Nursing Homes’ Flawed Business Model Worsens COVID Crisis

Medicaid is a Mainstay

To understand nursing homes’ finances, you have to start with their revenue. Three-fifths of the nation’s 1.3 million nursing home residents’ fees are paid by Medicaid, the federal-state insurance program for low-income Americans. These older adults (and people with disabilities) often spend their remaining years in a nursing home, at taxpayers’ expense.

How profitable is the Medicaid business? It depends on whom you ask. The average Medi­caid payment, which varies by state, is around $200 per resident per day. But unlike a hotel charging that price, nursing homes have to provide hands-on care that many residents need with their daily activities. They also must provide meals, medical services and more.

Nursing home operators consistently say that $200 doesn’t cover their costs. Industry critics aren’t so quick to agree, citing owners’ opaque finances and multiple income sources (more on that later). “We don’t know whether Medicaid rates are too low or not,” says
Charlene Harrington, a University of California, San Francisco, professor emerita who has studied nursing homes for decades.

What is clear is that the share of this revenue spent on paying and training personnel isn’t enough. The industry’s staff turnover is high, and there’s a critical shortage of people qualified to provide patient care. This detracts from residents’ well-being at any time, but it’s proven especially dangerous in 2020. 

And $200 a day isn’t enough to fund a deep well of supplies or to have private rooms available that might reduce the spread of infection. It has been especially inadequate this year, when facilities faced suddenly skyrocketing costs for infection-control supplies and tests.

Well before the coronavirus blindsided the industry, the numbers were bleak. Consider the most recent report of the government’s Medicare Payment Advisory Commission. In 2018, MedPAC found, nursing homes had an operating profit margin of negative 3 percent on patients paid for by Medicaid and other non-Medicare sources. In other words, for every $100 they took in for these residents, they spent $103 on their care — clearly a losing proposition. During the pandemic, no doubt the math got worse.

The Money is in Medicare

If caring for Medicaid residents is such a poor business, how have nursing homes stayed afloat all these years? The answer is, chiefly, Medicare. While Medicare doesn’t pay for long-term nursing home care, it does cover skilled services and therapy for up to 100 days after a patient is discharged from a hospital. And it pays very well. In 2019, for example, Genesis HealthCare received $535 per resident per day from Medicare — about 2½ times the $215 it got for Medicaid patients.

Yes, Medicare residents usually need more care than Medicaid residents. Even so, Medicare is more profitable: For every $100 that nursing homes receive on behalf of these patients, an average of $10 is left over after subtracting the cost of the care — not a loss of $3.

The upshot is that nursing homes rely on a relatively small number of well-paying residents to make up for the money they say they lose on the rest. “It’s not a structure anyone would have designed from the outset,” says R. Tamara Konetzka, a professor of health services research at the University of Chicago.

Not surprisingly, nursing homes strive to admit more Medicare patients to offset what they say are losses on Medicaid. But that can lead to bad care decisions, Konetzka says, such as encouraging nursing homes to send Medicaid residents to the hospital so they can return as higher-paying Medicare patients.

This year, some nursing homes evicted Medicaid residents in favor of COVID-19 patients receiving care at the higher Medicare rate, according to The New York Times and other news outlets. Inappropriate discharges have long been a top complaint to long-term care ombudsmen nationwide; AARP Foundation has fought the practice in the courts.

The Pandemic Has Hurt

This dependence on Medicare patients has proven hazardous for nursing homes this year. Starting in March, hospitals and patients canceled or delayed many elective procedures, and roughly 10 percent fewer Medicare patients were sent to skilled nursing facilities for rehabilitation, according to MedPAC. Overall nursing home occupancy dropped from 83.4 percent to 74.8 percent from March through June, according to the National Investment Center for Seniors Housing & Care, a research group that compiles nursing home data for investors.

Between May and October, the federal government pumped more than $21 billion into the industry in the form of grants, loans and advance Medicare payments. Only $2.5 billion of that had usage stipulations; it’s unknown how much of the aid went to stop the spread of COVID-19. “Nursing homes can use it to shore up their bottom lines if they want to,” says Elaine Ryan, AARP’s vice president of government affairs for state advocacy. “We might never know where the money went.”

Profits and Private Equity Can Eat Into Care

Beyond the problematic payment system, researchers and policymakers question whether the for-profit ownership structure of most nursing homes is the best model for delivering care.

A number of research studies have found that for-profit nursing homes generally have significantly lower staffing levels and quality of care than nonprofit facilities, as measured by the Nursing Home Compare quality star rating system run by the government’s Centers for Medicare & Medicaid Services (CMS).

Of particular concern to industry followers are the estimated 10 percent of America’s nursing homes owned by private equity (PE) investment groups. Bankrolled by institutional investors and wealthy individuals, these PE firms typically buy businesses, make efficiency and/or cost-cutting changes to increase their apparent value, then sell them within three to five years. PE firms often borrow money against the businesses’ assets and receive management fees as well as a share of profits when the enterprises are sold.

Here’s their usual practice as it pertains to nursing homes, according to Harvard University professor of health care policy David Grabowski and other researchers: A firm will buy a nursing home, then place its buildings and other real estate — nursing homes’ most valuable asset— in a separate holding company. Other companies also owned by the investors will start providing management, laundry, supplies and other services to the nursing home. These ownership structures make it hard to figure out who is responsible for the quality of care and how to recover damages if a resident is injured, says Ashvin Gandhi, a health economist at UCLA who has studied private equity and nursing homes.

Once a nursing home starts paying these related companies, says Grabowski, the home may appear to be struggling, while at the same time the owners are making money from their other entities. The nursing home itself ends up saddled with debts incurred to pay off lenders who financed the PE firm’s purchase.

“The main reason these for-profit companies are in the nursing home business is to extract money through management contracts and lease agreements,” UCSF’s Harrington says. “They scream they have no money, but they’ve legally taken money out through all these related-party transactions.”

Deals like these have been going on for more than 20 years. Other for-profit firms have engaged in similar practices, separating out their real estate holdings and striking management and supply deals with related firms.

“Every dollar they squeeze out of a nursing home for profit is a dollar that isn’t going to the care of the residents,” says Patrick Woodall, a senior researcher at Americans for Financial Reform, a national coalition of consumer and civil rights groups.

There is No Quick Fix

Solutions, sadly, seem far off. “People get concerned when stories of poor nursing home care come out,” Konetzka says. “But politicians never run for office on a platform of raising taxes to improve Medicaid reimbursement.”

The industry itself isn’t always eager for change; it often lobbies at both the federal and state levels to oppose long-term care reforms.

Ultimately, a group effort will be necessary, says Bob Kramer, founder of the National Investment Center for Seniors Housing & Care: “It will take partnerships between the federal government, states, the long-term care industry and insurers to change the system and ensure that people can afford the care they need.”

NEXT: What 2 Very Different Nursing Homes Learned From Fighting COVID-19