These Administrative Actions Would Improve Nursing Home Ownership and Financial Transparency in the Post COVID-19 Period

This piece was originally published in Health Affairs Blog and is reprinted with permission. Anne Montgomery, director of Altarum's Center for Eldercare Improvement, is a co-author along with Charlene Harrington, Terris King, David Grabowski, and Michael Wasserman.

The COVID-19 pandemic has exposed a failure to protect nursing home residents and staff. As of January 17, 2021, at least 570,626 residents and 490,635 staff members were infected and 112,383 residents and 1,385 staff had died. President Joe Biden has many options for addressing these failures, but one important proposal he has put forth is to require audits of nursing home cost reports and ownership data.

Prior to the pandemic, persistent problems with nursing home care had been documented for years, often because of too few and inadequately trained frontline staff. The harm to frail older adults can be quite severe—abuse and sexual assault, infections, overuse of psychotropic medications, pressure ulcers, falls with injuries, weight loss, dehydration, pain, and medication errors. Infection control violations have also been found repeatedly in a majority of nursing homes.

Quality issues persist as policy makers are unable to oversee how nursing homes spend Medicare and Medicaid payments. The growth in complex nursing-home ownership structures has limited financial transparency by allowing nursing homes to hide public payments and stint on direct resident care. We recommend specific policy changes to make ownership, management, and financing more transparent and accountable to improve US nursing home care.

Growth in Complex Nursing-Home Ownership Arrangements

About 70 percent of nursing homes are operated by for-profit corporations, 24 percent are not-for-profit, and 7 percent are government-owned, while 58 percent are operated by corporate chains. An increase in investor-owned regional and national chains has led to complex organizational structures. Private equity firms own about 11 percent of nursing facilities nationwide as investments have increased by $5.3 billion since 2015, compared to $1 billion between 2010 and 2014.

Many nursing homes separated their operating companies from their asset and property companies in an effort to shield parent companies from liability and reduce regulatory oversight. Real estate investment companies (REITs) have dramatically expanded their ownership since the Housing and Economic Recovery Act of 2008 allowed REITs to buy health care facilities. These companies lease their facilities and property to nursing home operating companies at sometimes exorbitant rents.

Corporations Hide Profits In Related-Party Transactions

By contracting with related-party individuals and organizations (which have the same owners) for services that include management services, nursing and therapy services, and lease agreements and loans, companies are able to legally pull money out of the nursing homes as expenses and hide the profits through these third-party contractors. As many as half of all nursing homes use separate management companies that are owned by the same owner or separate owners.

Nearly three-quarters of US nursing homes had related-party business transactions accounting for $11 billion of nursing home spending in 2015 according to Medicare cost reports. Nursing homes that did business with related-party companies employed fewer nurses, were more likely to have immediate jeopardy deficiencies, higher fines, and substantiated complaints compared with independent homes. For-profit nursing homes use related corporations more frequently than nonprofits. A recent Washington Post article sheds additional light on how related-party vendors and real estate owners siphon money away from care.

Government Efforts to Increase Transparency

Fourteen years ago, an investigative article published in the New York Times described in detail the impact of private equity and complex corporate nursing home structures, prompting Senator Herbert Kohl (D-WI) to introduce legislation with Senator Charles Grassley (R-IA) requiring investors to reveal their identities by reporting to the Centers for Medicare and Medicaid Services (CMS). Ultimately, this legislation was incorporated into the Affordable Care Act (ACA) in Section 6101. CMS later expanded reporting requirements for Medicare-reimbursed skilled nursing facilities (SNFs) to report both direct and indirect ownership down to 5 percent to Medicare’s Provider Enrollment, Chain, and Ownership System (PECOS) database. Section 6104 of the ACA was implemented to modify the Medicare cost reports for SNFs to reflect broad categories of spending in direct care, indirect care, administrative, and capital expenditures.

Failure to Ensure Ownership Disclosure and Accurate Data

CMS, however, has not established a mechanism to audit the accuracy and completeness of the PECOS ownership reporting system and has not enforced its requirements to fully and accurately report the names of all the parent companies of the licensee and their related owners and corporations. This allows each facility to largely hide its chain ownership arrangements by individual owners or groups of owners as well as by parent companies. Although nursing homes are required to report any Medicare and Medicaid payments to related-party organizations on their Medicare cost reports, this cannot be enforced if accurate and complete ownership data are not regularly analyzed and made available.

Nursing homes with the worst quality of care are more frequently bought and sold than high-quality nursing homes. The federal government generally fails to review ownership changes. Skyline Healthcare, a nursing home company that collapsed in 2018, was allowed to purchase and operate more than 100 facilities in 11 states with more than 7,000 residents. Residents were neglected, and some states had to appoint receivers to take over nursing homes and close other facilities.

The federal government doesn’t have specific quality and financial standards for approving changes in ownership or management such as meeting minimum staffing standards; meeting quality, life safety, and emergency regulations; preventing abuse and neglect of any residents; complying with financial and ownership reporting requirements; having liability and other insurance coverage; and having adequate financial reserves. In some cases, states have not made any decisions about changes in nursing-home ownership and management for years and have de facto allowed ownership and management changes that do not meet a reasonable standard to ensure resident safety and quality of care. By not establishing and enforcing ownership and management screening requirements, CMS also allows unsuitable persons or companies to acquire and operate facilities.

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Failure To Oversee Chain Operations

CMS has focused its regulatory oversight and enforcement on individual nursing facilities, even though the majority are part of a chain and under the control of a parent company or companies. Experts have recommended that CMS improve oversight and enforcement on nursing home chains with poor quality. Moreover, CMS does not collect and report information, or examine the quality of care in nursing home chains on its “Care Compare” website.

The Department of Health and Human Services (HHS) Office of Inspector General uses corporate integrity agreements to address fraud and worthless services provided by nursing home chains. While these models focus on the parent corporation and generally result in settlements and oversight, owners are rarely removed from participating in Medicare and Medicaid.

Nursing Home Profits Are Uncertain

According to the Medicare Payment Advisory Commission, the profit margin attributed to nursing home stays covered by Medicare in 2018 was about 10.3 percent. The average Medicare profit margin has been above 10 percent for more than 19 years. In contrast, the margins attributed to all payers have ranged from 0.6 percent to 3.8 percent. Because nursing homes can hide profits through their own related-party companies, however, it is not possible to know what the actual margins are without improved cost reporting and accountability.

Inadequate Financial Reporting and Accountability

The ACA required detailed Medicare nursing home cost reports, including expenditures for staff wages and benefits and separated costs for direct and indirect care, capital costs, and administrative costs that include owners’ profits. But Medicare cost report data are seldom audited, and penalties are not issued for failure to report. The Medicare prospective payment system allocates funds for expected costs but does not impose audit requirements to ensure that funds are spent as allocated. The Government Accountability Office recommended that CMS take steps to ensure that cost data are reliable and made readily accessible to public stakeholders.

Recommendations

HHS should immediately create an interagency (CMS, HHS OIG, Department of Justice (DOJ), and the Centers for Disease Control and Prevention) Early Detection Task Force to identify and monitor nursing homes that need more focused attention. The task force would analyze PECOS data in addition to information about staffing and medical director administrative time from the Payroll-Based Journal (PBJ) database, data from the survey and certification inspection program, and spending patterns from Medicare cost reports. Robust monitoring would provide a new lens on how ownership and financial investment in the nursing home sector impact the quality of care and the stability of individual facilities and chains.

The task force would coordinate oversight and monitoring across the federal government and with states, and report actionable recommendations—for example, whether “strike teams” may be needed if facilities are not able to assure resident safety, for example, during emergencies.

CMS should augment PECOS reporting to include all parent, management, and property companies, and other related party entities and ensure enforcement of Section 6101 of the ACA, including that companies provide a complete organizational chart. Failure to provide such complete and accurate data should result in specified financial penalties until the information is provided.

CMS’s Care Compare website should present information that is searchable not only by individual facilities but also by chain and common ownership, and an annual compendium should be published on the quality of care in nursing home chains.

CMS should promulgate federal regulations specifying minimum criteria for the purchase (or change of ownership) or management of any nursing home. The criteria should prevent individual or corporate owners from purchasing, operating, or managing additional facilities if they have a history of owning or operating other facilities with chronically low staffing and poor-quality care in any state. Companies with corporate settlements for fraud or for “worthless services” should be barred from purchasing new nursing homes for five years.

CMS should establish a prior approval process for changes in ownership or management. To implement these requirements, CMS should establish a centralized application unit for ownership and management evaluations, with processes delineated to work with state agencies, state attorneys general, and the DOJ. Finally, CMS should establish minimum per-day penalties for any owner or operator who has not received prior approval for a licensee or a change of ownership, including an automatic denial of payments.

Cost report requirements should be amended to require each nursing home to provide annual consolidated financial reports that include data from operating entities (license holders) and all organizations and entities related by common ownership or control. The reports should provide flow charts of all related party entities including home offices, management organizations, staffing, therapy, supply, pharmaceutical, consulting, insurance, banking, investment entities, parent companies, holding companies, and sister organizations. Management companies and property companies should also be required to provide a full financial report annually. The cost reports should be prepared by a certified public accounting firm.

Finally, a combined financial and oversight system should be established by CMS to conduct annual joint Medicare and Medicaid audits. It should include home office and related-party payer audits, with penalties levied for inaccurate cost data. As part of the audit oversight, CMS should be given full access to Internal Revenue Service filings of entities involved in the nursing home operation.