Crozer Health and ChristianaCare end merger talks. Crozer will become a non-profit association.

ChristianaCare, Delaware’s largest healthcare system, has dropped its bid to acquire Crozer Health, the organizations announced Thursday. No reason was given.

Crozer, instead, plans to revert to a nonprofit, the status it held before Prospect Medical Holdings Inc. acquired it in a 2016 deal valued at $300 million.

“Crozer Health’s community support is critical to its success and sustainability,” senior Crozer and Prospect officials said in a letter to the Crozer community. Being a non-profit organization “will allow us to engage with the community through local governance, supporting community volunteers and building partnerships with community organizations,” the letter says.

“It’s definitely the right direction to take,” said Dan Grauman, chief executive of Veralon, a Philadelphia-based healthcare consulting firm.

A conversion from a for-profit health care system to a not-for-profit system, as Prospect envisions, is rare, Grauman and other industry experts said.

It is not unusual for an existing nonprofit to buy for-profit hospitals, as happened when nonprofit Tower Health acquired five hospitals in southeastern Pennsylvania from Community Health Systems Inc., a publicly traded company, in 2017. Tower later converted these hospitals into nonprofit organizations.

But Prospect apparently intends to start a new nonprofit with a local board of directors and have Crozer participate in it.

Crozer’s spokeswoman, Lori Bookbinder, did not respond to an emailed question about whether Crozer should buy from Prospect, which until 2019 was controlled by Leonard Green & Partners, a private equity firm. investment based in Los Angeles.

It is unlikely that Prospect wanted to give Crozer to ChristianaCare, a non-profit organization.

Even if Prospect donated Crozer to a new nonprofit, the new entity would still have to raise a significant amount of money to pay its day-to-day bills — funds called working capital.

Borrowing money from the municipal bond market will not be easy, given that Prospect does not own its real estate, which could be used as collateral, experts said.

It was sold in 2019 to Medical Properties Trust, a large real estate investment trust, in a $1.55 billion sale-leaseback deal for property in three states. This money was used to pay off the debt charged on Prospect Hospitals by Leonard Green to pay himself and pay investors a dividend of $457 million.

Crozer now pays Medical Properties Trust about $35 million a year to lease real estate valued at $400 million on sale-leaseback. As a nonprofit organization, Crozer could theoretically benefit from philanthropy, but that expensive lease might put some potential donors on hold.

Recruiting board members for a new nonprofit can also be a challenge.

“There’s a lot of competition for really good board members, and board members are looking for opportunities where they can really make an impact and make a difference, and where they come into a functional environment” , said Frances M. Sheehan, President. of the Foundation for Delaware County, which raised $54.8 million in charitable proceeds from the sale of Crozer in 2016.

In their Thursday letter, Crozer and Prospect executives shared some of their short-term plans.

Crozer will reopen its Springfield hospital “as a full outpatient complex with an emergency department, doctors’ offices, ancillary services and an outpatient surgery center,” noting that 60% of Crozer’s revenue already comes from outpatient services.

Crozer also said he would invest in advanced services at Crozer-Chester Medical Center in Upland Township, including its behavioral health services. Last week, Crozer announced an agreement with Delaware County officials to retain some behavioral health and addiction treatment services he had planned to close.

No mention was made in the letter of Delaware County Memorial Hospital in Drexel Hill or Taylor Hospital in Ridley Park.

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