Prospect Medical announced the sale of its Connecticut hospitals. Is Crozer next?

Prospect Medical Holdings Inc., the Los Angeles company that owns Crozer Health in Delaware County, on Thursday announced a preliminary agreement to sell its Connecticut hospitals to Yale New Haven Health.

A deal for Crozer, which Prospect acquired in 2016 in a deal valued at $300 million, is expected to be made public Friday, according Philadelphia health care industry sources.

Prospect put Crozer’s four hospitals and three hospitals in Connecticut on the market in October as part of a plan to exit its East Coast markets. There have been rumors in Philadelphia-area health-care circles for more than a week that Prospect also had found a buyer for the financially struggling Crozer system.

Crozer has four hospitals: Crozer-Chester Medical Center in Upland, Delaware County Memorial Hospital in Drexel Hill, Springfield Hospital in Springfield, and Taylor Hospital in Ridley Park. It is among Delaware County’s largest employers.

The system has been in turmoil. Prospect laid off about 100 employees last week, including the executive suite, except for the chief nursing officer. Last month, Prospect closed the maternity ward at Delaware County Memorial. It will be closing the 10-bed hospice unit at Taylor Hospital on Friday, according to news reports.

The anticipated price for the Connecticut hospitals — in Waterbury, Manchester and Vernon — was not disclosed. The hospitals are part of two systems, Eastern Connecticut Health Network and Waterbury Health.

It is noteworthy that that tentative deal in Connecticut includes the real estate associated with those systems, according to the news release.

When Prospect was controlled by Leonard Green & Partners, a large private-equity firm, it sold the real estate at 14 hospitals and two psychiatric facilities in California, Connecticut, and Delaware County to Medical Properties Trust as part of a $1.55 billion sale-leaseback deal.

Much of the money from that 2019 sale was used to repay debt taken on to pay, among other things, a $457 million dividend to Leonard Green and that firm’s investors, according to Eileen O’Grady, research and campaign manager at the Private Equity Stakeholder Project, a nonprofit advocacy group.

The real estate sale left Prospect’s hospitals on the hook for millions in annual rent payments under long-term leases that were effectively the same as debt, but with no prospect of owning the buildings. Crozer has been paying $30 million to $35 million annually on real estate that was valued at $400 million in the Medical Properties Trust deal.

Those high-cost leases, unless they were renegotiated or the buyer bought out the landlord, would make a purchase of any of the hospitals difficult, health-care finance experts say.

Crozer officials have not responded to requests for information for more than a week.

Last week, Crozer officials told local elected officials that a sale was not imminent, said U.S. Rep. Mary Gay Scanlon, a Democrat who represents Delaware County.

Scanlon said she is part of a group of representatives who in June 2020 sent a letter Leonard Green “asking them to return the fees and dividends they had drawn from the hospitals to pay themselves and their investors” because of what she described as “declining quality of care” and financial struggles.

“There’s been some back and forth, but obviously no satisfactory resolution,” she said.

Meanwhile, Crozer is relying on nurses and respiratory therapists provided by the state to help alleviate staffing shortages.