Illustration: Lindsey Bailey/Axios

Prospect Medical Holdings' road to bankruptcy has eerie similarities to that of Steward Health, another multistate hospital chain formerly owned by private equity. Why it matters: The parallels — down to the way both chains sold the real estate under their hospitals to the same company and leased it back — raise questions about whether the bankruptcies were the result of bad management or what critics allege is private equity's rush to enrich itself at patients' expense.

Driving the news: Prospect Medical Holdings, which operates 16 hospitals across four states, filed for bankruptcy last weekend. The company said on its website that its actions will allow it to "refocus on its core strength and return to fulfilling its mission of operating community hospitals in California."

• "Prospect's financial distress started as a result of the decreased revenue and increased costs arising from the COVID-19 pandemic," Prospect wrote this week in a court filing, noting that its California hospitals remain financially viable.
• The document also lists inflation, labor expenses, insurer reimbursement rates and employee pension plans as contributors to Prospect's financial distress.

The big picture: The Prospect bankruptcy news comes only a few months after the resolution of Steward's bankruptcy saga, which made headlines and drew political ire for months.

• Both chains were formerly owned by private equity firms, which both exited after collecting large payouts and having sold much of the health systems' underlying real estate.
• In both cases, the real estate was sold to Medical Properties Trust, a real estate investment firm that then became the hospitals' landlord, requiring them to start paying rent on properties they had long owned.
• "It's very similar to what occurred with Steward," said Mary Bugbee of the Private Equity Stakeholder Project. "There were financially extractive business practices that were used that stripped value from the hospital system and loaded it with debt, and put the system in a pretty bad place financially."

Between the lines: Stewards' financial woes and the resulting threat to communities' access to health care led to finger-pointing over whether the chain was an outlier or a case study in larger systemic risks surrounding private equity ownership of hospitals and the use of REITs.

• The Prospect bankruptcy fuels the argument for the latter, some experts say.
• "There are certainly bad actors who bear a lot of responsibility for what has gone down at a lot of these hospitals, but at the end of the day, a lot of what they did, if not all of it, was perfectly legal," Bugbee said. "So we have a regulatory system that allows pillaging of hospitals in the United States."
• "Prospect Medical's bankruptcy is just another in a stream of failures involving sale-leaseback agreements with REITs," said Rosemary Batt, a professor at Cornell University. "Private equity firms enter into these agreements because the onerous conditions are put on the hospitals, while the PE firms will exit in a five-year window."

State of play: Prospect's financial problems have already caused it to close some facilities or service lines and put others on the market, with varying degrees of success.

• In the case of its Connecticut hospitals, a buyer was found. But those purchase agreements have become contentious, and Yale New Haven Health has sued to get out of the deal, citing financial mismanagement.

• Prospect and its former private equity owner, Leonard Green and Partners, has also been sued by the Pennsylvania attorney general over alleged mismanagement of its Pennsylvania properties.
• Prospect had previously struck a deal to sell its physician groups and other assets to Astrana Health. That deal is expected to close in June, and those assets are not part of the bankruptcy filing.

The other side: "America's health care system faces incredible challenges — no matter how local facilities are funded," said Emily Schillinger, executive vice president at the American Investment Council, a private equity trade group.

• "Private equity provides urgently needed capital infusions which support lifesaving medical innovations and help improve access to care in communities across our country."
• MPT said in a statement on its website that Prospect has not paid it any rent since last summer, and that its "priority during the restructuring process is to protect MPT's investment in Prospect's California hospitals."

What we're watching: The next several months will not only decide the future of Prospect's non-California hospitals, but also whether this bankruptcy will have political repercussions the way Steward's did.

• The Senate Budget Committee released a report critical of private equity's role in the health care system just days before the filing, using Prospect and Leonard Green as poster children for what can go wrong.
• But the Trump administration is generally expected to be more friendly toward private equity and dealmaking than the Biden administration was, and for all of the attention Steward received, legislation aimed at more tightly policing private equity in health care went nowhere.