PROVIDENCE, R.I. (WPRI) — When executives at Prospect Medical Holdings saw a draft ruling on their proposed ownership transfer in April, they were so upset they threatened to close their two Rhode Island hospitals, then went to court to block its release.

A little over a month later, and following tense closed-door negotiations, Attorney General Peter Neronha’s final decision is now public — and it’s not hard to see why Prospect disliked its contents.

Even with significant amounts of material redacted, the 70-page report paints a highly unflattering picture of a group of financiers and executives who the report portrays as more interested in lining their own pockets than ensuring the long-term stability of the local hospitals under their control.

“Our investigation revealed a company whose principals and investors have issued millions of dollars in dividends from a business responsible for the safety-net hospitals and services they own, which has translated into debt held by the entire system, such that liabilities now exceed assets by over $1 billion,” the report states.

Neronha, a first-term Democrat, used those findings to impose a long list of conditions on Prospect in exchange for letting the company’s chief shareholder, the private-equity firm Leonard Green & Partners, sell its majority stake in the company. His sign-off was required by state law due to Prospect’s ownership of Roger Williams Medical Center and Our Lady of Fatima Hospital.

Those conditions include putting $80 million in a “bankruptcy-shielded” escrow account that could cover the two hospitals’ costs if Prospect goes bust; appointing and training a professional board of directors with substantial local membership; and investing tens of millions of dollars in the facilities over the next few years.

“Rhode Islanders can ill afford their healthcare infrastructure serving as a private bank for private investors,” Neronha wrote in one of the report’s many pointed comments.

Prospect on Wednesday declined to respond to any of Neronha’s specific criticisms. A local spokesperson, Otis Brown, told 12 News the company was limiting its comments to a statement issued Tuesday that noted the attorney general’s decision had allowed the transaction to close.

“We look forward to continuing our mission to deliver high-quality health care and enhanced patient and provider experiences, at a lower cost of care, in Rhode Island and every community we serve,” the company said.

But Eileen O’Grady of the Private Equity Stakeholder Project, a union-supported pressure group, said the attorney general had peeled back the curtain for the public on how the company operates.

“Neronha’s review process revealed how Prospect’s owners essentially used the hospital company as a platform to raise debt and siphon money out of safety net hospitals, which serve patients regardless of their ability to pay,” O’Grady told 12 News. “These services are critical to providing care for low-income people in Rhode Island.”

The attorney general’s report follows over a decade of transition and turmoil for the two hospitals.

Roger Williams, a Providence facility with 220 beds, and Fatima, a North Providence facility with 278 beds, joined forces in 2009 under the new corporate banner CharterCARE. Soon in need of cash, CharterCARE’s leaders inked a deal in 2014 to sell an 85% ownership stake to Prospect Medical Holdings, a for-profit hospital company based in California.

Founded in 1996, Prospect had been a publicly traded corporation until 2010, when it was taken private by Leonard Green. (Leonard Green is the same firm that owned the Almac’s supermarket chain in the 1990s, shortly before it closed down.) Leonard Green currently owns 60% of Prospect shares, with most of the rest held by Prospect CEO Sam Lee and senior vice president David Topper.

In 2019, Leonard Green decided it wanted to get rid of its 60% stake in Prospect by selling it to Lee and Topper. As Neronha put it Tuesday: “Leonard Green wanted out, and the question was, under what conditions.” That led to the attorney general’s contentious review of the company and, finally, the newly released report.

Among the eyebrow-raising issues laid out in Neronha’s report is a mouthful of a financial transaction that Prospect undertook in 2018: a “leveraged dividend recapitalization.”

Basically, Prospect investors and executives borrowed $1.12 billion that year, pocketed $457 million of the proceeds as dividends, and used much of the remaining money to pay off existing debt. “The primary beneficiaries of the dividend were Leonard Green, David Topper, and Sam Lee,” according to the report.

It wasn’t the first time Prospect’s board had borrowed money to fund big payouts to its investors: the report said the company issued a bond in 2012 that partly funded a $188 million dividend — money that again went primarily to Leonard Green, Topper and Lee.

The attorney general’s report chastises them for “a focus on wealth that puts at risk the well-being of institutions and people.” It contrasted the dividend payments over the last decade with Prospect’s deteriorating financial condition as a company, including losses that totaled $603 million from 2015 through 2020 and a tripling of its overall debt load from $451 million to nearly $1.6 billion.

The report emphasizes that Leonard Green received all those dividend payments despite the fact that the firm “has never put its own money into [Prospect],” other than a $25 million cash contribution in 2019 that “was returned to Leonard Green within a year.”

The financial engineering led Moody’s Investors Service, the Wall Street credit rating agency, to offer a warning in 2019 about Prospect’s financial health due to the company’s “very high financial leverage, shareholder-friendly financial policies, and a history of failing to meet projections.”

Another concern for the attorney general: the dynamics around the transaction under review.

According to the report, Lee and Topper are paying only $12 million to buy Leonard Green’s 60% stake in Prospect. Company leaders provided “no substantiation” for where that number came from, and indicated to Neronha’s team that no independent experts were utilized to determine the value of the investment, the report said.

On top of that, Lee and Topper aren’t actually paying that $12 million with their own funds — they are going to make the payment using Prospect’s corporate balance sheet.

That move, the report argues, “reveals a troubling perspective … namely, that no difference exists between the money belonging to a company that operates over a dozen safety-net hospitals and the money located in the personal bank accounts and investment vehicles of Lee and Topper.” The attorney general also lambasted them for a lack of financial transparency.

The key concern coloring the entire report, as well as Neronha’s public comments at his news conference Tuesday, is a long-term one: what will motivate a for-profit company like Prospect to continue operating two money-losing Rhode Island hospitals in need of ongoing investment, rather than close them down?

The report does offer partial praise for Prospect. It notes the company has had to put an average of nearly $15 million a year into Roger Williams and Fatima in recent years to cover their operating losses. And it says capital investments made by Prospect since 2014 “have revived aging physical plants, expanded services, and attracted new physicians” — though some of that was mandated by the previous attorney general, Peter Kilmartin, when he authorized the takeover.

Still, the report notes the U.S. Centers for Medicare and Medicaid Services (CMS) ranks Roger Williams and Fatima in the bottom half among all Rhode Island hospitals, and that they “have been penalized by CMS since 2014 by a reduction in Medicare payments under a program that measures rates of infections, blood clots, and other preventable complications that occur at hospitals.”

Prospect executives’ response to those criticisms are largely redacted, though it appears they insisted they remain committed to the Rhode Island facilities and see them as positive investments. (A spokesperson for Neronha said the redactions were requested by Prospect and that some of them could be removed in the coming weeks as a thorough legal review of the report is completed.)

Neronha offers stinging criticism of the CharterCARE Community Board, a group of local directors who represent the 15% stake in the Roger Williams and Fatima that Prospect does not currently own; they share seats with Prospect on the joint Prospect CharterCARE board.

Describing the board as “dysfunctional,” the report portrays the local representatives as clueless and compromised, with Prospect failing to loop them in early on the planned Leonard Green buyout and one of them even accepting payments from Prospect starting in 2018 under a consulting contract, which the attorney general called “a clear and direct conflict of interest.”

Neronha’s leverage over Prospect and Leonard Green was substantial due to the 1997 Hospital Conversion Act, a state law requiring both the attorney general and the Department of Health to authorize financial transfers involving local hospitals. (Notably, the Health Department’s Health Services Council voted 4-1 to approve the Prospect transaction without the conditions imposed by Neronha.)

O’Grady, the private-equity watchdog, said that most states don’t have a similarly strict review process should be a concern to residents where Prospect operates — California, New Jersey, Pennsylvania and Texas.

“Where regulators do not have the same level of oversight over these transactions as in Rhode Island, there is serious concern that Prospect hospitals in Connecticut, California, and Pennsylvania will not have adequate resources to continue operating,” she said. “How will patients who need hospitalization be able to receive care if Prospect squeezes what profit it can, and then discards the hospitals?”

Describing his own approach, Neronha said: “As regulators, you can’t get rolled.”