Sen. Grassley seeks review of the effect of private equity ownership on nursing home care

WASHINGTON — Sen. Chuck Grassley has asked the Government Accountability Office to review the effect of private equity ownership on the quality of care provided in thenation’s nursing homes.

Grassley said he made his request based on an investigative report in the New YorkTimes in September that described higher numbers of serious health and safety deficiencies innursing homes that had been taken over by large private investment firms.

Grassley also raised his concerns about these findings in a statement he made today in theUnited States Senate and put a copy of the New York Times article in The CongressionalRecord.

When he served as Chairman of the Senate Special Committee on Aging in the late1990s, Grassley led a campaign to improve the quality of care in nursing homes. He conductedhearings, highlighted independent findings of the Government Accountability Office aboutsubstandard care, and prompted the Clinton Administration to launch what became known as theNursing Home Initiative. This initiative resulted in the federal agency in charge of overseeingstate-level nursing home inspections to issue regulations that were at that time ten years overdueand based on congressional reforms passed in 1987. The Health Care Financing Administrationis today called the Centers for Medicare and Medicaid Services (CMS). In subsequent years,Grassley has been active in his oversight of CMS’ actions related to nursing home quality ofcare.

Today, Grassley is the Ranking Member of the Committee on Finance, which haslegislative and oversight responsibility for Medicaid and Medicare.

The text of his letter of request to the Government Accountability Office follows here, along with the statement he delivered today in the Senate.

October 2, 2007

The Honorable David Walker
Comptroller General
U.S. Government Accountability Office
441 G St, NW
Washington, D.C. 20548

Dear Comptroller General Walker:

As you know, I have been working for many years to improve the quality of care atnursing homes, and at my request, the Government Accountability Office (GAO) has issuedmore than a dozen reports documenting the need for improved oversight of nursing home qualityand safety.

I read with great concern a recent article in The New York Times examining the effect ofprivate equity ownership on the quality of care provided in the nation's nursing homes.[1] Itappears that the investors may be increasing their profits at the expense of the health and safetyof nursing home residents. According to The New York Times, investor-owned nursing homes,on average, had higher numbers of serious health and safety deficiencies or violations, includingthe administration of wrong medications, faulty fire exits, and unhygienic kitchens. The NewYork Times also reported that nursing home residents were often worse off when their home wasowned by a private equity firm, compared to national averages for a number of indicators.

Accordingly, as Ranking Member of the Committee, I request that the GAO conduct areview of the effect of private equity ownership on the quality of care provided in the nation'snursing homes. Please ensure that your review includes the following information:

Total number of nursing homes purchased by private investment groups each year for thelast five years; Percentage of total nursing homes that are owned by private investment groups,including percentages by state, each year for the last five years; Condition of nursing homes atthe time of purchase by a private investment group; Names of the investment groups that havepurchased nursing homes over the last five years, as well as the number of homes purchased peryear; Condition and status of nursing homes in the years following purchase by a privateinvestment group compared to other homes; Number and types of complaints againstinvestor-owned nursing homes compared to other non-investment owned nursing homes;Number and types of health and/or safety deficiencies and violations cited at investor-ownednursing homes by state and federal regulators in each calendar year over the last five yearscompared to other homes; Role of the Centers for Medicare and Medicaid Services in theoversight of investor-owned nursing homes; and Recommendations or policy options asappropriate to help improve the oversight and accountability of investor-owned nursing homes.

Thank you for your attention to this important matter.

Sincerely,

Charles E. Grassley

United States Senator

Ranking Member, Committee on Finance

Floor Statement of U.S. Senator
Chuck Grassley of Iowa
Ranking Member of the Committee on Finance
Nursing Homes
Tuesday, October 2, 2007

Mr. President, for ten years I have advocated for stronger measures to ensure thatAmerica's nursing home residents receive the quality of care they deserve.

Currently, over 1.7 million Americans live in nursing homes. This number will grow byleaps and bounds as the baby-boomer generation ages. Therefore, there has never been a morecritical time to make sure that the federal government does all it can to protect the mostvulnerable among us from substandard care.

In late September, an article on the front page of the New York Times underscored thisissue and brought to light some troubling data. The article, entitled "At Many Homes, MoreProfit and Less Nursing," studied the quality of care at investor-owned nursing homes.

The findings were alarming, to say the least. Using numbers from the Centers forMedicare and Medicaid Services, the article compared several investor-owned nursing homechains to industry-wide averages for several indicators.

Here's what was found. The investor-owned homes, on average, had fewer clinicalregistered nurses per resident and higher numbers of serious health deficiencies. The article alsoreported that, in some cases, long-stay residents in these investor-owned homes suffered fromhigher rates of deterioration in their condition. I would like to highlight one case in particular.Following its purchase by a large investment firm, one nursing home cut its number of clinicalregistered nurses in half. Budgets for nursing supplies, resident activities, and other serviceswere also cut. Investor profits soared and resident care plummeted. Indeed, visits by regulatorsfound fire exits that didn't work, dirty kitchens, and other health and safety violations. 15residents died in three years due to negligent care, according to their families.

Our elderly and disabled nursing home residents - our own grandparents, mothers,fathers, and other loved ones - deserve better.

Is this a case of profits before care? Well, I'm not sure. But I certainly intend to lookinto it. I intend to investigate allegations that some large investment firms are buying up nursinghomes across the country and are hurting quality of care. And as a result, achieving, as the NewYork Times said, “More Profit and Less Nursing.”

And let's not forget that the Centers for Medicare and Medicaid Services shoulder someresponsibility for these problems too - CMS needs to do a better job of protecting seniors in ournation's nursing homes and I am going follow up with them to see what they have to say.

So I say to my fellow Senators, we must do what is necessary to protect America'snursing home residents. We need to closely examine this matter. I plan to take a very activerole in looking at this issue, and will be speaking with nursing homes, equity firms, and to CMS.We owe it to America's nursing home residents - and we owe it to their families. Also I wouldlike to put in the record a copy of the New York Times article.

The New York Times, September 23, 2007 Sunday Late Edition - Final

At Many Homes, More Profit and Less Nursing

BYLINE: By CHARLES DUHIGG

SECTION: Section 1; Column 0; Business/Financial Desk; Pg. 1

LENGTH: 3655 words

Habana Health Care Center, a 150-bed nursing home in Tampa, Fla., was struggling when agroup of large private investment firms purchased it and 48 other nursing homes in 2002.

The facility's managers quickly cut costs. Within months, the number of clinical registerednurses at the home was half what it had been a year earlier, records collected by the Centers forMedicare and Medicaid Services indicate. Budgets for nursing supplies, resident activities andother services also fell, according to Florida's Agency for Health Care Administration.

The investors and operators were soon earning millions of dollars a year from their 49 homes.

Residents fared less well. Over three years, 15 at Habana died from what their families contendwas negligent care in lawsuits filed in state court. Regulators repeatedly warned the home thatstaff levels were below mandatory minimums. When regulators visited, they foundmalfunctioning fire doors, unhygienic kitchens and a resident using a leg brace that was broken.

''They've created a hellhole,'' said Vivian Hewitt, who sued Habana in 2004 when her motherdied after a large bedsore became infected by feces.

Habana is one of thousands of nursing homes across the nation that large Wall Street investmentcompanies have bought or agreed to acquire in recent years.

Those investors include prominent private equity firms like Warburg Pincus and the CarlyleGroup, better known for buying companies like Dunkin' Donuts.

As such investors have acquired nursing homes, they have often reduced costs, increased profitsand 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 datacollected by government agencies from 2000 to 2006.

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

Regulators say residents at these homes have suffered. At facilities owned by private investmentfirms, residents on average have fared more poorly than occupants of other homes in commonproblems 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 worsethan national rates in 12 of 14 indicators that regulators use to track ailments of long-termresidents. Those ailments include bedsores and easily preventable infections, as well as the needto be restrained. Before they were acquired by private investors, many of those homes scored ator above national averages in similar measurements.

In the past, residents' families often responded to such declines in care by suing, and regulatorslevied 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 courtand for regulators to levy chainwide fines by creating complex corporate structures that obscurewho controls their nursing homes.

By contrast, publicly owned nursing home chains are essentially required to disclose whocontrols their facilities in securities filings and other regulatory documents.

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

Investors in these homes say such structures are common in other businesses and have helpedthem revive an industry that was on the brink of widespread bankruptcy.

''Lawyers were convincing nursing home residents to sue over almost anything,'' said Arnold M.Whitman, a principal with the fund that bought Habana in 2002, Formation Properties I.Homes were closing because of ballooning litigation costs, he said. So investors like Mr.Whitman created corporate structures that insulated them from costly lawsuits, according to hiscompany.

''We should be recognized for supporting this industry when almost everyone else was runningaway,'' Mr. Whitman said in an interview.

Some families of residents say those structures unjustly protect investors who profit while caredeclines.

When Mrs. Hewitt sued Habana over her mother's death, for example, she found that its ownersand managers had spread control of Habana among 15 companies and five layers of firms.

As a result, Mrs. Hewitt's lawyer, like many others confronting privately owned homes, has beenunable to establish definitively who was responsible for her mother's care.

Current staff members at Habana declined to comment. Formation Properties I said it ownedonly Habana's real estate and leased it to an independent company, and thus bore noresponsibility for resident care.

That independent company -- Florida Health Care Properties, which eventually became EpsilonHealth Care Properties and subleased the home's operation to Tampa Health Care Associates -- isaffiliated with Warburg Pincus, one of the world's largest private equity firms. Warburg Pincus,Florida Health Care, Epsilon and Tampa Health Care all declined to comment.

Demand for Nursing Homes

The graying of America has presented financial opportunities for all kinds of businesses. Nursinghomes, which received more than $75 billion last year from taxpayer programs like Medicareand Medicaid, offer some of the biggest rewards.

''There's essentially unlimited consumer demand as the baby boomers age,'' said Ronald E. Silva,president and chief executive of Fillmore Capital Partners, which paid $1.8 billion last year tobuy one of the nation's largest nursing home chains. ''I've never seen a surer bet.''For years, investors shunned nursing home companies as the industry was battered bybankruptcies, expensive lawsuits and regulatory investigations.

But in recent years, large private investment groups have agreed to buy 6 of the nation's 10largest nursing home chains, containing over 141,000 beds, or 9 percent of the nation's total.Private investment groups own at least another 60,000 beds at smaller chains and are expected toacquire many more companies as firms come under shareholder pressure to sell.

The typical large chain owned by an investment company in 2005 earned $1,700 a resident,according to reports filed by the facilities. Those homes, on average, were 41 percent moreprofitable than the average facility.

But, as in the case of Habana, cutting costs has become an issue at homes owned by largeinvestment groups.

''The first thing owners do is lay off nurses and other staff that are essential to keeping patientssafe,'' said Charlene Harrington, a professor at the University of California in San Francisco whostudies nursing homes. In her opinion, she added, ''chains have made a lot of money by cuttingnurses, but it's at the cost of human lives.''

The Times's analysis of records collected by the Centers for Medicare and Medicaid Servicesreveals 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 requiredby law. (At 19 percent of those homes, staffing has remained relatively constant, though oftenbelow national averages. At 21 percent, staffing rose significantly, though even those homeswere typically below national averages.) During that period, staffing at many of the nation'sother homes has fallen much less or grown.

Nurses are often residents' primary medical providers. In 2002, the Department of Health andHuman Services said most nursing home residents needed at least 1.3 hours of care a day from aregistered or licensed practical nurse. The average home was close to meeting that standard lastyear, according to data.

But homes owned by large investment companies typically provided only one hour of care a day,according to The Times's analysis of records collected by the Centers for Medicare and MedicaidServices.

For the most highly trained nurses, staffing was particularly low: Homes owned by large privateinvestment firms provided one clinical registered nurse for every 20 residents, 35 percent belowthe national average, the analysis showed.

Regulators with state and federal health care agencies have cited those staffing deficienciesalongside some cases where residents died from accidental suffocations, injuries or othermedical emergencies.

Federal and state regulators also said in interviews that such cuts help explain why seriousquality-of-care deficiencies -- like moldy food and the restraining of residents for long periods orthe administration of wrong medications -- rose at every large nursing home chain after it wasacquired by a private investment group from 2000 to 2006, even as citations declined at manyother homes and chains.

The typical number of serious health deficiencies cited by regulators last year was almost 19percent higher at homes owned by large investment companies than the national average,according to analysis of Centers for Medicare and Medicaid Services records.(The Times's analysis of trends did not include Genesis HealthCare, which was acquired earlierthis year, or HCR Manor Care, which the Carlyle Group is buying, because sufficient data werenot available.)

Representatives of all the investment groups that bought nursing home chains since 2000 --Warburg Pincus, Formation, National Senior Care, Fillmore Capital Partners and the CarlyleGroup -- were offered the data and findings from the Times analysis. All but one declined tocomment.

An executive with a company owned by Fillmore Capital, which acquired 342 homes last year,said that because some data regarding the company were missing or collected before itsacquisition, The Times's analysis was not a complete portrayal of current conditions. Thatexecutive, Jack MacDonald, also said that it was too early to evaluate the new management, thatthe staff numbers at homes over all was rising and that quality had improved by some measures.

''We are focused on becoming a better organization today than we were 18 months ago,'' he said.

''We are confident that we will be an even better organization in the future.''

A Web of ResponsibilityVivian Hewitt's mother, Alice Garcia, was 81 and suffering from Alzheimer's disease when, inlate 2002, she moved into Habana.

''I couldn't take care of her properly anymore, and Habana seemed like a really nice place,'' Mrs.Hewitt said.

Earlier that year, Formation bought Habana, 48 other nursing homes and four assisted livingcenters from Beverly Enterprises, one of the nation's largest chains, for $165 million.

Formation immediately leased many of the homes, including Habana, to an affiliate of WarburgPincus. That firm spread management of the homes among dozens of other corporations,according to documents filed with Florida agencies and depositions from lawsuits.

Each home was operated by a separate company. Other companies helped choose staff, keep thebooks and negotiate for equipment and supplies. Some companies had no employees or offices,which let executives file regulatory documents without revealing their other corporateaffiliations.

Habana's managers increased occupancy, and cut expenses by laying off about 10 of 30 clinicaladministrators and nurses, Medicare filings reveal. (After regulators complained, some positionswere refilled and other spending increased.) Soon, Medicare regulators cited Habana formalfunctioning fire doors and moldy air vents.

Throughout that period, Formation and the Warburg Pincus affiliate received rent and fees thatwere directly tied to Habana's revenues, interviews and regulatory filings show. As the home'sfiscal health improved, those payments grew. In total, they exceeded $3.5 million by last year.The companies also profited from the other 48 homes.

Though spending cuts improved the home's bottom line, they raised concerns among regulatorsand staff.

''Those owners wouldn't let us hire people,'' said Annie Thornton, who became interim directorof nursing around the time Habana was acquired, and who left about a year later. ''We told thehigher-ups we needed more staffing, but they said we should make do.''

Regulators typically visit nursing homes about once a year. But in the 12 months afterFormation's acquisition of Habana, they visited an average of once a month, often in response toresidents' complaints. The home was cited for failing to follow doctors' orders, cutting staffbelow legal minimums, blocking emergency exits, storing food in unhygienic areas and otherhealth violations.

Soon after, nursing home inspectors wrote in Centers for Medicare and Medicaid Servicesdocuments that Habana was at fault when a resident suffocated because his tracheotomy tubebecame clogged. Although he had complained of shortness of breath, there were no recordsshowing that staff had checked on him for almost two days.

Those citations never mentioned Formation, Warburg Pincus or its affiliates. Warburg Pincusand its affiliates declined to discuss the citations. Formation said it was merely a landlord.''Formation Properties owns real estate and leases it to an unaffiliated third party that obtains alicense to operate it as a health care facility,'' Formation said. ''No citation would mentionFormation Properties since it has no involvement or control over the operations at the facility orany entity that is involved in such operations.''

For Mrs. Hewitt's mother, problems began within months of moving in as she suffered repeatedfalls.

''I would call and call and call them to come to her room to change her diaper or help me moveher, but they would never come,'' Mrs. Hewitt recalled.

Five months later, Mrs. Hewitt discovered that her mother had a large bedsore on her back thatwas oozing pus. Mrs. Garcia was rushed to the hospital. A physician later said the wound shouldhave been detected much earlier, according to medical records submitted as part of a lawsuitMrs. Hewitt filed in a Florida Circuit Court.

Three weeks later, Mrs. Garcia died.

''I feel so guilty,'' Mrs. Hewitt said. ''But there was no way for me to find out how bad that placereally was.''

Death and a Lawsuit

Within a few months, Mrs. Hewitt decided to sue the nursing home.

''The only way I can send a message is to hit them in their pocketbook, to make it too expensiveto let people like my mother suffer,'' she said.

But when Mrs. Hewitt's lawyer, Sumeet Kaul, began investigating Habana's corporate structure,he discovered that its complexity meant that even if she prevailed in court, the investors' walletswould likely be out of reach.

Others had tried and failed. In response to dozens of lawsuits, Formation and affiliates ofWarburg Pincus had successfully argued in court that they were not nursing home operators, andthus not liable for deficiencies in care.

Formation said in a statement that it was not reasonable to hold the company responsible forresidents, ''any more, say, than it would be reasonable for a landlord who owns a building, one ofwhose tenants is Starbucks, to be held liable if a Starbucks customer is scalded by a cup of hotcoffee.''

Formation, Warburg Pincus and its affiliates all declined to answer questions regarding Mrs.Hewitt's lawsuit.

Advocates for nursing home reforms say anyone who profits from a facility should be heldaccountable for its care.

''Private equity is buying up this industry and then hiding the assets,'' said Toby S. Edelman, anursing home expert with the Center for Medicare Advocacy, a nonprofit group that counselspeople on Medicare. ''And now residents are dying, and there is little the courts or regulators cando.''

Mrs. Hewitt's lawyer has spent three years and $30,000 trying to prove that an affiliate ofWarburg Pincus might be responsible for Mrs. Garcia's care. He has not named Formation orWarburg Pincus as defendants. A judge is expected to rule on some of his arguments this year.

Complex corporate structures have dissuaded scores of other lawyers from suing nursing homes.About 70 percent of lawyers who once sued homes have stopped because the cases became tooexpensive or difficult, estimates Nathan P. Carter, a plaintiffs' lawyer in Florida.

''In one case, I had to sue 22 different companies,'' he said. ''In another, I got a $400,000 verdictand ended up collecting only $25,000.''

Regulators have also been stymied.

For instance, Florida's Agency for Health Care Administration has named Habana and 34 otherhomes owned by Formation and operated by affiliates of Warburg Pincus as among the state'sworst in categories like ''nutrition and hydration,'' ''restraints and abuse'' and ''quality of care.''

Those homes have been individually cited for violations of safety codes, but there have been nochainwide investigations or fines, because regulators were unaware that all the facilities wereowned and operated by a common group, said Molly McKinstry, bureau chief for long-term-careservices at Florida's Agency for Health Care Administration.

And even when regulators do issue fines to investor-owned homes, they have found penaltiesdifficult to collect.

''These companies leave the nursing home licensee with no assets, and so there is nothing totake,'' said Scott Johnson, special assistant attorney general of Mississippi.Government authorities are also frequently unaware when nursing homes pay large fees toaffiliates.

For example, Habana, operated by a Warburg Pincus affiliate, paid other Warburg Pincusaffiliates an estimated $558,000 for management advice and other services last year, according toreports the home filed.

Government programs require nursing homes to reveal when they pay affiliates so that suchdisbursements can be scrutinized to make sure they are not artificially inflated.

However, complex corporate structures make such scrutiny difficult. Regulators did not knowthat so many of Habana's payments went to companies affiliated with Warburg Pincus.

''The government tries to make sure homes are paying a fair market value for things like rent andconsulting and supplies,'' said John Villegas-Grubbs, a Medicaid expert who has developedpayment systems for several states. ''But when home owners pay themselves without revealing it,they can pad their bills. It's not feasible to expect regulators to catch that unless they havetransparency on ownership structures.''

Formation and Warburg Pincus both declined to discuss disclosure issues.

Groups lobbying to increase transparency at nursing homes say complicated corporate structuresshould be outlawed. One idea popular among organizations like the National Citizens' Coalitionfor Nursing Home Reform is requiring the company that owns a home's most valuable assets, itsland and building, to manage it. That would put owners at risk if care declines.

But owners say that tying a home's property to its operation would make it impossible to operatein leased facilities, and exacerbate a growing nationwide nursing home shortage.Moreover, investors say, they deserve credit for rebuilding an industry on the edge of widespreadinsolvency.

''Legal and regulatory costs were killing this industry,'' said Mr. Whitman, the Formationexecutive.

For instance, Beverly Enterprises, which also had a history of regulatory problems, sold Habanaand the rest of its Florida centers to Formation because, it said at the time, of rising litigationcosts. AON Risk Consultants, a research company, says the average cost of nursing homelitigation in Florida during that period had increased 270 percent in five years.

''Lawyers were suing nursing homes because they knew the companies were worth billions ofdollars, so we made the companies smaller and poorer, and the lawsuits have diminished,'' Mr.Whitman said. This year, another fund affiliated with Mr. Whitman and other investors acquiredthe nation's third-largest nursing home chain, Genesis HealthCare, for $1.5 billion.

If investors are barred from setting up complex structures, ''this industry makes no economicsense,'' Mr. Whitman said. ''If nursing home owners are forced to operate at a loss, the entireindustry will disappear.''

However, advocates for nursing home reforms say investors exaggerate the industry'sprecariousness. Last year, Formation sold Habana and 185 other facilities to General Electric for$1.4 billion. A prominent nursing home industry analyst, Steve Monroe, estimates thatFormation's and its co-investors' gains from that sale were more than $500 million in just fouryears. Formation declined to comment on that figure.

Analyzing the Data

For this article, The New York Times analyzed trends at nursing homes purchased by privateinvestment groups by examining data available from the Centers for Medicare and MedicaidServices, a division of the Department of Health and Human Services.

The Times examined more than 1,200 nursing homes purchased by large private investmentgroups since 2000, and more than 14,000 other homes. The analysis compared investor-ownedhomes against national averages in multiple categories, including complaints received byregulators, health and safety violations cited by regulators, fines levied by state and federalauthorities, the performance of homes as reported in a national database known as the MinimumData Set Repository and the performance of homes as reported in the Online Survey,Certification and Reporting database.

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