Robert I. Field argues that private equity has a limited impact on price competition between nursing homes, as prices are primarily determined by Medicaid. However, private equity affects quality and labor outcomes. This deserves greater government scrutiny.
This article is part of a series that explores how private equity in the US health sector reduces competition and enforcers can respond. You can read the rest of the series published here.
The hospital and physician sector tends to attract the attention of most people, but nursing homes also represent a significant portion of the healthcare industry as a whole. That is why it is an important goal for private equity investments. The United States has over 15,000 nursing homes and serves more than 1.3 million residents. In 2023 it was worth almost $3 billion. It is estimated that 70% are for commercial purposes, and about 9% of these are owned by private equity funds. The complexity of many private equity business arrangements makes it difficult to derive accurate numbers, which can actually increase the total.
Nursing facilities offer several attractive features for private equity investments. Most importantly, the stable income flow they can generate. Medicaid is the primary source of funding for long-term care in the United States, covering 60% of its residents. Once patients are covered, their support is relatively stable. Some of the remaining residents are under private long-term care insurance, which is another stable revenue stream. Nursing facilities are economically attractive because of the property they own. This is extremely valuable.
Beyond direct financial gains, nursing home regulations are uneven and therefore tend to be more out of the way than hospital and physician practices. Surveillance is fragmented across federal and state authorities, and state officials often lack resources. This could limit the scrutiny of aggressive financial restructuring arrangements implemented by acquiring companies, particularly scrutiny of cost-cutting efforts that could lead to quality lapses.
Post-acquisition private equity funds generally maximize financial revenue by implementing significant changes to the corporate structure that could lead to financial stress in the acquired nursing home. A common strategy is a sale leaseback, where nursing homes sell the property to related management companies. The fund then uses the proceeds from the sale to pay back any obligations that have arisen for the original purchase.
The nursing home is stripped of its own building and property and must then be leaseed to the management company as a landlord. Lease amounts may increase each year, but nursing homes will continue to be responsible for maintenance, taxes and insurance. Landlords can also charge an administrative fee. This reduces the resources to maintain the quality of service. Additionally, there are fewer resources to strain the long-term financial viability of acquisition providers, which is usually of little concern for private equity owners who are aiming to withdraw from their business in 5-8 years. Once debts from the acquisition are paid back and valuable assets such as real estate are transferred to affiliated entities, there is little incentive to maintain the business.
In addition to paying management fees to the landlord, nursing homes may also be required to obtain services from other affiliates that are part of the vertically integrated structure. These include medical devices such as rehabilitation services, staffing, pharmacies, hospices, facility management, payroll, and ventilation devices. Private equity supporters point out the efficiency of getting services within a vertically integrated system, but blocking facilities from price shopping.
Similar financial practices of private equity acquirers are also used in other healthcare sectors. Private equity-owned healthcare companies will enter bankruptcy at a much higher rate in 2023 than public companies that account for 20% of healthcare bankruptcies. It also increases the likelihood that you will be charged with claim fraud. Additionally, the acquired hospitals tend to have fewer full-time equivalent employees, lower patient satisfaction and lower performance of quality indicators. Among the other impacts of the acquisition are the higher rates of harmful medical events, such as falls, central line-related bloodstream infections, and surgical site infections.
The complex corporate arrangements implemented by private equity acquirers make enforcement of quality standards difficult. In addition to being complex, the arrangement is designed to be opaque, making it difficult for regulators to identify entities within the private equity structure that are responsible for quality revocation. They also can obscure the flow of funds, which makes assets and profits difficult or impossible to track. If the challenge of following the flow of funds is challenging for regulators, it can be overwhelming for private lawyers sue to indemnify harm.
Two common practices for private equity acquirers are particularly harmful to the safety and welfare of residents. The first is reducing the level of nurse creation. Launching staff is an easy way to quickly cut costs immediately after an acquisition, and for-profit nursing homes have less staff than nonprofits and are heavily dependent on untrained personnel. Facilities owned by private equity funds also typically pay low wages.
Nursing homes often use the second practice of administering antipsychotics as a form of chemical restraint to control non-integrated residents with a small number of staff. These drugs make residents more obedient, but can cause serious side effects. One analysis estimates that at least 20% of nursing home residents nationwide receive these drugs, while 80% are receiving some form of psychotropic drugs. Other studies have found associations between lower staffing levels and medication usage. Ownership of private equity is associated with a significant increase in antipsychotics use than traditional for-profit ownership. Antipsychotics can cause many serious side effects, including motor disorders, injuries, strokes, and heart attacks, resulting in higher mortality among residents taking them.
Practices such as lower nursing levels and the use of larger antipsychotics combine to use harmful practices that have already been common throughout the nursing home industry. Residents may be subject to physical abuse in the form of blows or slaps, ignoring basic needs such as food or medical care. The effects of such abuse include untreated infections, medication errors, malnutrition, falls, and bed sources. So, when acquiring nursing homes, private equity will embrace and exacerbate industries that are already suffering from quality revocation.
Private equity defenders claim that much needed capital can be injected into underperforming facilities, often improving care. The business literature contains many reports of such success stories. However, these instances do not reduce the widespread risk of acquisitions that have the opposite effect.
Regulators have tools to address financial and quality abuse that ramp out in nursing homes, but antitrust enforcement is not particularly prominent among them. It could be effective in other healthcare sectors, such as physician practices. This led to private stocks consolidating market ownership and gaining negotiating power with private insurance companies, leading to price increases. However, nursing homes rely heavily on government programs for Medicaid reimbursement, which primarily determine reimbursements based on costs rather than negotiations. Payments can increase due to increased costs after the acquisition, but rarely due to reduced competition. Therefore, recent federal efforts to address healthcare transactions more generally, such as joint initiatives by the Federal Trade Commission, the Department of Justice and the Department of Health and Human Services, have not been effective in addressing abuse, including nursing homes.
The main facilitators of substandard nursing home care after private equity acquisitions are the corporate structure and business practices adopted by the fund. To address them, various regulatory approaches are required, and can be most effectively implemented at the state level. Some states have enacted laws to reduce or block private equity acquisitions entirely, but only support residents of nursing homes within the border.
For those who have not yet taken action and should focus on three strategies to enhance surveillance. First, there is a need to increase the transparency of ownership and corporate structure to help regulators identify the entities responsible for quality lapses within the corporate structure of private equity funds and the location of the fund. Nursing facilities tend to be smaller entities than hospitals, so acquisitions are less likely to trigger federal scrutiny, but states can provide broader reporting and transparency before approving the transfer of ownership.
Increased transparency also helps state Medicaid programs analyze facility cost reports and better determine the percentage of spending actually spent on resident care and administrative expenses. Such scrutiny should begin with an investigation of rent, facility maintenance fees, and management fees the facility has paid to the affiliate management company based on the sale leaseback arrangement. You also need to evaluate the prices charged for services obtained from other entities within the private equity fund vertical integration structure.
Information obtained by the state's Medicaid program on nursing home operations will encourage a third strategy to monitor quality indicators more closely. It is a federal agency that oversees Medicaid under the Centers for Medicare and Medicaid Services (CMS) regulatory reforms and must report nursing home quality measurements as a condition for compensation. CMS regulations also implement a STAR rating system to assess the quality of nursing homes. However, the effectiveness of these efforts in their own right is doubtful. State regulators are in a stronger position to monitor and implement compliance due to their proximity to facilities and residents. They are also not prone to dramatic political changes that can change federal government policies.
Private equity investments have struck the industry with substandard care, and have compromised much of it further. Enhanced oversight of its quality and financial practices must be a national priority. If all states engage in more aggressive surveillance, the welfare of the residents of many nursing homes in the country could be significantly improved, and private equity funds could lead more to enhanced resources for care rather than greater returns for investors.
Author Disclosure: The author reports no conflict of interest. You can read the disclosure policy here.
The article expresses the author's opinion. It is not necessarily the opinion of the University of Chicago, the Booth School of Business, or its faculty members.
