Prospect Medical Enters Expansion Mode
Prospect Medical Holdings, the Santa Ana-based operator of hospitals in Southern California and Texas, is widening its horizons, having entered into two tentative deals to add four hospitals on the Eastern Seaboard to its operations.
The deals would expand Prospect's operations to Rhode Island and New Jersey and is reflective of what one industry observer said is a pressing business need for for-profit hospital operators to expand outside the Golden State.
Prospect, which is owned by the Los Angeles-based equity firm Leonard Green and Partners, operates five hospitals in the Los Angeles area through its Alta Hospitals System subsidiary, and two others in San Antonio through its Nix Hospitals System subsidiary.
On Wednesday, it was announced that Prospect would enter into a deal with CharterCare Health Partners, a Providence, R.I.-based owner of two-not-for-profit facilities, 177-bed Roger Williams Medical Center and 278-bed Our Lady of Fatima Hospital in North Providence.
“Successful completion of this proposed transaction not only supports our healthcare mission to the citizenry in our community, but it will also result in a significant investment in Rhode Island's economy," said CharterCare CEO Kenneth Belcher.
Both hospitals have been under financial duress, having lost at least $30 million combined in 2010 and 2011, according to their most recently available tax returns. The system's annual revenues are about $300 million.
Under the terms, Prospect would pledge to invest at least $95 million into the hospital system over the next four years. A total of $45 million would be pledged as soon as the deal closed, to be used for working capital and infrastructure improvements. Another $50 million would be pledged for physician development, officials said.
Although CharterCARE announced the transaction on Wednesday as an asset sale, it is structured as a joint venture, with officials from both organizations jointly governing.
However, details of the composition of its board were not immediately available from Prospect officials on Wednesday.
The transaction requires both approval from state regulators and the Roman Catholic Diocese of Providence, which controls the hospitals.
Steven T. Valentine, president of The Camden Group, an El Segundo-based hospital consulting firm who is also a member of the Payers & Providers editorial board, noted that hospital operators such as Prospect are under pressure to acquire properties outside of California.
“Most all investment bankers will advise you to be multi-state because it significantly reduces your exposure in California,” said Valentine, who added that because of the state's low Medi-Cal rates and high managed care penetration, it was a challenge to grow revenues.
Prime Healthcare, an Ontario-based hospital operator, has acquired facilities in four states in the East and Southwest in recent years, almost doubling the facilities it owns outside of California. Like Prospect, it is also attempting to break into the Rhode Island market in an attempt to acquire Landmark Hospital, a facility in the Providence suburb of Woonsocket that has been in receivership and managed by a court-appointed master since 2008. Prime has pledged to invest $60 million into Landmark over the next five years. The transaction is currently going through a variety of regulatory approvals.
Valentine noted that such deals by for-profits tend to follow a pattern: Money invested into their infrastructure and physician relationships, as well as an overall goal of geographical consolidation.
Just prior to the Providence deal, Prospect announced it entered into a non-binding letter of intent to acquire Raritan Bay Medical Center, which operates hospitals in Perth Amboy and Old Bridge, N.J. The hospitals lost $4.6 million in 2010 and 2011 combined, with growing debt. Raritan Bay officials distributed a request for proposals for a potential partner earlier this year.
“We chose Prospect after an extensive search to find a respected organization that would work with the hospital’s physicians and staff and grow the hospital’s identity within the communities we serve.” said Michael D’Agnes, Raritan Bay's chief executive officer.
Specific terms of that transaction were not disclosed. It is subject to both state and federal regulatory approval.
We are excited about joining this organization and building on this highly coordinated, efficient healthcare delivery model, which will be our flagship hospital in New Jersey,” said Prospect Medical CEO Samuel Lee in a statement.
