East Orange General Hospital’s Bankruptcy Filing Could Slow Pending Sale

Andrew Kitchenman | November 12, 2015 | Health Care
Move could strategically lower costs for future operator; Prospect Medical Holdings remains interested

Credit: Courtesy: East Orange General Hospital
East Orange General Hospital
The relatively speedy and smooth sale of East Orange General Hospital has been in stark contrast to the prolonged and controversial process involving Saint Michael’s Medical Center — until yesterday.

Just two weeks after receiving approval from a judge to complete a sale to Prospect Medical Holdings, East Orange General Hospital joined Saint Michael’s in declaring bankruptcy.

East Orange General executives say the sale to the California-based for-profit chain is still on, but that remains to be seen. Prospect representatives also said that the company remains interested in the hospital despite its bankruptcy filing.

If anything, the filing could make the hospital more profitable to a future operator, since the bankruptcy’s goal is to reduce debt.

Unlike the bankruptcy filing by Saint Michael’s Medical Center in August, the East Orange General filing isn’t intended to quicken state approval of a sale. The state must approve any conversions of nonprofit hospitals like East Orange General and Saint Michael’s to for-profit status.

Both acting state Health Commissioner Cathleen Bennett and acting Attorney General John J. Hoffman signaled their approval of the East Orange sale before Superior Court Judge Walter Koprowski Jr. approved it on October 28.

East Orange General interim CEO Martin Bieber summed up the reason for the bankruptcy filing in five words:

“The problem is old debt,” Bieber said in the statement announcing the filing.

Bieber said the hospital’s monthly losses last year before debt-related interest and other costs averaged 12 percent, requiring an “internal restructuring.”

“We’ve reduced those losses to 2 percent in the most recent month,” Bieber said.

“Still,” he added, “meeting old obligations on top of current obligations has contributed to the institution’s deteriorating cash position. This filing will enable the hospital to remain current with its ongoing obligations while renegotiating some contracts and emerge stronger.”

[related]It’s not clear whether going through the bankruptcy process will cause state regulators to reopen regulatory review of the sale. It was also uncertain yesterday whether the filing could lead to any changes in the sale process. A Department of Health spokeswoman declined to comment, and a hospital spokeswoman said lawyers weren’t available to comment.

The proposed sale to Prospect — as well as Saint Michael’s proposed sale to Prime Healthcare Services of California — is part of a rapidly increasing trend of nonprofit hospitals seeking to convert to for-profit status.

New Jersey had no hospitals owned by for-profits when the state enacted the Community Health Care Assets Protection Act (CHAPA) in 1999. The law was aimed at ensuring the for-profit conversions serve the public interest.

Since then, the for-profit ranks have grown steadily and now include Memorial Hospital of Salem County; Meadowlands Hospital Medical Center; CarePoint’s Bayonne Medical Center, Christ Hospital, and Hoboken University Medical Center; and Prime’s St. Mary’s Hospital in Passaic and Saint Clare’s Health System in Boonton, Denville, and Dover.

The East Orange General sale hasn’t drawn as much attention from activists as those of St. Mary’s and Saint Michael’s, perhaps because East Orange General’s nursing staff isn’t unionized.

Prospect Medical Holdings, which has 13 hospitals, is owned by Los Angeles-based private equity firm Leonard Green & Partners, which also owns BJ’s Wholesale Club, Lucky Brand jeans, and Petco. While Dow Jones-owned news service LBO Wire reported last week that Leonard Green & Partners was interested in selling Prospect Medical Holdings, firm officials told the Manchester, CT, Journal Inquirer that the report was “highly speculative” and “inaccurate.” The transaction appears to be unrelated to the East Orange General sale.

In supporting the sale of the 211-bed East Orange General to Prospect, state health officials noted Prospect’s willingness to work with other hospital operators and the state to coordinate care. Prospect also expressed agreement with several recommendations included in the state-commissioned Navigant Consulting report, among them expanding outpatient services and reducing inpatient beds.

Bieber said the hospital had depleted its cash “to a point that it is unable to complete the transaction without having the ability to financially restructure its operations.”

Prospect representatives said the company “remains highly interested in acquiring East Orange General Hospital and intends to work closely with EOGH through the bankruptcy process to complete the transaction. Prospect has invested in EOGH for more than two years while we jointly went through the regulatory approval process. We believe Prospect is the best solution for EOGH in this rapidly changing healthcare environment.”