Nursing Home Cost Cuts: A Private Equity Microcosm?

The New York Times today, in “More Profit and Less Nursing at Many Homes,” describes the often shameful behavior of private equity owners of nursing homes towards their charges: Some excerpts:

As such investors have acquired nursing homes, they have often reduced costs, increased profits and quickly resold facilities for significant gains.

But by many regulatory benchmarks, residents at those nursing homes are worse off, on average, than they were under previous owners, according to an analysis by The New York Times of data collected by government agencies from 2000 to 2006.

The Times analysis shows that, as at Habana, managers at many other nursing homes acquired by large private investors have cut expenses and staff, sometimes below minimum legal requirements.

Regulators say residents at these homes have suffered. At facilities owned by private investment firms, residents on average have fared more poorly than occupants of other homes in common problems like depression, loss of mobility and loss of ability to dress and bathe themselves, according to data collected by the Centers for Medicare and Medicaid Services.

The typical nursing home acquired by a large investment company before 2006 scored worse than national rates in 12 of 14 indicators that regulators use to track ailments of long-term residents. Those ailments include bedsores and easily preventable infections, as well as the need to be restrained. Before they were acquired by private investors, many of those homes scored at or above national averages in similar measurements.

In the past, residents’ families often responded to such declines in care by suing, and regulators levied heavy fines against nursing home chains where understaffing led to lapses in care.

But private investment companies have made it very difficult for plaintiffs to succeed in court and for regulators to levy chainwide fines by creating complex corporate structures that obscure who controls their nursing homes.,,,

The Byzantine structures established at homes owned by private investment firms also make it harder for regulators to know if one company is responsible for multiple centers. And the structures help managers bypass rules that require them to report when they, in effect, pay themselves from programs like Medicare and Medicaid….

The Times’s analysis of records collected by the Centers for Medicare and Medicaid Services reveals that at 60 percent of homes bought by large private equity groups from 2000 to 2006, managers have cut the number of clinical registered nurses, sometimes far below levels required by law. (At 19 percent of those homes, staffing has remained relatively constant, though often below national averages. At 21 percent, staffing rose significantly, though even those homes were typically below national averages.) During that period, staffing at many of the nation’s other homes has fallen much less or grown.

Let’s consider the nursing home industry as a case study of how the private equity industry operates. If anything, one would expect private equity owners to be more conservative when operating in a regulated industry. After all, not only can facilities lose their license, but in addition, performance is unusually transparent. Medicare provides information online, including ratings on various quality measures, plus summaries of state inspection reports. Many states also give access to their assessments. Every guide on how to choose a nursing home strongly advises consumers to review these scores in coming to a decision. Bad ratings will scare away prospective customers, therefore increasing acquisition costs (operators need to market more broadly to find chumps who don’t do due diligence) and possibly lowering revenues.

Yet the Times tells us the majority of acquires homes saw significant cuts in patient care and in parallel set up corporate structures that insulated them from the problems that resulted.

Private equity firms like to say that they create value by making operations more efficient. But its record at nursing homes tells a very different story, that the PE firms weren’t simply streamlining operations but were actually disinvesting in the businesses by cutting cost below a sustainable level, risking the brand image in the process.

The nursing home example validates the argument that PE firms deliver their results primarily from financial engineering and overzealous headcount cuts, putting them more in the wealth transfer than the wealth creation business.

“Legal and regulatory costs were killing this industry,” said Mr. Whitman, the Formation [nursing home owner[ executive.

Yes, it’s clearly cheaper to kill people instead.