Steven Senne/AP Photo
Another looted carcass of a for-profit hospital chain filed for Chapter 11 bankruptcy protection over the weekend, just days after it was the subject of an infuriating Senate Budget Committee report. Perhaps more pertinently, the filing comes ten weeks after the Pennsylvania attorney general sued its two founders and the private equity firm Leonard Green & Partners to claw back around $650 million in dividends they extracted from the company while clinicians were laid off en masse, ambulance drivers were forced to pay for their own gas, and rates of bedsores, sepsis, and other hospital-acquired conditions soared to some of the worst in the country.
The story of Prospect Medical Holdings is primarily a product of Southern California, long a magnet for health care profiteering. Hospitals spent much of the 1990s in the throes of merger mania and audacious billing schemes, and though it has been mostly forgotten, the 30-hospital Paracelsus Healthcare Corp. exemplified the era. By 1995, Paracelsus was embroiled in lawsuits and enforcement actions for offenses ranging from starving Medicare patients to falsifying SEC statements to deploying telemarketers to lure patients—sometimes whole families of them—to its dingy hospitals with promises of recovery from depression or weight problems in “resort” accommodations, then plying them with anti-psychotics and essentially holding them hostage until their insurance coverage expired. (This was an extremely popular business model in the late 1980s.)
At some point, the hospital chain hired a small private equity firm to help sell off hospitals to pay its legal bills. David Topper, a top Paracelsus executive of a decade and a half, resigned from the company in 1996 and teamed up with Sam Lee, an executive with the private equity firm, to buy some of the hospitals on the cheap. Topper and Lee called their “new” hospital chain Alta, quickly bankrupted three of the seven hospitals they’d purchased, then merged in the early 2000s with a physician practice company called Prospect Medical Systems, which in turn appointed Lee CEO even after its auditors discovered he had inflated the hospital chain’s profits and revenues.
In 2010, the duo sold a majority stake in Prospect to the L.A. private equity firm Leonard Green & Partners, which bought/commenced looting the retailer J. Crew just a few months later. Leonard Green floated billions of dollars in debt to acquire hospitals in Texas, Pennsylvania, New Jersey, Rhode Island, and Connecticut, and in 2018 alone the company used about a half billion dollars in debt to pay dividends to Leonard Green, Topper, and Lee, immediately rendering the hospital chain hopelessly insolvent.
The following year, Prospect sold the underlying real estate of most of its hospitals for $1.55 billion to Medical Properties Trust, trading ownership of its buildings for a $100 million-per-year lease with the Alabama REIT whose inflated rents triggered the insolvencies that ultimately led to last year’s bankruptcies of Steward Health and CarePoint. Then they used the proceeds of that sale-leaseback transaction to pay back some of the debt they had amassed. Sam Lee was estimated in a Senate Budget Committee report released last week to have personally siphoned at least $112 million out of Prospect, with Topper netting another $83.2 million; the two had earlier made $50 million selling Alta to Prospect.
Lee and Topper have not flaunted their ill-gotten gains as aggressively as their counterpart Ralph de la Torre of Steward, who bought a $40 million mega-yacht directly following one of his monster dividend payments in 2021 and celebrated his company’s own bankruptcy filing by traveling to Versailles for the Olympics. But they do all right: Lee owns several homes in Los Angeles, including a 6,500-square-foot Beverly Hills home assessed at $8.5 million, an estate in Aspen assessed at $16.5 million, and a 10,000-square-foot home in Santa Monica that is assessed at just $3.5 million. Among Topper’s properties is a 10,000-square-foot home in Beverly Hills assessed at $4.2 million but which Redfin estimates would fetch $6.9 million. Leonard Green exited the hospital chain in 2020 after extracting roughly a half billion dollars for its shareholders.
Now in bankruptcy, another wealthy Angeleno, hedge fund mogul Jon M. Brooks of JMB Capital Management, whose own stunning beachfront Malibu estate looks to have been mercifully unscathed by the fires that incinerated virtually everything just a couple of miles southeast of it, will be steering the ship at Prospect’s remaining 17 hospitals, having agreed to supply the company with $100 million in debtor-in-possession financing.
THAT’S WHERE THINGS COULD GET INTERESTING. Like so many dubious private equity–looted companies in recent years, Prospect has chosen to file for Chapter 11 protection in Texas, where it currently operates no health facilities, having shut down its four San Antonio–area hospitals many years ago. But unlike most dubious private equity–looted companies with no connection to Texas that nevertheless file for bankruptcy in the state, Prospect filed not in the busy Houston court that has presided over the Steward case but in Dallas, where the case was assigned to Judge Stacey Jernigan, a fascinating character who moonlights as a mystery novelist.
In 2023, Jernigan self-published her second novel, Hedging Death, about a bankruptcy judge who finds herself enmeshed in an elaborate conspiracy involving a hedge fund that financed a secret project in the abandoned Super Collider site and collaborated with a Mexican drug cartel to operate a retirement community for expat seniors. Soon after its publication, James Dondero, the founder of hedge fund Highland Capital, who had been trying in vain for years to force someone to recuse Jernigan from presiding over Highland’s bankruptcy for exhibiting bias against him, sued her, claiming that the judge had outed her irrational hatred of him through her villain Cade Graham, a “playboy” hedge fund manager involved in the “creepy” business of buying strangers’ life insurance polices, an industry in which Jernigan knew from her work on Highland’s case that Dondero was a pioneer. The petition lambasted Jernigan for also using her first novel to dole out “harsh commentary about financial services industry stakeholders (despite their presence in cases before her),” describing their suspicious ability to “make money no matter what” while displaying “outrageous amounts of hubris” as part of their “bro culture.”
Late last year, one such financial services industry stakeholder attempted to interest your correspondent in writing about Jernigan, forwarding a PowerPoint presentation cataloguing passages in which her books display an apparent bias in favor of the gun industry and against cryptocurrency, the mortgage servicing business, the life settlement industry, and anything involving the scandal-prone statelet of Malta. Given that most if not all of those “stakeholders” have repeatedly displayed a penchant for exploiting the bankruptcy code to harm every other form of stakeholder, I wasn’t quite sure what to do with this information. If indeed Jernigan was biased against hedge fund managers whose investment strategies she deemed “creepy,” she likely had a target on her back. And Dondero, who had availed himself of the bankruptcy code to get out of paying multimillion-dollar judgments to ex-employees who accused him of defrauding investors, did not seem like a reliable narrator.
During the pandemic, a former Prospect chief financial officer described the chain’s hospitals as “war-zone hospitals.” Conditions have only gotten worse. At Crozer-Chester Medical Center south of the Philadelphia airport in Chester, Pennsylvania, last month started with the abrupt closure of the emergency room for several days due to some problem with radiology services, followed by a water main burst later in the month, followed by a massive ICU fire resulting from the water main break, which involved evacuating 38 patients (including some who were in active labor) and shutting down the entire hospital for another two days, followed by another electrical fire in the mechanical room. CMS has repeatedly threatened to cut off funding to the hospital over its unsafe and chronically understaffed conditions, but the agency never follows through on its threats because it is terrified of shutting down the only hospital in Chester and one of the few left in the surrounding county.
On the other side of the state, close to the Ohio border, Steward just shut down a hospital in Sharon, Pennsylvania, the largest remaining employer in a (scenic but) deindustrialized steel town, after the state refused to cough up $45 million to stabilize its finances.
That money is long gone, as the Senate report points out: It’s been converted into luxury properties and modes of high-end transport held in the name of anonymous LLCs. In the Steward case, victims of the financiers’ lootings have been largely left with nothing as hedge fund lenders have forced hospitals into liquidation or management at the hands of even sketchier financiers. But with attorneys general in three states motivated to claw back funds from the villains, MPT relegated to the sidelines, and a true-crime novelist overseeing the proceedings, it’s possible the wealth transfers that transpire in Chapter 11 protection will look a bit different this time.
