St. Paul, Minnesota, 73-year-old woman in a nursing home for a stroke. (Photo by: Michael … [+]
Are nursing home owners underestimating the profits they report back to federal regulators by shifting income to affiliates? Two academic experts on nursing home financing found that in a single state, 63 percent of margins are hidden this fashion. Put one other way, only 37 percent of nursing homes’ actual profits are reported to federal regulators.
A brand new paper Health care economist Ashvin Gandhi of UCLA and financial economist Andrew Olenski of Lehigh University detail how operators “tunnel” spending to related parties and describe the extent of the practice, which is widespread throughout the health care industry.
common practice
Because federal nursing home financial reports are unreliable, the authors used data collected from Illinois. They estimated that 77 percent of companies within the state reported making payments to related parties in 2021. The dollar value of those transactions has greater than doubled to over $800 million from 2001 to 2021 in Illinois alone.
However, they found major differences in the way in which this practice was applied. Some facilities were very aggressive while others were in no way.
These related party transactions aim to overstate costs reported to the federal government and understate profits. The overwhelming majority is in real estate and management. Less commonly, they buy services from nursing to laundry.
“Diversionary maneuver”
The American Health Care Association, the trade group that primarily represents for-profit nursing homes, said the concentrate on related-party transactions was a “red herring.”
The group sent me a written comment that said, partially: “We do not believe it is common practice to “tunnel” profits into other areas of business…The sad truth is that long-term care is chronically underfunded and ancillary services, etc. aren’t available Related parties sometimes help keep these institutions afloat. These issues distract from the true challenges facing a lot of the long-term care sector.”
Low profits
The deals work like this: A nursing home operator sells a facility to an actual estate company controlled by the power’s owner. The real estate company then rents the property back to the nursing home at an inflated price.
The higher rent reduces the profits that the nursing home reports to the federal government, but at the identical time increases the income of the true estate company or its investors, which is mostly not disclosed to regulators. Purchasing other services through related parties works in the identical way.
The cost differences are striking. The newspaper reports on one facility whose rents from an affiliated party paid a mean of $7,094 per bed, in comparison with $4,377 from an independent party.
The authors also found that shifting profits to an affiliate also helps protect nursing home operators from malpractice insurance claims. Illinois facilities that used related-party transactions reduced premiums by a couple of third, or nearly $26,000 per 12 months, though their paid losses didn’t change.
Government payments
The study could have significant implications for the way in which the federal government pays and regulates the facilities.
For example, AHCA recently objected to 1 Biden administration efforts to extend staffing within the facilities. It wrote“Chronic underfunding of Medicaid and rising inflation leave many facilities operating on tight budgets or on the verge of closing, and these unfunded mandates could overwhelm them – significantly impacting seniors’ access to quality care.”
This argument has convinced many congressmen to oppose the proposed rules. There are Reasons why they needs to be modified. And many nursing homes are in financial trouble. However, if the brand new study is accurate, the industry’s widespread claims of bankruptcy are significantly overstated.
Solve a puzzle
Gandhi and Olseki didn’t conclude that related party transactions affected the standard of care. However, they estimated that nursing homes would have revenue to extend their staffing levels by about 30 percent in the event that they paid market reasonably than inflated prices for rent and services.
Your evaluation may also help solve a financial mystery. Even as for-profit nursing home operators complain that they can not survive on the payments they receive from Medicare and Medicaid, Buyers pay a mean of just about a record-breaking $100,000 per bed. That equates to $10 million for a typical 100-bed facility.
However, based on reported earnings, they calculated a yield of 0.1%, which is way lower than super-safe US Treasuries. These prices are only justified, say the authors, if the actual profits are significantly higher than those reported by many institutions.
Quality as an alternative of costs
These related party transactions largely result from the weird economics of nursing homes. Almost all nursing home revenue comes from either Medicare for expert nursing care or Medicaid for long-term stays. And the facilities are using low reported profits to pressure the federal government to extend their payments. Medicare Advantage managed care plans negotiate with nursing facilities for reimbursement rates which are much lower than traditional Medicare plans.
The federal government is taking steps to extend financial disclosure through nursing homes. However, more must be done to make clear the dimensions of related party transactions nationwide. Ultimately, nonetheless, nursing home payments needs to be more closely tied to quality and outcomes for patients and residents than to reported costs.
