The Corporatization of Nursing Homes

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By Maureen Tkacik, The American Prospect, October 20 2020

A tragic history of how we’ve treated elderly citizens, for profit

Maureen Dittmar of Rochester, New Hampshire, was sifting through junk mail one Saturday in early August when she found an envelope obviously sent by a human being. It began: “The content of this letter may be hard to hear … But you deserve to know the truth.” The anonymous author was a staffer at her mother’s nursing home.

Dittmar’s rush of cortisol was familiar. Every day for months, the virus had engulfed another crop of facilities. Residents are elderly, frail, and housed in close quarters; they are sitting ducks for a pandemic. By mid-September, the nationwide death toll from long-term care facilities had reached more than 77,000 residents and staff, 40 percent of the country’s total. For some reason, New Hampshire had only lost a relatively small number, but Dittmar knew better than to believe everything she was told, or assume they were out of the woods.

There wasn’t an outbreak, though; the letter was about staffing. Genesis HealthCare, the 357-facility nursing home chain that ran the Colonial Hill Center and by late May had already seen about 1,500 of its residents die, had slashed payroll so drastically that on many shifts, the primary unit had one nursing assistant responsible for 39 patients. Supervisors helped out on the floor whenever they could, but the last nursing manager who had gone to bat for them had been fired.

New Hampshire had been lucky to avoid the worst of COVID-19, but the minimum staffing requirements it imposed on nursing homes were the most lenient in the Northeast—and now their residents were paying the price. “It has always been a known rule in any health care facility to NEVER mention to family or residents that we are having staffing issues,” the author warned. “We feel that the current restrictions on in-house visitations from the families is allowing a veil of protection for corporate and management. Families are unable to see the full affects [sic] on their loved ones.”

Roughly 70 percent of the nation’s 15,400 nursing homes are for-profit, and the gross understaffing on display at Colonial Hill is the flip side of extreme profiteering. Hundreds of thousands of nursing home residents survived the bloodbath of 2020, only to spend the summer, no doubt, wishing the virus would come back for them. State health departments suspended Medicare inspections during the pandemic; it has been 18 months since Colonial Hill saw one. So management is no longer even trying to avoid the most conspicuous signs of neglect: filthy clothing, odd facial hair, urine on the floor and in the air.

In many hard-hit homes, dead friends are being replaced with psychiatric referrals from psych wards and homeless shelters; in more selective ones, dementia sufferers are being ejected into psychiatric hospitals. At a facility in Pennsylvania with one certified nursing assistant for every 22 residents, eight assistants teamed up to tell the evening news their patients were going months without a bath. The average resident in one facility in suburban Illinois lost 3.7 pounds between February and April alone, with nearly a quarter losing more than 5 percent of their body weight. The evening news in Minneapolis in late September tells us of a bird-watcher in his eighties with Lewy body dementia whose daughter takes him home after spying him through a window, disheveled and confused and so bottomlessly sad. He has bruises everywhere, an untreated infection has turned his genitalia bright red; he dies quickly.

Amplifying this neglect are the dozens of state laws passed hastily in the spring, granting the entire health care industry immunity from legal liability. “Dehydration, malnutrition, falling, bedsores—they’re saying, ‘Look, we’re not liable for any of that right now because of COVID,’” says Steven Levin, an Illinois trial lawyer who has spent his career suing nursing homes and is working on more than 100 wrongful-death suits right now. These laws comprise the single coherent national policy response to the nursing home bloodbath of spring 2020.

In the absence of an accessible long-term care system for all families, older Americans are callously warehoused in these institutions, which in the crisis have descended into death traps. But for decades before the pandemic, for-profit nursing homes have been robbing seniors of their dignity and their money. And where you find extraction of value and indifference toward horrors inflicted on human beings, you inevitably find a financier’s spreadsheet.

THE AMERICAN NURSING home industry is a hellscape whose history is generously paved with bad intentions. I began my research under the assumption that senior care facilities were much like other private equity–stripped health care institutions: bought up and saddled with debt and forced to cut costs wherever possible, leading to unconscionable outcomes for workers and residents. I assumed financial firms perverted a formerly well-intentioned system for providing vital care. The truth is almost the inverse. The private equity guys learned a lot of their tricks from the original nursing home predators. Most good people were driven out of the business generations ago, and the ones who have hung on have been mostly punished for refusing to play the game.

Roughly 70 percent of the nation’s 15,400 nursing homes are for-profit, and gross understaffing is the flip side of extreme profiteering.

“Bad nursing homes seem to be contagious,” wrote the pre-eminent nursing home muckraker Mary Adelaide Mendelson, in her 1974 exposé Tender Loving Greed: How the Incredibly Lucrative Nursing Home “Industry” Is Exploiting America’s Old People and Defrauding Us All. She traced the origins of this devolution to about 1950, when an amendment to the Social Security Act allowed nursing homes to collect benefit checks and stipends from the Veterans Administration directly, on behalf of their residents, generating a small windfall for operators shrewd enough to appoint themselves middlemen between senile geriatrics and their assets. Twenty years later, of the more than 200 facilities Mendelson had personally toured, “I could honestly call only one a good home.”

As Mendelson explains, the entire nursing home system had by the late 1960s come under the near-total control of a predator class known in some corners as the Syndicate, a sprawling and incomprehensible collection of nursing home owners, front men, and ethically deficient mortgage bankers, doctors, and public officials made famous by an Orthodox Jewish rabbi who was its New York boss, Bernard Bergman. Dubbed the “meanest man in New York” by the Village Voice, Bergman by 1975 had reputedly built a nursing home fortune worth $100 million (a lot of money in those days), according to the memoir of one of the endless string of attorneys he retained to defend it, the then-youthful Alan Dershowitz.

We think now of the inception of Medicaid and Medicare as a glorious milestone to recognizing health care as a human right. The Syndicate correctly saw a massive fire hydrant of cash with the capacity to make them all rich, though its leaders got a bit too greedy in the early years. Social Security Administration economists had forecast that Medicaid would spend $25 million to $50 million on nursing home care in its first year of coverage; when the reality turned out to be something more like $300 million, auditors began sniffing around.

Much of what we know about the Syndicate emerged in a probe into a gruesome nursing home on 106th Street near Central Park called the Towers, which under the ownership of a mysterious figure named Anne Weiss—who turned out to be Bernard Bergman’s wife (it took the health department, by its own admission, “quite awhile [sic] to figure out” this little nugget)—had billed Medicaid for 926 days of care for eight patients who had died or been discharged from the home. Inside the facility were flies, urine stench, and dirty beds with no sheets.

The ownership of the Towers and many other nursing homes had gone to dizzying lengths to conceal itself. Wherever Mendelson went she heard rumors, often from government officials, of Mafia connections—who else would be so diabolical? But her digging yielded evidence of a specialized nursing home mafia, a linked set of dons that attached itself parasitically to our most honorable social programs.

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Two of the era’s most prominent bosses were Bergman and a Rolls Royce–driving former duffel bag manufacturer named Joseph Kosow, known in New England as “King of the Nursing Homes.” Like Bergman, Kosow had his own endless network of associates, straw buyers, shadowy front groups, and highly placed regulatory and law enforcement officials. Kosow had some troubles with the feds, but only Bergman ever served any time, and when both died in 1984 extremely rich, protégés brought their business model into the modern era.

Abe Gosman was a longtime associate of Joe Kosow’s, probably from their days in the Boston shoe business. He was a quintessential Bonfire of the Vanities mogul, with a 143-foot yacht named Octopussy, an oceanfront palace in Palm Beach bought from Les Wexner that he would later sell to Donald Trump, and assets worth nearly a half billion dollars, following a string of deals in which he repeatedly sold, bought, and repackaged the same group of nursing homes and psychiatric facilities. Bernard Bergman’s lower-key protégés Moshael and Daniel Straus, the sons of his old Connecticut deputy Joseph Straus, launched a nursing home chain called Multicare in 1984 that they sold for more than a billion dollars cash in 1997 to Genesis Health Ventures, another of the high-flying chains founded in the ’80s during the Reagan era of deregulation. Daniel Straus’s second act, the nursing home chain CareOne, suffered by far the worst outbreaks in their home state of New Jersey, but made lots of money doing it, as a ProPublica investigation explored.

Many profitable industries are incestuous and dominated by the sons and grandsons of tycoons. It’s just harder to track in nursing homes, whose trade publications fill my in-box each morning with incessant announcements of the buying and selling, recapitalizing and reorganizing of assets. The New Jersey consultancy commissioned to review the state’s devastating nursing home death toll found that some changed hands “multiple times in a single week.” When a registered nurse named Angela Ruckh decided to sue her old nursing home for defrauding the government, she ended up suing seven different companies. A defense attorney who tried to sue the same chain for wrongful death discovered it was spread out over 15 different entities. But all those entities originated with Formation Capital, a private equity giant founded by Arnold Whitman and his shadowy partner, Steve E. Fishman. “You could spend forever trying to untangle this stuff,” said Ernie Tosh, an Austin-based attorney who runs a side business analyzing nursing home data. “The nursing home industry as a whole should not be looked at through the lens of normal corporate America. If you think of it as organized crime it will make a lot more sense.”

WHITMAN, A FORMER college basketball player from just outside Boston who had dabbled in advertising and worked at a brokerage, entered the nursing home scene in 1984 when he was 31. Abe Gosman was bringing Joe Kosow’s business model into the junk bond era, and he saw in Whitman a natural networker who could bring in deals. “I was one of those guys who wanted to be in something glamorous—advertising, entertainment, something along those lines,” Whitman later said of his younger self. But then he went to meet Abe Gosman in the basement of one of his “totally depressing” nursing homes. “I remember being overcome by the indignity,” he said. But “I realized that, unglamorous though the nursing home industry is, it was where a good future might indeed be had.”

A fixture of Syndicate nursing homes was an early version of what is now called the OpCo/PropCo model, wherein the nursing home’s operating company (OpCo) was separated from the real estate property company (PropCo) in a series of complicated transactions that usually left the OpCo paying massive interest payments, rental payments, or both. The setup lowered taxes for both the OpCo, which appeared to be losing money, and the PropCo, which used the structure to trade the real estate back and forth between entities, collecting profits each time that were taxed as capital gains. OpCo/PropCo, also known as sale-leaseback, is today a common feature used by private equity firms to suck assets out of its portfolio companies, and keep them out of the hands of vendors, employees, and plaintiffs’ attorneys in the (likely) case that the OpCo is forced to file for bankruptcy.

Mendelson’s digging yielded evidence of a specialized nursing home mafia, a linked set of dons that attached itself parasitically to our most honorable social programs.

Gosman was one of the first nursing home moguls to establish his PropCo as a publicly traded real estate investment trust (REIT), which didn’t have to pay any taxes so long as it paid out most of its profits as dividends to investors. Gosman dispatched Whitman to find other nursing home chains interested in sale-leasebacks through the REIT, and he brought in hundreds of millions of dollars in deals before striking out on his own in 1992.

By the late 1990s, most nursing home OpCos were going bankrupt, done in by a destructive feedback loop of debt, austerity, and illegality. Congress had cut Medicaid reimbursement rates in many states, which caused nursing homes to slash labor and investment in their facilities. A report commissioned by former Rep. Henry Waxman (D-CA) revealed that reports of serious elder abuse had more than doubled between 1996 and 2000, by which point they had implicated nearly one-third of the nation’s nursing homes. Litigation insurance premiums had surged as a result, especially in Florida, where lawsuit and legal costs for nursing homes had risen tenfold between 1990 and 1998.

Whitman saw this cycle of despair as a window of opportunity. Along with Fishman and the owners of a nursing home chain near his office in Atlanta, his company Formation devised a strategy of buying up distressed homes, with a focus on Florida, outsourcing operations to contractors and letting standards fall even further. He paid an unheard-of $27,000 a bed, virtually all of it debt, for a portfolio of 54 facilities previously owned by Beverly Enterprises. He kept going back to the strategy, buying unwanted, mostly Floridian properties for rock-bottom valuations from Genesis, Mariner Health Care, Laurel Health Care, and others.

Most states have minimum staffing requirements for nursing homes, though they’re usually far lower than experts say they should be. But the new chain, which would come to be called Consulate Health Care, had no compunction about scheduling well below Florida’s minimums. A 2018 presentation for a Formation deal with another private equity firm called Allegiant gives a sense of how these policies are pitched to investors. The new consortium promised to generate 12 percent annual returns by ending the “mismanagement and spiraling costs” of its “infamous” previous operator, vowing to chop annual payroll $16 million a year across 18 homes.

Formation set a model mimicked in the 190 private equity deals in the nursing home industry since 2015, a $5.3 billion bonanza. The script, written by Arnold Whitman, is familiar: facilities saddled with debt, short-staffed and underpaid workers, residents left to rot, a lack of preparedness that looms large in a pandemic. Much of the tumult seen today is a by-product of the slash-and-burn strategy practiced by Formation and its imitators.

This year, thousands of infected humans have been gratuitously transferred in and out of different nursing homes, depending upon where they would be the most profitable. More than 6,400 residents found themselves evicted to homeless shelters and other facilities. In New York, 4,500 patients infected with coronavirus were sent back to nursing homes, where they spread the disease. Others were dumped into ambulances to die in hospital parking lots, or stuffed into a closet for the police to find, for reasons unclear but possibly having to do with life insurance policies purchased in their names. Hundreds of operators seized $1,200 CARES Act stimulus checks of their patients. After the Federal Trade Commission banned the practice, some threatened to evict residents who didn’t “voluntarily” hand theirs over. Dozens more residents participated in massive amateur hydroxychloroquine experiments. Nurses were fired for wearing masks, calling out sick, or speaking to the media about how direly they needed PPE and extra help. Nursing assistants, whose pay is so abysmally low that they are more likely to work three jobs than one, shared microbes with dozens of other homes as they ferried from morning job to afternoon job to overnight job in cramped shuttle buses and Uber pools. An 88-year-old advanced dementia patient, found wandering the highways after his nursing home evicted him to make way for COVID patients, ended up spending his 89th birthday in jail after he stabbed the nephew who had taken him in with a kitchen knife. A nursing home resident in Brooklyn who died of COVID-19 was buried in a Catholic cemetery and billed $15,000 for makeup, limousine service, and $200 in rosary beads before anyone at the home informed her Jewish family—which had long before informed the facility of her already-purchased family burial plot in a Jewish cemetery—that she had died. A nursing home watchdog and attorney told me about nursing home bosses in Connecticut emptying one of the facility’s supply closets for PPE to sell on the black market, and says that when the street value of N95 masks peaked in April, multiple investors approached her to draw up documents enabling them to discreetly sell off their inventories.

These borderline or sometimes flat-out criminal activities, which became front-page news during the pandemic but were a feature of the industry for years, are born of a frantic desire to feed interest and rent payments to legal loan sharks and their investors. The typical COVID-19 superspreader home was afflicted by the same problems that abuse and kill residents in ordinary times: minimal supply budgets, threadbare staffing, and “zero infectious disease avoidance protocols,” which regularly wipe out dementia wards during flu season. When critical senior care is given over to the free market, their well-being is subordinated to the balance sheet of people like Arnold Whitman. And the would-be regulatory guardians of the elderly, housed mostly in the Centers for Medicare and Medicaid Services and focused on other matters, are at best unaware of the abuse, and at worst complicit by their negligence.

THERE WERE A FEW important exceptions to the radical austerity imposed over Formation’s Florida homes, of course. The budget for incentivizing Medicare fraud, for example, expanded considerably. In a whistleblower suit filed by a consulting nurse who went to work coding Medicare claims at two Formation homes in 2011, spreadsheets defaulted to the highest possible “ultra” level of care, even though no one got anything approaching that. The whistleblower’s bosses schemed daily to rehire the drug-addict predecessor who’d been escorted from the facility in handcuffs during his third week on the job for stealing thousands of painkillers, because nurses like him understood “how to boost the bottom line.” Bosses gave cash bonuses to nurses for bringing their average reimbursement levels up, while patients’ open wounds went undressed for days at a time, a patient’s leg brace went missing for a month, and one resident subsisted on a liquid diet for a full year because a nurse couldn’t be bothered to retrieve his dentures from a dresser drawer.

In a particularly brutal scene, a 40-something Medicaid patient immobilized from a violent mugging begged an administrator to see a physical therapist as someone at the hospital had told him he would. After his repeatedly being told there’s “no payor” for physical treatment because he’s on Medicaid, the administrator said: “You will never walk again.” The patient died of a painkiller overdose a few years later.

Formation also spared no expense, predictably, on political contributions. Between the dozens of Consulate Health Care facilities it now controls, Formation has given close to a million dollars to elected officials. Two months after former Florida Gov. Rick Scott signed into law a 2014 bill granting immunity from liability to “passive” investors in nursing homes, he received the beginnings of what would be $240,000 in contributions. Consulate and its related entities also spent between $260,000 and $540,000 lobbying in favor of the bill. The following year, Formation helped a near-identical bill pass in Georgia. This isn’t anything new; nursing home tycoons have been investing in high-placed friends since Bernard Bergman cultivated New York Gov. Nelson Rockefeller and Joe Kosow bought off the Massachusetts health department. In May, Politico called nursing homes “the lobbying world’s quiet powerhouses.”

Formation homes also got creative with liability insurance, buying a new product for the Consulate homes called an “eroding policy,” allowing the company to deduct its own legal fees from its ceiling. This enabled the homes to tell plaintiffs a few months into litigation that the money was all gone. “A lot of lawyers won’t even take a case when they learn there’s an eroding policy on the other side,” says Tom Edwards, a Jacksonville trial lawyer who has won numerous out-of-court settlements from Consulate.

In 2007, The New York Times published an investigation into the efforts of a few mourning family members to sue a Formation property where 15 residents had died over the course of three years. “Lawyers were suing nursing homes because they knew the companies were worth billions of dollars, so we made the companies smaller and poorer, and the lawsuits have diminished,” Whitman matter-of-factly told the newspaper.

The chain has since won some unlikely allies in its bid for tort reform. In June, after a judge reinstated $255 million of the $350 million a jury had awarded Ruckh in her whistleblower case against Consulate, representatives of both the Center for Medicare Advocacy and the nursing assistant union expressed concern that the judgment would cause the chain’s standards to fall even further. That wouldn’t be a long fall: In a survey of the 54 worst nursing homes in Florida conducted by the Naples News in 2018, 26 were run by Consulate, and 55 of its 77 statewide facilities were in danger of losing their licenses.

When things grow untenable, Whitman trades himself out of trouble. Formation sold the underlying real estate of the Consulate homes to the now-imploded General Electric Capital in 2006 for $1.4 billion. The sale of the real estate netted more than twice what Formation had paid for the homes, and nearly ten times what it had invested in cash, freeing Whitman and company to set about replicating their successes, and our health care system’s failures, hundreds more times. By 2017, Formation had acquired—at minimum, because it’s not easy to track—an additional 60,000 beds in 590 facilities in the United States, along with rehab hospitals in four states, a mobile diagnostics company called Trident, and 275 nursing homes in the United Kingdom, some of which endured their own vicious COVID-19 outbreaks in February.

Between the roughly 150 Consulate Health Care facilities it now controls, Formation has given close to a million dollars to elected officials.

Genesis HealthCare was the biggest prize. Formation took it private for $1.7 billion in 2007, sold its real estate to a REIT for $2.4 billion in 2011, spent an extra $275 million buying the remains of Gosman’s Mediplex, then in 2014 merged with another nursing home chain in California in a “backdoor” IPO. Having financed all the deals with debt, and having used more than $700 million of the proceeds to pay Formation a dividend, “Genesis went public with 531 homes, virtually no real estate and $17.6 billion in long-term financing obligations,” on which it was paying interest rates as high as 22.2 percent. The company was glaringly insolvent, and it had sold most things of value it had owned. So it did the only thing it could: cut staff.

Boston Globe analysis of the deal’s aftermath reported that nearly half of the homes under Genesis management had seen their Medicare star ratings downgraded since 2010. These ratings, designed to give families insight into the quality of nursing facilities, are based on limited and often self-reported information, making the downgrades all the more remarkable. In line with Formation’s other properties, more than 70 percent of Genesis nursing homes now had either a one- or two-star rating on the five-star system, and registered-nurse hours were drastically lower than the averages; meanwhile, serious infractions were on the rise.

“I would argue that the traditional REIT structure in skilled nursing has been proven to be a failure,” Genesis CEO George Hager told an industry panel in 2019. There was, he reasoned, just too much money in the real estate, and it was too tempting to cash it all out and leave seniors and nursing assistants holding the bag.

This unusual admission of something like guilt offers a painful lesson to policymakers interested in designing a more sustainable and humane elder care system. Although Genesis oversaw thousands of deaths, although it undoubtedly committed innumerable sins of both commission and omission that caused the pandemic to spread much further in both its homes and their surrounding communities, and although the company’s fiscal woes are rooted in its structural embodiment of a system that siphons billions of dollars from our taxpayer-financed insurance system and exports them gratuitously into the offshore bank accounts of billionaires, it is not an anomaly relative to its peers in the nursing home business. The model of anything-goes for-profit facilities is as perfunctory as it is immoral.

There are solutions available. The federal government supplies a significant portion, as much as 72 percent, of the nursing home industry’s revenue, a figure that will undoubtedly rise this year as taxpayers blanket the sector with bailouts. It must overhaul the ways it both follows that money—to curtail the amount that can legally be consumed on rent, interest payments, and pricey “management fees”—and administers it in the first place. Rotating Medicaid patients in and out of $600-a-day Medicare-funded rehabilitation regimens has become an art form at many chains; the system as currently designed literally rewards homes that chronically neglect patients to the point that they require hospitalization.

What we actually need is a public-health corps that can assume the reins of a perilous health care provider. The Federal Deposit Insurance Corporation has the ability to temporarily nationalize banks when it senses they have devolved into Ponzi schemes; health care regulators need to recognize that a nursing home that pays 22 percent interest on its credit lines but fails to bathe its patients is just a Ponzi scheme with humanitarian implications, and develop protocols for intervening before these develop into mass casualty situations.

After all, anyone who follows nursing home finance could have told you companies like Genesis and Consulate were going to have an especially tough time fighting a pandemic. “I mean, we all knew it was going to be bad,” says Alex Spanko, an editor at Skilled Nursing News. “It still kind of surprises me that it was as bad as it was, given that they all knew it was coming. But we knew it would be bad.”

Genesis, having spent the past four or five years trying to sell its way out of its fiscal hole, has tapped former Trump official and CNN regular Jim Schultz, a bald, broad-shouldered, sleepy-eyed former White House counsel, to lobby for a bigger bailout. In August, George Hager told the one analyst who still covers the company’s stock, which trades below $1, that they wouldn’t make it without one. A slide into bankruptcy would inevitably lead to another shadowy LLC or two picking through the remains, repeating the churn cycle again. Whatever the case, without substantial reforms, our elderly, our nurses, and our tax dollars are likely to again be the losers.

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