, said the town welcomes state approval of the deal and will be closely reviewing the agreement terms and its impact on the hospital and the community.

Rockville General “is an essential community asset that has a long history of serving people in Vernon and surrounding towns,” Champagne said.

Sujata Srinivasan is Connecticut Public Radio’s senior health reporter. Prior to that, she was a senior producer for Where We Live, a newsroom editor, and from 2010-2014, a business reporter for the station.
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