Profits Before People Attitude Kills Nursing Home Residents
Over the past 20 years, we have seen a surge of private equity groups purchasing distressed nursing home chains. These PE acquisition teams swarm around larger nursing home corporations, acquire debt which is attributed to the nursing home corporation, then starve the facilities of staff or run the chain into insolvency.
This kind of business approach is repulsive in any industry. However, when it comes to protecting our senior citizens, the business practices employed by some private equity investors are downright wrong.
A recent 2021 study confirms what industry experts have always suspected; nursing home residents residing in private equity-owned facilities are far more likely to die than nursing home residents in non PE facilities.
Statistics Connected to Nursing Home Private Equity Acquisition are Shocking
The National Bureau of Economic Research has studied private equity acquisition of skilled nursing facilities, and the downstream effects on resident care. The February 2021 study revealed the following statistics:
- 70% of America’s nursing homes are for-profit, run by corporations. This is a sizeable increase when compared to hospitals, of which, only about 1/3rd in the US are for-profit.
- Medicare and Medicaid (federal funding) accounts for 75% of skilled nursing facilities revenues.
- There is a causal connection between a facility being for-profit, and the providing of sub-standard care to residents.
- About half of a nursing home’s costs are related to staffing the facility. This represents the largest item on any nursing home’s budget sheet.
- Cutting labor costs is one of the most effective ways a private equity company can increase profitability in operating a skilled nursing facility.
- “PE buy outs are linked to greater labor churn”, and this leads to a breach in the quality of care provided to patients.
- Incidents of death and preventable injury are consistently higher in nursing homes acquired by private equity firms.
- During the sampled time period, the Bureau estimates that private equity ownership in facilities has cost American taxpayers $20.7 billion in additional medical treatment which would not have been incurred in non private equity owned facilities.
- During the 12 year sample time period studied, the Bureau believes private equity ownership of nursing homes cost 20,150 American lives. These 20,150 souls were lost because of PE firm involvement in the facility operations.
How and Why Private Equity Firms Bleed a Nursing Home of Capital and Harm Resident Care
A private equity firm can perform a leveraged buyout of a skilled nursing chain. This means the PE firm gets capital through debt financing, which can saddle the nursing home license holder with insurmountable debt, owed to investors. As a result, in order to maintain some profitability, nursing home operators are forced to slash staff numbers to reduce overhead. This cutting of staff inevitably leads to poor outcomes with needy residents.
So why do PE firms swoop in and strangle operators with insolvency? Do they enjoy harming old people? No, of course not. Instead, PE managers are focused on profitability, not on the quality of care provided. The private equity compensation structure requires some form of increased profitability in order to justify bonuses. Fund managers are compensated through a call option-like share of the profits, The upper echelon of private equity firms only make money if they radically improve profitability, so quick returns are needed out of the nursing home in order to make the acquisition ‘worth it’ for investors. This quick flip mentality is why we see PE firms scooping up facility chains, taking out loads of debt, slashing nursing staff and then filing for bankruptcy or selling off the facilities.
An Example of a Private Equity Purchase of America’s Largest Nursing Home Chain
In 2007, the Carlyle Group bought HCR Manorcare for $6.3 billion. At this time, the company was one quarter was equity and three-quarters debt.
In 2011, Carlyle sold the real estate assets of Manorcare for $6.1 billion, resulting in a large payout to investors. Manorcare still operated the facilities, but now had to pay rent and lease payments to third parties. These rent payments were exorbitant and resulted in the tanking of the company, as it was structured. The recent February 2021 study found that resident care plummeted after Manorcare sold its real estate. Why? Because when companies need to make more room on the budget, they must cut staff numbers.
Staffing is critical to a nursing home’s ability to provide adequate care:
“Nurse availability is crucial to the quality of care and there is a consensus that low ratios of nursing staff to residents are associated with higher patient mortality and other adverse clinical outcomes. Staffing ratios are therefore standard metrics to examine nursing home quality.” Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes, February 2021
Findings on the Impact of Patient Mortality and Nursing Home Private Equity Ownership
Unequivocally, the data shows that when PE firms gobble up facilities, the end result is harm to residents.
“Receiving care at a PE-owned nursing home increases the probability of death during the stay and the following 90 days by 1.7 pp, about 10% of the mean. In the context of the health economics literature, this is a very large effect. This estimate remains stable in magnitude at about 10% of the mean regardless of the time horizon studied . . .” Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes, February 2021
Even beyond the individual carnage to residents, private equity ownership of skilled nursing facilites costs Americans millions of dollars each year in hospitalizations and medical care. Remember, it is our tax dollars that are being used to pay these elderly patients’ bills. And the cost of private equity owned nursing homes is astouding:
We calculate the implied cost in statistical value of life-years. We translate the IV coefficients into lives and life-years lost based on the number of index stays by patients of PE-owned nursing homes during our sample period. Accordingly, we compute about 20,150 additional deaths due to PE [private equity] ownership over our twelve-year sample period. To estimate life-years lost, we rely on observed survival rates for Medicare patients at all nursing homes. This leads to an estimate of about 160,000 lost life-years. Applying a standard estimate of statistical value of a life-year of $100,000 inflated to 2016 dollars, this implies a mortality cost of $20.7 billion.” Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes, February 2021
A Solution to the Private Equity Nursing Home Crisis
We are nursing home abuse attorneys and we routinely sue negligent nursing homes for preventable injury and wrongful death to residents. We also sue company chains, on the macro level, in nursing home whistleblower fraud suits. Although the harm varies from bed sores, falls, medication errors, et cetera, the root cause is always the same. A financially troubled nursing home operator is using skeleton staff numbers and, as a result, vulnerable residents get hurt.
The recent study performed by The National Bureau of Economic Research clearly establishes a link between private equity ownership and nursing home instability. If we want to stem the tide of nursing home neglect, we must prevent private equity firms from using these facilities as a personal piggy bank. We need stricter regulations on nursing home ownership, and stronger accountability laws when corporations provide sub-standard care.
