YuLin Zhen, Photography Editor

Shortly before Prospect Medical Holdings filed for bankruptcy, a U.S. Senate committee issued a scathing bipartisan report alleging that the company consistently put profits over patient care. 

The report, led by Sen. Sheldon Whitehouse, D-R.I., and Sen. Chuck Grassley, R-Iowa, stems from a year-long investigation into the effects of private equity ownership of healthcare institutions.

The private equity firm Leonard Green & Partners, or LGP, held majority ownership of Prospect between 2010 and 2021. The report identified them as leveraging the health system’s assets to pay dividends, which prioritized profits and accumulated unsustainable debt, leaving hospitals financially unstable and compromising patient care.

“Private equity has infected our health care system, putting patients, communities and providers at risk,” Whitehouse wrote in a press statement. “As our investigation revealed, these financial entities are putting their own profits over patients, leading to health and safety violations, chronic understaffing and hospital closures.”

Private equity investment in healthcare has surged, with an all-time high of $151 billion worth of investment deals as of 2021. The report raised concerns about this business model in the national healthcare landscape, stating that such investment booms often prioritize short-term profits at the expense of sustainable hospital operations.

Private equity companies “pocketed millions while driving hospitals into the ground and then selling them off,” Whitehouse wrote.

The report cited peer-reviewed studies finding negative consequences for hospitals under private equity ownership, including lower quality of care, decreased staffing and higher costs.

The report specifically named David Topper and Sam Lee — the current co-owners of Prospect — as the key players in the mismanagement of multiple hospitals across the U.S.

Prospect did not respond to multiple requests for comment.

Topper’s previous work at a different for-profit hospital operator was the subject of several federal investigations. The report stated that he was investigated for alleged Medicare fraud, as well as a fraudulent billing scheme in which patients were allegedly “given bogus diagnoses and kept in mental hospitals until their insurance benefits were depleted.”

Another major leadership influence in Prospect’s mismanagement came from LGP asserting control over Prospect’s Board of Directors, according to the report. LGP appointed three of the Board’s five members — John Baumer, Michael Solomon and Alyse Wagner — who had control over the Board and the committees within this, giving them access to Prospect’s financial processes.

The report stated that discussions during Board and committee meetings focused on “profits, cost cutting, acquisitions, managing labor expenses and increasing patient volume,” with little to no discussion of patient outcomes.

Debt-funded dividends and underinvestment in hospitals

The report painted a grim picture of Prospect’s financial strategies that prioritized shareholder returns. 

One key strategy highlighted was the use of debt-funded dividends, where hospitals under Prospect’s ownership were used as collateral to secure loans. These loans financed massive shareholder payouts while leaving the hospitals themselves in “severe financial distress,” the report said. 

This pattern of behavior began shortly after LGP’s 2010 acquisition of Prospect. Between 2010 and 2021, Prospect paid out $424 million in dividends and stock redemptions to investors while its liabilities skyrocketed and its ability to invest in patient care declined.

“Whenever [Prospect] showed any signs of financial improvement, LGP and [Prospect] seized the opportunity to take on even more debt to benefit its shareholders rather than investing in hospital operations to benefit its patients,” the report states.

The consequences of these financial strategies extended beyond the balance sheet, with tangible effects on hospital operations and patient outcomes. The report identifies a pattern of declining quality at Prospect hospitals during LGP’s ownership — including labor cuts, decreased patient capacity and inadequate building maintenance.

The financial strain caused by excessive payouts directly impacted Prospect’s ability to maintain its hospitals. Prospect leadership has overseen the closure of eight hospitals across the country, with three-fourths of those coming during or directly after LGP’s ownership of the system.

By 2021, when LGP exited its investment, Prospect was burdened with over $3 billion in liabilities.

Yale New Haven Health Services also filed a lawsuit against Prospect in 2022, citing that Prospect engaged in financial mismanagement and failed to maintain sanitation and staff training in three Connecticut hospitals. Furthermore, in October 2022, Prospect stopped paying the rent for these hospitals. This led to a $56 million back-rent accrued by May 2023, a mere seven months later.

In light of these findings, the Senate report calls for increased transparency and regulatory oversight of private equity’s role in healthcare. 

Key recommendations include requiring detailed reporting on hospital ownership structures, restricting the use of debt-financed dividends and strengthening protections for patient care standards.

“A dependable health care system is essential to the vitality of a community,” Sen. Chuck Grassley wrote in a press statement. “This report is a step toward ensuring accountability, so that hospitals’ financial structures can best serve patients’ medical needs.”

Prospect Medical Holdings is based in Los Angeles.