Dive Brief:
- Nor Healthcare Systems Corp. appears poised to buy Prospect Medical Holding’s California hospital portfolio out of bankruptcy, according to documents filed to a Texas bankruptcy court last week. The company was named the stalking horse bidder for the California assets, meaning Nor will set a floor price for the hospitals should an auction occur.
- Nor Healthcare was registered in Nevada just three months ago. The company lists no board of directors, general partners or trustees in its initial business application. However, it does name a director: Prospect veteran Michael Sarian. Sarian served as SVP of Prospect’s hospital operations between 2005 and 2012.
- It could be a competitive auction. California is Prospect’s core market, and attorneys told the court this month they have “multiple active bidders” for the facilites. Should an auction go forward, an outcome will be decided by the end of the month, with a final sales hearing scheduled for Aug. 28.
Dive Insight:
Debt-ridden Prospect has sought to sell multiple facilities and opted to close others since filing for bankruptcy in January following years of financial difficulties. Each time, Prospect told the court it needed to act fast to divest in the face of mounting liquidity pressures.
Critics say Prospect’s to blame for its own cash problems and lack of interested buyers. Lawmakers in Pennsylvania and Connecticut say the health system ran its facilities into the ground by prioritizing profits over investments in patient care.
California hospitals were meant to be safe from a fire sale. Prospect CEO Von Crockett entered the restructuring process intent on keeping the California market intact.
However, six hospitals are now up for grabs, including Bellflower Behavioral Health Hospital, Los Angeles Community Hospital, Norwalk Community Hospital, Southern California Hospital at Culver City, Southern California Hospital at Hollywood and Van Nuys Behavioral Health Hospital.
Prospect did not respond to requests for comment about possible sale terms for its California portfolio, including a purchase price.
If Nor emerges as the buyer, it will be a homecoming of sorts for Sarian.
Prospect purchased its first four California hospitals from Alta Hospitals System in 2007. Sarian sat at the head, serving as CEO of Alta and SVP of hospital operations for Prospect for approximately seven years, according to his LinkedIn profile and securities filings.
Sarian’s tenure coincides with the beginning of private equity firm Leonard Green & Partner’s ownership of Prospect, which spanned 2010 to 2021. A bipartisan Senate investigation released earlier this year found that as early as 2010 Prospect began siphoning millions of dollars toward dividends and fees to benefit Leonard Green & Partners while hospital quality declined.
After leaving Prospect in 2012, Sarian served as president of hospital operations at Prime Healthcare, managing operations for 45 hospitals across 15 states, before launching hospital turnaround firm Healthcare Systems of America and affiliate American Healthcare Systems.
There, Sarian built a portfolio mostly by buying hospitals out of bankruptcy, including North Carolina-based Randolph Health in 2021 and eight hospitals formerly run by Steward Health Care last year.
But American Healthcare Systems has had financial struggles of its own, according to a report from the Wall Street Journal. The health system has reportedly fallen behind on vendor payments at some of its facilities and, in other cases, failed to pay doctors on time. At one hospital, payment delays caused vendors to stop shipping critical medical supplies, including dialysis products, according to the report.
Both Prime and HSA, where Sarian has worked, have done business with Prospect’s long-time landlord, real estate investment trust Medical Properties Trust. Some familiarity could be a plus for helping Nor broker the California deal, because the stalking horse bid agreement stipulates that whomever takes over Prospect’s California hospitals will enter into lease agreement with MPT.
Such leases are often contentious. Lawmakers and academics have argued that sale leaseback transactions between hospitals and real estate investment trusts benefit investors by giving them quick access to cash but ultimately harm health systems by saddling them with unaffordable rent payments.
HSA, Prospect, MPT and Nor did not respond to requests for comment on this article.
