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What if a local hospital goes broke? CT lacks receivership authority

Waterbury Hospital.
Molly Ingram
Waterbury Hospital.

In October, as Gov. Ned Lamont was preparing to meet with state officials about a pending deal for Yale New Haven Health to purchase three troubled hospitals owned by Prospect Medical Holdings, an aide in Lamont’s office raised a concern about a gap in state law.

Officials from the public health and social services departments, along with members of the attorney general’s and governor’s offices, were to meet “to discuss what legal authority the state has to intervene if Prospect declares bankruptcy,” wrote Matthew Brokman, senior advisor to the governor.

“Other states [like Rhode Island] have clear authority to put a hospital into receivership, we do not.”

The Connecticut Mirror obtained the Oct. 15 email through a Freedom of Information Act request. Agencies involved in the initial meeting would not comment on that meeting or on whether the state has any plan in place if the California-based hospital chain were to file for bankruptcy, a move that could leave its three Connecticut hospitals in limbo.

The state’s Office of Health Strategy, which oversees hospital mergers, closures and other transactions, confirmed the state does not have a direct path to take over hospitals through receivership, as it has with nursing homes.

In states with hospital receivership, a receiver may be appointed if the health department revokes a facility’s license or if a hospital’s administrators request receivership and the court finds there is a serious threat to the health and safety of patients. The receiver uses the facility’s income and assets to try to correct the conditions posing a threat.

“Connecticut does not have a law that specifically allows for receivership of hospitals,” Office of Health Strategy spokeswoman Tina Kumar Hyde said. “Building on ongoing, open communication between [state agencies] and our hospital system, the state will be prepared to monitor and assist with any challenges that arise from a disruption in service at any hospital.”

But the absence of a hospital receivership law is raising concerns among some state officials and lawmakers who have been monitoring Prospect’s financial situation in recent years.

The company bought and later closed Delaware County Memorial Hospital in Drexel Hill, Pa., and shuttered most services at a second facility, Springfield Hospital in Springfield, Pa. A local nonprofit and Pennsylvania’s attorney general sued Prospect over the closure of Delaware County Memorial.

In Connecticut, hospital executives said Prospect owes tens of millions of dollars to vendors and physicians under contract to provide services at its three hospitals — Waterbury, Manchester Memorial and Rockville General. The state filed liens against the company after it neglected to pay $67 million in taxes.

Prospect is not the only health system struggling. In Massachusetts, the for-profit Steward Health Care, which owns 10 facilities, is tens of millions behind on its rent, and vendors and contractors aren’t being paid, causing supply shortages, media outlets have reported.

State leaders in Connecticut are asking the legislature to explore reform, including a proposal that would require for-profit entities like Prospect to set aside a year’s worth of operating expenses in the event of a bankruptcy and to consider instituting a clear path for hospital receivership.

“We have serious concerns about the expanding role of private equity and the consolidation of health care delivery in Connecticut,” Attorney General William Tong said. “Our current laws and regulations are inadequate, and I am working closely with [Senate leadership] and other stakeholders on legislation to protect patients, health care providers and workers.”

Legal options in Connecticut

Legal experts say a hospital bankruptcy is unprecedented in Connecticut. But if a hospital or health care system were to file for bankruptcy, that does not mean the facility would immediately close.

A judge can appoint a health care ombudsman to ensure patients are properly cared for while the hospital continues to operate. If the provider is being mismanaged, the court could also appoint a trustee to operate it while in bankruptcy, officials said. With a company like Prospect that owns multiple facilities, a bankruptcy case could take years.

Connecticut also requires a certificate of need for cessation of health care services, such as the closure of an emergency room or labor and delivery unit, though some facilities have halted services before receiving approval from the state.

“Even though there is not a direct path to hospital receivership, the Connecticut Department of Public Health works with its partner state agencies … to monitor our health care systems. DPH also seeks counsel from the Centers for Medicare and Medicaid Services as well as input from the Connecticut Hospital Association in these situations,” said Chris Boyle, a spokesman for the health department.

“DPH retains regulatory enforcement authority over hospitals even when such hospitals are subject to court oversight, for example in bankruptcy. DPH’s regulatory authority focuses on ensuring that hospitals comply with state and federal health care quality and safety laws, including the conditions of participation for Medicare and Medicaid.

Kumar Hyde said that, as of now, some Prospect hospitals in Connecticut have “healthy” profit margins.

“A review of the data provided to OHS by Manchester and Waterbury hospitals demonstrates that both hospitals have reported healthy profit margins in the recent past, as well as a steady number of hospital discharges over the last five years,” she said. “Audited financial statements through fiscal year 2022 (the most recent) show mostly positive margins for both facilities over the last five years.”

Prospect suffered a devastating cyberattack across its facilities in August, however, and hospital executives told state leaders that the data breach set them back financially. Prospect and other health systems are expected to file financial statements for the 2023 fiscal year in the coming weeks.

“As the Prospect hospitals have worked to recover from last year’s cyberattack, DPH continues to monitor health and safety in their facilities,” Kumar Hyde said. “The state considers all possibilities for addressing potential challenges that could arise from any disruptions to the health care system, such as any potential hospital bankruptcy.”

Hospital finances a growing concern

Although Connecticut has some safeguards in place, several officials say more should be done as concerns mount over the financial state of hospitals.

Senate President Pro Tem Martin Looney has recommended the Public Health Committee draft a bill that would require for-profit hospitals to place in escrow one year’s worth of operating expenses, “to make sure patients and the state are protected.”

That could mean setting aside $100 million or more, depending on the health care system, he said.

“I would certainly also support a receivership process. Those hospitals are critical providers of service in the communities where they’re located, and there’s a great deal of alarm about what might happen,” said Looney, D-New Haven. “I worry about the delivery of services to people who live in those regions of the state. There’s a huge concern about access and convenient travel distances. All those things come into play if the hospitals’ operations might be in jeopardy.”

Massachusetts recently considered a bill that would create a path for state receivership of hospitals and free-standing clinics that provide “essential health services” and are slated for closure.

Sen. Saud Anwar, co-chair of the Public Health Committee, said he plans to incorporate into a bill the requirement for for-profit hospitals to put funds in an escrow account.

“I think we have to address some of these weaknesses in our policies,” he said.

Any proposal to create a path for hospital receivership would be reviewed carefully by the health committee, he said. But he worries receivership would be too costly and complex for the state.

“The idea is to protect the hospitals and the well-being of the patients from people who are trying to make blatant profits from patient care,” Anwar said. “If the state is managing them, it’s going to be very difficult. The state does not have the infrastructure to manage some of these facilities. It can definitely regulate and have protections and identify areas to manage, but to take over the entire hospital and run it, it’s going to be very complex.”

A spokeswoman for Lamont said the governor has not proposed modifying the state’s receivership laws but is concerned about the state of hospital finances.

In his proposed budget for the fiscal year that begins July 1, Lamont has recommended adding a new position to the Office of Health Strategy that would support expanded financial monitoring of hospitals, “to develop advanced warning of financial distress” and to strengthen Connecticut’s certificate of need review process.

“As the governor illustrated with his legislative proposal to strengthen the state’s financial oversight of hospitals, he believes the state needs to have more timely information and authority over major transactions in the health care industry,” said Julia Bergman, Lamont’s spokeswoman. “With respect to Prospect, the office continues to be in touch with all of the parties, and the Department of Public Health continues to ensure patient care is maintained. Prospect has a legal obligation to provide care at the hospitals it owns until ownership is transferred.”

Negotiations between Yale New Haven Health and Prospect Medical are ongoing, and the deal is awaiting state approval.

Health officials have also recommended strengthening Connecticut’s certificate of need policies to ensure better enforcement and more timely decisions. The state requires a certificate of need for closures, expansions and other changes to health care facilities.

The Connecticut Hospital Association said it is open to conversations about new ways to support patients and health care access and “would be interested” in seeing language on a proposal requiring for-profit hospitals to set aside operating expenses.

But the agency urged the state to bolster its certificate of need process.

“At its core, receivership is a reactive measure used in a crisis. While [we are] open to conversations related to what authorities [think] would be helpful in preserving patient care and protecting jobs during a time of crisis, energy would be far better spent actually preventing the crisis in the first place,” said Paul Kidwell, senior vice president of policy for the association.

“If used correctly, the state’s certificate of need process is a tool to prevent crisis. Unfortunately, inefficient administration of the CON process has resulted in significant delays that have put in jeopardy access to health services for patients in our state. CHA’s first priority is ensuring that the information and tools at hand are used to prevent a crisis.”

Deidre Gifford, director of the Office of Health Strategy, declined to comment on a potential change in receivership laws.

“It may be there are additional steps the state could take, but I think we need to see specific proposals and comment on them once they’re before us,” she said.

The new hospital financial oversight position proposed by the governor would help the state “get more frequent reporting from hospitals on certain key indicators of financial health” that go beyond the annual reports the state currently receives, Gifford said.

“It’s a matter of frequency. But also, we’re proposing to get things like accounts that are more than 90 days past due, and to get that reporting on a quarterly basis; days cash on hand, to get that on a quarterly basis — things that might be indicators of financial distress at a hospital.”

Launched in 2010, The Connecticut Mirror specializes in in-depth news and reporting on public policy, government and politics. CT Mirror is nonprofit, non-partisan, and digital only.