Federal bankruptcy judge approves deal to sell Roger Williams and Fatima hospitals

A federal bankruptcy judge has authorized the sale of Roger Williams Medical Center and Our Lady of Fatima Hospital, offering what proponents hope will be a cure to the ills inflicted by its bankrupt owner.

“There has certainly been a compelling argument in the presentation of facts showing that time is of the essence here,” Chief Judge Stacey Jernigan of the U.S. Bankruptcy Court for the Northern District of Texas, said during the hearing in Dallas Wednesday. “There is a significant prospect that the debtor would not be able to keep these Rhode Island hospitals up and running for very much longer if it did not did not have the approval of a transition.”

The deal is expected to close in 30 to 60 days, said Anne Wallice, an attorney for Sidley Austin LLP, which represents the hospitals’ owner, Prospect Medical Holdings.

Otis Brown, a spokesperson for CharterCARE Health Partners, Prospect’s Rhode Island subsidiary, praised the approval as “critically important” in a statement Wednesday.

Prospect filed for Chapter 11 bankruptcy in January, just before the $80 million sale of its Rhode Island hospitals to The Centurion Foundation was expected to close.

The bankruptcy declaration reignited fears among Rhode Island health care providers and advocates over the fate of the two safety net hospitals. Prospect had for years sought to offload its Rhode Island assets to new owners to boost its weakened balance sheet; meanwhile, Roger Williams and Fatima have grappled with canceled surgeries, a lack of equipment and federal violations of health and safety protocols under Prospect’s ownership. 

Prospect declares bankruptcy, says sale of Roger Williams and Fatima hospitals will continue

Prospect, a national hospital chain operator based in Los Angeles, owed more than 100,000 creditors at the time of its bankruptcy filing on Jan. 12, recording liabilities between $1 and $10 billion. 

Prospect continues to face severe cash flow woes and expected to end the week with just $11.7 million cash, Paul Rundell, chief restructuring officer, said in written testimony Monday. Without additional financing, Rundell said Prospect would run out of cash entirely by Feb. 21, risking operations at its 16 hospitals nationwide.

The $80 million sale of Roger Williams and Fatima is expected to return $10 million to $15 million to Prospect, according to Rundell.

Jernigan’s authorization to sell the pair of Rhode Island hospitals does not address broader restructuring decisions, including what happens to contractors and consultants that provide services locally. Those agreements will be considered at a later date, Jernigan said.

Prospect and Centurion had asked Jernigan to fast-track the sale of its Rhode Island hospitals despite the ongoing bankruptcy proceedings, indicating that without the sale, the facilities may shutter. The Rhode Island Office of the Attorney General and Rhode Island Department of Health, which gave conditional approval to the sale in June 2024, also cited the potentially devastating impacts of losing the hospitals, which account for more than 50,000 emergency room visits per year across its 400 beds combined, according to court filings.

CMS, Rhode Island AG raise objections

The proposed sale agreement submitted on Feb. 3 was updated hours before Wednesday’s afternoon hearing to reflect concerns raised by the state regulators as well as the Centers for Medicare & Medicaid Services.

The attorney general’s office objected to the original sale agreement because it did not explicitly state that Prospect must still meet the 85 conditions state regulators attached to the sale, several of which have still not been met. The updated agreement reflects the need for Prospect and Centurion to still meet the conditions already set by state regulators to close the deal.

The revised agreement also specifies that Prospect must seek CMS approval to formally transfer its licenses to treat Medicare patients to Centurion, based on objections filed by CMS. Prospect will also pay $3.2 million to CMS for outstanding debts, while setting aside another $465,000 in escrow for future debts that might arise before the sale closes.

Rhode Island Attorney General Peter Neronha in a statement Wednesday following the hearing reiterated the need for Prospect to meet outstanding conditions set by the state, which include an $80 million cash infusion into the hospitals balance sheet as well as a separate escrow account, to be held by the AG, to keep operations running.

“The bankruptcy court’s approval of this sale provides reason for cautious optimism,” Neronha said. “All parties came to the table to prioritize moving these hospitals away from private equity and returning them to local control. At the same time, we can still stop the closing if any of our conditions are not met. Currently, several information requests from the State remain unfulfilled, including those involving critical financial information. My Office will stay vigilant to ensure that our conditions are fully adhered to.”

Both Neronha and Dr. Jerry Larkin, state health director, stressed the importance of the sale to stabilize the hospitals, and the state’s health care landscape.

“While some steps in this transaction are still outstanding, we are committed to the two facilities having new ownership,” Larkin said in a statement. “Rhode Island needs a stable network of hospitals that supports the health and wellness of every community in the state.”

Jernigan praised state regulators for their rigorous, yearslong review, ensuring the deal protects the hospital operations, patients and employees.

“This is not a quick fire sale or anything of that nature,” she said. 

Jernigan also touted the benefits of the sale in returning the two Rhode Island hospitals to nonprofit status — bucking the trend of private equity taking over the health care industry.

Local advocates for the sale also see a return to local control as pivotal. 

Centurion’s lack of experience in hospital operations, as well as use of debt financing to pay for the deal, caused initial doubts among the United Nurses and Allied Professionals, which represents more than 1,200 workers for CharterCARE. But even UNAP leaders warmed to the sale after Prospect filed for bankruptcy; even if Centurion can’t keep the hospitals afloat, state regulators would be able to step in before the situation escalated to an out-of-state bankruptcy filing under the conditions attached by the AG and health department.

The net $192 million in taxable and tax-exempt bonds being used to cover the cost of the sale could not be secured without a sale order from the bankruptcy judge, Wallice said.

Trouble ahead with unpaid commission, contractor fees

The biggest hurdle has been cleared, but a line of smaller obstacles remain in the form of the half dozen consultants and contractors hired by Prospect to provide financial services, technical support and software for its Rhode Island hospitals. Some just want to know what will happen to their agreements when the hospitals change hands.

But one, Fifth Third Securities, is also still vying for the unpaid commission owed for helping Prospect negotiate the deal in Rhode Island. The subsidiary of Fifth Third Bank was hired by Prospect to act as its bank and financial adviser in the sale starting in 2021. The contract required Prospect pay a commission fee equal to at least 3% of the sale cost, according to court documents.

But now, Prospect wants to reject that agreement, as Wallice indicated Wednesday in response to arguments made by Rebecca Matthews, an attorney representing Fifth Third.

Jernigan ruled that Matthews’ objections over unpaid commissions and fees were not germane to the sale, punting the dispute to a later hearing. However, Matthews warned that the company’s objections will come with extra administrative costs and potentially, more delays.

“Fifth Third is not Dropbox,” Matthews said, referring to the file hosting service. “Fifth Third is a bank and this is a contract they had for investment banking services which they’ve been providing.”