This is the first part of a two-part story. See part two here.

A report unveiled earlier this month raised new financial questions about Rhode Island’s third-largest hospital group, CharterCARE Health Partners, which owns Fatima and Roger Williams Medical Center.

CharterCARE is owned by Los Angeles-based Prospect Medical Holdings. The report by accounting firm PYA, which bills itself as an industry leader, found that Prospect Medical was so heavily leveraged as of last September that its liabilities exceeded its assets by more than $1 billion.

Prospect Medical’s CEO, Sam Lee, and his business partner, David Topper, want to raise their ownership stake in Prospect from about 40 percent to 100 percent.

In its report for the state Health Department, PYA said it did not find evidence that the transaction giving Lee and Topper full ownership of Prospect would directly affect the financial condition of the two Rhode Island hospitals. But PYA principal Michael Ramey offered this warning during an April 6 meeting of a state advisory group known as the Health Services Council: “Both Prospect CharterCare and Prospect Medical Holdings, through our observations, face some long-term viability risks.”

In particular, Prospect Medical is due to make a balloon payment on a $113 million loan in August 2022. PYA said a sale or leaseback of the real estate occupied by Fatima and Roger Williams might be used to pay for that. PYA also found that Prospect has limited liquidity, with enough cash and credit to operate for 43 days.

Despite the concerns, the Health Services Council voted, four to one, to recommend the change giving Sam Lee and David Topper full ownership of the two CharterCARE hospitals in Rhode Island.

The Public’s Radio requested interviews with the five Health Services Council members who took part in the April 6 vote on Prospect Medical: Raymond Coia (the only member who voted ‘no’), Melody Lawrence, Jesse Saglio, John Sepe, and Edward Quinlan.

Quinlan was the only one willing to comment.

As Quinlan notes, the two CharterCare hospitals faced financial instability for years before Prospect Medical acquired them in 2014. He said Prospect made things better and improved care for patients.

“Significant investments were made that enabled both Roger Williams Medical Center and Fatima Hospital to proceed on making significant improvements in their facilities -- new emergency department at Roger Williams Hospital, new operating room at Fatima hospital,” Quinlan said.

Quinlan is a longtime former head of the Hospital Association of Rhode Island, and he served on CharterCARE’s board until it dissolved last year. He said the state Ethics Commission told him it would not be a conflict of interest for him to participate in the April 6 vote.

Quinlan said he did not read PYA’s 20-page report on Prospect’s finances. He said the PYA executive’s testimony during that meeting did not give him pause since it did not square with his own understanding of CharterCARE’s finances.

“I listened,” Quinlan said. “I listened carefully. It did not apply to the experience that I have witnessed at the CharterCARE hospitals here in Rhode Island.”

But a broader debate about Prospect Medical has been raging since last year, as The Public’s Radio reported in February. While Prospect has its supporters, ProPublica has reported that almost all of the company’s 17 hospitals around the U.S. rank below average in annual quality of care assessments by the federal government. Prospect has also faced criticism for how its current majority owner, a private equity firm in Los Angeles, and other investors have taken $645 million in dividends out of the company.

Chris Callaci is general counsel for United Nurses and Allied Professionals, which represents more than 600 workers at Fatima, and is a vocal opponent of the ownership change. Callaci dislikes how Lee, Topper and other investors took so much money out of Prospect Medical in dividends.

And Callaci said PYA’s findings raise doubts about Prospect ability to manage the CharterCARE hospitals, for both patients and workers.

Callaci said he’s dumbfounded by how the Health Services Council recommended the change in spite of those financial concerns.

“They are laden with debt,” he said, referring to Prospect Medical. “They have very little liquidity and they’re facing financial risk. And that means they can’t fund the operating shortfalls of the local hospitals. So it is inexplicable to me. I have no idea how the council could have ignored that and given the green light on this application.”

Rhode Island is the last state to stand in the way of Lee and Topper as they try to gain full control of Prospect Medical.

Attorney General Peter Neronha last year began a review that is ongoing and which has delayed final consideration of the change.

In an interview earlier this year, Neronha said unanswered financial questions about the proposed ownership change explain why his office and the Health Department have repeatedly extended their review, as part of the state’s Hospital Conversion Act.

“What we’re really looking at and looking at very closely is, ‘what will the financial health of these hospitals be going into the future?’ If we’re not satisfied with that, if we’re not satisfied with that fundamental question,” Neronha said, “then the likelihood that we’re going to approve a change is very low.”

The local lawyer for Prospect Medical, Patricia Rocha, encouraged the Health Services Council to vote during its April 6 meeting.

Mentioning Ecclesiastes, Rocha pointed to how the proposed ownership change was filed almost two years ago, in late 2019. Rocha said Prospect Medical has met all the legal requirements for the change. And she rejected concerns about the company’s finances.

“Prospect has approximately $600 million total in cash and an unused line of credit,” Rocha said. “It has yearly revenues in the amount of $2.7 billion. Its most recent financial audit, completed in December of 2020, confirms that Prospect has substantial cash and liquidity.”

Rocha did not respond to a request by The Public’s Radio for documents to support these assertions.

CharterCARE spokesman Otis Brown also declined an interview request for this story.

The concerns cited in the PYA report have attracted attention in the General Assembly.

State Sen. Louis DiPalma, (D-Middletown), chairs the Senate’s Rules, Government Ethics and Oversight Committee. He said the findings raise questions about the future of the CharterCARE hospitals.

“That’s a concern -- where will Roger Williams and Fatima be three or four years from now?” DiPalma said. “What will happen to the access, the quality and affordability of the care that is provided in those two and other facilities associated with the project?”

The decision of whether to approve, reject, or approve with conditions the Health Services Council’s recommendation in support of the change rests with state Health Director Dr. Nicole Alexander-Scott, who declined our request for an interview.

Sen. DiPalma is considering calling for changes to the Health Services Council due to his concerns on this issue. More on that in the second part of our story on Thursday.

Ian Donnis can be reached at Follow him on Twitter @IanDon. Sign up here for his weekly RI politics and media newsletter.