Crozer-Keystone Health System has reached a preliminary deal to be acquired by Prospect Medical Holdings Inc., a for-profit firm that owns 13 hospitals in California, Texas, and Rhode Island, Crozer officials said Monday.
The goal is to reach a definitive purchase agreement by Thanksgiving.
"This is an exciting development for Crozer-Keystone Health System," said Joan K. Richards, the system's chief executive. "We have selected a partner that shares our mission to improve the health of the communities we serve, and has the financial resources to make sure that the care we provide continues to rank among the best in our region."
Crozer, which owns five hospitals in Delaware County with about 600 beds, has struggled financially. It announced a year ago that it was exploring strategic options.
Details of the prospective deal between Crozer and Prospect, which is based in Los Angeles and majority-owned by private-equity firm Leonard Green & Partners, were not available.
Besides owning hospitals with 2,258 licensed beds, Prospect also has a division that manages services for independent physician organizations that cover 290,000 members. Prospect said its networks include 8,900 doctors. Such groups attempt to reduce spending by coordinating care, which could be key in Delaware County, where Crozer has a large base of patients on Medicare and Medicaid.
Overall, Prospect had $1.2 billion in revenue in the year ended March 31, according to Moody's. It has $425 million in debt, according to Bloomberg L.P.
Its consolidated financial statements are not public.
Standard & Poor's Ratings Services last month affirmed Prospect's corporate credit rating at the highly risky "B" level, but kept the outlook stable. S&P analyst Shannon Murphy cited growth through acquisitions and "high single-digit same-facility growth in the company's hospital and medical group portfolio."
Prospect, which has three additional hospital deals pending in New Jersey and Connecticut, traces its roots to 1996, when it started acquiring groups of physicians that receive per-capita payments to care for HMO members.
In 2007, Prospect expanded into the hospital sector through the acquisition of Alta Hospitals System L.L.C., which owned four Los Angeles hospitals then.
After expanding to San Antonio, Texas, in 2012 with the purchase of Nix Health System, Prospect set it sights on New England, which has become a feeding ground for for-profit health systems.
A deal last year to buy CharterCare Health Partners in Rhode Island showed Prospect has resorted to creative arrangements. It agreed to pay $45 million for an 85 percent stake in two hospitals and related business with the former tax-exempt parent, retaining 15 percent of a new holding company. Board seats for the new holding company were split 50-50 between Prospect and the former owner, allowing some local control.
That may be an important factor in Delaware County, where officials were concerned about loss of local influence on the health system, one of the county's largest employers.
Crozer had $710.5 million in net patient revenue in the year ended June 30, about the same as the year before. It had an operating loss of $8.4 million in fiscal 2015, down from $32.9 million the year before.
When Moody's downgraded Crozer's credit rating for the second year in a row in June, it cited Crozer's aging facilities, large pension liability, and high cost of servicing its debt relative to its cash flow.
In one of Prospect's pending deals, a $105 million agreement to buy Eastern Connecticut Health Network Inc., it is seeking "substantial reductions" in debt, pensions, and retiree health benefits, according to a July filing with the Connecticut Office of Health Care Access.
If Prospect completes its deal for Crozer, it would join Southern California competitor Prime Healthcare Services Inc. in the Philadelphia region.
Prime owns Roxborough Memorial and Lower Bucks Hospitals. Its purchase of Mercy Suburban Hospital is expected to close Nov. 1.