House Hearing Scrutinizes ‘Horror’ of Private Equity Investment in Nursing Homes

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By Alex Spanko, Skilled Nursing News, March 25, 2021

For the second time in as many weeks, federal lawmakers scrutinized private equity investment in nursing homes as the probes into the COVID-19 disaster in long-term care continue to intensify.

“How many grandmothers and grandfathers died because profits were prized above lives, with our taxpayer dollars funding this?” Rep. Bill Pascrell, who chairs the House Ways and Means Subcommittee on Oversight, said during his opening statement for the Thursday afternoon hearing.

Billed as an investigation into PE’s increasing role in the wider health care landscape, the hearing quickly coalesced around nursing home finance more generally — with a particular emphasis on the need for increased transparency around ownership and management.

“The fact is we do not know whether any one chain is making money or losing money,” Ernest Tosh, a trial attorney who specializes in nursing home abuse cases, testified. “We don’t know if an individual nursing home is highly profitable or on the verge of bankruptcy.”

Tosh accused nursing homes of hiding profits behind related-party entities, and asserted that more information about facilities’ balance sheets is necessary to determine whether current reimbursement rates are sufficient to support operations.

Terris King, a former Centers for Medicare & Medicaid Services (CMS) official and current CEO of King Enterprise Group, similarly called for an overhaul of the way the federal government collects and presents data about nursing facilities on its consumer-facing Care Compare tool.

“The website needs to be looked at in terms of its consistency and what information is provided in terms of ownership and management of nursing homes,” King said. “CMS should establish a prior approval process for changes in ownership. Cost reports should be amended to require each nursing home to provide — and its ownership — annual consolidated financial reports. And finally, a financial oversight [group] should be established at CMS.”

Pascrell specifically pointed to the wave of recent research into private equity investment in nursing homes in focusing his criticism.

“Research has shown nursing home buyouts are linked with higher patient-to-nurse ratios, lower quality care, declines in patient outcomes, weaker inspection performances, and increased mortality rates,” Pascrell said. “That’s a horror. Think about it: Our most vulnerable.”

The New Jersey Democrat also used the occasion to take aim at the federal five-star rating system for nursing homes, which has come under increasing scrutiny after a New York Times investigation uncovered alleged gaming of the system; current Department of Health and Human Services (HHS) secretary Xavier Becerra, in his previous role as attorney general of California, earlier this month sued Brookdale Senior Living (NYSE: BKD) over alleged data reporting fraud related to the five-star rating system.

Pascrell called the rating system “a fraud.”

“It does not look like that system will see the next day,” Pascrell said. “It should be finished, and I’m waiting to hear from everybody, after this hearing, what they’re going to do about it before we act — and we’re going to act, hopefully in a bipartisan way.”

The Republicans on the subcommittee largely used their statements and questions to criticize New York Gov. Andrew Cuomo for his handling of COVID-19 in nursing homes, an ongoing scandal that has seen the administration accused of deliberately under-reporting deaths in long-term care.

As lawmakers and advocates have sought to figure out what went so terribly wrong in nursing homes during COVID-19, private equity’s role in the space has been subject to an increasingly harsh glare.

Most recently, a February 2021 study published by the National Bureau of Economic Research blamed PE firms for more than 20,000 excess deaths in nursing homes over a 12-year span, citing a 10% higher death rate among residents of PE-owned buildings; that analysis also found significantly higher rates of antipsychotic drug use and spottier staffing coverage.

Sabrina Howell, an assistant professor of finance at the New York University Stern School of Business who coauthored that study, testified during the hearing, expressing support for more public reporting around investors of all types in all health care settings — not just nursing homes.

Howell’s research was the latest in a string of academic probes into PE and nursing homes.

In New Jersey, facilities with either whole or partial PE ownership had 10.2% higher COVID-19 death rates and 24.5% greater infection rates than the statewide average, a financial reform advocacy group determined in an August 2020 study; a nationwide analysis in October 2020 found no significant differences in COVID outcomes and staffing shortages between PE-owned facilities and those with other ownership types, though PE investment was associated with shortages of personal protective equipment (PPE).

In a preemptive statement released Wednesday night, American Health Care Association president and CEO Mark Parkinson pointed to the pandemic’s impact on 95% of nursing homes, regardless of ownership types, and called on Congress to increase investment in the long-term care landscape.

AHCA serves as the primary industry lobbying and trade group for for-profit nursing facilities; along with LeadingAge, which represents non-profit aging services providers, the organization has released a package of proposed legislation that would implement some stricter staffing requirements while also providing $4 billion in increased Medicaid funding for the sector.

“The small number of nursing homes that have turned to alternative revenue sources underscore the financial and staffing crisis that nursing homes are facing due to the fact that Medicaid does not cover the cost of care,” Parkinson said.

Parkinson repeated that sentiment in a statement released after the hearing, pegging the proportion of nursing homes under PE ownership at less than 10%; Howell noted that while her team was able to identify PE parents for about 9% of nursing facilities, that number was from 2015 and is likely to have increased since.

“There are many factors that affect the quality of care in nursing homes, and focusing solely on ownership structure will not achieve better outcomes for residents and staff,” Parkinson said in the Thursday statement.

Even the fiercest critics on the subcommittee did not directly attack the concept of the for-profit health care system more broadly.

“I agree with the free market if it’s truly free. Let the free market do its thing,” Pascrell said. “Private equity’s track record during the pandemic is not pretty.”

Rep. Tom Suozzi, a Democrat who represents Long Island, echoed that sentiment while also calling for increased transparency.

“I’m not against making money as long as you are taking care of your patients,” Suozzi said.

The House hearing came one week after Sen. Elizabeth Warren of Massachusetts vowed to launch an investigation into for-profit nursing homes and private equity investment in the sector at a separate hearing on the COVID-19 crisis in long-term care.

Warren, a Democrat, took particular aim at Genesis HealthCare and its former CEO, George Hager, who received a controversial $5.2 million bonus before leaving the company at the start of January.

Adelina Ramos, a certified nursing assistant (CNA) at a Genesis-operated facility in Rhode Island, had testified during the March 17 hearing about severe staff shortages during the pandemic.

“The next time there’s a pandemic, seniors shouldn’t be stuck in subpar institutions run by greedy CEOs and vulture firms in order to make a quick buck,” Warren said. “Congress needs to act now before tragedy strikes again.”

Warren earlier that week sent a letter to then-Genesis CEO Robert Fish asking for more information about the company’s plan to cease trading publicly on the New York Stock Exchange and accept a partial ownership stake from ReGen Healthcare, a private investment firm.

“The unseemly decision to reward Mr. Hager for his ‘vital and effective leadership’ deserves additional scrutiny given that, just last week, the company announced a major restructuring that includes the termination of dozens of leases (leading to questions about whether residents would be forced to move, or who would be responsible for their care); the sale of a large percentage of the company to private equity firm ReGen Healthcare, and the delisting of its Class A common stock from the New York Stock Exchange,” Warren wrote in the letter.

The Kennett Square, Pa.-based Genesis this Monday announced the replacement of Fish with “turnaround specialist” Harry Wilson.

Genesis had previously been under the ownership of private equity firms Formation Capital and JER Partners from 2007 to 2015, when the operator went public.

The senator’s zeal for investigating private equity’s role in nursing home care stretches back before the pandemic, when Warren — along with fellow Democratic Sen. Sherrod Brown of Ohio and Rep. Mark Pocan of Wisconsin — sent letters to several major private equity firms demanding more information about their nursing home holdings.

Criticism of private equity has even come from within the industry itself, with former Welltower Inc. (NYSE: WELL) CEO Tom DeRosa publicly blaming The Carlyle Group for nursing home operator HCR ManorCare’s struggles under its ownership.

Welltower — a Toledo, Ohio-based real estate investment trust (REIT) — in 2018 bought the real estate associated with the ManorCare chain in an 80-20 joint venture with non-profit health system ProMedica, which now operates the facilities under the ProMedica Senior Care brand.

“Anyone who knows the ManorCare real estate knows it’s really good-quality real estate in really good markets,” DeRosa said back in 2018. “It was just capital-starved because the skilled nursing industry had been taken private by private equity firms, and what does a private equity firm do? They over-lever businesses in order to [take] cash out of them. The REITs got left holding the bag here when reimbursements changed.”

That put DeRosa in agreement with NYU-Stern’s Howell, who in her Thursday testimony singled out the Carlyle-ManorCare deal as a particularly damaging example of what PE can do to nursing home quality.

“Our analysis indicates that in the context of nursing homes, it is clear that private equity buyouts are detrimental to patients and taxpayers,” Howell said.

Moving forward, PE firms may become choosier about the types of investments they make in the sector.

“That’s something that really needs to continue to be at the forefront: We generally believe that a cost-cutting strategy to create value is not a good idea,” Jonathan Slusher, head of senior living and health care at the Northwind Group, said during a virtual event in February. “Sure, you generate short-term cash flow, and you may be able to sell a building for more than you bought it for a year ago. But it’s just fundamentally not the way the space should be owned and operated.”

Slusher also observed that within the nursing home world, PE could have multiple definitions: the traditional investment giants commonly associated with the sector among lawmakers and the general public, and wealthy families and individuals who focus on owning and operating nursing homes.

“Those owner-operators have been the most active throughout COVID, and we expect them to continue to be, over the next year, the primary source of demand for driving good transactional volume,” Slusher said. “Private equity that writes a big check, that’s a little more institutional, we expect to follow as the owner-operators prove that doing a deal now, coming out of COVID and the recovery of 2021-2022, wind up being a very unique opportunity to acquire good assets for long-term holders.”

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