by James C. Sherlock

I have written here for years about Virginia’s worst nursing homes and the inevitable abuse that comes from ritual understaffing as a business model. The activities of the nursing home operating companies are funded by Medicare and Medicaid and overseen by federal and state health authorities.

To make short a very long story that I have been telling for those same years, government oversight hasn’t proven to work.

Here in Virginia, the General Assembly passed new legislation this year after the Colonial Heights scandal in December.  

It took that body more than four decades to strengthen state oversight, both in increased VDH oversight authority and by increasing the staffing of its nursing home inspection program.

Secretary of Health and Human Resources Janet Kelly is leading an effort to make the Department of Health’s Office of Licensure and Certification — the inspectors of nursing homes — not only larger, but better. Her Departments of Health, Medical Assistance Services (Medicaid) and others are engaged in the effort to improve oversight. As a member of the Governor’s new Commission on the matter, I have seen their plan and been briefed on its execution to this point. Progress in both is extraordinary.

That is exceptionally good news.

Virginia has a number of excellent nursing facilities. Just not enough of them.

Because of COPN, lack of competition drives occupancy rates very high compared to national norms. Inexplicably, the worst performing and lowest staffed facilities in Virginia are the most crowded. That will be investigated.

Worse news is that the regulators — health care people — are swimming upstream against a strong current from a HUD program that insures mortgage loans for purchase, refinancing and rehabilitation of facilities to the buyers of our worst nursing homes. There are big fees and no loan risk to the lenders.  The only risk to the buyers in forfeiture of the property itself. Which they would not have bought without the program.

That one HUD program fully funds the massive and very high-speed penetration into the nation’s nursing home portfolio of the very people I have made a journalistic career investigating. They have come quickly to dominate the markets for nursing home acquisitions in the Mid-Atlantic states, the Midwest and recently as far west as Colorado and South Dakota.

The Section 232 program has been around in some form since 1959. It was created to ensure that there is an active market for nursing homes. So, the intentions were good. The road to hell and all that.

“Section 232” is a Federal Housing Administration (FHA) mortgage insurance program that insures HUD-approved lenders against financial loss from mortgage defaults. It is authorized by Section 232 of the National Housing Act.

Section 232 mortgage insurance is available on mortgages that finance residential healthcare facilities, such as, nursing homes, assisted living facilities and board and care facilities. Eligible mortgages can be for the purchase, refinance, new construction, or substantial rehabilitation – or for a combination of these. Section 232 may also be used to insure mortgages to install fire safety equipment in such properties.

Because of the obvious potential for abuse, HUD has an oversight team and publishes a handbook for the lenders in an attempt to establish guardrails. Very early it offers guidance on how to get a waiver from the requirements of the law. Not a good way to begin in my view.

It then defines an “Identity of Interest” as..

any relationship based on family ties or financial interests between or among two or more entities involved in a project-related transaction which reasonably gives rise to a presumption that the entities may not operate at arms-length.

HUD is against identity of interest. But the program itself absolutely ensures that the lenders and borrowers have identical interests.

• The lenders want the 3 1/2 % fees and the mortgage insurance that come with the program.
• The borrowers want the money and the below-market rate, fixed rate, non-recourse loans that come with it.

For those not steeped in banking terms, a non-recourse loan means that only the collateral, in this case the nursing home property itself, is at risk. The lenders have no recourse to the personal or other business assets of the borrowers. But why should they care? Upon failure to maintain the payments, the lenders are made whole and the FHA owns a nursing home.

Sweet for the lenders.

HUD’s Office of Healthcare Programs (OHP), and specifically the Office of Residential Care Facilities (ORCF) within OHP, has responsibility for administering the Section 232 mortgage insurance program.

When I examine the loan records of bad owners, I inevitably find Section 232 loans. They are often huge. Some exceed a billion dollars at a time. For those of you counting at home, a 3 1/2 percent fee for the lenders on a risk-free billion-dollar loan is $32.5 million.

Sweeter yet for the lenders.

But I also see the same buyers using the same lenders over and over again. Those are the customer fee generators for whom the lenders are charged with judging credit worthiness and managing the process

to ensure each FHA-Insured 232 mortgage is financially and operationally strong, that each property provides a safe, quality place of residence, and that the loan remains viable for the term of the mortgage.

The people at ORCF are terrible at the “safe, quality place of residence” part. The program repeatedly lends money to people who run the worst nursing home chains in America. The evidence is so easy to find that they cannot be even trying.

The borrowers, by the way, are not natural persons. They are not even the operating LLCs that run each nursing home for the owners and are inspected by the government. They are property LLCs set up by natural persons to collect the rent from the operating LLCs and absorb the risk of asset forfeiture. The same natural persons own both LLCs and negotiate the rent with themselves.

Sweet for the bad guys.

The worst owners try never to forfeit. Because for them:

• the profits on Medicare and Medicaid payments are too high when they pay skeleton staffs with 95% occupancy rates, collect rent from themselves, and distribute fees at every level to shell companies and company officials;
• the loan interest is below market, and
• the administrative penalties for abusing and killing people are too low.

They literally cannot buy nursing homes fast enough to sate their demand.

So, Section 232 is sweet for the lenders. Sweet for the borrowers.

Not sweet for federal and state healthcare regulators trying to get the bad guys under control. Even less so if you or a loved one are in a hell hole.