Private-Equity Ownership and Nursing Home Quality

by James A. Bacon

Several days ago, Carol J. Bova published data showing that 50 of the 101 Virginia nursing-home facilities rated as below average in the latest Medicare ratings belong to privately owned firms “When is the Department of Health going to enforce basic standards,” she asked in conclusion. “And when are our legislators going to appropriate enough for inspectors to do the job?”

In the comments, I cautioned about jumping to conclusions about equating for-profit nursing home chains with lower quality. In particular, I wondered if for-profit firms were more likely to acquire nursing homes funded by Medicaid, which chronically underpays its vendors.

Now comes a new study that suggests that Private Equity (PE) ownership of nursing homes is adverse to patient health. “Our estimates show that PE ownership increases the short-term mortality of Medicare patients by 10%, implying 20,150 lives lost due to PE ownership over our twelve-year sample period,” write Atul Gupta and the co-authors of “Does Private Equity Investment in Healthcare benefit Patients? Evidence from Nursing Homes.”

The lost lives are accompanied by declines in other measures of patient well-being, such as lower mobility, while taxpayer spending per patient episode increases by 11%, the authors write. Operational changes at the nursing homes that help explain these effects include declines in nursing staff and reduced compliance with standards.

Maybe Carol was on to something: Maybe Virginia nursing homes do need more inspections. And maybe fellow Bacon Rebel James C. Sherlock is right when he argues that the political clout of the nursing home industry is what blocks the state from carrying out those inspections.

The national study, published by the National Bureau of Economic Research, certainly gives credence to the idea that the private-equity model of nursing home ownership is not compatible with patient well being. The strength of Gupta’s findings suggests that the ownership issue does warrant closer examination in Virginia.

Credit:”Does Private Equity Investment in Healthcare benefit Patients? Evidence from Nursing Homes.”

However, what may be true nationally is not necessarily true locally. Conceivably, Virginia is an exception to the national trend. “Private Equity” ownership does not necessarily equate with “private” ownership. Private equity deals are financed with extensive debt, and they reward general partners for short-term profits. Therefore, it would be necessary to distinguish between different types of private ownership among Virginia nursing home companies before drawing strong conclusions.

PE investment has increased significantly in the U.S. healthcare system, from less than $5 billion in 2000 to more than $100 billion in 2018. PE-owned firms provide the staff for more than one-third of emergency rooms, own larger hospital and nursing-home chains, and are expanding ownership of physician practices, says the study.

This map, taken from the study, does not provide the kind of granular detail required for careful analysis, but it does suggest that there has been less PE activity in Virginia than in neighboring states.

Still, the authors’ analysis is consistent with the red flags raised by Bova and Sherlock in numerous Bacon’s Rebellion posts highlighting cutbacks to nursing staff and state underfunding of inspections. States the study:

We find negative effects on facility Five Star ratings, which are constructed by CMS to provide summary information on quality of care. We next consider nurse availability, which is the most important determinant of quality of care …. We find that PE ownership leads to a 3% decline in hours per patient-day supplied by the frontline nursing assistants who provide the vast majority of caregiving hours and perform crucial well-being services such as mobility assistance, personal interaction, and cleaning to minimize infection risk and ensure sanitary conditions. Overall staffing declines by 1.4%.

Gupta and his co-authors find it “puzzling” that nursing homes, which have low and regulated profit margins, make attractive targets for PE firms. Buyouts appear to have no effect on net income, which raises the questions of how the PE firms create value. The answer: financial engineering.

There are three types of expenditures that are particularly associated with PE profits and tax strategies: “monitoring fees” charged to portfolio companies, lease payments after real estate is sold to generate cash flows, and interest payments reflecting the importance of leverage in the PE business model. … We find that all three types of expenditures increase after buyouts, with interest
payments rising by over 300%. These results, along with the decline in nurse availability, suggest a systematic shift in operating costs away from patient care.

The last time the Joint Legislative Audit and Review Commission (JLARC) took a close look at Virginia’s nursing homes, I believe, was in 2000, when it concluded that Virginia’s Medicaid reimbursements were inconsistent with a high level of care. That still may be true today. After 20 years, it may be time for JLARC to take another look, and this time to expand the scope of its analysis to include ownership structure, staffing levels, and inspections.

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23 responses to “Private-Equity Ownership and Nursing Home Quality”

  1. LarrytheG Avatar

    I’d take the findings as likely true but I do ask because it looks like the complaints are essentially advocating for more tax dollars – either for inspectors or for higher reimbursement rates.

    Is there a solution that does not require more taxpayer money?

  2. LarrytheG Avatar

    This is one of those areas that touch on the idea of whether it is a personal responsibility or a government responsibility.

    We’ve argued about whether or not the Govt should require FICA taxes rather than let people decide how to invest their own money for retirement.

    We seem to have less disagreement about the need for Medicare.

    The government allows tax-free money into a long term care insurance but it’s just a few that do it.

    So, here’s a question: Should the government do the same thing with long term care finances that it did with Social security and Medicare, i.e. add a tax to FICA that pays into a fund for long term care?

    1. Nancy Naive Avatar
      Nancy Naive

      Ahh, they’ll call it another Nanny State proposal. I’ll say they have it exactly wrong. Not so much in outcome, but in the relative involved and the total outcome.

      What we have is more like a “Mommy and Daddy” State.

      Right now, Mommy is asking Daddy to spend $1.9T on food, clothing, medicine and school supplies, and Daddy is complaining because he’s going to have to explain why every night after work he has been at the DoD nudie bar shoving $1.7T into the F-35 g-string of a stripper.

  3. Nancy Naive Avatar
    Nancy Naive

    Hedge Funds…

  4. Nancy Naive Avatar
    Nancy Naive

    The one thing for which I am truly grateful was Dad’s brilliant decision to buy into a “resident owned” retirement facility that had all levels of living up to fully assisted living and a nursing home with a separate Alzheimer’s research unit with MDs and PhDs on site.

    Because it was “resident owned”, residents could “go anywhere” at any time. Needless to say the nursing home and the Alzheimer’s facility were 5-star. If there’s a chance you might be there someday, you take an interest in patient welfare.

    Mom was there for 25 years.

  5. LarrytheG Avatar

    There’s a bit of irony on this issue in that, it’s the Federal Govt that is trusted to develop information about nursing homes… rather than state inspectors.

    I’m not sure having more state inspectors would actually do anything if there is no real enforcement mechanism and/or the sanctions would result in closing some homes. At that point, it would then be up to the state to relocated the residents to other homes – which are not required to take them.

    This sounds like a rock and a hard place.

  6. Nancy Naive Avatar
    Nancy Naive

    “This business model wasn’t really “helping,” of course – and it wasn’t new. Fans of mob movies will recognize what’s known as the “bust-out,” in which a gangster takes over a restaurant or sporting goods store and then monetizes his investment by running up giant debts on the company’s credit line. (Think Paulie buying all those cases of Cutty Sark in Goodfellas.) When the note comes due, the mobster simply torches the restaurant and collects the insurance money.”

  7. SudleySpr Avatar

    From experience I offer this. Beware that “complaints” are no less when caring for parents at home. Families are not equipped to handle these situations well, disputes arise easily. So, even when parents cared for in a family members home, there will be trouble. If a family member wants to complain about service either at home with the family or in an institution, they will find something to complain about. If you are looking for trouble, you will find it anywhere. I believe institutions have more complaints simply because they have more residents. Sure there will be abuses but not all complaints are justified.

    1. CJBova Avatar

      It’s not complaints that reduce quality ratings; it’s citations for deficiencies found in investigating complaints or upon inspections.

  8. Nancy Naive Avatar
    Nancy Naive

    “Notably, the study found lower staffing on average at the more than 1,600 private equity-owned facilities researchers reviewed. Once a nursing home is acquired in a PE-financed buyout, the number of hours provided by frontline nursing assistants typically declined by 3%, while overall staffing slips by 1.4%, the study found.

    Patients in private equity-owned nursing homes are also more likely to be given antipsychotic medications, according to the study. The AARP and other groups advocating for the elderly have said these medications are overused at nursing homes and sometimes misused on older patients who are experiencing dementia and similar ailments as a form of “chemical restraint.” ”

    1. Nancy Naive Avatar
      Nancy Naive

      What Happens to a Nursing Home Chain When Private Equity Takes Over? A Longitudinal Case Study
      Aline Bos and Charlene Harrington

  9. When I was looking for a facility for my mother, what was true across price range was that it was a warehouse operation and regardless of cost the only real difference was the face they presented to the prospect. True, there were some that were horribly below average but as far as accommodation, food quality and staff care and activities it was pretty standard.

    I don’t fault them and don’t have a solution, just sayin’

  10. Fred Costello Avatar
    Fred Costello

    So 50 of the 101 were private. Does that mean that 51 of the 101 were government? Isn’t 51 greater than 50? Maybe the data should be recast as the percent of the facilities or the percent of the beds.

    1. CJBova Avatar

      No. I just looked at 5 groups of owners with multiple facilities all acquired at the same time that happened to add up to 50. I believe these are all private.

    2. CJBova Avatar

      No. I just looked at 5 groups of owners with multiple facilities all acquired at the same time that happened to add up to 50. I believe these are all private.

  11. Stephen Haner Avatar
    Stephen Haner

    Wow. just like when similar investment firms buy newspapers…..

    Indeed, David. We have to ask (not to go all Jonathan Swift) what are people buying when they move somebody into one of these places? Skilled nursing and rehab have the goal of releasing the patient/resident back to the world, but often they are there just Waiting for Godot. The whole thing is very sad and frankly not something I want when the time comes. My mother’s final six months were hard to watch. Despite the advertising, is extending life and giving it value really what people are paying for? If so, it will cost more. (That level of cynicism does not extend to failing to protect residents in a viral pandemic.)

  12. CJBova Avatar

    Larry, it’s not the funding. It’s taking profit at the expense of the patients/residents. One and two star ratings say there are problems. It’s not idle complaints. I just looked at the 50 companies I used as examples on Feb. 28 to see how many health citations Medicare has posted. Health citations are from the most recent standard health inspection and the last 12 months of complaint-related and infection control inapections .

    The U.S. average number of health citations is 8.1.
    In Virginia, the average is 12.5.

    Twelve had 6 to 13 citations.

    Fifteen had 14 to 19.
    Seventeen had 20 to 27 including three with records of abuse.

    Five had 30 to 39. One with record of abuse.

    One had 64 and a record of abuse.

    Nine were inspected in early 2020; three haven’t been inspected since 2018, and the rest were last inspected in 2019.

    1. LarrytheG Avatar

      Is there any distinction to percent of medicaid patients?

      In other words, are the ratings worse for the homes with larger numbers of medicaid patients?

  13. LarrytheG Avatar

    Amother study of interest:

    ” High Nursing Staff Turnover In Nursing Homes Offers Important Quality Information
    Ashvin Gandhi, Huizi Yu, and David C. Grabowski

    Nursing staff turnover has long been considered an important indicator of nursing home quality. However, turnover has never been reported on the Nursing Home Compare website, likely because of the lack of adequate data. On July 1, 2016, the Centers for Medicare and Medicaid Services began collecting auditable payroll-based daily staffing data for US nursing homes. We used 492 million nurse shifts from these data to calculate a novel turnover metric representing the percentage of hours of nursing staff care that turned over annually at each of 15,645 facilities. Mean and median annual turnover rates for total nursing staff were roughly 128 percent and 94 percent, respectively. Turnover rates were correlated with facility location, for-profit status, chain ownership, Medicaid patient census, and star ratings. Disseminating facilities’ nursing staff turnover rates on Nursing Home Compare could provide important quality information for policy makers, payers, and consumers, and it may incentivize efforts to reduce turnover.”

  14. Publius Avatar

    I worked 20 years at public company insurance brokerage that had to sell out due to bad management by a bad CEO, but it was a great payday.

    Years later I got to join another insurance brokerage roll up, but this time private equity backed. It flipped twice in 7 years. I can assure you – these guys care only about money. They love money. They dream about money. They would sell their Moms for money. But….they do have incredible access to money and experience taking these businesses to a quick payday… So a lack of insistence on enduring quality is not exactly surprising…

  15. Nancy Naive Avatar
    Nancy Naive

    I never thought that The Who’s anthem “My Generation” would stand the test of time, but the line “I hope I die before I grow old” is taking on an entirely different, but highly relevant, meaning.

  16. DJRippert Avatar

    Anytime private equity is involved in anything red flags should fly, klaxons should scream and robots should run around waving their banded arms yelling, “Warning, warning Will Robinson”.

    Private equity operators should be held criminally liable for negligence inside nursing homes they own. That’s the only things these self-proclaimed masters of the universe fear – windbreakers. you know, the kind of windbreakers that say FBI or POLICE or IRS on the back.

  17. LarrytheG Avatar

    The general idea that any company could buy a nursing home, then institute changes, that would cut costs, introduce efficiencies is not necessarily bad on the face of it.

    But the thing is, we DO rely on “government” to set the standards of care and we also rely on government to monitor the facilities for adherence to the standards and finally to enforce them.

    The problem comes if facilities fail the standards, the normal “big sick” of government to just shut them down does not work, at least the way it might for a restaurant serving bad food or a company selling a bad product.

    The government ends up with the duty to find a facility to transfer the residents to – and most facilities are privately run and don’t have to accept new residents especially if the reimbursement is lower than they charge.

    So… how should this work? If the “big stick” threat of shutting them down is not that easy?

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