Peter Neronha is the Attorney General of the State of Rhode Island, a role he has held since 2019. He has previously served as the US Attorney for the District of Rhode Island from 2009–2017 and as Assistant US Attorney from 2002–2009. Neronha is a native Rhode Islander and a graduate of Boston College and Boston College Law School.
Elijah Dahunsi: Walk our readers through the story of Prospect Medical Holdings and their involvement in the Rhode Island health system from 2014, when they bought Roger Williams Hospital and Our Lady of Fatima Hospital, to 2019, when your office started to investigate some of the financial practices of the firm.
Peter Neronha: Prospect Medical Holdings, throughout the time period that you’re asking about, was owned by Leonard Green, a private equity firm in California. Leonard Green owned 60 percent of Prospect Medical Holdings. Two other individuals owned the remaining 40 percent of the company. When Prospect bought the Rhode Island hospitals in 2014, they owned somewhere in the range of 15 to 17 hospitals around the country. This includes the two Rhode Island hospitals they purchased that year. From 2014 to 2019, Prospect Medical Holdings was investing and needed to invest at least $15 million a year in each of our Rhode Island hospitals to keep them running.
Before the purchase, our hospitals weren’t able to meet their operating expenses or make the necessary capital investments in the equipment, renovations, and expansions needed to provide the kind of medical care that they wanted to deliver and that Rhode Island patients expected to receive. In our estimation, both hospitals lost a combined $15 million each year. The income streams of both hospitals were part of the reason for the financial difficulties. Both hospitals relied heavily on public insurance for funding. This was one of the reasons they both had a hard time breaking even. The thought was that Prospect would make them whole. So the health—if you’ll pardon the phrase—of Prospect really mattered to the health of Roger Williams and Fatima. When Prospect was strong, Roger Williams and Fatima had an entity that could keep them going. When Prospect diminished, so did Roger Williams and Fatima.
The problem with private equity, as I see it, is that private equity wants to make money for its partners and for its investors no matter what they’re investing in. If you were to look at what Leonard Green owns, you would see that they have some interest in healthcare but also in other sectors. They’re hardly healthcare experts. What they are is a money-making firm. It’s very difficult in my view—and I think there’s universal or near-universal agreement on this—to make money in healthcare. And so in my judgment, they reached a point where they were going to make money in healthcare no matter what it took to do that. Prospect took out about a billion-dollar loan, and they put about half of that in their pockets as dividends. They paid out the proceeds of that loan in dividends to their investors and to their partners. As a result, Prospect had a large financial liability. To remedy this liability, they sold the hospitals they owned and leased them back. They couldn’t sell and lease back the Rhode Island hospitals because they needed to go through this office for approval. This approval process is different from other states. They did, however, put our hospitals on a $100 million promissory note that would’ve come due in August 2022.
When Leonard Green, having made money by putting debt on both hospitals, decided to sell their 60 percent stake to the other two individual owners of Prospect, Mr. Lee and Mr. Topper, they came to us for approval. But when we investigated the financial condition of Prospect, we had real concerns. Further, it was not clear whether Mr. Lee and Mr. Topper would invest the money needed to keep both hospitals operating.
In response to these findings, I rejected the change of ownership initially—an action I can take under Rhode Island law. Subsequently, through negotiation, I made sure that Prospect provided $80 million in escrow that I hold to make sure that both hospitals operated the way they should. Both hospitals were taken off the $100 million promissory note. Now our hospitals continue to run because Prospect is required to cover operating expenses and make the necessary capital investments. They only get that $80 million back as they make these investments. And so that was the security that we obtained for these two hospitals. My concern, I think, has been borne out by at least one other hospital owned by Prospect in Pennsylvania that recently closed. Patients who relied on that hospital would go there and find the facilities simply closed out of the blue, as I understand it. So, in that case, a healthcare institution that patients had come to rely on was just gone.
We were able to protect our hospitals. But the lesson for me was that private equity and healthcare are going to make money no matter what it takes to make it. What was very interesting to me was that private equity saw the storm coming, and they wanted out before the storm hit because it was important to their reputation as an investment firm not to be on the boat when it hit the shoreline. In other words, these hospitals were going to close or go bankrupt, and Leonard Green wanted to be nowhere near them when it happened. I wasn’t going to let them out without getting the security we needed to make sure our hospitals could continue to function going forward. That was my takeaway from our dealings with Prospect.
ED: What specific legislative aids were useful during your dealings with Prospect? In your estimation, why does Rhode Island differ from other states in providing these legislative aids?
PN: Rhode Island has legislation called the Hospital Conversions Act. The Hospital Conversions Act lays out the criteria that financial parties have to meet in order for us to approve hospital mergers, changes in hospital ownership, or hospital purchases. The legislation has different criteria for the Attorney General and for the Department of Health.
First of all, you need to have this tool in the first place. I can’t answer why other states don’t have this. They certainly should, in my opinion. It gave us a real chance to take a hard look at Prospect. Frankly, the Department of Health did not reach a decision on Prospect. That was something that we needed to do. The Department of Health wasn’t in a position for whatever reason to take the steps we were able to take. So I’m grateful, frankly, that this office was in a position to do it. When you have the legislative tools, you still have to use them.
You can approach the criteria with a check-the-box attitude, or you can really get inside the data and understand what a transaction really means. I think one of the concerning things about the Prospect case for me was that the Rhode Island Health Services Council, which is an offshoot of the Department of Health, approved this transaction. We blocked it, but they approved it. It’s never really been clear to me why they did. I think, perhaps, they didn’t have the information we had. If we didn’t act on the information we had, we would’ve given up an opportunity to take the steps to make sure that both hospitals survived into the future. And that’s why we took those steps.
ED: Have there been moves to repair any harms that may have arisen to patients?
PN: Our decision put in place a number of conditions. Prospect has to maintain the same level of care they had been providing previously, and they have to pay for an outside monitor that has expertise in healthcare. This monitor makes sure that Prospect provides healthcare in the way it should. We are not health economists here in this office. We understand issues in healthcare like most lawyers. We know what questions to ask, but we need experts.
Under Rhode Island law, those experts have to be paid for by the transacting parties. So in this case, Prospect had to pay for our experts. This is a huge benefit to the taxpayers because we’re getting the expertise we need at the expense of the people who want to change ownership. It was really helpful to us in the proposed merger between Lifespan and Care in New England, for example, that the General Assembly added antitrust as a criterion of the Hospital Conversions Act.
This allowed us to do an antitrust review, not separately under the antitrust laws, but under the Hospital Conversions Act, where our antitrust experts were paid by Lifespan and Care in New England. That allowed us to do a deep dive into that transaction. It would’ve been very difficult to do otherwise. We got that change in my first or second year in office. That’s why it’s really important to understand what your legislative framework allows you to do. If you see something coming, and you don’t have a tool in your toolbox, you need to go get it.
ED: Is there discussion in the state government about preventative measures that aim at providing hospitals with alternative sources of funding before they make deals with private equity firms?
PN: This is the critical issue. It’s one that, in my view, the state has yet to really take on. We’re starting to give that some thought here in the office, but the way that hospitals and other providers are reimbursed and paid in this state is a real issue. The bottom line is that we’re going to be able to keep Our Lady of Fatima and Roger Williams going for five years. That’s the extent of our regulatory authority under the Hospital Conversions Act.
After those five years have passed, that $80 million escrow is either returned to Prospect or invested by our office if Prospect fails to meet its obligations. When this happens, those hospitals are going to have to survive again in the hands of a company that, at that point, may not be willing to keep them going. So then the question becomes: How do you meet that $15 million gap? If we don’t adjust the way both hospitals are reimbursed, does that money come from the government? Does it come from Medicare, Medicaid, or private insurance? Does it come from taxpayer funds or the General Assembly? I don’t believe that we’re doing enough strategic thinking about that problem, and that’s something we need to take on. I think the other critical issue here in Rhode Island is a lack of primary care.
Both hospital financing and primary care are the foundations of our healthcare system. We need primary care physicians to ensure that patients have healthcare. It’s all well and good to have a lot of insurance. But if people can’t access a doctor, that’s a problem. And when their health issues become so significant that they need healthcare provided by a hospital, are we ensuring that our hospitals can survive into the future?
There are some really difficult questions about how we do that. Some quarters may ask whether we need all the hospitals we have. I think many would say that we do—that we need to figure out how we’re going to keep them going because those are real issues that are going to come up very soon, and I worry that the state isn’t thinking enough about those issues.
ED: Based on your conversations with other state officials and other attorneys general, are you optimistic that more attention will be given to pursuing the more strategic approach to private equity and healthcare?
PN: Well, I hope so. I’ve certainly had this conversation with other attorneys general, and I have been interviewed by CBS News on this subject. CBS News came to talk to me last fall because every hospital owned by Prospect in Pennsylvania is closing. The question was: Why didn’t that happen in Rhode Island? It didn’t happen to Rhode Island because we had strong legislation here that we were willing to use.
That was a pretty ugly fight with Prospect. It was pretty heated. They didn’t like what I was doing, but I believe it was the right thing to do. So you need to have the laws, but you have to be willing to use them, and you have to be willing to take on those tough fights. I think my colleagues around the country are willing to do it. They see the same problems at those 17 hospitals owned by Prospect around the country that are closing.
But I don’t think this is the only private equity healthcare organization that is doing the same thing. So other attorneys general see it. The question is, do they have the tools to do anything about it? That’s the real challenge. So for example, my neighbor to the Southwest, William Tong in Connecticut, doesn’t have the tools to replicate what I did to Prospect on a couple of hospitals over there that have since been sold to Yale and New Haven Health. I think certainly there have been those conversations. I think attorneys general would like those tools from the toolbox. I don’t know how successful they’ll be in pushing their legislatures to deliver.
ED: Do you think national legislation could also be an effective tool in fighting private equity’s influence on healthcare?
PN: Certainly. Federal legislation has a national impact and applies well to standards. That is certainly beneficial. But things move very slowly in the federal government. I was the United States Attorney for the District of Rhode Island for about seven years under the Obama administration, and I was over there in the US Attorney’s office on the line before that. I know how slowly the federal government works. And, frankly, with a divided Congress, the timing of passing any special legislation is, I think, a real question mark.
ED: What final message do you want to give our readers, many of whom reside in Rhode Island?
PN: Firstly, I think they should know, strictly in Rhode Island, that this office is paying close attention to private equity. We are really scrutinizing every transaction that comes before us, whether it involves private equity or not, to determine whether it’s in the best interest of Rhode Islanders. But I think we need a Department of Health with a stronger regulatory side. They’re very strong in dealing with things like Covid-19, which is far more challenging. There are great people at the department, but the department needs, in my view, to be expanded so that they can work with us to provide the close regulatory scrutiny that Rhode Islanders deserve and need.
I’m glad Rhode Islanders are paying attention to this issue. Certainly, they should speak to their legislators, representatives, and senators to voice their concerns about private equity in our healthcare system. But they should know that this office is paying very close attention.
The Prospect case taught me a really strong lesson: You have to have a healthy skepticism of any private equity firm or any for-profit firm that wants to get involved in healthcare. It’s very difficult to break even in healthcare. I don’t believe it’s possible to make a profit. And when someone comes in to try to make a profit, I think that it bodes ill for the overall healthcare system’s state of well-being.
*This interview has been edited for length and clarity.