It’s been called one of the worst nursing homes in New Jersey.
For years it “siphoned” millions of dollars of Medicaid funds out of the home and to various side businesses, a state watchdog found, “leaving residents to live in a dismal, understaffed, and under-resourced facility.”
And in December, acting State Comptroller Kevin Walsh moved to kick South Jersey Extended Care, its owner and those associated with its operations from the state’s Medicaid program.
“This was a massive scam,” he said. “These individuals were able to amass a fortune by pretending to be independent parties. In reality, they operated as one unit, providing terrible care to the sick, the elderly, and the poor, so they could make big profits.”
Money that could have been used to hire additional staff, improve facilities, or enhance resident programs was instead used for owner distributions, “consulting” fees, and charitable donations to organizations they controlled, the report said.
There are approximately 15,000 nursing homes in the United States, caring for about 1.2 million people, and more than half reported operating at a loss in 2023, according to a review of the annual cost reports they file with the Centers for Medicare and Medicaid.
Nursing home owners and the organizations that represent them have repeatedly said that Medicare and Medicaid reimbursements simply aren’t enough. The best way to improve care for the frail and elderly, they have said time and again, is to send more taxpayer dollars their way.
But some long-term-care operators across the country have become adept at the legal practice of paying related side businesses they own as well, effectively blurring where the money goes, according to advocates, critics and academic studies. And in the case of South Jersey Extended Care, they crossed a line, regulators charged.
“They siphoned funds intended for resident care to their personal and business interests, reflecting a clear case of fraud, waste, and abuse of Medicaid funds,” the comptroller said.
‘Skimming’
Mark Davis is an elder care attorney in New Jersey. He said nursing homes often pay inflated costs to the related companies. He said: “They use management entities to get money out of the facility and into the owners’ pockets.”
Some call that “skimming.” Others term it “tunneling.” Or “funneling.”
And today, most nursing homes are doing it, according to an analysis by reporters of federal cost reports. It’s how a nursing home can show a substantial loss on paper, as operators shift money through deals with their own side companies.
“They use management entities to get money out of the facility and into the owners’ pockets…” Illustration by Andrea Levy
But such transactions are legal and by no means uncommon, industry officials point out.
Martin Allen is senior vice president of reimbursement at American Health Care Association/National Center for Assisted Living, a trade organization that represents more than 14,000 nursing homes and long-term care facilities.
“Related parties are common across a variety of industries,” said Allen, “and focusing on them among nursing homes is a red herring.”
Here’s how it works: More than 7 in 10 long-term care facilities, or about 78% of all nursing homes nationwide, operate multiple entities with the same or related owners, according to the cost reports they file with federal regulators.
A home might rent its building from one company, pay management fees to another company and hire a third company to provide physical therapy. The nursing home business could show a loss, while the other businesses, owned by some of the same people, make money.
Experts trace the widespread use of sister companies to a 2003 article in the Journal of Health Law that suggested nursing home operators split off their real estate holdings to limit legal liability.
“And let me tell you, the industry read that article because within a couple of years, everyone was using this model,” said Ernest Tosh, a Texas attorney who has testified before Congress. “It’s not uncommon for us now to go into litigation with a chain that only has 50 regional nursing homes, but it’ll have 150 or 200 (limited liability corporations) at least.”
Which makes figuring out where the money is going difficult. “It takes too much effort, too many depositions. It’s not worth the expense,” he added, “so it is very effective.”
But Allen said the related businesses help owners streamline services. The real problem, he added, is that the government is not paying enough.
“The sad truth is that because long-term care is chronically underfunded, ancillary services sometimes help keep these nursing homes afloat,” the trade group official said. “But they alone cannot fix where public policymakers have shortchanged our nation’s seniors.”
Driving up costs
In a paper published last year by the National Bureau of Economic Research, economists Andrew Olenski and Ashvin Gandhi estimated that in 2019, “63% of nursing home profits were hidden and tunneled to related parties through inflated transfer prices.”
So what happens when nursing homes do business with sister companies?
Olenski and Gandhi found that costs go up. A lot.
Once a facility adopts a related party for one of these services, total spending increases by 20.4% for real estate and by 24.6% for management, they discovered.
“This may not seem like a tremendous amount of money,” said Olenski, a professor at Lehigh University in Pennsylvania, “but when you consider just how much money these firms are spending on rents and management, it turns out that a 20 to 30% markup on your costs can really meaningfully shift your stated profit margins.”
Industry officials note that such transactions aren’t hidden. They are disclosed on federal and state nursing home cost reports.
But the public can’t see those records online. They are filed in massive data files that are difficult to parse out into individual reports.
Lack of transparency is getting worse, said Stephen Crystal, director of the Center for Health Services Research at Rutgers University. He said that’s due to the use of related companies under the same ownership, but also due to the increasing presence of private equity investors buying nursing homes.
“There is an obscurity built into private equity. They are not public companies, so they operate under much more of a veil,” he said. “When you send your mom into a nursing home, they should be accountable for who that is.”
‘The Russian doll scenario’
For nursing homes doing business with companies under the same ownership, the federal government sets a standard for Medicare for costs that a “reasonably prudent buyer” might pay on the open market.
But that’s not how those costs appear on the reports nursing homes file with regulators each year, according to Tosh, the attorney in Texas. Instead, he explained, they contain what is called the “allowable cost” — what a related company claims it actually cost to provide a good or service.
Those numbers are reported each year by the nursing homes. Operators spell out what they paid to related companies in annual federal reports. In the federal filings examined by reporters, U.S. nursing homes in 2023 reported paying related businesses billions more than what they stated to be the actual costs for those services (as listed as “allowable costs” in federal reports).
The instructions for entering the actual costs in the reports are pretty straightforward: “Enter the allowable cost from the books and/or records of the related organization which includes only the actual cost incurred by the related organization for services, facilities, and/or supplies and excludes any markup, profit or amounts that otherwise exceed the acquisition cost of such items.”
A final column shows how much each home paid related companies above that actual cost.
In 2023, nursing home operators paid $2.76 billion over and above “allowable costs” to related businesses.
For example, if a nursing home operator also owns a pharmacy supply service, the cost report might show that it spent $300,000 on drugs. That’s the allowable cost under Medicare. If the federal cost report indicates that the nursing home actually paid the pharmacy $500,000, the difference between the two numbers shows the pharmacy was paid $200,000 over the “allowable cost,” said Tosh.
Since both businesses are owned by the same owner, he said, that $200,000 effectively stays with the nursing home operator.
But what was the actual cost? What was the fair market value?
“Nobody knows the answer to either of those questions,” said Tosh. “There is no monitoring of related parties. The reporting of overpayments to related parties relies on the nursing home industry to truthfully report this information.”
Those kinds of arrangements are no surprise to attorney Paul da Costa, who has sued several long-term-care operators over allegations of failure of care. He described the business as “the Russian doll scenario,” referring to the iconic Matryoshka nesting dolls that stack within each other.
‘Not arm’s length’
In Ohio, the family of a man who choked to death in a nursing home filed a lawsuit questioning how much money that facility was funneling out of the facility in management fees.
Ronald Wysong’s family installed a camera inside his room at the Ohio nursing home soon after the 81-year-old he moved in. According to a lawsuit the family filed against Sanctuary at Wilmington Place in Dayton, he was prescribed a “mechanically altered diet” that required his food to be pureed and minced or he would choke.
“Help me,” he muttered one afternoon, visibly struggling to breathe, as seen on a video cited in the lawsuit. A nursing aide from a temporary staffing agency handed him a bucket before leaving him alone, according to the lawsuit.
When the aide returned, Wysong was unresponsive, according to the lawsuit and the video.
Panic erupted as the aide started repeatedly swearing and a nurse attempted to revive Wysong using CPR, as captured on video. After more delay, the staff brought a “crash cart” into the room. However, the suction machine it carried was not working, according to the complaint. Finally, an EMS crew arrived on the scene.
Wysong, who loved photography, wood carving and fishing, choked to death, according to a pathologist’s report. The lawsuit, still pending in court, alleges the nursing home’s parent company, American Health Foundation “undertook a concentrated effort to increase the number of residents in the buildings while reducing the budget and resources to such a degree that appropriate and safe care was not and could not be provided” at the expense of their residents’ care.
At the same time, the case questioned how much money was going out through management fees paid to the parent company. “The management fee agreements are not arm’s length transactions where both sides act independently and in their own self-interest,” they alleged in the lawsuit.
That was because both parties were owned and controlled by American Health Foundation, according to the lawsuit.
American Health Foundation did not return calls or emails seeking comment. But in court filings, it said that the nursing facility itself “directs and controls day-to-day operations including staffing and nursing care,” and denied that any conduct by the facility’s staff “led to Ronald H. Wysong’s pain, suffering and wrongful death.”
Side businesses
A federal report in December raised concerns about the use of side businesses.
Nursing homes from 2015 through 2020 reported receiving $160.4 billion in Medicare payments. But more than a third, $65.4 billion, of that was paid to related parties, according to the report by the Office of Inspector General for the Department of Health and Human Services.
Nursing homes from 2015 through 2020 reported receiving $160.4 billion in Medicare payments. More than a third of that was paid to related parties, according to a recent report. Illustration by Andrea Levy
Federal regulations state that “related to the provider means that the provider to a significant extent is associated or affiliated with or has control of or is controlled by the organization furnishing the services, facilities, or supplies,” the report stated.
And the report just looked at what nursing homes share about themselves.
Much doesn’t get shared. For example, in an audit of just 14 nursing homes, the inspector general found three failed to report one or more related parties on their Medicare cost reports.
“In addition, 7 of the 14 SNFs (skilled nursing facilities) did not properly adjust some of their related-party costs to Medicare-allowable costs as required, which resulted in more than $1.7 million in overstated costs,” the inspector general said.
The watchdog in its report criticized CMS as well, finding that the federal agency “did not provide sufficient guidance” to nursing homes on Medicare-allowable related-party costs.
‘Extremely high profits’
In New Jersey, the state comptroller in a report in December highlighted the potential abuse of using related businesses.
At the center of it all was South Jersey Extended Care, a sprawling 167-bed nursing home located in a wooded tract off a rural, two-lane road in Bridgeton about 50 miles west of Atlantic City. The report noted that the facility was operated by Mark Weisz. However, investigators called Weisz “a straw owner who yielded all control to his cousin, Michael Konig, and Konig’s brother-in-law, Steven Krausman.”
South Jersey Extended Care in Bridgeton. NJ Office of the State Comptroller
Konig transferred ownership of his nursing homes in New Jersey to his cousin after he had been barred from operating nursing homes in Connecticut and Massachusetts, the comptroller reported. The arrangement allowed Konig to continue operating the facility and continue to profit through third-party companies that received contracts from South Jersey Extended Care, the comptroller concluded in a report of his findings.
Those deals included a food services contract with one Konig company, National Nutritional, which received $13.9 million over a five-year period from April 2018 to March 2023. Of that, $2.8 million went into Konig’s bank account, said the comptroller, who accused National Nutritional of “significantly inflating the costs it charged to South Jersey Extended Care” to profit from the relationship.
“They decided where the money went. They handled everything,” said Walsh. “And for almost every major contract, they hired their own businesses.”
In his report, the comptroller said a review of South Jersey’s contracts and invoices documented that price terms and payments “were not based on the actual cost of goods and/or services to the related party.”
That resulted in “what appears to be extremely high profits to Konig-owned or -controlled entities, for things such as food, medical supplies, and staffing, with comparatively little spent on the actual goods or services provided to South Jersey Extended Care,” the report said. “This arrangement obviously benefitted Konig but resulted in waste of public funds and harmed SJEC’s residents.”
Peter Slocum, the attorney for Konig, the nursing home and others named in the report, denied the allegations. He maintained that the third-party companies providing services did not meet the definition of “related entities.”
Slocum also said Konig had not been barred from owning nursing homes.
“He merely agreed not to purchase a new facility for a given period,” Slocum wrote in a letter to the comptroller, which he shared with NJ.com.
Slocum added that the “wildly defamatory accusations that (his clients) ‘actively commit(ed) fraud, waste, and abuse’ as part of a ‘wholesale fraud upon the state and federal governments’ are unsupportable.”
But Walsh said his office, with the approval of the state Attorney General, “is suspending those responsible for this conduct from New Jersey Medicaid.” They include Weisz, Krausman through his company Comprehensive Health Care Management Services, and Konig. That suspension was to take effect last week, court filings show, but has been moved to the end of May with the appointment of a receiver.
The nursing home has not challenged the suspension, officials said.
In April, New Jersey went to court to have a receiver appointed to take over South Jersey Extended Care’s operations, determining that the home was “in acute financial distress and/or at risk of filing for bankruptcy protection and/or at risk of an impending closure, which would have a significant adverse effect on the health, safety and welfare of the facility’s residents.”
A judge approved the naming of a receiver, which went unopposed by the home’s operators. State records show South Jersey Extended Care is now seeking to transfer ownership.
‘A multibillion-dollar game of Whac-a-Mole’
In general, nursing homes that outsource to related organizations tend to have major shortcomings, according to an analysis of inspection and quality records by KFF, a nonprofit health policy research organization.
“They have fewer nurses and aides per patient, they have higher rates of patient injuries and unsafe practices, and they are the subject of complaints almost twice as often as independent homes,” the analysis found.
Tosh, the Texas attorney, said staffing levels are an indicator of the quality of care. “Staffing dictates outcomes,” he said. “If the number is too low, you’ve killed off a number of old people.”
He said nursing homes should be staffing based on the health needs of the residents in each facility — what is known as staffing to acuity.
Those numbers are already reported to the Centers for Medicare and Medicaid Services, or CMS. But the regulators don’t use them, he said.
Keeping an eye on industry financial practices, meanwhile, can be difficult, say some advocates and regulators.
“The history of attempting to ensure nursing homes don’t divert money away is a multibillion-dollar game of ‘Whac-A-Mole,’ in which the government regulates and the industry adjusts,” said Walsh, the New Jersey state comptroller.
“Greed is at the heart of the problem,” he added.
Acting New Jersey State Comptroller Kevin Walsh Courtesy of the Office of the State Comptroller
In New Jersey, Walsh has been ushering in a more aggressive approach to policing poorly performing nursing homes by urging the administration of Gov. Phil Murphy to withhold Medicaid funding from nursing home owners that receive one out of five stars from the federal government based on quality and staffing.
Nationally, what can be done?
The feds could set standards. They could set requirements for how much money is spent on food for residents, said Charlene Harrington at UC San Francisco. The feds could also set limits on how much money goes to administration or rents or profits. Harrington said it’s not clear that government regulators have any idea how long-term care facilities are spending Medicaid dollars, or how much operators are profiting. “The regulation of nursing homes is a disgrace,” she said.The U.S. Centers for Medicare and Medicaid Services could conduct random audits on facilities, suggested Richard Mollot, executive director of the Long-Term Care Community Coalition. “There is a lack of urgency when it comes to resident safety and program integrity, and a domino effect of failure after failure after failure to take resident harm seriously. At every level in my experience and what I see in the data, there is a disregard for the lives of people in nursing homes and assisted living facilities,” Mollot said.Federal regulators could also audit the cost reports nursing home operators file each year. “They just let it go into a giant database to never be seen again,” said Tosh.Inspections could be improved. Or even conducted in the first place.
Nationwide, routine inspections are not happening in many nursing homes because of delays and understaffing at the state level. More than 20% of the nation’s 15,000 nursing homes were behind on comprehensive annual inspections, reporting shows. One in 10 have not received an annual inspection in two years or more, according to CMS data reviewed by reporters.
But federal regulators in charge say they don’t have enough money to do more.
A spokesman for the Centers for Medicare and Medicaid Services said annual funding to conduct health and safety inspections has not changed over the last nine years. Yet, the spokesman acknowledged that the number of complaints has “sharply increased” in recent years.
And there aren’t enough inspectors at the state level.
The U.S. Senate Committee on Aging in 2023 found more than half of the inspector jobs were unfilled in nine states.
And employees sometimes know to prepare for inspections anyway, according to a lawsuit by the U.S. Justice Department .
“The facilities often had some sense of when a survey could occur, which gave the facilities a chance to prepare for scrutiny,” said federal prosecutors looking into one home in Pennsylvania.
A week after an inspection by the state, prosecutors said, a worker sent an internal email to another mocking the state inspection:
“Ain’t nobody faker than a nursing home when the state is in the building… #Factz.”
