The sale of Roger Williams Medical Center in Providence, pictured, and Our Lady of Fatima Hospital in North Providence has picked up speed after Attorney General Peter Neronha agreed to modify five conditions attached to regulatory approval of the deal. (Michael Salerno/Rhode Island Current)
Back in June, Rhode Island Attorney General Peter Neronha declared the laundry list of regulatory conditions tied to the sale of two state safety net hospitals to be “non-negotiable.”
Turns out, Neronha was willing to budge after all. And small compromises made a big difference to the buyer and seller of Roger Williams Medical Center in Providence and Our Lady of Fatima Hospital in North Providence.
“Centurion and Prospect are pleased to confirm their acceptance of the Attorney General’s Amended Decision regarding the Hospital Conversions Act application for the sale of CharterCARE Health Partners,” Otis Brown, a spokesperson for CharterCARE Health Partners, said in an emailed statement Friday, Nov. 15. “This is a welcome step in the regulatory review process and draws us closer to concluding this important transaction for our hospitals and their 2,700 employees.”
Under the state’s Hospital Conversions Act (HCA), hospital conversions to nonprofit status must be approved by the Rhode Island Office of the Attorney General and Rhode Island Department of Health. Prospect Medical Holdings, the Los Angeles-based parent company of CharterCARE, has for years attempted to unload the two local safety net hospitals from its worsening balance sheet. In May 2023, Prospect found a new buyer in The Centurion Foundation, an Atlanta-based nonprofit. Convincing state regulators was no easy feat; the application was first rejected, the second deemed incomplete, before a third and final proposal was accepted, and in June, conditionally approved.
Hours before Brown’s statement Friday, Neronha’s office announced it would ease up on a few of the conditions tied to the sale.
“This would not have happened if we had not reached agreement on the money side of the transaction,” Neronha said in an interview on Friday. “That’s what I have always been focused on. The rest is just a matter of working through the realities of how a hospital functions.”
The compromise paves the way for the sale to be finalized within a few months, pending final licensure approval from the state health department and the necessary private financing.
Five changes bring flexibility to hospital operations
Five conditions out of 40 total imposed by Neronha’s office last June were amended to ensure hospital operations run smoothly during and after the sale:
- Prospect will put the $47 million balance of an outstanding escrow account into a new $66.8 million escrow. Previously, the condition stated that the company “may” do so without expressly noting that it would.
- Any termination or promotion of CharterCARE employees must be reported to the AG’s office within 14 days. The prior condition required 30 days advance notice.
- Funds from an escrow tied to a federal energy efficiency program loan may be used to pay for physical repairs required by the Centers for Medicare and Medicaid Services. The prior condition did not specify where the money to complete repairs would come from.
- Bids for a turnaround consultant required as part of the transition must be shared with the AG’s office at least 14 days before a selection is made. Previously, the AG’s office would have had input on the bid language before a request for proposals was published, but the companies have now begun the search.
- Centurion Foundation can submit either audited, or unaudited, annual financial statements to the AG’s office. Previously, only audited financial statements were allowed to meet financial reporting requirements.
What hasn’t changed: a requisite $80 million capital injection — on top of the $80 million sale price — for the hospitals’ balance sheet, along with a separate, $66.8 million escrow fund that cannot be used for executive compensation or management fees.
“The way to give them the best possible shot at success is to get them a pot of money,” Neronha said Friday.
Brown did not respond to follow-up requests for comment on whether CharterCARE had secured the financing needed to meet the financial conditions of the sale.
As proposed in the application, the company plans to finance much of the transaction through new debt, composed of a mix of taxable and tax-exempt bonds. Another $47 million in funds already held in state escrow — tied to a 2021 state agreement when Prospect bought out former majority stakeholder Leonard Green & Partners — will be put toward the new, $66.8 million escrow fund.
Conditions still not enough, union says
The extra money is not enough to overcome the decade of debt and decline of key hospital operations under Prospect’s management, said Chris Callaci, general counsel for United Nurses & Allied Professionals. Callaci, who represents the 1,200 union members who work for CharterCARE hospitals, affiliated physician groups, home care and hospice agencies and offices, remains concerned with the finances of the deal, given the hospitals’ weakened balance sheets and current owner’s less-than-exemplary track record.
“The conditions that have been attached are inadequate,” Callaci said in an interview on Monday. “It still is almost an entirely debt-driven transaction, and the entity incurring the debt is the same entity drowning in red ink.”
From fiscal years 2015 to 2020, CharterCare recorded $88 million in operating losses, according to the sale application. The subsidiary racked up another $122 million in cumulative losses over the next four years, while letting $24 million in unpaid vendor bills pile up over the course of 2023. Prospect finally paid $17 million of its outstanding vendor bills, per court order, in July 2024.
“Prospect is a failure and a disgrace,” Callaci said. “No one wants them out of the state more than we do.”
But the $80 million balance sheet injection is not sufficient, in Callaci’s view. He pointed to similar concerns raised by the consulting firms hired by the health department and the AG’s office to review the application.
Veralon, the Pennsylvania-based consultant hired by the AG’s office to review the sale application, wrote in its review that the $80 million cash infusion “will be quickly drawn down to fund operating shortfalls unless a material financial turnaround is successful.”
The conditions that have been attached are inadequate. It still is almost an entirely debt-driven transaction, and the entity incurring the debt is the same entity drowning in red ink.
– Chris Callaci, general counsel for United Nurses & Allied Professionals
Callaci voiced similar concerns at a Nov. 12 meeting of the Rhode Island Health Services Council. The 12-member, appointed panel is charged with reviewing and issuing recommendations on the separate, but parallel, license-change application for Fatima and Roger Williams. In a corresponding letter to the health department, Callaci urged the panel to impose a host of extra conditions as part of its license approval, including letting the state health department’s hired consultant set new requirements for escrow and capital investments from CharterCARE.
The panel did not incorporate any of Callaci’s 13 suggestions in its recommendation approving the license change. One member, Raymond Coia, attempted unsuccessfully to tack on Callaci’s suggestion barring employee layoffs for five years.
One more regulatory approval remains
The council voted 6-1, with one recusal, to advance the license application — including prior conditions imposed by the attorney general and health department — to the state health director. The health director has 90 days to make a final decision, which is the only remaining state regulatory approval.
Callaci acknowledged that the deal, while hardly ideal, might be better than the alternative: continued Prospect ownership.
“I feel a lot more comfortable that if these hospitals fail, we will be in a much better position to right the ship than if Prospect held on to them and filed for federal bankruptcy in Delaware or California,” Callaci said.
Massachusetts found itself in that exact predicament after Texas-based hospital chain operator Steward Health Care filed for federal bankruptcy, leaving the fate of a half-dozen Steward-owned hospitals in Massachusetts up to a federal judge in Houston. The approved sales to new owners, including to Rhode Island’s Lifespan Corporation, come with several hundred million dollars in state and federal grant funding promised by the Commonwealth to aid in the transition.
Requirements to ensure the newly created CharterCARE Health of Rhode Island, Inc., and parent company Centurion provide regulators with updates allow Neronha to proactively file to put the hospitals into court-appointed receivership before any bankruptcy declarations arise.
“The fact remains that these are among, if not, the weakest hospitals in the state,” Neronha said. “They won’t have a big endowment. They won’t have a big company propping them up. Is receivership a possibility? Yes.”
He added: “This is the best of a pair of not-so-great options.”
GET THE MORNING HEADLINES.