Prospect Medical Holdings Files Chapter 11 After Private Equity Extraction

Prospect Medical Holdings, Inc. filed for Chapter 11 bankruptcy protection on January 11, 2025, in the U.S. Bankruptcy Court for the Northern District of Texas, marking a significant collapse in the healthcare sector. According to Healthcare Dive, the health system declared between $1 billion and $10 billion in both assets and liabilities, with more than 100,000 creditors affected by the filing.

The bankruptcy follows years of financial distress exacerbated by private equity ownership. As CBS News reported, a Senate Budget Committee report accused private equity firm Leonard Green & Partners of plundering the health system for investors' gain, extracting hundreds of millions while loading the company with debt.

Private Equity's Devastating Impact

Leonard Green & Partners owned Prospect Medical between 2010 and 2021, during which time the firm systematically extracted value from the healthcare system. The Senate Budget Committee investigation found that Prospect paid out $645 million in dividends and preferred stock redemption to investors, with $424 million going directly to Leonard Green investors while the company took on high debt loads.

Pattern of Extraction

The private equity ownership model prioritized investor returns over healthcare infrastructure and patient care. Through dividend recapitalizations and sale-leaseback transactions, Leonard Green extracted substantial value while leaving Prospect with unsustainable debt burdens and deteriorating facilities.

Comparison to Steward Health

As noted by Fierce Healthcare, Prospect becomes the second large health system with private equity roots to file for Chapter 11 bankruptcy protections in recent months. Steward Health Care, previously owned by Cerberus Capital Management, declared bankruptcy in May 2024, shaking the healthcare ecosystem.

Hospital Operations and Geographic Footprint

At the time of filing, Prospect operated 16 hospitals across California, Connecticut, Pennsylvania, and Rhode Island. The official restructuring website states that hospitals, medical centers, and physicians' offices would remain open with patient care continuing during the bankruptcy process. In Pennsylvania, circumstances changed later in the case: a federal court approved wind-downs at Crozer Health and Taylor Hospital closed on April 26, 2025, followed by Crozer‑Chester Medical Center on May 2, 2025 (Healthcare Dive; Geisinger update; CBS Philadelphia).

The company plans to use the restructuring process to sell hospitals and refocus on its core operations in California. As reported by WFSB News, the financially strapped health system will streamline divestitures outside of its home state to achieve financial stability.

Debtor-in-Possession Financing

To maintain operations during the bankruptcy process, Prospect successfully negotiated a secured postpetition revolving credit facility provided by eCapital Healthcare Corp. in an amount up to $90 million (as reflected on the restructuring site). In a Business Wire release, Prospect said the court granted interim approval to access up to $100M in new‑money term loans from JMB Capital (with $29M available immediately) and to obtain a revolving facility of up to $90M from eCapital.

The DIP financing ensures continuity of patient care and enables the company to meet payroll, maintain critical supplies, and preserve going-concern value during the restructuring process.

Legal Representation and Professional Advisors

Sidley Austin LLP serves as bankruptcy counsel to Prospect Medical Holdings, bringing extensive healthcare restructuring experience to navigate the complex proceedings. The retention of premier legal counsel reflects the sophistication required to address the interests of over 100,000 creditors while maintaining healthcare operations.

Political and Regulatory Response

The bankruptcy has drawn significant political attention given its impact on healthcare access and employment. A joint statement from Pennsylvania legislators expressed concern about the impact on local communities and healthcare workers, calling for accountability and protection of patient care standards.

State attorneys general and health departments in affected states are monitoring the proceedings to ensure compliance with charitable care obligations and maintenance of essential services. The regulatory scrutiny reflects broader concerns about private equity ownership of healthcare assets.

Senate Investigation Findings

The Senate Budget Committee's investigation into Prospect Medical revealed a pattern of financial engineering that prioritized investor returns over patient care. The extraction of $645 million while deferring maintenance and accumulating debt exemplifies concerns about private equity's role in essential services (full report PDF).

Restructuring Strategy and Asset Sales

Prospect's restructuring strategy centers on divesting non-core assets while preserving California operations. The company indicated it will pursue strategic sales of hospitals in Connecticut, Pennsylvania, and Rhode Island to focus resources on its home state facilities.

The asset sale process must balance maximizing value for creditors with maintaining healthcare access in affected communities. State regulators will likely impose conditions on any sales to ensure continuity of care and preservation of charitable missions.

Creditor Landscape and Recovery Prospects

With more than 100,000 creditors and approximately $2.3 billion in funded debt as of the filing, the creditor landscape is exceptionally complex. Trade vendors, healthcare providers, employees, pension beneficiaries, and secured and unsecured lenders all seek recovery through the bankruptcy process.

The substantial asset base, valued between $1 billion and $10 billion, provides potential for meaningful recoveries, though the priority structure and administrative costs will significantly impact distributions. Secured creditors and critical vendors will likely receive preferential treatment to maintain operations.

Impact on Healthcare Delivery

Despite the bankruptcy filing, Prospect committed to maintaining patient care without interruption. Most hospitals continue operating; however, the Crozer Health shutdown in Delaware County, which included closures at Taylor Hospital and Crozer‑Chester Medical Center in late April and early May 2025, reduced access for local communities (court-approved wind-down; closure coverage).

However, the long-term impact on healthcare access remains uncertain, particularly in communities where Prospect operates safety-net hospitals serving vulnerable populations. The potential closure or sale of facilities could create healthcare deserts in already underserved areas.

Employee and Pension Concerns

Thousands of healthcare workers face uncertainty regarding job security and pension obligations. While operations continue during bankruptcy, potential hospital sales or closures could result in significant workforce reductions. Unfunded pension obligations add another layer of complexity to the restructuring process.

Systemic Implications for Healthcare Finance

The Prospect Medical bankruptcy, following Steward Health's collapse, signals systemic challenges in private equity healthcare ownership. The pattern of value extraction through financial engineering while deferring capital investments and accumulating debt has proven unsustainable across multiple health systems.

These failures have prompted calls for regulatory reform, including restrictions on dividend recapitalizations, sale-leaseback transactions, and minimum capital requirements for healthcare facilities. Policymakers increasingly recognize that traditional private equity models may be incompatible with the public interest obligations of healthcare providers.

Path Forward and Restructuring Timeline

The restructuring process will likely extend through 2025 as Prospect navigates asset sales, creditor negotiations, and regulatory requirements. The company must balance the urgency of addressing liquidity needs with the complexity of maintaining healthcare operations across four states.

Success will require coordination among bankruptcy courts, state regulators, employee representatives, and community stakeholders. The outcome will influence future approaches to distressed healthcare assets and potentially reshape the role of financial investors in essential service sectors.

As the Prospect Medical Holdings bankruptcy proceeds through the Northern District of Texas, it serves as a critical case study in the intersection of healthcare delivery and financial engineering. The extraction of hundreds of millions by private equity owners while the health system accumulated unsustainable debt illustrates fundamental tensions between investor returns and public health obligations. For practitioners navigating healthcare restructurings, this case emphasizes the importance of balancing financial imperatives with the unique responsibilities of healthcare providers to their communities. For more insights on other recent bankruptcies and restructuring strategies, visit the ElevenFlo blog.