The United States Bankruptcy Court for the Northern District of Texas has approved a $3.9 million key employee retention plan for Prospect Medical Holdings, Inc., which operates 16 safety net hospitals across four states. The court's May 1 order authorizes retention payments for 73 non-executive employees deemed critical to the company's restructuring, while a separate $3.5 million incentive plan for six executives remains under consideration.
Prospect Medical Holdings and its affiliates, which filed for Chapter 11 protection on January 11, 2025, are navigating a complex restructuring that involves closing several Pennsylvania hospitals while marketing their California and Connecticut facilities for sale. The company's hospitals play what it described as a "vital role" in their communities, providing healthcare regardless of patients' insurance status or ability to pay.
"The Debtors' 16 hospitals play a vital role in their communities' health and well-being and provide life-saving, critical care to their thousands of patients," Prospect stated in its motion filed April 22. "In California, Connecticut, Rhode Island, and Pennsylvania, the Debtors' hospitals are safety net hospitals, meaning they provide healthcare for individuals regardless of their insurance status or ability to pay."
According to court filings, the approved retention plan (KERP) targets employees who are essential to maintaining patient care during hospital closures and sales processes. The 73 employees include staff supporting the wind-down of Pennsylvania facilities, employees devoted to the sales process, and personnel who will provide transition services following any sales.
"Given their direct contributions to the execution of an orderly wind down of the Pennsylvania Hospitals and the success of the CA/CT Facilities, the KERP Participants are critical to the Debtors' closure, sale(s), and/or related transition services and wind-down efforts," the company explained in court documents.
The retention payments range from 0.64% to 3.33% of employees' base salaries per month retained, with payments scheduled at different times depending on employees' roles. For example, employees supporting the Pennsylvania hospitals' closure will be paid upon completion of that process, while others will receive payments upon consummation of facility sales or following transition services.
In a separate motion filed April 29, the company has requested court approval for a key employee incentive plan (KEIP) for six executives. This plan would provide incentive payments based on the gross consideration received from the sale of California and Connecticut facilities, with payment thresholds starting at $365 million.
The incentive plan establishes graduated payment levels: executives would receive 75% of target bonuses if sales reach $365 million, 100% at $515 million, and 125% at $665 million, with additional bonuses for exceeding the top threshold.
One noteworthy aspect of both compensation plans is their integration with a separate transaction involving the company's non-bankrupt physician services entities ("PhysicianCo"). Nine KERP participants and all six KEIP participants are already entitled to receive payments from the pending sale of PhysicianCo to Astrana Health, Inc. These payments, previously approved by Prospect's board in April 2024, will offset the bankruptcy-related compensation on a dollar-for-dollar basis.
As a result, the actual cost to Prospect's bankruptcy estate would be significantly reduced, falling to approximately $3.2 million for the retention plan and potentially just $150,000 for the executive incentive plan.
Alvarez & Marsal, serving as restructuring advisor to Prospect, benchmarked both plans against similar programs at comparable distressed companies, finding them to be "well within the range of market."
The Court has scheduled a June 10 hearing to consider the executive incentive plan. The case is proceeding before Chief U.S. Bankruptcy Judge Stacey G.C. Jernigan.
Sidley Austin LLP is representing the debtors, with Thomas R. Califano, Rakhee V. Patel, William E. Curtin, Patrick Venter, and Anne G. Wallice appearing as counsel.
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