Are nursing home owners underestimating the profits they report to federal regulators by shifting income to related businesses? Two academic experts in nursing home finance say that in some states, margins of 63. I discovered that % was hidden in this way. Put another way, only 37 percent of a nursing home's true profits are reported to federal regulators.
A new paper by UCLA health economist Ashvin Gandhi and Lehigh University financial economist Andrew Orensky details how operators “tunnel” expenses to stakeholders, and the entire health care industry. A range of widespread practices are described.
General method
Because federal nursing home financial reports are unreliable, the authors used data collected by the state of Illinois. They estimated that 77% of businesses in the state reported making some sort of related party payment in 2021. The dollar value of these transactions more than doubled from 2001 to 2021, exceeding $800 million in Illinois alone.
However, we found wide variation in the use of this practice. Some facilities were very proactive, while others did not do it at all.
These related party transactions are designed to overstate the costs and understate the benefits reported to the government. Most are for real estate and management. Less frequently, they purchase services ranging from nursing to laundry.
“Red Herring”
The American Health Care Association, a trade group that primarily represents for-profit nursing homes, said the focus on related-party transactions is a “red red herring.”
The organization sent me a written comment that read in part: “We do not believe that 'pumping' profits into other areas of business is common practice…The unfortunate truth is that long-term Long-term care is chronically underfunded, which means that ancillary services and services are lacking. Stakeholders may assist in the survival of these facilities. These issues distract from the real challenges facing much of the long-term care sector. ”
poor profits
The transaction takes place as follows: A nursing home operator sells the facility to a real estate company managed by the facility owner. The real estate company then leases the property back to the nursing home at a premium price.
Rising rents reduce the profits nursing homes report to the federal government, which are generally not disclosed to regulators, even as real estate companies and their investors increase profits. Purchases of other services by related parties work similarly.
The difference in cost is significant. The newspaper reported that facilities rented from related parties paid an average of $7,094 per bed, compared to $4,377 from unrelated parties.
The authors also found that shifting profits to related businesses can help protect nursing home operators from medical malpractice claims. An Illinois facility that used a related-party transaction saw its premiums reduced by about one-third, or nearly $26,000 annually, even though the losses paid remained the same.
government payments
This research could have significant implications for how governments pay for and regulate facilities.
For example, AHCA recently opposed the Biden administration's efforts to increase staffing at facilities. “Chronic Medicaid underfunding and high inflation mean many facilities are operating on a shoestring budget or on the brink of closure, and these unfunded mandates Facilities may be stretched beyond their limits, severely impacting access to quality care for older adults.”
This debate led many lawmakers to oppose the proposed rules. There's a reason why it needs to change. And many nursing homes are in financial trouble. But if the new study is correct, it means that widespread claims of financial ruin across the industry are greatly exaggerated.
solve the mystery
Gandhi and Oluseki found that related party transactions did not compromise the quality of care. But they estimated that if nursing homes paid market rates for rent and services instead of having prices gouged, they would receive enough revenue to increase staffing levels by about 30 percent.
Their analysis may also help explain financial mysteries. While for-profit nursing home operators complain they can't live on the payments they receive from Medicare and Medicaid, willing buyers are paying a near-record average of about $100,000 per bed, which That equates to $10 million for a typical 100-bed facility.
But when calculated based on reported profits, the rate of return is 0.1%, much lower than ultra-safe U.S. Treasuries. The authors state that these prices could only be justified if the actual profits were significantly higher than many facilities report.
Quality, not cost
These related party transactions are primarily due to the unusual economic conditions of nursing homes. Nearly all of a nursing home's revenue comes from Medicare for skilled nursing care or Medicaid for long-term stays. And facilities are using the reported low profits to pressure governments to increase payouts. Medicare Advantage managed care plans negotiate much lower payment rates with nursing facilities than traditional Medicare.
The federal government is taking steps to increase financial disclosure by nursing homes. However, more efforts are needed to uncover related party transactions on a national scale. But ultimately, nursing home payments should be more closely tied to quality and patient and resident outcomes, rather than reported costs.
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