'Lean and mean' Prime Healthcare poses risks for Illinois

Bad things can happen when a privately-owned hospital chain comes to town. State legislatures need to protect local communities from the downside risks.

The following op-ed appeared yesterday in Crain’s Chicago Business, the nation’s leading local business publication.

Illinois recently approved the purchase of eight Chicagoland hospitals by a for-profit hospital chain. Hailed as good news by local communities, there are serious risks associated with the transaction, which the legislature should take immediate steps to prevent.

California-based Prime Healthcare earlier this month paid $375 million to St. Louis-based Ascension for hospitals in Aurora, Chicago, Des Plaines, Elgin, Evanston, Joliet and Kankakee. All are heavily dependent on Medicare and Medicaid for funding.

Prime, which specializes in turning around hospitals serving low-income clientele, will bring its proven “lean and mean” model of health care operations to Illinois. It has already required staffs to reapply for their jobs. The company says “substantially all” have accepted the offer.

However, in other states where Prime operates, physician, nurse and housekeeping unions say Prime’s management style leads to reduced staffing and heavier workloads. That poses a risk to patient care.

Ascension, a Catholic system, began the process last year after negotiations with Prime began. It transferred its in-house physicians to a private-equity-owned staffing firm, SCP Health. As Crain’s Chicago Business reported at the time, angry doctors told to reapply for their jobs said SCP sharply reduced their pay while raising patient visits to as many as 30 a day, up from an average of 18.

Credit: Crain’s Chicago Business

I recently spoke with insurers, nearby hospitals, employees and their representatives in other states. They say Prime has eliminated or pared back less profitable services like obstetrics while cherry-picking among patients passing through its emergency rooms. The company favors admitting those needing short-term but highly profitable care, but sends some off to other hospitals if they need less profitable care.

Prime often remains out-of-network with private insurers, which can be financially painful for local employers. When an out-of-network patient who is privately insured visits their ER, the company bills at rates above what the insurer pays other hospitals in the region. Those added costs are borne by local employers and their employees through higher premiums.

Prime said in response to my written questions that it will honor existing contracts with insurers. However, those contracts “will be subject to renegotiations at the end of their respective terms.”

After honing its model in California nearly a decade ago, Prime went on an acquisition spree financed by selling its hospitals to a real estate investment trust, Alabama-based Medical Properties Trust (MPT). Under this private-equity model, Prime pays rent – a new burden that drained resources from ongoing operations. By 2018 MPT held $1.1 billion in what had previously been Prime assets, making Prime its second largest renter after Steward Health Care.

Steward, like Prime, financed hospital acquisitions by selling properties to MPT. Steward declared bankruptcy last May after it could no longer pay rent. Former Steward CEO Ralph de la Torre, who collected $250 million in salary and bonuses from the company, was recently found in contempt of Congress for refusing to testify before a Senate committee investigating the bankruptcy.

Numerous studies have shown that patient experience and outcomes worsen after non-profit hospitals are acquired by privately-owned chains. They sometimes even shut down hospitals whose decline is hastened by sale-leaseback arrangements.

So far, Prime’s operating tactics have avoided that outcome. It has never closed a hospital. Indeed, its highly profitable lean strategy has enabled it to spend $716 million since 2022 to buy back hospitals at fire sale prices from MPT, which is raising cash to avoid bankruptcy itself after Steward stopped paying rent.

In press releases announcing recent transactions, Prime said it financed the buybacks with cash on hand and new debt. Last September, the company borrowed $1.5 billion due in 2029 to repurchase hospitals and fund expansion.

Illinois law prevents Prime from selling off its real estate for two years to help pay off that debt. After that, it is free to do what it wants. Prime says its purchase agreement extends that promise to three years as well as contains a promise not to close facilities.

Massachusetts, where Steward owned eight hospitals, recently passed legislation to prevent future fiascos. The law prohibits any hospital from selling its assets to a real estate investment trust. Connecticut, another Steward victim, is considering similar legislation.

Illinois should do the same. It should also revisit its facility staffing laws and beef up enforcement of patient safety protections.

Given the looming threat of massive cuts in federal support for Medicaid, this state can ill-afford any private sector financial engineering that drains badly needed funds from already troubled institutions.

Merrill Goozner is the former editor of Modern Healthcare, a CCB sister publication. He now writes about health care at GoozNews.substack.com.