[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                    TRENDS IN NURSING HOME OWNERSHIP 
                              AND QUALITY 

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 15, 2007

                               __________

                           Serial No. 110-66

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

                         Subcommittee on Health

                FORTNEY PETE STARK, California, Chairman

LLOYD DOGGETT, Texas                 DAVE CAMP, Michigan
MIKE THOMPSON, California            SAM JOHNSON, Texas
RAHM EMANUEL, Illinois               JIM RAMSTAD, Minnesota
XAVIER BECERRA, California           PHIL ENGLISH, Pennsylvania
EARL POMEROY, North Dakota           KENNY HULSHOF, Missouri
STEPHANIE TUBBS JONES, Ohio
RON KIND, Wisconsin

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of November 8, 2007, announcing the hearing.............     2

                               WITNESSES

Charlene Harrington, Ph.D., Professor of Sociology and Nursing, 
  Department of Social and Behavioral Sciences, University of 
  California, San Francisco, California..........................    12
John Schnelle, Ph.D., Professor of Medicine and Director of the 
  Vanderbilt Center for Quality Aging, Vanderbilt University, 
  Nashville, Tennessee...........................................    22
Scott A. Johnson, Special Assistant Attorney General, State of 
  Mississippi, Jackson, Mississippi..............................    27
Arvid Muller, Assistant Director of Research, Service Employees 
  International Union............................................    40

                       SUBMISSIONS FOR THE RECORD

American HealthCare Association, statement.......................   100
AARP, statement..................................................   104
Center for Medicare Advocacy, statement..........................   106
HCR ManorCare, letter............................................   110
National Association of Portable X-Ray Providers, statement......   114
Wisconsin Institute of Certified Public Accountants, letter......   115


                    TRENDS IN NURSING HOME OWNERSHIP

                              AND QUALITY

                              ----------                              


                      THURSDAY, NOVEMBER 15, 2007

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:13 a.m., in 
Room 1100, Longworth House Office Building, Hon. Fortney Pete 
Stark (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
November 08, 2007
HL-18

                  Stark Announces Hearing on Trends in

                   Nursing Home Ownership and Quality

    House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) 
announced today that the Subcommittee will hold a hearing to examine 
the effect of nursing home ownership trends on nursing home quality and 
accountability. The hearing will take place at 10:00 a.m. on Thursday, 
November 15, 2007, in Room 1100, Longworth House Office Building.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Subcommittee and 
for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Medicare covers care in skilled nursing facilities (SNFs) for 
beneficiaries who need short-term skilled nursing care or 
rehabilitation services on a daily basis in an inpatient setting. In 
2005, Medicare covered 2.5 million SNF admissions, and nearly 70 
million SNF days.
      
    The Congressional Budget Office projects Medicare SNF spending of 
$21.1 billion for fiscal year 2008, with spending growing at an annual 
average rate of 6.0 percent through 2017. Medicare and Medicaid pay for 
the majority of nursing home care in the United States.
      
    According to the Medicare Payment Advisory Commission, Medicare 
margins for SNFs reached 12.9 percent in 2005. For-profit SNFs, which 
constitute 68 percent of facilities, had margins of 15.5 percent, as 
compared to nonprofit homes, with margins of 4.5 percent. For 2007, 
MedPAC projects Medicare SNF margins of 11 percent.
      
    Nursing home chains constitute slightly more than half of the 
industry. In recent years, several major nursing home chains have 
restructured or reorganized as a result of mergers, bankruptcies, and 
acquisitions. HCR ManorCare, one of the largest chains, will soon be 
purchased by the Carlyle Group in a $6.3 billion acquisition described 
in both companies' press releases as one that will convert ManorCare 
from a publicly-traded company to a private, equity-owned company.
      
    Acquisitions and related increases in debt have often been 
accompanied by changes in ownership and management, cost controls, and 
corporate restructuring, including the sale of assets and real estate 
and the establishment of limited liability companies. As a major 
purchaser of nursing home services, the implications of these changes 
on quality and accountability of care are of great importance to the 
Medicare program. The New York Times recently investigated the effect 
of private investment in certain nursing homes, reporting that the 
heightened focus on cost controls led to staffing cuts and concurrent 
declines in quality care. The New York Times also reported that 
corporate restructuring created difficulties for State regulators and 
beneficiaries in identifying accountability and liability for quality 
of care.
      
    ``It's been far too long since Congress has focused on nursing home 
quality issues,'' stated Chairman Stark in announcing the hearing. ``I 
am concerned about quality issues and lack of accountability, 
particularly as more and more beneficiaries are now living in private 
equity-owned homes. While we must not prejudge anything, these changes 
provide ample reason for us to reinitiate close oversight of this 
industry to make sure that interests of beneficiaries are protected.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on trends in nursing home ownership and 
quality of, and accountability for, patient care, including the effect 
of the relatively new trend of private equity ownership.
      

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    Mr. STARK. With an apology to my colleagues and our guests 
for the late start, I would like to begin our hearing on the 
issue of nursing home quality. Thank you for joining us in the 
first of a series of hearings on nursing home quality issues. 
It has been 20 years since the passage of the Nursing Home 
Reform Act, and I guess over a decade since we have held any 
hearings on nursing home issues on the Committee on Ways and 
Means. Despite improvements in areas of quality, there is still 
much to be done. I think our return to this issue is long 
overdue.
    I don't want to prejudge any segment of the industry or 
anyone in the industry, but I am concerned about a trend that 
is underway. In recent years, several nursing home chains have 
changed their corporate structure in ways that may obfuscate 
the real ownership and management of the individual facilities. 
I will talk more just for a second at the conclusion of my 
remarks about that by itself. It seems that--I will talk more 
about that in a minute.
    Without this transparency and accountability, it is hard to 
hold chains accountable for the quality of care of an 
individual unit. I worry that this move to more large private 
equity firm ownership will exacerbate that trend. It has been 
suggested that there is a negative effect on quality that may 
result from these corporate structures. I was alarmed to read 
The New York Times article earlier this year that suggested the 
decline in quality among private equity-owned nursing homes. I 
guess in a nutshell, they are suggesting that the private 
equity firms spin off the real estate to leverage the value of 
the real estate to pay for the acquisition, and in so doing 
either increase the interest payments needed by the individual 
units to support the increased mortgages or increase, if they 
spin it off into a REIT, for instance, they increase the rent 
to the individual units to sustain their purchase obligations.
    I have no quarrel with that if it doesn't result in their 
reducing the funds they spend for the needed facilities and 
needed employment to maintain quality of care. I don't intend 
to question what they do as a business practice. But I do worry 
that the end result could create an incentive to cut costs, as 
we like to say. The only costs that I know that they can cut 
are either in nursing care or food or tender loving care. I 
don't know how you legislate tender loving care. This industry 
operates largely on the government's dime. Sixty percent of the 
spending on nursing homes annually comes from the government, 
and the remainder is out-of-pocket or from private insurance. 
At any time nearly 80 percent of the residents in nursing homes 
are supported by public funds.
    The same nursing home industry is enjoying very healthy 
Medicare--and I have to underline Medicare because there is a 
distinct difference here between Medicare and Medicaid 
throughout the industry. But with margins of nearly 13 percent 
at the last reportable period, and we hear indirectly they are 
close to that even in the most recent figures that are 
available, the for-profit nursing homes are doing even better, 
with Medicare margins north of 15 percent. For those of you who 
follow the hospital margins, we are used to dealing with acute 
care hospitals in the neighborhood of somewhere between zero 
and far out would be 5 percent margins. The industry is 
publicly supported, and therefore must be held accountable to 
the public for the care it provides. The nursing home chains 
should be striving to improve care and not cut corners to 
increase profits at the expense of the seniors and people with 
disabilities. I plan to continue looking into the issue of 
nursing home quality and accountability. We have already 
received some policy recommendations from a coalition of 
consumer groups. I would like to review those.
    I would like to enter into the record a letter from the 
National Consumer Voice for Quality Long-Term Care, a letter 
addressed to Mr. Camp and myself. Without objection I would 
make that part of today's record.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    


    Mr. STARK. Mr. Camp and I would also like to see if we 
could initiate further professional investigations into this 
issue. I think we will do that today. Let me just return for a 
moment to this issue, and that is, as I said, there may be a 
lot of business reasons for large corporations or chains who 
acquire hundreds of nursing home entities to separate each one 
of those entities into a separate corporation or separate them 
into different corporations in different States. That is their 
business. They may do it for tax reasons, which is perfectly, 
as long as they pay their legal taxes that they owe, that is 
okay, too. But to the extent that either intentionally or as a 
result it limits both financial liability and/or professional 
liability by shielding small units, say a 50-bed hospital out 
of a chain that may have thousands of beds so that either the 
State enforcement agency or a court in a tort liability--in a 
liability suit can't get at assets either to pay the fine or to 
assess penalties for behavior that is originated at the owning 
level, but not--you can't get to them because of corporate 
shields, to that extent I might suggest that they can go ahead 
and to that, but then each major chain would have to provide a 
bond, for example, for each unit in the chain equal to 
somewhere north of the total equity of that institution.
    So, that for whatever reason, if they want a separate 
corporate entity that doesn't own any real estate that you 
could get after, doesn't have any assets against which you can 
levy a fine or a court judgment, they would have to bond 
themselves up to the many millions of dollars of equity that 
their corporate parent might have. So, we could probably 
accommodate both issues, the business reasons that the multiple 
chain corporations would like to have and also what the State 
regulators would like to have, and what the people who would 
like to use the courts as a way to see that people provide good 
care.
    So, I think that there are a lot of ways that we can work 
together to do this, and I think everybody, the industry, who, 
by the way, were invited. The industry's advocates and many of 
the large corporations were invited to be here today, and they 
chose not to. HCA had submitted written testimony, which is in 
the record. I yield now for any comments he would like to make 
to my Ranking Member, Mr. Camp.
    Mr. CAMP. Thank you, Mr. Chairman. Like you, I was troubled 
by the recent articles in The New York Times, and particularly 
the one entitled ``At Many More Homes More Profit and Less 
Nursing,'' which really does paint a disturbing picture of the 
care being delivered at two Florida nursing homes. The author 
makes the argument that private equity homes are purchasing 
nursing homes, slashing their budgets, firing their staff, and 
leaving residents with substandard care all in order to 
increase profits.
    In addition to this preference for profit over quality 
care, the article suggests private equity firms reorganize the 
corporate structure of nursing homes to shield owners and their 
assets from liability in suits arising from patients receiving 
inadequate care. While this is an important story for us to 
hear, I am concerned that it is not the whole story. In 
response to the article, the Florida Agency for Health Care 
Administration recently issued an investigative report that 
examined these issues. This detailed report found that, and I 
quote, ``there is no evidence to support that the quality of 
nursing home care suffers when a facility is owned by a private 
equity firm or an investment entity.''
    Instead, this report found that other factors, like the 
percentage of Medicaid patients and the age and location of the 
facility were more likely to have an impact on nursing home 
quality. I am disappointed that story will not be examined at 
today's hearing. I am especially frustrated that the American 
Healthcare Association and the Alliance For Quality Nursing 
Home Care, who are supposed to represent the nursing home 
industry, both declined our offers to testify today. This 
failure does a disservice to the entire nursing home industry 
and the Members of this Committee who will now not be able to 
hear their side of this important issue. I would just like to 
ask unanimous consent to admit into the record a statement. 
This is the eighth hearing on nursing home issues since 2003, 
including a hearing in May of '07, which the president of the 
American Healthcare Association did testify before this 
Committee. So, I would ask unanimous consent that that memo be 
placed in the record.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. CAMP. While it is extremely important to have 
transparency of ownership and clear patient protections, I am 
concerned that it is simply attacking private equity ownership, 
or for that matter making it easier for care givers to be 
unionized, and ignores the root problem and will do little, if 
anything, to improve the quality of nursing home care or lower 
health care costs. Given our narrow focus today, I fear this 
hearing is more about political payback than the patients 
suffering from inadequate care.
    I hope that the Chairman will work with me in attempting to 
get to the bottom of this larger issue. It certainly deserves 
our attention. As a first step I would ask that he join me in 
drafting a joint letter to the GAO, asking them to explore 
nursing home quality as it relates to ownership and other 
factors. With that I yield back the balance of my time.
    Mr. STARK. Thank you. The gentleman as usual is correct, we 
have had hearings on nursing homes, but they have been entirely 
focused on payment issues, which are important, and not 
necessarily on the quality or quality regulations or the 
results of various studies. I would like to introduce our 
panel.
    Mr. THOMPSON. Mr. Chairman?
    Mr. STARK. Mr. Thompson?
    Mr. THOMPSON. Thank you, Mr. Chairman. I want to thank you 
for holding today's hearing. I think quality of care in nursing 
homes is something that is important to all of us. But I just 
want to state for the record, and would like to hear from you, 
Mr. Chairman, if you would, I just think it is very important 
that this Committee recognize that we share jurisdiction with 
another Committee on this issue. One of the big--you can't 
divorce the two issues of quality and the issues of pay in this 
discussion. The reality is we look at one side of it.
    The Commerce Committee has the Medicaid side of it. I think 
this Committee needs to do everything we possibly can to make 
sure that we encourage our colleagues on the Commerce Committee 
to do a better job with the Medicaid component. That is a big 
problem in this whole debate. As long as there is going to be a 
need for these care homes, and believe me there is going to be 
as long as we all keep getting older and there are no other--
not you, Mr. Chairman--and there are not other alternatives, 
this is a very, very important industry in our community and in 
our families. We need to have a more holistic, I think, 
approach in how we deal with this.
    So, I would like to encourage you, Mr. Chairman, and Mr. 
Camp, the Ranking Member, to please use the power and force of 
this Committee and all of its memberships to get our colleagues 
in the Commerce Committee to address this other side of the 
financial equation.
    Mr. STARK. Well, the gentleman's remarks are well taken. I 
have great fear of taking on the entire Michigan delegation, 
much less the Ranking Member or the Chair of the Energy and 
Commerce Committee, all in one term of Congress. But I have 
been encouraging Energy and Commerce to do a better job for 
over 35 years, and I will continue to do that. You are correct 
that we have a joint jurisdiction, and our reimbursement part 
is very small. But our concern, I think, that is shared equally 
with Energy and Commerce right now is the quality issue and 
what we can do there. If it is indeed overall payment, I don't 
think, although we are called on often to pay for other 
Committees' legislative mandates--I will address the issue as 
long as you raise it--that we can have Medicare in the position 
of bailing out lower Medicaid payments.
    I just would give you an example. I don't know how many 
States anybody can think of where Medicaid pays a physician 
more than Medicare. There may be a State, but I haven't heard 
of it lately. Now if we were going to suddenly have to raise 
Medicare physician reimbursement to cover low payments by 
States we could break the Medicare system in short order. So, 
while that jurisdictional problem will come up, and I think we 
should all be cognizant of it, I think we just have to go ahead 
based on our role for those Medicare beneficiaries who need 
these services. I agree.
    Okay. I am supposed to agree with him. I am following 
pretty well. He says I should listen to my staff. Now let me 
introduce our witnesses and see if I can get through that one 
without a correction. I am going to call on the witnesses in 
the order on which they appear on our list. The first one is 
Ms. Charlene Harrington, who is a professor of sociology and 
nursing at the Department of Social and Behavioral Sciences at 
the University of California in San Francisco. Dr. Harrington 
will provide an overview of ownership and quality trends. 
Professor John Schnelle, did I pronounce that correctly.
    Mr. SCHNELLE. Close.
    Mr. STARK. Close. Okay. Professor of medicine and director 
of the Vanderbilt Center for Quality Aging at Vanderbilt 
University in Nashville, Tennessee. Mr. Scott Johnson, a 
Special Assistant Attorney General from the State of 
Mississippi. He will explain how companies have moved to more 
complex corporate structures and what it presents to a 
regulator in trying to build quality care. Mr. Arvid Muller, 
the assistant director of research for the SEIU are, more 
affectionately known as the Service Employees International 
Union. He will report and discuss the effects of corporate 
structure on care in the nursing home industry. We are going to 
ask each of the witnesses to summarize in about 5 minutes, if 
they can. Without objection, their entire prepared testimony 
will appear in the record. We can get more of the issues that 
are of interest to you as we inquire after your testimony. 
Professor, or Dr. Harrington, as you prefer, would you like to 
lead off?

STATEMENT OF CHARLENE HARRINGTON, Ph.D., PROFESSOR OF SOCIOLOGY 
  AND NURSING, DEPARTMENT OF SOCIAL AND BEHAVIORAL SCIENCES, 
                    UNIVERSITY OF CALIFORNIA

    Ms. HARRINGTON. Yes. Thank you very much. I am pleased to 
be here to testify today as an individual researcher who is 
concerned that the recent purchase of nursing home chains by 
private equity companies will have a negative effect on the 
quality of care for nursing home residents. Today I will 
present trends in nursing home quality and ownership, and 
discuss three areas. One, adequate nurse staffing levels and 
electronic staff reporting; two, transparency and 
responsibility in ownership; and three, financial 
accountability for government funding.
    Over 16,000 nursing homes, with over 1.8 million beds, will 
take in about $132 billion in revenues this year. Sixty-two 
percent of that is paid by Medicare and Medicaid and 
government, which covers 78 percent of all the residents. In 
spite of the high cost of care, literally dozens of studies 
have documented the persistent quality problems in many nursing 
homes. The poor care is related to low staffing levels and the 
25 percent drop in RN staffing since the year 2000. Nursing 
homes are not required to provide the level of staffing paid 
for by Medicare rates, and few nursing homes in the United 
States meet the staffing levels recommended by experts. For-
profit companies are 66 percent of nursing homes and for-profit 
chains now operate 52 percent of the beds. For-profit chains 
have lower nurse staffing than for-profit independent 
facilities and nonprofit chains. In fact, for-profit chains 
provide only 57 percent of the RN hours and 78 percent of the 
total hours that nonprofit facilities provide in the United 
States. In 2006, the 50 largest nursing home chains operated 30 
percent of the Nation's facilities.
    By 2007, six of the 10 largest chains were either purchased 
or in the process of being purchased by private equity 
companies. These companies used strategies similar to those 
used by the publicly-traded chains to enhance profits. Many own 
a range of related companies, and they target Medicare and 
private payers to increase their revenues, while they control 
their staffing levels and expenditures. Private equity 
companies may have a negative impact on staffing and quality.
    We examined 105 nursing facilities purchased by one private 
equity company in 2006. The average RN staffing dropped by 8 
percent, and the total nurse staffing dropped by 7 percent 
after purchase. After the sale, the average RN staffing was 
only 75 percent, and total staffing was 85 percent of the 
national average.
    At the same time, total deficiencies increased from over 
500 to over 1,000 deficiencies. Serious deficiencies increased 
by 80 percent after the purchase. These findings raise two 
concerns. First, the private equity firms do not have the 
expertise and experience to manage complex nursing home 
organizations. Second, these firms are likely to cut staffing 
to increase profits, which can harm residents. Another 
troubling and dramatic trend is the conversion of individual 
facilities into limited liability companies, which protect the 
parent companies from litigation. Many nursing home chains have 
dropped their liability coverage entirely to discourage 
litigation.
    Some chains have moved facility assets into separate real 
estate investment trusts, or REITs, and REIT profits are 
largely hidden by the lease arrangements, and the REIT protects 
the assets from litigation. Medicare prospective payment does 
not limit the nursing home profit margins, and the GAO reported 
that the 10 largest for-profit chains had margins of 25 percent 
in the year 2000. Our research shows that nursing homes with 
profit levels of 9 percent or more have significantly more 
total deficiencies and more serious deficiencies.
    So, private equity firms seek high profits, and they are 
under no obligation to report the profits because they don't 
report to the SEC. Private equity companies have multiple 
investors and holding companies and multiple levels of 
companies. This complexity makes it difficult to know who the 
owners are, who is responsible for the management and the 
operation of the nursing homes, and who is responsible for the 
property and the assets. Moreover, CMS has no ownership 
tracking, monitoring, and reporting system for nursing homes.
    The following five areas need to be addressed by Congress: 
Establish minimum Federal standards for nursing homes 
recommended by researchers and experts.
    Two, require nursing homes to report all types of nurse 
staffing by shift from payroll records. These should be 
electronically submitted on a quarterly basis so that CMS can 
monitor staffing levels.
    Three, require ownership reporting for all nursing homes, 
including the private equity investors and all the related 
companies and REITs. CMS needs to develop an accurate and 
timely database for ownership reporting, tracking, and 
oversight.
    Four, a surety bond could be posted by each nursing 
facility to ensure that the funds are available to pay for 
civil money penalties, temporary managers, litigation, and 
other costs.
    Finally, establish four cost centers for Medicare nursing 
home reporting, one for direct care, for indirect care, for 
capital, and for administrative costs. Nursing homes should be 
prevented from shifting funds from direct and indirect services 
to pay for administrative costs, capital, and profits. Audits 
should be conducted.
    In summary, the growth of nursing homes home chains, and 
now the purchase of chains by private equity companies 
represents a substantial threat to the quality of care for 
residents. Congress needs to take action to protect the 
residents. Thank you.
    Mr. STARK. Thank you very much, Professor Harrington.
    [The prepared statement of Ms. Harrington follows:]
    Prepared Statement of Charlene Harrington, Ph.D., Professor of 
 Sociology and Nursing, Department of Social and Behavioral Sciences, 
          University of California, San Francisco, California
    I am pleased to be asked to testify today as an individual 
researcher who is concerned about the poor quality of care in many 
nursing homes in the U.S. and about the potential negative impact that 
the recent purchase of nursing homes by private equity companies may 
have on nursing home residents. First, I would like to discuss some of 
the trends in the quality of nursing home care and ownership. Second, 
there are three areas that need to be addressed to ensure high quality 
nursing home care, including: (1) adequate nurse staffing levels in 
nursing homes and electronic reporting of staffing data; (2) 
transparency and responsibility in ownership, and (3) increased 
financial accountability for government funding of nursing homes.
TRENDS IN NURSING HOME FACILITIES, BEDS, AND OWNERSHIP
    U.S. nursing homes have grown dramatically from a cottage industry 
of local `mom and pop' providers prior to 1965 to large corporations, 
fueled by the 1987 expansion of the Medicare nursing home benefit and 
its cost-based reimbursement system. In 2006, there were 16,269 nursing 
home facilities with over 1,760,000 certified and 52,000 uncertified 
beds in the U.S.1 Although the total number of nursing home 
beds has shown little growth over the past decade, there has been a 
sharp decline in the number of hospital-based nursing home beds (from 
13 percent of all beds in 1995 to only 9 percent in 
2006).2,3
    Occupancy rates for certified nursing home beds were only about 85 
percent in 2006, having dropped from 90 percent in 1995 in spite of the 
growth in the aged population.2,3 This shows that there is 
excess capacity and increased competition among nursing homes to 
attract and retain residents. The decline in demand for nursing home 
care is related to the growth in residential care and assisted living 
facilities and the expansion of home and community based services that 
serve as alternatives to nursing home care.
TRENDS IN QUALITY OF CARE AND STAFFING
    Literally dozens of studies by researchers, the U.S. Government 
Accountability Office, the U.S. Inspector General for Health and Human 
Services, and others have documented persistent quality problems in a 
sizable subset of the nation's nursing homes since the U.S. Senate 
Committee on Aging first began holding hearings on nursing homes in the 
early 1970s.4-7 A recent GAO (2007) report found, for 
example, that many nursing homes have serious deficiencies and 
sanctions, but that States tend to under report quality problems 
because of weaknesses in the survey and enforcement system.8 
Often quality problems are not detected and when they are, the scope 
and severity of problems are underrated. Nursing homes with serious 
quality problems continued to cycle in and out of compliance, causing 
harm and sometimes death to residents.8
    In spite of recent efforts to increase nurse staffing levels in 
nursing homes, the total average staffing has remained flat, at 3.6 to 
3.7 hours per resident day (hprd) since 1997, and some homes have 
dangerously low staffing levels.2,3 The shocking situation 
is that the RN staffing hours per resident day (0.6 hprd) in U.S. 
nursing homes have declined by 25 percent since 2000,2,3 and 
this in turn has led to a reduction in nursing home 
quality.9,10 The decline in staffing levels is directly 
related to the implementation of the Medicare prospective payment 
system (PPS) for nursing homes. Although Medicare rates are based on 
each facility's resident needs for nursing and therapy services, 
nursing homes are not required to provide the level of care paid for by 
the Medicare rates. The declining RN levels in nursing homes and 
chronic quality of care problems show the need for establishing higher 
minimum Federal staffing standards than are currently required.
    Research has shown that higher staffing hours per resident, 
particularly Registered Nursing (RN) hours, have been positively and 
significantly associated with overall quality of care,11-14 
lower worker injury rates, and less litigation actions. An important 
study conducted by Abt Associates for CMS (2001) reported that a 
minimum of 4.1 hours per resident day were needed to prevent harm to 
residents with long stays (90 days or more) in nursing 
homes.13 Of the 4.1 hprd total, 0.75 RN hours per resident 
day and 0.55 LVN hours per resident day are needed to protect residents 
from substantial harm and jeopardy.13 At the time of the 
study, 97 percent of U.S. nursing homes did not meet this 
standard.13 There is compelling evidence that staffing 
levels are a better measure of quality than the clinical quality 
measures that are commonly used by CMS (e.g. pressure 
sores).14 Nursing homes often do not report quality measures 
accurately and some facilities manipulate their quality measures to 
increase their Medicare and Medicaid payments and/or to show higher 
quality scores on the Medicare public reporting system.
TRENDS IN NURSING HOMES OWNERSHIP
    For-profit companies have owned the majority of the nation's 
nursing homes for many years and operate 66 percent of facilities 
compared to non-profit (28 percent) and government-owned facilities (6 
percent) in 2006. Many studies have shown that for-profit nursing homes 
operate with lower costs and staffing, compared to nonprofit 
facilities, which provide higher staffing, higher quality care, and 
have more trustworthy governance.15-18
    Chains.  For-profit corporate chains emerged as a dominant 
organizational form in the nursing home field during the 1990s. Chains 
were promoted with the idea that they would have lower operating costs 
than independent facilities, because they could pursue goals including 
efficiency and access to capital through the stock market. The 
proportion of chain-owned facilities increased from 39 percent in the 
1990s to 51 percent of the nation's nursing homes in 1995.19 
In 1997, most chains were for-profit and relatively small (2-10 homes), 
operating in one or just a few States. Nursing home chains were 
established primarily through acquisitions and mergers of individual 
facilities or other chains (not new construction), and they have 
exerted considerable influence over the industry.19 Chains 
increased to 56 percent of the total in 2001 and then declined to 52.5 
percent (i.e., 8,700 facilities) of all nursing homes in 
2006.2,3
    In the late 1990s, as the nursing home industry received widespread 
criticism for intractable quality problems and low staffing, several 
large chains entered into large settlement agreements with the Federal 
Government for fraud and others had corporate compliance `monitors' 
imposed by the Department of Justice.20 Two common 
managerial practices among large nursing home chains in the 1990s were 
to acquire facilities with the goal of converting Medicaid beds into 
higher-revenue generating Medicare beds, and to adopt `creative' 
financing sources including the establishment of real estate investment 
trusts (REITS) that own the land and/or buildings.21
    In 2000, five of the nation's largest chains elected to operate 
under bankruptcy protection, involving 1,800 nursing 
homes.22-25 Although it is acknowledged that large chains 
suffered financially from the 1997 introduction of Medicare prospective 
payment system (PPS), the General Accounting Office (U.S. GAO) argued 
that Medicare PPS rates were `adequate,' and that the large chains' 
bankruptcies stemmed from `poor' business strategies including rapid 
expansion and sizeable transactions with third parties.25,26
    For-profit nursing home chains have had lower staffing than for-
profit independent facilities and non-profit chains. In 2006, U.S. for-
profit nursing home chains had an average of .62 RN hrpd and total 
hours of 3.77. This compares to 0.60 RN hprd in for-profit independent 
nursing facilities and 1.08 RN hrpd in non-profit facilities in the 
U.S. For-profit independent nursing facilities had a total of 3.85 hrpd 
and non-profit facilities had a total of 4.8 hrpd. This shows that for-
profit chains have 57 percent of the RN hours that non-profits provide 
and 78 percent of the total hours that non-profit facilities 
provide.1
    Publicly-Traded Chains.  The largest nursing home chains have been 
publicly-traded companies. My colleagues and I conducted an historical 
(1995-2005) case study of one of the nation's largest publicly-traded 
nursing home chains and we found that shareholder value was pursued by 
using three inter-linked strategies at the expense of quality.
    First, the company began with a few facilities and grew to become 
one of the top five largest nursing home chains in 1998. This rapid 
growth was accomplished primarily by debt-financed mergers which placed 
a burden on the facilities to pay of their debts.27 Second, 
the chain used labor cost constraint through low nurse staffing levels 
to increase its net income, which caused quality problems.27 
California data showed that even as the poor quality of care in the 
company's facilities was sanctioned by Federal corporate compliance 
agreements and legal actions by the State attorney general, the company 
maintained low nurse staffing levels, which in many cases were below 
the minimum level required by State law. They also had high staff 
turnover rates and poor quality, which was indicated by multiple 
deficiencies and fines for harm and jeopardy.27 The low 
staffing level was a particular problem because the chain focused on 
admitting Medicare residents with high acuity, so that their facilities 
needed to have higher than average staffing levels to provide quality 
care, but they did not adjust staffing to reflect resident acuity.
    The third managerial practice used by the company was to treat 
regulatory sanctions as normal costs of business.27 The 
company had regulatory actions imposed by a number of States for poor 
quality of care as evidenced by regulatory violations (including many 
that jeopardized the health and safety of residents), and despite this, 
the facilities did not address their quality problems. Additionally, 
the corporate governance of the company was sanctioned through 
governmental actions for fraud and improper billing and shareholder 
legal actions were taken for misrepresentation of its financial status 
and lack of disclosure. These findings show the need for extended 
oversight of the corporate governance structure and performance of 
large nursing home chains.27
PRIVATE EQUITY PURCHASES OF NURSING HOME CHAINS
    In 2006, of the 50 largest nursing home companies, 12 were publicly 
traded, 31 were private and 7 were nonprofit. These companies had about 
30 percent of the nation's nursing home residents.28 In 
2006, the top 10 nursing home chains had 218,729 beds. Only one chain 
was a non-profit organization, 3 were privately-held companies and 6 
were publicly-traded companies.28 By 2007, private equity 
companies had purchased 6 of the largest chains (including Mariner 
Health Care, Beverly Enterprises, Genesis HealthCare, and ManorCare), 
which represented about 9 percent of the nation's nursing home 
beds.29
    Private equity investment firms are those that issue and invest in 
securities. The companies invest the money they receive on a collective 
basis and investors share in the profits and losses in proportion to 
their investment, with no oversight by the Securities and Exchange 
Commission. There is no Federal requirement to report information to 
CMS on whether the licensee of a nursing home is owned by an investment 
company or by a more traditional company.
    Private equity companies use strategies similar to those used by 
publicly-traded nursing home chains to enhance profits. Like other 
large nursing home chains, these companies have diversified with a 
range of related companies offering hospice care, residential care, 
rehabilitation, Alzheimer's units, outpatient therapy, home health 
services and other services and facilities.28 These related 
companies have complex relationships with the nursing homes and the 
inter-relationships allow for self-referrals to related companies as a 
way to enhance revenues and profits.
    These companies target Medicare and private payers to increase 
their revenues (over Medicaid with its lower rates) while they control 
their expenditures. With Medicare, patient acuity is higher so staffing 
should be higher for these residents, and yet private equity companies, 
like publicly held nursing home chains, are likely to keep their 
staffing below the national average and to keep other costs low to 
enhance profits.
QUALITY AND STAFFING IN NURSING HOMES OWNED BY PRIVATE EQUITY FIRMS
    The purchase of nursing homes by private equity companies raises 
serious questions about the staffing and quality of these facilities. 
To examine the staffing and quality in one chain purchased by a private 
equity firm in 2006, we examined 105 nursing facilities owned by the 
company in the 18-month period prior to its purchase compared with the 
period after its purchase (from 2006 through June 2007).1 
After its purchase, average RN staffing dropped by 8 percent, LVN 
staffing dropped by 6.5 percent, nursing assistant staffing dropped by 
7.5 percent, and total nurse staffing dropped by 7 percent. After the 
purchase, the average RN staffing hours in the company's facilities 
were only 75 percent of the national average staffing hours (0.6 hrpd) 
and 60 percent of the minimum level recommended by experts for (.75 
hrpd) for RN staffing. Total staffing hours were only 85 percent of the 
national average (3.7 hprd) and only 77 percent of the level 
recommended by experts (4.1 hrpd).1 These facilities were 
substituting nursing assistants with little training for registered 
nurses in order to lower costs. Extensive research shows this can 
result in harm and jeopardy to residents.
    At the same time, total deficiencies for those 105 facilities 
increased from over 500 to over 1,000 deficiencies after the purchase 
by the private equity firm. Deficiencies that caused more than minimal 
harm, harm, or immediate jeopardy increased by 80 percent after the 
purchase by the private equity firm.
    Before this large publicly-traded nursing home company was 
purchased by a private equity company, it had a long history of quality 
problems as well as fraud and abuse. It was investigated and charged by 
the U.S. Department of Justice (DOJ) for fraud and abuse allegations 
and currently remains under a DOJ Corporate Integrity Agreement (CIA), 
because of poor quality in its nursing homes. In addition, the company 
had a history of poor labor relations and work place safety and has 
been investigated by both the National Labor Relations Board and the 
Occupational Safety and Health Administration (OSHA). The company has 
also been involved in cases of resident neglect, and entered into 
settlement agreements in two States and has been under investigations 
in five other States. This company has had some of the largest 
litigation awards in the U.S. by many patients for poor quality. In 
California, the company was sued by the CA attorney general and entered 
into one the largest settlements in CA history. During the past 5 
years, the company's facilities have been subject to continual 
monitoring by California officials because of court compliance orders. 
It has also had a long history of providing inadequate staffing levels 
throughout the country and, in particular, in California. It is far 
from clear that the new private equity company has the necessary 
expertise and experience to provide oversight and to improve the 
quality delivered to residents by this chain.
    These findings raise several concerns about the purchase of nursing 
homes by private equity firms. First, private equity firms do not have 
the expertise and experience to manage complex nursing home 
organizations caring for frail and seriously ill residents, and they 
are reliant upon the management of the nursing homes for the management 
of quality that was not demonstrated prior to the purchase of the 
chain. Second, these firms appear likely to cut staffing to increase 
their profits. Cutting staffing, supplies, equipment and other needed 
services can result in serious problems to residents and even deaths, 
such as in the Florida investor-owned nursing home where 15 resident 
deaths occurred in three years as a result of poor care.1
LIMITED LIABILITY CORPORATIONS
    Another troubling and dramatic trend is the conversion of 
corporations, especially chains, into limited liability companies 
(LLCs). Limited liability companies (LLCs) and partnerships (LLPs) have 
structures similar to corporations but owners have limited personal 
liability for the debts and actions of the LLC. These companies are 
designed to limit personal liability for breaches of contracts or 
torts, and especially have been established in some States where 
litigation has been common. For example, in Florida most nursing homes 
are LLCs in 2007 (349 LLCs/LLPs compared with 292 nursing home 
corporations and 31 other types of nursing homes).30 
Separate LLCs for each nursing facility in chains that are publicly-
traded or owned by private equity companies protect the parent 
companies from liability and limit litigation by residents and families 
who seek redress for poor and negligent quality of care. Another 
troubling new practice by nursing home chains has been to drop their 
liability coverage as a way to prevent or discourage litigation.
Real Estate Investment Trusts
    Some private equity-owned chains and publicly-traded chains have 
established separate real estate investment trusts (REITS) by moving 
facility assets (buildings and land) into the trusts. Although some of 
these have been in place for a number of years, this trend appears to 
be accelerating with the purchase of nursing homes by private equity 
companies. In situations where the assets are owned by a separate 
entity other than the operating company, the rent or lease is fixed by 
a lease payment with an annual escalator. In other cases, some of the 
landlords have a participating rent feature that requires the tenant 
(lessee) to pay a portion of the increased cash flow from the business 
as an additional part of the rent payment. If the cash flow after 
payment of all facility-based expenses exceeds a certain amount, then 
it is shared on some basis between the group that owns the asset and 
the group that operates the business. These arrangements divert funds 
from direct care.
    REITS are a concern for several reasons. The REIT may encourage an 
operator to cut back on staffing, food, or other expenses as a means of 
increasing profitability to the REIT. Second, in these arrangements, 
profits acquired by the REITs are largely hidden by the lease 
arrangements. Third, the REIT maintains the assets and thereby protects 
the assets from litigation actions that might be taken against the 
operator.
Excess Profits
    Medicare PPS does not limit the profit margins that nursing homes 
can make. A GAO study of Medicare profit margins found that the median 
margins for freestanding SNFs were 8.4 percent in 1999 and increased to 
18.9 percent in 2000. The 10 largest for-profit chains had margins of 
18.2 percent in 1999 and 25.2 percent in 2000.25,26 These 
high profit levels direct funds away from direct resident care.
    For-profit nursing homes in California have significantly lower 
quality of care than non-profit homes based on the number of 
deficiencies and the number of serious deficiencies that may result in 
serious harm or jeopardy to residents. Our research found that nursing 
homes with profit levels or 9 percent or more (in the top 14 percent of 
homes in terms of profits) had significantly more total deficiencies 
and more serious deficiencies, but this relationship was not found in 
non-profit facilities.16 Excess profit-taking has a 
dangerous negative effect on nursing home quality. Profit taking at 19-
25 percent levels, reported by chains,25,26 raises serious 
concerns about the dangers to residents and shows the need to monitor 
and limit profit levels for certified nursing homes.
    Private equity firms are under no obligation to publicly report the 
profits they achieve from their investments, and are unlikely to 
report, which makes monitoring excess profit-taking difficult. 
Moreover, the buying and selling of pre-existing commitments to private 
equity (secondary market) can also occur that can make the nursing 
homes less financially stable. One concern is that some private 
investors may enter into the nursing home business for a short time 
period in order to extract profits and then sell, leaving the companies 
with fewer resources to carry out their operations, which will later 
compromise care.
CONFUSING OWNERSHIP AND LACK OF RESPONSIBILITY
    Shielded by private equity companies, the ownership of nursing 
homes has now become so complex that it is increasingly difficult to 
identify the owners of nursing homes. For example, a review of the 
corporate filings to States for changes in ownership showed multiple 
investors, holding companies, and multiple levels of companies involved 
in the ownership of the nursing homes for a single chain. Many of these 
companies have converted the facilities to LLCs and moved the property 
to separate LLC property companies (i.e., REITs). This level of 
complexity makes it difficult to know who the owners are, who is 
responsible for the management and operation of the nursing homes and 
responsible for the management of the property and assets. The lack of 
transparency in the ownership responsibilities makes regulation and 
oversight by State survey and certification agencies problematic. It is 
difficult for individuals to determine who is ultimately responsible 
for taking care of their family members in a nursing home.
    Moreover, CMS has no ownership tracking, monitoring, and reporting 
system for nursing homes. The CMS OSCAR report which has the licensee 
listed is inaccurate and incomplete. (In one case, OSCAR showed only 
\1/3\ of the facilities that were owned by a chain compared to the 
chain's own website). Thus, it is extremely difficult for CMS and State 
survey and certification agencies to monitor the actions of chains, to 
track changes in ownership, and to conduct evaluations of companies 
applying for certification as new owners. CMS and State evaluations of 
the appropriateness of new ownership applications are even more 
difficult with private equity companies which have no prior track 
record in providing nursing home care.
AREAS FOR OVERSIGHT
    Three major areas need to be addressed by Congress: (1) adequate 
nurse staffing levels in nursing homes and electronic reporting of 
staffing data; (2) transparency and responsibility in ownership, and 
(3) increased financial accountability for government funding of 
nursing homes.
STAFFING
    Staffing Standards.  Unfortunately, the Centers for Medicare and 
Medicaid Services has not established minimum Federal staffing 
standards that would ensure that nursing homes meet the 4.1 hours per 
resident day (hprd) recommended by researchers and 
experts,13,14,31 mostly because of the potential costs. 
Considering that most nursing homes are for-profit and have 
significantly lower staffing and poorer quality of care than non-
profits, these facilities are unlikely to voluntarily meet a reasonable 
level of staffing. If staffing levels are to improve, minimum Federal 
staffing standards are needed.
    Accurate Quarterly Electronic Staffing Reports.  The current CMS 
reporting system, which only requires nursing homes to report on 2 
weeks of nurse staffing at the time of the annual survey, is inadequate 
and sometimes inaccurate.13 These reports are not audited 
and are collected during annual State surveys when nursing homes often 
temporarily increase their staffing. Nursing homes should be required 
to make complete reports of staffing hours for all types of staff and 
for total staff for each shift on a daily basis from payroll records to 
ensure accuracy. These should be required to be submitted to CMS by 
nursing homes on a quarterly basis, using a standard electronic 
reporting format. Nursing homes should certify the accuracy of their 
reports under penalty of serious fines. Staff turnover and retention 
rates are also important indicators of quality which should also be 
extracted and reported from payroll data of nursing homes. CMS has 
developed the capacity to collect and report this data so Congress 
should mandate the reporting.
    Staffing data can be used for two purposes. First, it is needed to 
monitor staffing levels and to investigate facilities that have lower 
staffing or that show substantial declines in staffing. This allows for 
better oversight of facilities that may cut staffing and then develop 
quality problems. Second, it will improve the accuracy of the staffing 
that is publicly reported on www.Medicare/NHcompare.gov. Providing 
consumers with information about quality of care is an important way to 
give consumers more power in making informed decisions about nursing 
home care.
    Detailed Deficiency Reports.  Low staffing and high turnover 
results in poor quality. CMS should be reporting the detailed survey 
agency deficiency reports (Form 2567) on its Medicare nursing home 
compare website. These reports provide clearer information on the types 
of violations and the quality of care for residents than the summary 
information currently reported by CMS on Medicare nursing home compare 
website.
OWNERSHIP TRANSPARENCY AND RESPONSIBILITY
    The complex new ownership relationships, particularly those 
established by private equity firms, need to be taken into account to 
increase the transparency and responsibility of facilities for the 
quality of care and the financial liabilities of the facilities. All 
owners including all private equity companies and investors should be 
annually reported to CMS for certification by Medicare and Medicaid. 
All related parties with direct and indirect financial interests in a 
nursing facility should be identified to CMS and disclosed to the 
public on the Medicare nursing home compare website. The parent 
companies, the operators of nursing homes, and all the multiple 
companies including the real estate investment trusts that have an 
interest in the nursing home should be responsible for nursing home 
care. One approach is to require these parties to sign the Medicare/
Medicaid provider agreements, which should be renewed annually. CMS 
should refuse to sign the annual provider agreements where nursing 
facilities and their parent companies have been involved in causing 
harm or jeopardy to residents or found to be involved in fraud and 
abuse.
    CMS needs to establish an accurate and timely ownership tracking, 
monitoring, and reporting system for nursing homes, which should 
include all parties involved in the operation of each nursing home and 
their owners including private equity companies and REITs. CMS and 
state survey and certification agencies need to monitor the actions of 
nursing homes, to track changes in ownership, and to conduct 
evaluations of companies applying for certification as new owners.
    Another option is to require a surety bond to be posted by each 
nursing facility operator. The bond would ensure that facilities pay 
for civil monetary penalties, fines, temporary managers or receivers, 
attorney fees, litigation judgments and damage awards. This would also 
address the increasing problem of nursing facilities that do not carry 
liability insurance.
FINANCIAL ACCOUNTABILITY
    The National Health Statistics Group at the Centers for Medicare 
and Medicaid Services (CMS) estimated that the U.S. will spend $132 
billion on nursing home care in 2007 (excluding counting care in 
hospital based facilities).32 Of the total nursing home 
expenditures in 2005, 16 percent was paid by Medicare and 46 percent 
was paid by Medicaid and other public programs.33 Moreover, 
government is paying for 78 percent of all residents at any given point 
in time.2 Because government is paying an increasingly large 
proportion of the total nursing home costs, it is important that 
nursing homes be more fully accountable for the public funds they 
receive.
    Medicare developed a complex and elaborate system for establishing 
its PPS nursing home payment rates, but requires little financial 
accountability. As noted above, under Medicare PPS, nursing homes do 
not need to ensure that the amount of staff and therapy time is equal 
to the amount that is allocated under the Medicare rates. Moreover, 
nursing homes are not required to spend a specific proportion of their 
funds on direct and indirect care to assure quality. This is also the 
case in many States under Medicaid payment rules. Since the adoption of 
Medicare PPS, RN staffing levels have declined by 25 percent and 
quality of nursing home care has declined.2,3 Because 
Medicare does not limit nursing home profit margins, facilities have an 
incentive to cut staffing and expenses to increase profits.
    Cost Centers.  One approach to make nursing homes more financially 
accountable under Medicare PPS systems is to establish cost centers. 
Four general cost centers could be established for reporting purposes: 
(1) direct care services (e.g. nursing, activities, therapy services), 
(2) indirect care (including housekeeping, dietary, and other 
services), (3) capital costs (e.g. building and land costs), and (4) 
administrative costs. Medicare should determine prospectively the 
amount of funds allocated for each of these costs centers. Nursing 
homes should be required to report by cost center and they should be 
prevented from shifting Medicare funds from direct and indirect 
services to pay for administrative costs, capital costs, or profits. 
Reports on profits from all parts of the nursing facility's operation 
should be disclosed, including profits on the real estate and buildings 
(REITs) and other related parties.
    Audits.  To ensure that the reimbursement rates are used for the 
intended purposes, retrospective audits should be conducted to collect 
Medicare and Medicaid funds not expended on direct and indirect care. 
Penalties should be issued for diverting funds from direct and indirect 
services.
Summary
    In summary, the growth in nursing home chains and the purchase of 
chains by private equity companies represents a substantial threat to 
quality of care in nursing homes. Current nurse staffing levels are not 
adequate to ensure high quality and private equity companies may cut 
staffing further to increase profits. In nursing homes, the decline in 
registered nurses and the failure to improve staffing shows the need 
for greater regulatory standards and incentive systems. As ownership 
has become more complex with private equity companies that do not have 
the same reporting requirements as publicly-held companies, steps must 
be take to assure ownership transparency and responsibility. Finally, 
greater financial accountability is needed to ensure that Medicare and 
Medicaid funds are spent on direct and indirect care and not diverted 
to paying for real estate, administration, and profits. We must ensure 
that nursing homes deliver high quality of care for our family members, 
friends and ourselves when we need such care.
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Compromise the Quality of Care? American Journal of Public Health. 91, 
1452-1455.
    16. O'Neill, C., Harrington, C., Kitchener, M., & Saliba, D. 2003. 
Quality of Care in Nursing Homes: An Analysis of the Relationships 
Among Profit, Quality, and Ownership. Medical Care, 41, 1318-1330.
    17. Schlesinger, M. and B.H. Gray. 2005. Why Nonprofits Matter in 
American Medicine: A Policy Brief. Washington DC: Aspen Institute.
    18. Harrington, C., Zimmerman, D., Karon, S.L., Robinson, J., and 
Beutel, P. 2000. Nursing Home Staffing and Its Relationship to 
Deficiencies. The Journal of Gerontology: Social Sciences. 55B 
(5):S278-286.
    19. Banaszak-Holl, J., W.B. Berta, D. Bowman, J.A.C. Baum, and W. 
Mitchell. 2002. The Rise of Human Service Chains: Antecedents to 
Acquisitions and Their Effects on the Quality of Care in U.S. Nursing 
Homes, 1991-1997. Managerial and Decision Economics. 23:261-282.
    20. Kitchener, M., and C. Harrington. 2004. U.S. Long-term Care: A 
Dialectic Analysis of Institutional Dynamics. Journal of Health and 
Social Behavior 45 (Extra issue): 87-101.
    21. Lehman Brothers. 2004. 2004 Health Care Facilities: Long-Term 
Care Industry Guidebook. January 29. New York: Lehman Brothers.
    22. Kitchener, M., O'Neill, C. and Harrington, C. 2005. Chain 
Reaction: An Exploratory Study of Nursing Home Bankruptcy in 
California. Journal of Aging and Social Policy. 17 (4):19-35.
    23. American HealthCare Association (AHCA). 2002. Facts and Trends: 
The Nursing Facility Sourcebook. Washington DC: AHCA.
    24. U.S. Centers for Medicare and Medicaid Services, Scully, T. 
2003. Health Care Industry Market Update. Nursing Facilities. 
Washington, DC: CMS, May 20.
    25. U.S. General Accounting Office. 2000. Nursing Homes: Aggregate 
Medicare Payments Are Adequate Despite Bankruptcies. Testimony Before 
the Special Committee on Aging, U.S. Senate. GAO/T-HEHS-00-192. 
Washington, DC: U.S. General Accounting Office, September 5.
    26. U.S. General Accounting Office. 2002. Skilled Nursing 
Facilities: Medicare Payments Exceed Costs for Most but Not All 
Facilities. Report to Congressional Requestors. GAO/HEHS-03-183. 
Washington, DC: General Accounting Office, December.
    27. Kitchener, M., O'Meara, J., Brody, A., Lee, H.Y., Harrington, 
C. 2007. Shareholder Value and the Performance of a Large Nursing Home 
Chain. Health Services Research. In press.
    28. LaPorte, M. 2007. ManorCare Soars Above the Pack by 18,000 
Beds. Top 50 Nursing Facility Chains 2006. Provider. 33-41.
    29. Duhigg, C. 2007. At Many Homes, More Profit and Less Nursing. 
New York Times. September 23, A1-A20, A21.
    30. Florida Agency for Health Care Administration (FAHCA) 2007. 
Long Term Care Review: Florida Nursing Homes Regulation, Quality, 
Ownership, and Reimbursement. Tallahassee, FL: AHCA. https://
exchange.ucsf.edu/exchange/Charlene. Harrington/Inbox/
FW:%20Today%27s%20New%20York%20Times%20Article.EML / 1 
_ multipart _ xF8FF _ 4 _ Florida%20Agency%20White%20Paper%2010-30-
07.pdf / C58EA28C - 18C0 - 4a97 - 9AF2 - 036E93DDAFB3 / 
Florida % 20Agency % 20White % 20 Paper%2010-30-07.pdf?attach=1
    31. Harrington, C., Swan, J.H., and Carrillo, H. 2007. Nurse 
Staffing Levels and Medicaid Reimbursement Rates in Nursing Facilities. 
Health Services Research. 43 (3):1105-1129.
    32. Poisal, J.A., Truffer, C., Smith, S. et al and the National 
Health Expenditure Accounts Team. (2007). Health spending projections 
through 2016: modest changes obscure Part D's impact. Health Affairs. 
26 (2):w242-w253.
    33. Catlin, A., Cowan, C., Heffler, S., Washington, B. and the 
National Health Expenditure Accounts Team. (2007). National health 
spending in 2005: the slowdown continues. Health Affairs. 26 (1):142-
153.

                                 

    Mr. STARK. Mr. Schnelle, how is that?
    Mr. SCHNELLE. Schnelle, actually.
    Mr. STARK. Schnelle. Okay. I am getting pretty close. 
Professor Schnelle, would you proceed?

STATEMENT OF JOHN SCHNELLE, PROFESSOR OF MEDICINE AND DIRECTOR, 
   VANDERBILT CENTER FOR QUALITY AGING, VANDERBILT UNIVERSITY

    Mr. SCHNELLE. Thank you. I am a behavioral psychologist.
    Mr. STARK. But you got to punch the button on your 
microphone.
    Mr. SCHNELLE. Excuse me. I am a behavior psychologist at 
Vanderbilt University with a special interest in nursing home 
care quality and analyzing the factors that control provider 
and consumer decisions about care quality. I have worked 
directly with nursing home residents and staff for over 30 
years to document staff labor costs and outcomes when care is 
provided consistent with regulatory guidelines. This 
experience, as well as my daily interaction with licensed 
nurses, and aides have led me to the conclusion that there are 
not enough staff to provide all the care mandated in regulatory 
guidelines, and that furthermore incentives exist that prevent 
realistic solutions to this problem at both the provider and 
regulatory level.
    The major points to be made in my presentation is that the 
minimum staffing requirements to implement the basic care 
described in regulatory guidelines is five to six residents per 
nurse aide during waking hours even if one assumes very high 
staff productivity.
    The acuity level of at least long-term stay residents, how 
sick they are, do not dramatically change these minimum 
staffing levels. They do change maximum, but not the minimum. 
Most nursing homes are staffed significantly below this minimum 
level to provide the basic care. But here is the important 
point about incentives. The measures most sensitive to staffing 
levels in nursing homes are quality of life measures that can 
only be collected by directly talking to residents and staff or 
observing care delivery.
    Examples of such measures include asking incontinent 
residents deemed capable of interview how many times someone 
helps them to the toilet. The further removed we are as 
researchers, surveyors or owners have from the daily care being 
provided within the facility, the more likely we are to 
underestimate the effects of staffing on resident life quality 
and staff productivity.
    In the case of owners, there may be incentives for facility 
managers to reduce one of their higher operating costs, which 
is staffing, under the false premise that this reduction will 
not impact care quality. This latter point is perhaps the most 
relevant to the purpose of today's hearing. My original report 
on the relationship between staffing and quality was published 
in 2001 by CMS. We used computerized simulation methods that 
are used in business and industry and the best data available 
about how much time it takes to actually take somebody to the 
bathroom and do other basic care.
    We used very conservative estimates of productivity--or 
very liberal estimates of productivity. We assumed very high 
productivity among the nursing home staff. Despite our evident 
to be very conservative, we came up with the number that you 
need five to six residents per aide to provide all the care 
that is in regulatory guidelines. The typical nursing home is 
staffed at eight to ten residents per one aide. We projected, 
there would be very many people who would do without basic 
care, getting out of bed in the morning, given adequate feeding 
assistance at those ratios. The worse the ratios, the much 
worse it became because of efficiency reasons. This study has 
been validated several times by direct observations. We have 
gone into nursing homes in California specifically who are 
staffed high and staffed low. Most of the ones staffed high are 
either 100 percent private pay or for-profit--or not for 
profit, and we found that in the higher staffed homes that they 
do significantly better on 16 out of 18 process measures, like 
how often patients are talked to, the tender loving care that 
you were talking about.
    However, what they don't do better on necessarily are 
Minimum Data Set quality indicators that are widely used to 
measure quality. These indicators are heavily influenced by 
resident frailty and sickness burden. Nursing home residents, 
in our experience, get acutely sick about twice a year, can 
dramatically affect their functioning. Basically, even a well-
managed home might not do well on those indicators.
    In a recent study by Mukamel and her associates, even the 
providers who generate the information for the quality 
indicators rated resident acuity and coding errors as more 
influential in affecting these quality indicators than the 
actual care provided by staff. There are controversial 
arguments about the validity of measures used to monitor 
nursing home quality, but it is clear to me that important 
differences in residents' quality of life due to staffing 
differences would be missed if one relies solely on quality 
indicators generated by providers or even survey deficiencies. 
There are numerous important implications from a behavioral 
point of view relevant to how provider behavior is affected by 
the fact that staffing is much more related to the care that 
the residents receive, such as dining and toileting assistance, 
than MDS quality indicators or deficiency measures.
    However, I think the most important incentive that exists 
is that people who are not in direct contact with the daily 
life of residents may make business decisions to reduce 
staffing based on false data. Arguments could always be made to 
justify a lower staffing through improvements in work 
efficiency and good leadership or training, and on site 
administrators can be easily misled by incentives to make 
staffing reductions based on these false arguments. These cost 
control incentives are not inappropriate. Any good business 
would do them. But any good business has to do them based on 
accurate data about what their consequences are on care. I 
don't think there is accurate data about what consequences they 
have on care. We reported in several reports that data recorded 
about nursing home daily care activities, how often people are 
toileted, how much feeding assistance they got are not 
accurate. They are not accurate because these records are used 
for compliance purposes rather than improvement purposes, and 
if you record things for compliance purposes, the goal is to 
make everything look good. It is not to identify problems for 
improvement. In defense of nursing homes, I think they are put 
into an unrealistic state where what their expectations for 
care exceeds what their resources are for care, and they are 
more or less forced into the situation where compliance has to 
be the goal of these records. But the consequence of this is 
simple to me.
    If people who are removed from the daily reality of nursing 
home care are making the staffing decisions based on these 
data, they might make decisions to reduce staffing that are 
wrong from a business and quality perspective, but will not be 
detected by the measures that currently exist. The possibility 
of such poor staffing decisions may increase due to the nature 
of the equity company or organizational structures that are the 
focus of today's hearing because there may be more people who 
do not have personal experience with the realities of nursing 
home care making these financial decisions.
    I say ``may'' because to be quite frank, I have read all 
this, and I have a very hard time understanding the structure 
of the equity companies. So, at least there seems to me the 
potential for that to exist. What is the solution? There are 
two ways to immediately address the issue, I think, make 
transparent and accurate nursing home reports of staffing level 
and costs both at the facility and the chain level, and allow 
consumers easy access to this data. I think improving the 
accuracy and objectivity of the survey process and documenting 
care quality problems at the resident level, how often they are 
toileted, how often they are talked to, how much time they 
spend in bed would get at quality measures that currently are 
being missed and ignored. Thank you.
    Mr. STARK. Thank you very much.
    [The prepared statement of Mr. Schnelle follows:]
 Prepared Statement of John Schnelle, Ph.D., Professor of Medicine and 
    Director of the Vanderbilt Center for Quality Aging, Vanderbilt 
                    University, Nashville, Tennessee
    I am Dr. John Schnelle, Director of the Center for Quality Aging 
and Professor of Medicine at Vanderbilt University. I am a behavioral 
psychologist with special interests in nursing home care quality and 
analyzing the factors that control provider and consumer decisions 
about care quality. I particularly appreciate the opportunity to talk 
about staffing and quality in nursing homes.
    I have worked directly with nursing home residents and staff for 
over 30 years to document the staff labor costs and resident outcomes 
when care is provided consistent with regulatory guidelines and best 
practice recommendations. This experience, as well as my daily 
interaction with licensed nurses, nurse aides and residents, has led me 
to the conclusion that there are not enough staff to provide all of the 
care mandated in regulatory guidelines and that incentives exist that 
prevent realistic solutions to this problem at both the provider and 
regulatory level.
    Both nursing home residents and direct care staff would reiterate 
this same message about the inadequacy of existing staffing levels if 
given the opportunity to do so in a non-threatening context. It is my 
goal today to give voice to their concerns about staffing limitations 
and how low staffing affects their ability to provide quality care to 
residents and residents' associated quality of life. The major points 
to be made in this presentation are the following:

    1.  The minimum staffing requirements to implement the basic care 
described in regulatory guidelines is 5-6 residents per nurse aide 
during waking hours even if one assumes very high staff productivity.
    2.  The acuity level of long-stay residents do not dramatically 
change these minimum staffing requirements; thus, most nursing homes 
are staffed significantly below the minimum levels to provide basic 
care for all residents in need.
    3.  The measures most sensitive to staffing levels are quality of 
life measures that can only be collected by talking directly to 
residents and staff or observing care delivery. Examples of such 
measures include asking incontinent residents deemed capable of 
interview how many times each day someone helps them to use the toilet 
or observing feeding assistance care provided during meals for 
residents at risk for unintentional weight loss. The further removed we 
are as researchers, surveyors or owners from the daily care being 
provided within a facility the more likely we are to under estimate the 
effects of staffing on resident life quality and staff productivity. In 
the case of owners, there may be incentives for facility managers to 
reduce one of their highest operating costs, which is staffing, under 
the false premise that this reduction will not impact care quality. 
This latter point is perhaps the most relevant to the purpose of 
today's hearing.

    My original report on the relationship between staffing and quality 
was published in a 2002 report for CMS.1 In this report, we 
identified from research studies the time required to implement 
incontinence care, dining assistance, exercise and repositioning for 
pressure ulcer prevention to all residents who were rated by nursing 
home staff as needing such assistance. We used computerized simulation 
technology to model an unrealistically high productivity work 
environment and predicted the number of staff needed to consistently 
provide care in all of these daily care areas at the frequency and 
intensity necessary to produce positive clinical outcomes (e.g., lower 
the prevalence of incontinence). We were conservative in our estimates 
of the time to provide care (e.g. 18 minutes per meal for people who 
needed dining assistance) and optimistic in our projections of how 
productive staff could be in a work environment that is characterized 
by high staff turnover and poor organization in daily work processes. 
Despite our effort to project staffing needs under the best of 
circumstances, we determined that from 2.9 direct care (nurse aide) 
hours per resident per day (in a home with a low number of dependent 
residents) to 3.1 direct care (nurse aide) hours per resident per day 
(in a home with a high number of dependent residents) was minimally 
necessary to provide good care. These numbers translate into a direct 
care (nurse aide) staffing ratio of about 5-6 residents to one nurse 
aide. In homes staffed at the average level for the nation's facilities 
we were also able to project how many residents would not receive care. 
These findings showed that in homes staffed at a level of 8 residents 
to one aide (a typical ratio) 20% of residents dependent on staff for 
eating would not receive assistance at all meals. The number of 
residents who would not receive assistance in many basic daily care 
areas increased dramatically as staffing decreased further.
    These staffing and care quality projections have been validated in 
recent studies wherein independent research staff assessed staffing 
levels and the quality of daily care delivery.2 These 
studies compared care quality measures between facilities staffed above 
the minimum levels (2.9-3.1 hours per resident/day) and facilities 
staffed below these levels (2.1-2.3 hours per resident/day). Results 
showed that the higher staffed facilities provided significantly better 
care based on 13 of 16 care process measures. For example, residents in 
the higher staffed homes received significantly more dining assistance, 
exercise, and spent more time out of bed during the day.3 In 
addition, residents in higher staffed homes also reported that they 
received more toileting and mobility assistance and had more choices 
about meals.
    While these daily care process measures showed significant 
differences between low and high staffed homes, it is important to note 
that research also shows there are not large differences in Minimum 
Data Set defined quality indicators (e.g., prevalence of incontinence) 
between low and high staffed homes. These MDS indicators reflect 
clinical outcomes for the resident population within a facility and 
currently are being used to monitor nursing home care quality. 
Unfortunately, these indicators are heavily influenced by resident 
frailty and sickness burden and thus relatively insensitive to the 
quality of care provided by even the best homes. In a recent study by 
Mukamel and her associates, even the providers who generate the 
information for the quality indicators rated resident acuity and coding 
errors as more influential in affecting these quality indicators than 
the actual care being provided by staff.4
    There are controversial arguments to be made about the validity of 
measures used to monitor nursing home care quality, but it is clear 
that important differences in residents' quality of life due to 
staffing level differences would be missed if one relied solely on 
quality indicators generated by providers or even survey deficiencies. 
Survey deficiencies have been documented in several reports by the GAO 
and CMS to be inaccurate and inconsistent and one must ask the question 
why the quality of care problems frequently documented by research 
teams is frequently not detected in the survey process.5 A 
recent study by CMS evaluating the survey process has been conducted to 
help answer this question and points to directions for improving survey 
accuracy and consistency. A more objective and realistic survey process 
would be an important step to both improving the ability of providers 
to provide better care and the sensitivity of the survey in documenting 
quality differences between homes. This study is under review and will 
be released soon.
    There are numerous important implications relevant to how provider 
behavior is affected by the fact that staffing is much more related to 
the care that residents receive, such as dining and toileting 
assistance, than to the MDS-defined indicators and deficiency measures 
widely used to judge nursing home care quality. However, one of the 
most important implications is that people who are not in direct and 
frequent contact with residents and staff and who are insulated from 
their concerns about quality may believe that staffing can be reduced 
without affecting quality. In fact, staffing reductions from already 
low levels that exist in most homes may not be reflected by poorer 
quality indicator scores because many indicators are uniformly poor due 
to low staffing and it would be difficult to make them worse by 
reducing staffing even further. The most obvious example of this 
phenomenon is for incontinence quality indicators. These indicators 
show that 80 plus percent of residents dependent on staff for toileting 
assistance are incontinent despite the fact that many could be 
continent if provided consistent toileting assistance. Residents have 
been observed to receive an average of only 1 to 2 assists to the 
toilet per day which is not adequate to maintain 
continence.6 Low staffing levels according to both direct 
care staff interviews and independent observations of care provision 
explain the low toileting assistance rate and the fact that the number 
of residents incontinent could not get much worse if staffing were 
reduced even further. However, further staffing reductions would result 
in even fewer residents receiving care considered basic for dignity and 
quality of life.
    It would be a logical yet misguided business decision to reduce 
costs by reducing staffing because quality measures heavily influenced 
by factors other than the quality of care actually received by 
residents and which are uniformly poor do not dramatically change. 
Arguments can always be made to justify lower staffing through 
``improvements in work efficiency'' and ``good leadership or 
training''; and, on-site administrators can be easily misled by 
incentives to make staffing reductions based on these false arguments. 
Such cost control incentives are already prevalent in the nursing home 
industry and they are not necessarily inappropriate. However, we do not 
know to what extent these incentives are effective or appropriate 
because we do not have accurate measures of the impact of staffing 
decisions on the quality of care residents actually receive in daily 
care practice.
    Unfortunately, a strong argument can be made that these accurate 
measures are not available.7,8 One consequence of this is 
that there is a risk that decision makers who are under financial 
pressure and who are removed from the daily reality of nursing home 
care will design incentives to induce operators to reduce staffing 
costs which are wrong from both a business and quality perspective. The 
possibility of such poor staffing decisions may increase due to the 
nature of the equity company organizational structures that are the 
focus of today's hearing because there may be more people who do not 
have personal experience with the realities of nursing home care making 
these financial decisions. This can only lead to inappropriate and 
misguided decisions to reduce costs by reducing staffing and lead to 
even poorer care quality for many elderly residing in our nation's 
nursing homes. There are two ways to immediately address this issue:

    1.  Make transparent and accurate nursing home reports of staffing 
levels and costs at both the facility and chain level and allow 
consumers easy access to these data. The preliminary work to allow for 
such a staff reporting system has been largely done and awaits 
implementation.
    2.  Improve the accuracy and objectivity of the survey process in 
documenting care quality problems, particularly problems created by low 
staffing levels. The protocols used by survey staff to improve their 
documentation of the care that residents actually receive also could be 
used by providers to judge the effects of staffing decisions if these 
protocols meet basic specificity criteria that would allow for their 
replication. Some of these protocols have been developed and currently 
are being evaluated for use by surveyors.
References:
    1. Schnelle JF, Simmons SF, Cretin S. Minimum Nurse Aid Staffing 
Required to Implement Best Practice Care in Nursing Homes. Chapter in 
Report to Congress: Phase II Final. Appropriateness of Minimum Nurse 
Staffing Ratios in Nursing Homes. Prepared by Abt Associates, Inc. 
Cambridge, MA. December 2001. Volume I, Chapter 3. p3.1-3.67.
    3. Bates-Jensen B, Schnelle J, Alessi CA, Al-Samarrai NR, Levy-
Storms L. The Effects of Staffing on In-Bed Times Among Nursing Home 
Residents. J Am Geriatr Soc 2004; 52:931-938.
    4. Mukamel D, Spector W, Zinn J, Huang L, Weimer D, Dozier A. 
Nursing Homes' Response to the Nursing Home Compare Report Card. 
Journal of Gerontology 2007; 62B (4)S218-S225.
    5. Louwe H, Parry C, Kramer A, Feuerberg M. Improving Nursing Home 
Enforcement: Findings From Enforcement Case Studies. UCDHSC, Division 
of Health Care Policy and Research. CMS Report March 22, 2007.
    6. Schnelle JF, Cadogan MP, Yoshii J, Al-Samarrai NR, Osterweil D, 
Bates-Jensen BM, Simmons SF. The Minimum Data Set Urinary Incontinence 
Quality Indicators: Do They Reflect Differences in Care Processes 
Related to Incontinence? Medical Care 2003; 41(8):909-922.
    7. Schnelle JF, Osterweil D, Simmons SF. Improving the Quality of 
Nursing Home Care and Medical Record Accuracy with Direct Observational 
Technologies. The Gerontologist 2005; 45(5):576-582.
    8. Schnelle JF, Continuous Quality Improvements in Nursing Homes: 
Public Relations or Reality? JAMDA. 2007; 8(1):S2-S5.

                                 

    Mr. STARK. General Johnson?
    Mr. JOHNSON. That was a perfect pronunciation of my name, 
by the way.
    Mr. STARK. All right. Good.

STATEMENT OF SCOTT JOHNSON, SPECIAL ASSISTANT ATTORNEY GENERAL, 
                      STATE OF MISSISSIPPI

    Mr. JOHNSON. First, let me extend greetings from my boss, 
the Honorable Jim Hood, Attorney General for the State of 
Mississippi. I appreciate being here today. I have worked as a 
Special Assistant Attorney General, especially when I was 
Director of the Medicaid Fraud Control Unit in our office, 
closely with our Mississippi State Department of Health. The 
State Department of Health is the entity in Mississippi which 
inspects nursing homes and which levies fines for misconduct 
found, substandard conduct, and also levies penalties for 
deficiencies until such time as those deficiencies are 
corrected.
    I am here today to testify about the potential dangers 
associated with undercapitalization of nursing homes, 
specifically with respect to the growing trend of ownership by 
private equity firms and the subsequent divestiture of assets. 
To make that clear to the Subcommittee what that means is that 
we have a situation or trend going on where the nursing home 
licensee, the entity who is responsible for possibly or would 
be responsible for a fine or a penalty levied by the State 
regulator, is divesting itself of assets. In other words, it 
exists in name only because it is selling off its real estate 
holdings, possibly its equipment, and any other tangible assets 
that it has to various limited liability companies.
    Now what are you left with then when a potential creditor 
and I say creditor, the State, when it is owed money, is a 
creditor just like a plaintiff that has got a successful 
judgment would be a creditor. What are you left with when 
attempting to collect these fines or penalties? Well, what we 
have found in Mississippi is there has been a sufficient income 
stream to date from Medicare and Medicaid payments.
    In Mississippi, we have a lag time that is up to 90 days on 
the time in which from services being rendered to services 
being paid by Medicare or Medicaid to the providers. Therefore, 
if we have levied a fine or penalty, we have a hammer of being 
able to come in and collect that money. We can intercept the 
money, in other words.
    So, we don't have a problem at this point. Where we would 
have a problem is if there was a situation where there were 
fines or penalties which exceeded the amount of money which was 
due from Medicaid or Medicare. In other words, if the fine that 
was levied or the penalties that were levied exceeded the 
income stream. Well, then what are we left with to be able to 
collect the funds from? This is what plaintiffs, this is what 
plaintiffs who have obtained successful judgments, this is the 
situation they find themselves in. Our primary concern as a 
State regulator is to make sure that the nursing homes are 
operating at at least minimal--or providing at least minimal--
standards of care.
    So, we come in and we are looking at the baseline. You 
know, some of the other people at this table, or I guess the 
other people at this table are, you know, looking above the 
baseline, trying to improve, as we should as a society because 
either we are going to die or we are all going to become 
elderly. We know we ought to look out for the present elderly 
and look out for ourselves in the future also.
    So, as a State regulator, we come in and we look and make 
sure there is a maintenance of minimal standards. Our then 
primary concern is if we assess a penalty or a fine, can we 
collect that penalty or fine? Now, if for whatever reason the 
income stream is not sufficient to extinguish levied penalties 
or fines there are some options that could be taken. One would 
be the assets of the nursing home. This is what we had in the 
past. You could place a lien on the actual assets of the home. 
Another option would be that each individual home could be 
bonded for an amount sufficient to cover any penalties or fines 
that were levied. A third option would be insurance, which 
would cover civil or regulatory penalties.
    Now the problem with, when I mentioned the first 
alternative of levying a lien--or placing a lien, I should say, 
on the assets of a corporation--with the trend that we are 
seeing, there are no assets of the corporation. You cannot 
place a lien on something that does not exist. So, in this 
complex--the other thing that I believe the Subcommittee should 
consider is with the complex corporate structures that 
routinely exist--there is no way to follow the assets. There is 
a concept in law called piercing the corporate veil. In the 
paper that I provided I set out--I didn't do a national survey 
because it was time-prohibitive--but in Mississippi, there are 
four ways that you can go after assets that have been divested 
from a corporation.
    The only one that would potentially be available in this 
context, in my opinion, would be if you could show the assets 
were fraudulently divested, in which you would have to be able 
to show--the State regulator would have to be able to show, or 
any other creditor--that the assets were conveyed for a less 
than fair market value. That is almost impossible to do with 
nursing homes because nursing homes are not fungible entities. 
How do you prove the value; how do you prove that the assets 
were conveyed for less than a fair market value? It would be 
very tenuous to do so.
    One last point I want to make clear is I am here speaking 
on behalf of State regulators, and not the plaintiffs' bar. The 
reason that there is an extreme dichotomy between the two is 
the State regulator, we, our job is to identify misconduct and 
to attempt to, through remedial action, correct that 
misconduct, or to identify deficiencies and put the nursing 
home on notice of those deficiencies. And say for example, you 
have got a door: Alzheimer's patients are being able to escape 
out through the door; one is eventually going to get hit by an 
automobile; fix the door. If you don't, we are going to fine 
you so much per day. The cost associated with regulatory 
agencies as levied against nursing homes is a very small 
fractional amount when you look at it in comparison to what the 
cost of the potential harm is. For example, if the person 
escapes from the nursing home because of a problem with the 
door, we come in and levy a relatively small fine. What happens 
with the person who has eloped when they do get hit by the 
automobile? That is an issue that I am not able to address 
today. I would just point out that comparing what we do as 
regulators to what people do--what we do in trying to prevent 
harm, versus the recoupment of payment to make someone whole 
for having suffered harm is not comparing apples to oranges, it 
is comparing grapes to watermelons. Thank you.
    [The prepared statement of Mr. Johnson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    









    Mr. STARK. Thank you very much. I would hope that Mr. 
Muller can tell us the difference between a grape and a 
watermelon and enlighten us in any way you would like. Turn on 
your mike and proceed.

  STATEMENT OF ARVID MULLER, ASSISTANT DIRECTOR OF RESEARCH, 
             SERVICE EMPLOYEES INTERNATIONAL UNION

    Mr. MULLER. Thank you, Mr. Stark, Ranking Member Camp and 
other distinguished Members of the Committee. Thank you for 
giving me the opportunity to appear before you today. I am the 
assistant director of research for the Service Employees 
International Union, SEIU. SEIU represents almost one million 
health care workers, including more than 150,000 nursing home 
workers. Twenty years after Congress passed landmark nursing 
home legislation, the modest but real progress made since 1987 
is being threatened by a new breed of nursing home operator, 
private equity. The private equity business model seeks to make 
extreme profit at the expense of nursing home residents, their 
families, care givers and taxpayers.
    On September 23rd, The New York Times published an 
investigative story confirming what many caregivers in our 
Nation's nursing homes already know. Medicare and Medicaid 
resources that are intended to support vulnerable Americans are 
being diverted to the private benefit of wealthy investors. The 
New York Times found that among other concerns with private 
equity ownership of nursing homes, there are serious quality of 
care problems. SEIU, in a new report, Equity and Inequity: How 
Private Equity Buyouts Hurt Nursing Home Residents, which we 
are submitting as supplemental testimony, confirmed the 
findings of The New York Times article.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    



































    Mr. MULLER. SEIU analyzed OSCAR deficiency data available 
from CMS. We looked at two major nursing home chains, Mariner 
Health Care and Beverly Enterprises, which were bought buy 
private equity firms. In December 2004, Mariner Health Care, 
comprised at that time of 252 facilities with about 30,000 
nursing home beds across 19 States was taken private by 
National Senior Care, a private equity firm. To analyze the 
impact of the buyout of Mariner, we compared the number of 
Federal resident care violations from the annual inspections 
prior to being bought out by private equity with the number of 
violations found during their most recent annual inspections.
    The results were distressing. We found a 29.4 percent 
increase in violations of Federal resident care standards 
during their most recent inspections. This was more than double 
the 11.9 percent increase in violations among non-Mariner homes 
in the States in which Mariner operates. The next analysis we 
did was to look at the severity of the violations. Violations 
of resident care, otherwise known as deficiencies, have four 
levels of severity: Deficiencies with potential for minimal 
harm; deficiencies with potential for actual harm; deficiencies 
that cause actual harm; and finally, the most serious 
deficiencies, those that cause immediate jeopardy.
    As you can see from this slide, we looked at all four 
categories and discovered that not only are there more 
deficiencies in the now private equity-owned Mariner homes, but 
the most serious deficiencies, those causing actual harm or 
immediate jeopardy, increased the most. Deficiencies that 
caused actual harm increased by 66.7 percent for Mariner homes, 
while only increasing 1.5 percent for non-Mariner homes. 
Immediate jeopardy deficiencies increased by 87.5 percent, 
compared to a 13.3 percent increase for non-Mariner homes.
    As you can see from the next slide, over the same period 
the percent of Mariner facilities cited for 10 or more 
deficiencies during an inspection increased from 25.1 percent 
prior to the sale to 43.8 percent of facilities after the sale. 
Non-Mariner homes in the same States saw a much smaller 
increase over that time, from 21.6 of all facilities to 25.9 
percent of all facilities. As The New York Times article 
indicated, Mariner's performance post-buyout is not an anomaly, 
and for more details I refer you to our report.
    Furthermore, holding private equity firms accountable for 
poor quality of care is exceedingly difficult. Private equity 
firms restructure nursing homes to maximize profit, but in the 
end, create a maze of control and ownership that makes it 
difficult to hold nursing homes and private equity companies 
accountable for providing quality care.
    A December 2006 study prepared by Harvard Medical School 
experts for the U.S. Department of Health and Human Services 
detailed these impacts. Quote, Integrated Health Services, 
Mariner Health Care, and most recently Beverly are examples 
where equity groups purchased chains with the intention of 
separating the real estate and operations, with the goals of 
limiting liability and enhancing profitability.
    Now, private equity firms are poised to become even more 
dominant in the nursing home industry, as the Carlyle Group, 
one of the world's largest private equity buyout firms, moves 
to complete the $6.6 leveraged buyout of HCR ManorCare, one of 
the Nation's largest nursing home care providers. ManorCare 
claims it has no intention of changing its operating structure 
or of separating its nursing home's real estate from 
management. But ManorCare's own public filings indicate it 
plans a significant restructuring as part of the deal.
    As you can see from this slide, documents filed by 
ManorCare with State regulators indicate that the company's 
restructuring will send each nursing home's operation to an 
entirely new corporate entity and will separate real estate and 
operations into two completely separate companies, with 
multiple layers of corporate ownership between these companies 
and the parent company. This four-tiered structure may shield 
ManorCare's assets and distance itself from liability because 
part of Carlyle's restructuring plan involves creating multiple 
limited liability corporations. Limited liability means just 
that, limited. If patients can only get redress from the entity 
operating the home, that entity may have no real estate assets, 
and little ability to pay.
    While I am neither a lawyer or an accountant, and thus 
cannot testify as to the legal aspects of this corporate 
restructuring, I do know, based on a study of other nursing 
home buyouts, that these proposed structures raise some 
troubling questions. For example, will the Federal Government, 
State regulators, residents and their families be able to hold 
Carlyle accountable with its maze of limited liability 
corporations? How can the Federal Government and the States 
ensure transparency and accountability in this buyout and 
others? Our research demonstrates that care suffers under 
private equity's ownership, and at the same time these 
companies appear to shield themselves from liability for their 
poor care.
    Congress must exercise its oversight authority to ensure 
that Medicare and Medicaid dollars are spent as intended, to 
provide high quality care. As Congress considers a Medicare 
bill, we urge you to include Medicare reforms that increase 
transparency and accountability. Last week SEIU, in conjunction 
with other advocacy organizations, sent your Committee a letter 
outlining our suggestions for reform.
    We would like to submit that letter as supplemental 
testimony for the official record of this hearing.
    [The information follows:]

    * * * * * * * Not available at the time of printing * * * * 
* * * *

    Mr. MULLER. We would urge you to use the nursing home 
revisit fees as a tool to hold private equity homes accountable 
for quality of care and safety. Taxpayers trust that Medicare 
and Medicaid dollars will go toward providing seniors and the 
disabled with the quality care they deserve. Profits should not 
come at the expense of nursing home residents, their families, 
caregivers and taxpayers. I thank you for inviting me here 
today to testify about SEIU's concerns about private equity 
ownership of nursing homes. Thank you.
    [The prepared statement of Mr. Muller follows:]
  Prepared Statement of Arvid Muller, Assistant Director of Research, 
                 Service Employees International Union
    Thank you for giving me the opportunity to appear before you today. 
I am the Assistant Director of Research for the Service Employees 
International Union (SEIU). SEIU represents almost one million health 
care workers, including more than 150,000 nursing home workers.
    Twenty years after Congress passed landmark nursing home reform 
legislation, the modest but real progress made since 1987 is being 
threatened by a new breed of nursing home operator--private equity 
firms. The private equity business model seeks to make extreme profit 
at the expense of nursing home residents, their families, caregivers, 
and taxpayers. On September 23, The New York Times published an 
investigative story confirming what many caregivers in our nation's 
nursing homes already know: Medicare and Medicaid resources that are 
intended to support vulnerable Americans are being diverted to the 
private benefit of wealthy investors.
    The New York Times found that among other concerns with private 
equity ownership of nursing homes, there are serious quality of care 
deficiencies. SEIU, in a new report ``Equity and Inequity: How Private 
Equity Buyouts Hurt Nursing Home Residents,'' which we are submitting 
as supplemental testimony for the official record of this hearing, 
confirmed the findings of the NYT article. SEIU analyzed Online Survey, 
Certification, and Reporting (a.k.a. OSCAR) data available from the 
Centers for Medicare and Medicaid Services (CMS). We looked at two 
major nursing home chains, Mariner and Beverly Enterprises, which were 
bought by private equity firms. In December 2004, Mariner Health Care 
Inc. (252 facilities with 29,685 \1\ nursing home beds across 19 
States) was taken private by National Senior Care Inc., a private 
equity firm.\2\ To analyze the impact on quality care of National 
Senior Care's buyout of Mariner, we compared the number of Federal 
resident care violations from the annual inspection prior to being 
bought by private equity with the number of resident care violations 
found during their most recent annual inspection for each of the homes. 
The results were distressing. We found a 29.4% increase in violations 
of Federal resident care standards during the most recent inspections 
since it was acquired by National Senior Care. This was more than 
double the 11.9% increase in violations in the other homes in the 
States in which Mariner operates.\3\
---------------------------------------------------------------------------
    \1\ This number, obtained from publicly available CMS data, 
represents the number of beds at 248 of the 252 facilities that were 
part of the deal. Four facilities that were part of the deal have since 
closed, and we are unable to find bed counts for those facilities.
    \2\ Francis, Theo. ``Real Estate Is Driver of ManorCare Buyout 
Deal--Nursing-Home Firms, Attractive at Moment, Are Acquisition 
Targets.'' Wall Street Journal, July 3 2007, A2.
    \3\ Aug 23 07 download of OSCAR.
---------------------------------------------------------------------------
    The next analysis we did was to look at the severity of the 
violations. Violations of resident care, (a.k.a. deficiencies) have 
four levels of severity.
    The first, deficiencies with ``potential for minimal harm'' are 
those that have the potential for causing no more than a minor negative 
impact on a resident.\4\
---------------------------------------------------------------------------
    \4\ Centers for Medicare and Medicaid Services, State Operations 
Manual, ``Appendix P--Survey Protocol for Long Term Care Facilities--
Part I--(Rev. 22, 12-15-06),'' Section IV: Deficiency Categorization.
---------------------------------------------------------------------------
    Next are deficiencies with ``potential for actual harm'' reflecting 
non-compliance on the part of the nursing home in a way that causes, or 
has the potential to cause, no more than minimal physical, mental, or 
psycho-social harm to a resident.\5\
---------------------------------------------------------------------------
    \5\ Centers for Medicare and Medicaid Services, State Operations 
Manual, ``Appendix P--Survey Protocol for Long Term Care Facilities--
Part I--(Rev. 22, 12-15-06),'' Section IV: Deficiency Categorization.
---------------------------------------------------------------------------
    Then there are deficiencies that ``cause actual harm'' causing real 
injury to fragile nursing home residents.\6\ Examples of actual harm 
citations include:
---------------------------------------------------------------------------
    \6\ Centers for Medicare and Medicaid Services, State Operations 
Manual, ``Appendix P--Survey Protocol for Long Term Care Facilities--
Part I--(Rev. 22, 12-15-06),'' Section IV: Deficiency Categorization.

      Failure to give each resident enough fluids to keep them 
healthy and prevent dehydration.
      Failure to give residents proper treatment to prevent new 
bed (pressure) sores or heal existing bed sores.
      Make sure that residents who cannot care for themselves 
receive help with eating/drinking, grooming and hygiene.\7\
---------------------------------------------------------------------------
    \7\ Based on information from ``About the Nursing Home--
Inspections,'' Centers for Medicare and Medicaid Services Nursing Home 
Compare data, downloaded 10/29/2007.
---------------------------------------------------------------------------
    Finally we have deficiencies that ``cause immediate jeopardy'' 
meaning that something the nursing home did or failed to do put 
residents' health, safety, and lives directly in harm's way. These 
deficiencies require immediate correction.\8\
---------------------------------------------------------------------------
    \8\ Centers for Medicare and Medicaid Services, State Operations 
Manual, ``Appendix P--Survey Protocol for Long Term Care Facilities--
Part I--(Rev. 22, 12-15-06),'' Section IV: Deficiency Categorization.

---------------------------------------------------------------------------
    Examples of immediate jeopardy citations include:

      (1) Failure to hire only people who have no legal history 
of abusing, neglecting or mistreating residents; or (2) failure to 
report and investigate any acts or reports of abuse, neglect or 
mistreatment of residents.
      Failure to protect each resident from all abuse, physical 
punishment, and being separated from others.\9\
---------------------------------------------------------------------------
    \9\ Based on information from ``About the Nursing Home--
Inspections,'' Centers for Medicare and Medicaid Services Nursing Home 
Compare data, downloaded 10/29/2007.

    We looked at all four categories and discovered than not only are 
there more deficiencies in the now private equity-owned Mariner homes, 
but the most serious deficiencies--those causing immediately jeopardy, 
---------------------------------------------------------------------------
increased the most. TALK THRU CHART/SLIDE.


------------------------------------------------------------------------
                               Mariner % Increase       Non-Mariner %
       Deficiency Type             Post Buyout            Increase
------------------------------------------------------------------------
All Deficiencies                      29.4%                  11.9%
------------------------------------------------------------------------
Potential for Minimal Harm            -8.0%                 -13.3%
------------------------------------------------------------------------
Potential for Actual Harm             33.6%                  18.0%
------------------------------------------------------------------------
Actual Harm                           66.7%                   1.5%
------------------------------------------------------------------------
Immediate Jeopardy                    87.5%                  13.3%
------------------------------------------------------------------------


    Over the same period, the percent of Mariner facilities cited for 
10 or more deficiencies during an inspection increased from 25.1% prior 
to sale to 43.8% of facilities. Other facilities operating in the same 
States as Mariner saw a much smaller increase over that time, from 
21.6% of all facilities cited for 10 or more deficiencies to 25.9% of 
all facilities.
    There are real people behind these violations who suffered 
needlessly. After one facility failed to prevent and properly treat a 
resident's bed sores, the resident's wound worsened so much that the 
resident had to have his leg amputated above the knee. And 3 weeks 
after the resident's leg was amputated, the resident developed three 
more pressure sores on his other foot.
    As the NYT articles indicated, Mariner's performance post-buyout is 
not an anomaly. When we looked at the impact of the sale of Beverly 
Enterprise to Fillmore Capital Partners, we saw a similar increase in 
Federal violations during their most recent inspections when compared 
to inspections immediately prior to the sale. Since Beverly's sale to a 
private equity company in March 2006, their most recent annual 
inspections show a 19.4% increase in violations, more than double the 
8.2% increase in violations cited in other homes located in the States 
where Beverly operates.\10\ The quality of care at nursing homes is a 
serious concern throughout the industry, but this analysis of the CMS 
data, indicates an even greater cause for alarm at private equity-owned 
firms.
---------------------------------------------------------------------------
    \10\ Ibid.
---------------------------------------------------------------------------
    And holding private equity firms accountable for poor quality of 
care is exceedingly difficult. Private equity firms restructure nursing 
homes to maximize profit but in the end create a maze of control and 
ownership that makes it difficult to hold nursing homes and private 
equity companies accountable for providing quality care. A December 
2006 study prepared by Harvard Medical School experts for the U.S. 
Department of Health and Human Services, detailed these impacts:

          ``Integrated Health Services, Mariner Health Care, and, most 
        recently, Beverly, are examples where equity groups purchased 
        chains with the intention of separating the real estate and 
        operations with the goals of limiting liability and enhancing 
        profitability.'' \11\
---------------------------------------------------------------------------
    \11\ http://aspe.hhs.gov/daltcp/reports/2006/NHdivest.htm

    As the new owners of Mariner, National Senior Care hired roughly 80 
attorneys from a half-dozen law firms to help design and execute a 
complicated web of corporate structures that took nearly 7 months to 
complete. To help pay for the deal, National Senior Care immediately 
sold approximately two-thirds of the homes they had purchased to 
another company called SMV Property Holdings.\12\ SMV set up separate 
real estate holding companies for each of the properties purchased \13\ 
and then leased the facilities back to Mariner or SavaSenior Care,\14\ 
an affiliate of National Senior Care.\15\ Adding to the structural 
complexity, documents submitted to California regulators indicate that 
at least some former Mariner homes are actually run by subsidiary 
operating companies that are unique to each location.\16\ Not 
surprisingly, the lawyers who helped set up the National Senior Care 
deal called it one of the most complicated transactions they had ever 
been involved in.\17\
---------------------------------------------------------------------------
    \12\ Counsel to Counsel Magazine. ``A Study in Complexity: Mariner 
Health Care Inc. and Powell Goldstein LLP'' by Scott M. Gawlicki, March 
2005, pages 27-29.
    \13\ Standard & Poors, ``Presale: Credit Suisse First Boston 
Mortgage Securities Corp.,'' published December 7, 2004, reprinted from 
RatingsDirect, page 6.
    \14\ Counsel to Counsel Magazine. ``A Study in Complexity: Mariner 
Health Care Inc. and Powell Goldstein LLP'' by Scott M. Gawlicki, March 
2005, pages 27-29.
    \15\ Mariner Health Care Inc. Form DEFM14A filed with SEC on 10/22/
04, p. 5.
    \16\ Review of Licensure & Certification Applications submitted to 
California Department of Health Services by several former Mariner 
facilities, including Diamond Ridge HealthCare Center (Pittsburg) 
application signed 12/5/05, Excell HealthCare Center (Oakland) 
application signed 1/10/07 and Hayward Hills HealthCare Center 
(Hayward) application signed 3/6/07.
    \17\ Counsel to Counsel Magazine. ``A Study in Complexity: Mariner 
Health Care Inc. and Powell Goldstein LLP'' by Scott M. Gawlicki, March 
2005, pages 27-29.
---------------------------------------------------------------------------
    While we don't know the exact amount of rent that the Mariner homes 
paid to these related parties--all owned by National Senior Care--the 
building and fixture-related capital costs that Mariner reported on its 
Medicare cost reports rose by 60% the year after National Senior Care 
took over. (For comparison purposes, in the previous 3 years it had 
increased by a total of only 11%.) In addition, interest expense 
payments, an indicator of how much debt has been incurred, increased by 
145% from 2004 to 2005, the year after the buyout. At the same time, 
the number of Mariner facilities that reported any interest expenses in 
2005 was more than four times the number that had reported interest 
expenses in any of the previous 3 years.\18\
---------------------------------------------------------------------------
    \18\ Cost growth figures are based on analysis of 2001-2005 
Medicare cost report data for 212 facilities currently operated by 
National Senior Care and purchased from Mariner in December 2004. 
Analysis excluded facilities that did not report complete data in all 
years analyzed. Capital-related costs for buildings and fixtures and 
interest-related expenses were taken from Sheet A, column 2, lines 1 
and 53 of the cost report. Data was summed for facilities submitting 
multiple cost reports and costs were annualized by facility.
---------------------------------------------------------------------------
    Private equity firms are poised to become even more dominant in the 
nursing home industry as the Carlyle Group one of the world's largest 
private equity buyout firms, moves to complete the $6.6 billion 
leveraged buyout of HCR ManorCare, the nation's largest nursing home 
care provider. This buyout should raise serious concerns for nursing 
home staff trying to provide quality care; for State surveyors whose 
job it is to provide ongoing oversight on behalf of Medicare; for the 
taxpayers who fund the bulk of this care and; most importantly, for the 
residents who may suffer as Carlyle Group and ManorCare executives pay 
themselves millions while saddling ManorCare with billions in debt. It 
is unclear how ManorCare could service such high debt without affecting 
the quality of care.
    In response to The New York Times investigation, ManorCare has 
claimed in communications to employees that it has no intention of 
changing its ``operating structure'' or of separating its nursing 
homes' real estate from management.\19\
---------------------------------------------------------------------------
    \19\ ``ManorCare Buyout has Local Effect,'' Williamsport Sun 
Gazette, October 11, 2007.
---------------------------------------------------------------------------
    But ManorCare's own SEC filings and filings in the States reveal 
that it plans a significant ``restructuring'' as part of the deal.\20\ 
While I am neither a lawyer nor an accountant, and thus cannot testify 
as to the legal aspects of this corporate restructuring, I do know 
based on study of other nursing home buyouts that this corporate 
restructuring should raise serious concerns. It appears from the 
documents filed by ManorCare that the company's ``restructuring'' will 
send each nursing home's operations to an entirely new corporate entity 
and will separate real estate and operations into two completely 
separate companies, with multiple layers of corporate ownership between 
these companies and the corporate parent. Applications for nursing home 
licenses in Maryland, Michigan, Washington, and West Virginia lay out a 
four-tiered structure for Carlyle to shield ManorCare's assets and 
distance itself from any liability for poor care in ManorCare homes 
(talk thru slide):
---------------------------------------------------------------------------
    \20\ ManorCare 14A filing, dated 9/14/2007, pp. 62-64.

    (1)  Create a corporation as a holding company to own the entire 
ManorCare chain;
    (2)  Create limited liability corporations for the operations of 
individual ManorCare homes;
    (3)  Create limited liability corporations for the real estate 
holdings of individual ManorCare homes;
    (4)  Create another affiliated corporation to lease all the 
properties from the ownership corporations, and then sublease to the 
operating corporations.

    Part of Carlyle's restructuring plan involves creating multiple 
limited liability corporations, and ``limited liability'' means just 
that, limited--if patients can get redress only from the entity 
operating the home, that entity may have no real estate assets. Will 
the Federal Government, State regulators and residents and their 
families be able to hold Carlyle accountable with a maze of LLCs? How 
can the Federal Government and the States ensure transparency and 
accountability in this buyout and others?
    The New York Times and our research demonstrate that care suffers 
under private equity's ownership and at the same time these companies 
appear to shield themselves from liability for their poor care. 
Congress must exercise its oversight authority to ensure that Medicare 
and Medicaid dollars are spent as intended--to provide high quality 
care. As Congress considers a Medicare bill, we urge you to include 
Medicare reforms that increase transparency and accountability. Last 
week, SEIU, in conjunction with other advocacy organizations sent your 
Committee a letter outlining our suggestions for reform. We would like 
to submit that letter as supplemental testimony for the official record 
of this hearing. We also urge you to use the nursing home ``revisit 
fees'' as a tool to hold private equity-owned homes accountable for 
quality of care and safety. Taxpayers trust that Medicare and Medicaid 
dollars will go toward providing seniors and the disabled with the 
quality care they deserve. Profit should not come at the expense of 
nursing home residents, their families, caregivers, and taxpayers. I 
thank you for inviting me here to testify about SEIU's concerns about 
private equity ownership of nursing homes.

                                 

    Mr. STARK. Thank you very much. I don't want to say I don't 
care what the ownership structure of nursing homes--what form 
it takes. I am concerned about several things. As a person who 
a thousand years ago organized a bank, I was able to fool the 
regulators into thinking I was a good person. You know, of high 
responsibility and ethics and morals. But there was a 
requirement you couldn't start a bank if you were a crook. I 
suspect to get a legal license, Mr. Hulshof has to prove what 
we all know, that he is an honorable, respectable gentleman or 
he couldn't have got admitted to the Bar. I don't know what we 
do in hospitals or other areas, but in many areas, it is the 
individuals who will be responsible for the management who have 
to be vetted.
    I suspect that that should be true in nursing homes, that 
those individuals who will make decisions about how money is 
spent or how money is invested ought to pass some kind of 
muster. That is step one. Two, I think you ought to be able to 
get a hold of these people in a meaningful way. If you have got 
a billion dollar corporation and you are going to assess piddly 
little fines of a couple hundred bucks a day, that doesn't make 
any difference to them. But if they are subject to, you know, 
if you got a good lawyer like Mr. Hulshof after them, and you 
have got some million dollar judgment against them and there is 
only $50,000 in the bank, that doesn't do you much good. It 
won't even pay his fees, much less pay anything to the person 
who was damaged.
    So, it seems to me that you have the management quality 
assurance of however you do that; and second, you have to have 
some way, whether it is bonding or insurance, and bonding makes 
some sense to me, but I am not that familiar with what they 
cost and how easy it is to enforce a judgment or a fine against 
a bonding company. But if you can do that, then it is oh, never 
mind to me, again, whether the operator of the nursing facility 
is paying rent or paying interest or owns the property, the 
real estate free and clear, as long as regulators or aggrieved 
or harmed patients can get after them.
    The other issues, and I don't think they have anything to 
do, I don't think we can identify them very clearly, at least I 
think we get into a brouhaha, is basing factors of quality or 
minimum standards of service based on ownership. I suspect that 
there are standards, whether it is food that is prepared in a 
sanitary, hygienic, and sufficient manner; whether the building 
has proper safety precautions like fire escapes and that sort 
of thing; whether there is adequate staffing.
    I don't want to get into the--I don't think that Congress 
wants to decide whether you need RNs or other types of 
professionally trained people. Somebody should be able to set 
minimum standards of care as you suggest, General Johnson, and 
baseline, and hopefully we could go from there. But where we 
can provide to State regulators the opportunity to enforce 
their mandates because they can't collect on a fine or they 
can't cause enough financial impetus for the owner or the 
director to do the right thing, I think it is incumbent on us 
to do that. I think that means that we have to set some sort of 
standards for each unit and relate the ability to get the 
assets to the owner, to the aggregate of the facility and/or 
facilities. If it is the CEO of Carlyle, then the CEO of 
Carlyle ought to be at risk, it seems to me, for what happens 
in the lowliest, smallest subsidiary in his or her arrangement 
of corporations. That will get their attention, I suspect, more 
than just issuing a statement of concern, which sounds very 
nice, but which is unenforceable.
    So, I appreciate all of your testimony, and if anybody 
disagrees with that they can raise their hand. Otherwise I am 
going to recognize Mr. Camp to agree with me. You can add to 
this later, but I know a lot of my colleagues want to question 
or inquire. Mr. Camp?
    Mr. CAMP. Thank you, Mr. Chairman. I just have a few 
questions, and my time is limited, so Ms. Harrington, I would 
like to better understand--or Dr. Harrington, I would like to 
better understand the magnitude of the issue before us today. 
Can you please tell me what percentage of nursing home beds are 
owned by private investment groups, if you know, nationwide?
    Ms. HARRINGTON. Nationwide we don't know right now. But 
that is partly because CMS does not have a tracking system, and 
private equity owners do not have to be listed as the licensee.
    Mr. CAMP. Looking at The New York Times article, they said 
that six of the ten largest chains had been purchased, which is 
about 141,000 beds----
    Ms. HARRINGTON. Yes, that is right.
    Mr. CAMP [continuing]. Which would be about 9 percent.
    Ms. HARRINGTON. Yes, that is right.
    Mr. CAMP. They said in the smaller chains, they have bought 
an additional 60,000 beds. So, it looks like currently about 
200,000 beds. Would that be fair? Which would be roughly 15 
percent of the beds nationwide in private investment. Dr. 
Schnelle, you make the point that adequate staffing levels in 
nursing homes decline. As those decline, so does the quality of 
care. Can you tell me what would the effect of a $6.5 billion 
reduction in Medicare nursing home payments do to the ability--
on staffing ratios?
    Mr. SCHNELLE. I can't give you a number. Obviously, it 
would make them significantly worse than they are now. But my 
other point was you might not recognize how much worse care 
would be with existing measures. The care that would be 
significantly worse would be at the bedside level.
    Mr. CAMP. Is whether the staff in the facilities are union 
or nonunion a part of your study? Would that make any 
difference?
    Mr. SCHNELLE. Wasn't part of my study.
    Mr. CAMP. So, you didn't look at it?
    Mr. SCHNELLE. No.
    Mr. CAMP. In your opinion do you think it would make a 
difference?
    Mr. SCHNELLE. I am not sure.
    Mr. CAMP. All right. You published a report for CMS in 
2002?
    Mr. SCHNELLE. Yes.
    Mr. CAMP. Which you make recommendations for minimum 
staffing levels in nursing homes.
    Mr. SCHNELLE. Yeah.
    Mr. CAMP. Did you estimate how much it would cost to 
provide those new minimum staffing requirements?
    Mr. SCHNELLE. I didn't, but CMS did. It would cost 
significantly more.
    Mr. CAMP. Do you know if any of the recommendations in your 
report have been adopted by CMS?
    Mr. SCHNELLE. No, they have not been adopted.
    Mr. CAMP. Okay. Do hospitals have minimum staffing 
requirements, if you know?
    Mr. SCHNELLE. Yes. In some States at least. In California 
they do.
    Mr. CAMP. In most States do they?
    Mr. SCHNELLE. I don't know.
    Mr. CAMP. Mr. Johnson, in Mississippi, are nursing homes 
licensed?
    Mr. JOHNSON. Yes.
    Mr. CAMP. Who licenses nursing homes in Mississippi?
    Mr. JOHNSON. The State Department of Health.
    Mr. CAMP. Are there State insurance requirements as a part 
of the license?
    Mr. JOHNSON. To my knowledge, no.
    Mr. CAMP. So, in Mississippi there are no bond or insurance 
requirements?
    Mr. JOHNSON. No, sir.
    Mr. CAMP. All right. Are you aware of other State laws with 
regard to nursing home licensing?
    Mr. JOHNSON. No, sir. I did not research that.
    Mr. CAMP. All right. Well thank you, Mr. Chairman. At this 
time I will yield back my time. Thank you.
    Mr. STARK. Mr. Thompson, would you like to inquire?
    Mr. THOMPSON. Thank you, Mr. Chairman. I want to pick up on 
the issue of the minimum standards, the staffing, relationship 
between staffing and quality of care. I think a couple of you 
had mentioned that this was an issue in your statements. I read 
recently a study, I think it was published earlier this year, 
stating that the nursing shortage would be about 350,000 across 
the country by the year 2020. In California there was another 
study that was just recently done that says in our State alone, 
we are going to face a shortage of about 11,000 nurses over the 
next 5 years.
    In the nursing home industry there are currently some 
100,000 RN and nurse-related positions that are open in 
facilities across the country. They are open because people 
that run those facilities can't find individuals to fill those 
positions. So, irrespective of how you come down on the issue 
of minimum standards or ratios, we are facing a pretty big 
shortage of nursing personnel. If we are going to, I think, 
address the issue of quality care, we are going to have to 
figure out how to close that gap.
    I would like to hear from the witnesses if you have any 
ideas as to what this Committee can do to help to close that 
gap and to address the workforce shortages as it pertains to 
nurses.
    Ms. HARRINGTON. I would like to address that. Coming from 
the school of nursing and having thought about this a lot, we 
have done studies of the relationship of staffing turnover and 
wages, and the main problem is the wages in nursing homes are 
too low, significantly lower than hospital wages, and that 
causes high turnover.
    But the workload is the major factor that causes the 
turnover. If you don't have adequate staff, then the employees, 
the RNs as well as the nursing assistants, do not stay. So, we 
have to have adequate staffing levels, and that is a big 
problem.
    Low pay is the reason we have the current vacancies. Now, 
there is a problem in the future, but if we don't address the 
working conditions, the wages, right now, then we are not going 
to have nurses be willing to go into nursing in the future. 
That is what is going to cause the shortage.
    Mr. THOMPSON. Again, it is not just in nursing homes, it is 
an across-the-board shortage.
    Ms. HARRINGTON. There is a shortage, but in nursing homes 
it is acute because they are paying such low wages, and there 
are about 300,000 nurses that don't work. They don't work right 
now because the working conditions are not good.
    Mr. THOMPSON. What determines if it is an acute shortage 
and just a shortage? If I am going to the hospital next month 
for a problem, and there isn't an adequate number of nurses, 
from my perspective it is pretty acute.
    Ms. HARRINGTON. But you have to have a hospital, and a 
nursing home has to be willing to hire enough staff so that the 
nurses are willing to stay there and work, and that is what 
they are not doing right now.
    Mr. THOMPSON. So, that the workload and wages, as you see 
it, are the big issues.
    Ms. HARRINGTON. Those are the big issues.
    Mr. THOMPSON. So, any reduction in either side of the 
financial ledger for nursing homes, be it Medicaid or Medicare, 
is going to further impact us?
    Ms. HARRINGTON. Well, it already has, because nursing homes 
have already dropped the RN staffing by 25 percent, but we 
don't know where the money goes. It is not necessarily that 
they need money, it is that they need to be accountable for the 
money that Medicare has already given them for the staffing. 
Right now they don't have to staff at the level that Medicare 
has paid them for.
    Mr. THOMPSON. Would anyone else like to comment?
    Mr. JOHNSON. Yes, Representative. In my work when I was 
Director of the Medicaid Fraud Control Unit, I, on a regular 
basis, was present in nursing homes. One of the reasons that it 
is difficult to get nurses to stay there is because a lot of 
residents are nonambulatory, so it is a very physically 
demanding position.
    Also, in some nursing homes--a lot of nursing homes--you 
have Alzheimer's units, or you have persons who are suffering 
with dementia for whatever reason, and they are very difficult 
to deal with. So, when you have the opportunity to go work in a 
hospital setting, with the things that you have to deal with 
normally on a daily basis, versus the nursing home setting, and 
the hospital is paying significantly more, why would you go 
work at the nursing home?
    So, I agree that it is a matter of, one, money. However, I 
am not saying that the nursing homes don't have the money to 
actually pay these people. If you want someone to do a job, if 
you want it properly staffed, if you pay enough, the people 
will come. So, I am not saying that they don't have enough 
money to pay. They may be unwilling to reduce their profit 
margins to pay significant enough money to get the nurses to 
come----
    Mr. THOMPSON. With all due respect, sir, there is a 
national nursing shortage, not just in nursing homes, but 
across the board. So, if you are going to make that argument, 
you have to make it across the board. If there is one nursing 
job that is vacant and paying more with better working 
conditions, I don't care where it is, you are going to create 
the situation that you are talking about.
    My question was more of a macro question: How do we deal 
with the overall nursing shortage so we can supply the nurses, 
because as you stated in your testimony, there is a relation 
between staffing and quality of care. It is not enough just to 
say you have got to pay more money.
    My time has run out. Thank you, Mr. Chairman.
    Mr. STARK. Thank you.
    Mr. JOHNSON. May I respond?
    Mr. STARK. Did you want to respond? I don't know who you 
were addressing that to.
    Mr. English, how many votes do we have?
    I am going to ask if Mr. English would like to inquire, and 
then we have three votes which should take us about 25 minutes. 
So, we will recess and try and reconvene.
    Mr. ENGLISH. I thank the Chairman.
    I realize our time is short here, but, Dr. Harrington, 
looking at your studies, they strangely confirm some of the 
concerns that I have had about nursing home quality over the 
years, although I have probably identified maybe a different 
specific focus for how to deal with that problem. I know that 
your studies are kind of blind to the conclusion that the 
purchase of nursing home chains by private equity companies are 
a substantial threat to the quality of care because of the 
financial incentives for profits. Also I think you conclude 
they lack the experience and expertise to oversee nursing 
homes.
    Looking at the same set of facts, I had come to the 
conclusion that the payment system needed to have incentives 
for quality, and for that reason in the last Congress I 
introduced a pay-for-performance initiative that would create 
the financial incentives for nursing homes to move in the 
direction of quality. I am not sure that from an ideological 
standpoint everyone would like the idea of financial 
incentives, but I wonder, looking objectively at your studies, 
isn't it fair to say that your concerns about profits would be 
addressed by a pay-for-performance structure, given especially 
since nursing homes have in place already some fairly detailed 
quality standards, and that this might be an easier test case 
for pay-for-performance than many other health care services?
    But also more to the point, don't all nursing homes, 
regardless of ownership, have to abide by these same Federal 
and State regulations or face financial penalties or even risk 
expulsion from the Medicare and Medicaid programs?
    So, I guess my question is, looking at the facts, aren't 
there potential carrots and sticks both to address the quality 
problem perhaps more directly than focusing on ownership?
    Ms. HARRINGTON. Well, the Federal staffing standards are 
totally inadequate. You only have to have one RN on duty 8 
hours a day, 7 days a week, and that could be a 1,000-bed 
facility or a 50-bed facility.
    Mr. ENGLISH. What about State regulations?
    Ms. HARRINGTON. The States vary in their regulations. Some 
have very good regulations, like Florida right now, it has very 
good regulations; but others have almost no regulation, they 
just go along with the Federal standards. Most surveyors do not 
look at the staffing, they don't have time to audit the 
staffing and the facilities staff up at the time of the survey. 
So, the data we have on staffing is not accurate, which is why 
we want electronic reporting of staffing.
    I think a pay-for-performance focus, if it is focused on 
staffing and turnover rates, I think that might be a good way 
to go. It depends on how it is structured, though, because if 
the pay is not a high enough incentive, and there is a better 
incentive just to take it off in profits, I don't think the 
nursing homes will change their behavior. So, it could work, 
depending on the structure.
    Mr. ENGLISH. Your research concludes that nursing homes 
with higher profits have lower quality of care, and you 
recommend limiting the amount of profit a nursing home can 
make. For some of us that is a little bit of a quaint proposal, 
but you are looking exclusively at the Medicare margin.
    I think if the industry were here today, they would make 
the counterargument that they rely on high Medicare margins to 
offset low Medicaid margins. I think you would have to concede 
what some of the States have been doing on Medicaid 
reimbursements is very, very troubling.
    As Medicaid pays for the bulk of long-term care provided in 
nursing homes, wouldn't you concede that it is important to 
look at overall margins to get a complete view of profit 
levels?
    Ms. HARRINGTON. Yes, I agree. But I think if you set up 
cost centers under Medicare and not allow the shifting of funds 
across the cost centers, many States would set up the same type 
of arrangement. Right now, as long as the nursing homes can 
take the money and use it for profit, they have no incentive to 
keep the staffing up. So, that would help solve the problem at 
both the Medicaid and the Medicare level.
    Mr. ENGLISH. Thank you for your presentation, and thank 
you, Mr. Chairman, for allowing me to inquire.
    Mr. STARK. Mr. Camp and I are usually able to agree on most 
everything. We are trying to agree on whether we have three 
votes or four votes on the floor, but in any event I suspect it 
will be shortly after quarter of 12:00 that we can reconvene. 
So, the Committee will stand in recess subject to the call of 
the Chair at approximately 11:45.
    [Recess.]
    Mr. STARK. As soon as we can find our witnesses or round up 
some new ones, we will reconvene.
    The Committee will resume, but before I recognize Mr. 
Hulshof to inquire, I would like to repeat a statement that I 
made at the opening of this hearing. I have heard since then 
that, quite frankly, many lobbyists and members of the nursing 
home community have been whining and suggesting that they were 
not invited to this hearing, and nothing could be further from 
the truth.
    The Minority staff has advised us that they called and 
asked the representatives and advocates for the nursing home 
community if they had any witnesses, and they said, no. We 
called and asked, and never in the history of this Committee 
have we sent engraved formal invitations, we have always done 
it by phone. For any member of the nursing home community to 
suggest that they are not invited is absolutely false, and I 
just want to make sure that that is clearly on the record. They 
will be welcomed back at any time that they think would be nice 
for them to let us know their position, but they were invited 
and chose not to be here, and I--in fairness to both of them, 
Minority and Majority, that is not correct.
    With that I recognize Mr. Hulshof.
    Mr. HULSHOF. Thank you, Mr. Chairman. Let me state for the 
record that both you, Mr. Chairman, and Mr. Camp were accurate; 
there were four votes, but only three recorded.
    Mr. Johnson, I left Oxford, Mississippi, with my law degree 
about 7 years before you graduated summa cum laude with your 
business degree, and I have great fondness of my time in the 
State of Mississippi.
    You create in your written statement on page 4 beginning, 
an interesting hypothetical analysis, a corporate structure, 
and I think the gist of that hypothetical is that a nursing 
home licensee establishes the corporate structure to divest its 
assets for the purpose of limiting its financial liability in 
the event of a lawsuit.
    I don't want to comment on our legal brethren in the State 
of Mississippi and the proliferation of plaintiffs' lawsuits in 
that State, but some States do--I am not sure if Mississippi 
does, but I know Missouri and other States have actually 
allowed those transferred assets to be fair game in a lawsuit. 
Does Mississippi allow that, for instance--does not?
    Mr. JOHNSON. No, sir, not unless you can show that the 
transfer was fraudulent.
    Mr. HULSHOF. Okay.
    Mr. JOHNSON. That would require that you show that it was 
conveyed at an amount largely below what anyone would consider 
fair market value.
    Mr. HULSHOF. You asked some really interesting questions, 
and perhaps we should visit beyond the scope of this hearing. 
One of the questions that you have left lingering, in fact you 
said lingering inquiry, can the interest of nursing home 
residents be adequately protected through rigorous enforcement 
of minimum standards by State regulatory agencies? Can they?
    Mr. JOHNSON. Yes, I touched on that briefly in my opening 
statement in that as a regulatory agency, State regulators as a 
whole, we come in and we identify misconduct, substandard care, 
deficiencies, and we take a proactive stance then to remedy 
that substandard care, misconduct, deficiencies. However, often 
the harm has already occurred.
    Mr. HULSHOF. Right.
    Mr. JOHNSON. So, the question then becomes--I am probably 
not the best person to answer this question, but, you know, I 
was in private practice for several years prior to taking a 
position with the Attorney General's Office, and I do know that 
the following is true. You can have a tremendous injury, 
someone that comes in with paralyzation or severe burns or 
whatnot, to see a plaintiff's attorney, and if there is nothing 
that you can get from the tortfeasor, the person who is at 
fault, then you don't even sign the victim up; you don't become 
their attorney.
    So, the question then becomes if we are only looking at 
this from a standpoint of can we maintain the line on holding 
nursing homes to a minimum standard. The vast majority of the 
time--through regulatory action, I believe the answer is yes.
    Mr. HULSHOF. Could I cut you off right there, if you don't 
mind, because I am limited on time, so I appreciate your 
answer.
    Mr. JOHNSON. Sure.
    Mr. HULSHOF. Let me go on to a couple more areas quickly.
    Mr. JOHNSON. Okay.
    Mr. HULSHOF. Dr. Harrington, in my last colloquy between my 
colleague Mr. English and yourself, you indicated or at least 
suggest your idea that Medicare should perhaps limit nursing 
home profits. For consistency sake, should Congress and CMS 
also take similar actions to limit the profit margins of 
hospitals and physicians?
    Ms. HARRINGTON. Well, I don't want to comment on hospitals 
and physicians, but I know that the vast majority of nursing 
home revenues comes from the government, whereas hospitals and 
physicians' revenues don't necessarily come from the 
government. We know for sure that the nursing homes are cutting 
staffing. So, if you did not want to limit profits, if you 
simply set up the cost centers so that money could not be taken 
from the direct and indirect care cost centers, that would, in 
fact, help tremendously.
    Mr. HULSHOF. Mr. Muller, in the few moments I have 
remaining, I have read your witness statement, it is very well 
documented and very well cited. I did not see a citation--you 
quote extensively from The New York Times, but I see no 
citation to the Palm Beach Post. Are you familiar with the 
editorial that came out Tuesday, November 13th, in the Palm 
Beach Post, sir?
    Mr. MULLER. No, I am not.
    Mr. HULSHOF. If the Chairman would indulge. SEIU, through 
you, have been quite critical of Mariner and Carlyle, and yet 
the editorial talks about SEIU support for the buyout of 
nursing home chain Genesis HealthCare by Formation Capital, 
which is a private equity firm, because apparently some secret 
deal or deal that I guess the secret terms of which have 
recently been allowed. I find a little inconsistent in your 
testimony you talk about and address this shielded liability 
issue, and yet when the service employees union actually signed 
off on the private equity buyout of Genesis, the agreement 
included a provision that SEIU would walk the halls of the 
California Assembly to lobby for reduced legal liability for 
nursing homes in the State of California.
    Do you care to address that inconsistency?
    Mr. MULLER. I am not aware of those policy issues, but I do 
know that we have been working to try to improve quality care 
as a union representing 150,000 nursing home workers who are on 
the frontlines and are dealing with these issues all day long. 
We are very invested in trying to figure out all the different 
ways we can to try to improve the quality of care, and we will 
work with whomever we can to try to do that.
    Mr. HULSHOF. Probably not a fair question given that you 
have not seen it, so, Mr. Chairman, if it is not part of the 
record, I would ask the Palm Beach Post editorial of Tuesday, 
November 13th, 2007, be included for whatever purpose it may 
serve in the record.
    Mr. STARK. Without objection.
    [The information follows:]

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    Mr. STARK. Mr. Emanuel, would you like to inquire?
    Mr. EMANUEL. Thank you, Mr. Chairman.
    This is more of a statement up front. Having a bill on the 
floor that deals with the mortgage crisis, one of the problems 
of the mortgage crisis is that the debt was so dispersed and 
securitized that there was no single holder; that, therefore, 
nobody knew who to negotiate with on behalf of the homeowner. 
One of the purposes of the hearing, that was a piece of the 
problem, not the only problem. But the financial instruments 
had become so sophisticated that where there is no single 
holder of the mortgage and nobody living in the home had 
somebody to deal with when it came to the problem we have 
today.
    Here in this hearing we are talking about the different--
totally legal, but different structures that are put in place 
by folks who own these nursing homes, and yet when it comes to 
holding that nursing homeowner accountable for the care given, 
because of the structure, there is nobody accountable.
    Ms. HARRINGTON. Exactly.
    Mr. EMANUEL. I appreciate Dr. Harrington is the first I 
will call on since she is nodding, ``Exactly.'' She a very 
sophisticated, very smart woman. I am sure you are 
sophisticated.
    The fact is that on the floor we are dealing with a problem 
that has beset now the entire mortgage and homeownership 
industry, and yet here we are dealing with this specifically as 
it relates to the nursing home industry. The fact is that 
Chairman Frank, who is on the floor dealing with this, has 
said, what has happened in the last 5 years is an amazing 
amount of sophistication brought to different financial 
instruments, some of it helping people to buy homes. But 
through that securitization what we also have is a situation 
where the regulations haven't stayed in pace with the different 
financial instruments or ownership structures that had been 
moving.
    It is okay that private equity would go into buying up 
nursing homes, chains, et cetera. There is nothing wrong with 
that. But if nobody is accountable for the care delivered, then 
the very purpose of the nursing home is merely for profit and 
not for delivery of a service and a product. One of the ways to 
make sure that that service and product that in many ways the 
taxpayers are paying for is to ensure that there is somebody at 
the other end of the line that is accountable.
    So, to anybody who would like to grab this, because you are 
not going to stop private equity from coming in or a REIT 
structure for that matter, but what regulations or oversight 
would you recommend so we are on top of the game that--what is 
going on in the private sector so that folks who are paying the 
bill, the taxpayers, feel like their money is being well spent 
in delivering, and the reason they are willing to do this is 
because a service is being provided to the elderly?
    Dr. Harrington.
    Ms. HARRINGTON. Well, we want to see that all the companies 
involved with a nursing home be disclosed, and that CMS develop 
a tracking system for all the owners and companies involved.
    Another way to improve things would be to make these people 
sign the provider agreement. Right now the licensee is the only 
one that signs the provider agreement. So, the REIT is not 
involved. The multiple holding companies are not involved. So, 
if all parties had to sign the Medicare provider agreement, 
that would be a step forward.
    Mr. STARK. Can you yield at that point? Is there a 
Medicare, a Medicaid provider agreement in California, Medi-Cal 
as well?
    Ms. HARRINGTON. There is a Medicare and Medicaid provider 
agreement.
    Mr. STARK. They are different?
    Ms. HARRINGTON. No. Some nursing homes do not take 
Medicaid, and in that case it would only be a Medicare provider 
agreement, but if they are duly certified, they would sign one 
provider agreement.
    Mr. EMANUEL. What you are suggesting, though, is that one 
way to do this is that whoever signs that provider agreement 
between CMS and X, that is the responsible party?
    Ms. HARRINGTON. Well, right now only the licensee has to 
sign it. So, all these multiple levels of companies don't have 
to sign it, so they don't have any responsibility in a sense.
    Mr. EMANUEL. Even though the owner is ultimately 
responsible for providing the service?
    Ms. HARRINGTON. Right. CMS doesn't even know who they are, 
so there is no tracking system that you know who the owners 
are.
    Mr. EMANUEL. Anybody else?
    Mr. Johnson.
    Mr. JOHNSON. In Mississippi, by statute, we have a rule 
that in order for a certificate of need to be obtained or for a 
transfer to happen with respect to a nursing home, that any 
entity that is going to have a 5 percent or greater ownership 
has to be disclosed.
    Mr. EMANUEL. But what about ultimate--I don't want to say 
legal, but accountable, some level of accountability beyond 
just the ownership? I understand the 5 percent threshold, but 
where is it for the purpose of accountability that if the 
service is subpar, if there are violations to the senior 
citizens for their health and welfare, beyond the 5 percent, 
where is the accountability for insuring that that care is 
going to be improved beyond the fact that you documented that 
your own 8 percent, 9 percent, 12 percent? There isn't, is 
there?
    Mr. JOHNSON. There is not. So, as a State regulator, other 
than making sure that these companies meet the minimal 
standards threshold and thereby allow them to continue 
receiving their Medicaid, Medicare income stream, that is it. 
However, as far as any mechanism for--say, for example, if it 
is a wrongful death case, and a company is not insured, then 
there is no way to go after the assets.
    Mr. EMANUEL. Mr. Chairman, I would--in this hearing, I 
would assume hopefully one of the things that comes out of 
this--and I yield back the remainder of my time, if I have 
any--the sense that you are accountable--am I over--if I am 
over----
    Mr. STARK. Go ahead.
    Mr. EMANUEL. Is that somehow we have to bring into line 
accountability with the profit, and I have no problem. Actually 
there is a good thing if private equities are here if they see 
an opportunity. That is not the problem. The problem is to make 
sure that we have in place the same level of accountability and 
same level of interest if accountability is measured that you 
can be motivated by profit and do well, that is not the 
problem, but the fact is that you are also accountable for the 
service you deliver and that somebody is minding the store 
here.
    Mr. STARK. As usual the gentleman's aim at the nail is 
quite accurate.
    Mr. Camp, did you have further inquiry?
    Mr. CAMP. Yes. I would just state that I think there are a 
labyrinth of regulations and rules covering nursing homes. I 
think we obviously--I would agree with my colleagues that the 
form of ownership is not as much of a concern to me or who is 
the owner as much as the fact that the compliance with existing 
rules and regulations occurs. Certainly the licensee is 
responsible for complying with all of Medicare's rules and 
Medicaid's rules and regulations.
    Mr. EMANUEL. Will the gentleman yield?
    Mr. CAMP. Yes.
    Mr. EMANUEL. I think all sides want to make sure that, A, 
there is good service delivered, and if there is a problem, 
that we know what is happening and that somebody is 
accountable. But as you will appreciate, and I think you do, 
that if, in fact, the structure is created to merely protect 
the investors from not just liability, from any accountability, 
that is then a problem.
    Mr. CAMP. Yes.
    Mr. EMANUEL. Okay.
    Mr. CAMP. I think we just don't have enough information. I 
think there are States that require insurance, have insurance 
requirements in order to be licensed. Obviously Mississippi 
apparently does not. But why isn't the State legislature then 
taking action then to require--if they have been able to put in 
a requirement that ownership be disclosed, why not also have 
minimal insurance requirements?
    So, I think we need to get some more information in terms 
of what is the state of play around the country in terms of 
what are States doing. Clearly your point about it is about the 
care and the quality of care that is delivered, I think that 
really needs to be the focus of this Committee.
    Mr. HULSHOF. Would you yield?
    Mr. CAMP. Yes.
    Mr. HULSHOF. I will say to my friend from Illinois, I agree 
in principle with your statement, but regulation for 
regulation's sake, there could be, for instance, differing 
opinions. Congress wanted to address the WorldCom issue, and so 
as a result--or Enron, and as a result we passed Sarbanes-
Oxley, and there have been varying opinions about whether that 
accountability measure, if the good has outweighed the possible 
harm.
    Then to address Mr. Camp's point, having some consistency 
in enforcement, I know firsthand some years ago because we did 
some constituent advocacy in Missouri, a nursing home privately 
owned, but by a family company was written up by a very 
aggressive regulator because they had provided a pat of butter 
on the tray of the meal of a diet-restricted patient and faced, 
in my view, enormous fines.
    So, again, the goal is the same. I would say to my friend 
from Illinois, those residents deserve--and especially because 
of taxpayer moneys going to support their care--the enforcement 
of important safety regulations. But I agree with my friend 
from Michigan that in law school they used to say, bad cases 
make bad law. I am not sure. Anecdotally we can all probably 
talk about tough cases, but I would like to see some more data 
before we run headlong into some sort of regulatory issue. 
Thanks.
    Mr. CAMP. I would just say that some of the reasons these 
legal entities have been created is because of the explosion of 
lawsuits we have seen throughout society, many with merit, but 
many without merit, and how do we sort through that. So, that 
is also a concern I think we need more information on.
    I would be happy to yield.
    Mr. EMANUEL. To your one point about data, I am not saying 
this is the Bible from The New York Times, but it does compare 
privately owned nursing homes versus the national standards by 
other nursing homes, and it shows the care there. So, I am not 
saying--I am open for State-by-State data, company-by-company 
comparison, et cetera.
    Two, as to the Sarbanes-Oxley reforms, we may have taken a 
hammer to a problem, but if you talk to a number of CEOs who 
have problems with provisions of the bill, all would 
acknowledge two things: One, that forcing the CEO to put his or 
her signature at the bottom of the page knowing they are 
responsible for a report is far more important than any other 
item in there, that they knew if their name was on there, they 
had to go through that document and not just let the CFO and 
the treasurer at the company do that; two, as a wake-up call to 
the Board that they had accountability.
    So, I would say that although you can point to problems, I 
would say that, in fact, although it may have overshot the 
runway in some areas, it got the job done, and everybody knows 
that what happened through a long period of time there were 
successes there, that the Board and the CEO were accountable 
for what happened and what was documented and reported to the 
Securities and Exchange Commission.
    Second, I am not looking for regulation for regulation 
purposes. I would be open to setting a minimum standard, and 
then every State, if they wanted to exceed that standard--we 
don't mean to pick on you, Mr. Johnson, or your State, but if 
Mississippi doesn't require some level of insurance, but other 
States do, since Medicare is paid for by the Feds and Medicaid 
at least 50 percent is paid by the Feds, I think we have not 
just statutory, but fiduciary responsibility to the taxpayers 
that there is a standard. You want to exceed the standard, that 
is what the legislature is for. If you just want to hit the 
bar, that is your job, too.
    Mr. CAMP. Thank you, Mr. Chairman.
    Mr. STARK. Thank you.
    I would just like to add to this, and, again, the witnesses 
feel free to chime in, just a couple of issues. Mr. Hulshof 
wondered whether we set rates, and we do for hospitals. We 
actually do set DRG rates.
    To Mr. Camp's issue of how they could survive a $6\1/2\ 
billion cut, it wasn't a cut, it was just a freeze of what they 
are getting now. The difference was this: Acute care hospitals 
had a margin of about 5 percent and the nursing homes 15 
percent. The Medicare part of acute care was negative, so we 
let them have the full market basket--we didn't, but MEDPAC 
recommended it--whereas it was better at a 15 percent margin 
for Medicare for nursing homes, so we didn't give it to them.
    Now, we didn't sit around and noodle that through with our 
own calculators here. We got that advice through MEDPAC, and we 
have changed that every year. We have made adjustments, and in 
effect it is a form of rate setting.
    As to minimum standards and regulations, I am overjoyed. We 
got a response from the American HealthCare Association about 
their successes in improving quality, and one of the successes 
they state is that they say that there is a decline in the use 
of physical restraints. Well, guess what? In 1987, we mandated 
that in the law, and I suspect that is why there has been a 
decline in the use of physical restraints, and not just through 
some restraint fairy putting that message under the pillows of 
them. So, that some regulations, as we do with acute care 
hospitals, we have conditions of participation.
    It seems to me that if we have been, and I think I have 
been, incorrectly looking at private equity funds, I don't 
really think that is the issue here today. We may have some 
examples of wealthy investors with a lot of assets adjusting 
nursing homes to make more profit. That could be an individual. 
It could be Bill Gates or Warren Buffett could do that, too, I 
suppose, as an individual.
    The question is, at least in my mind and I think Mr. Camp, 
ought we to have some minimum standards as we do for acute care 
hospitals for nursing homes to participate in Medicare? Those 
ought to set whatever we find or whatever our advisors--the 
nursing home industry certainly should be part of that--and set 
that in the record.
    Then the question of penalties, and how does General 
Johnson or others--how do they enforce those? If somebody has 
devised a loophole so they can shield themselves from 
enforcement, it seems to me we could structure that in a way 
that would make the rules enforceable.
    Mr. HULSHOF. Would you yield, Mr. Chairman?
    Mr. STARK. Yes, I will yield.
    Mr. HULSHOF. Very briefly, and I apologize to the witness 
for hearing this sort of out-and-out discussion, but I think it 
is useful. But you are exactly right, Mr. Chairman, DRG rates 
or a host of reimbursements are set, and so if you see a 
Medicare patient, you know, for instance, what you are going to 
be reimbursed for a particular procedure, rate setting and 
market baskets. Quite frankly, as a real aside, tangential 
aside, I think unfortunately our health care decisions are 
often driven by the reimbursement rates, but I have said that 
on other occasions.
    When you talk about profit margin and what is too much or 
too little in the citation of 13 percent or 15 percent for 
nursing homes, a couple weeks ago sitting in those chairs we 
had some representatives of some big insurance companies 
providing Medicare Advantage, and I seem to recall during that 
testimony one company in particular said they weren't making 
even a 3 percent profit margin.
    So, I bristle a bit. I am reluctant to embrace the idea of 
determining the profit margin, yes, on rates and 
reimbursements, and even, as Dr. Harrington pointed out, often 
a provider will see a Medicaid patient knowing that Medicare is 
going to help kind of pay for the bills and to keep the doors 
open.
    So, I think this has been a very useful hearing, but I hope 
we are not going to get too far afield by Congress, in its 
infinite wisdom, deciding what the private sector or the profit 
margins or percentages should be, and I appreciate the 
gentleman yielding.
    Mr. STARK. I concur with the gentleman.
    I did want to ask Dr. Harrington, because I had mentioned 
it to staff and one of my colleagues who hasn't returned from 
the vote, but in California are there many entities that are 
solely Medi-Cal or solely Medicare; is that common or----
    Ms. HARRINGTON. No. At the current time nationally it is 95 
or 98 percent that are duly certified.
    Mr. STARK. Would it serve any purpose of separating these 
entities; in other words, even if they had to operate under the 
same roof and said, wait a minute, you have to have separate 
beds, separate rooms, separate staff for Medicare, which I 
think gets the more acute patients?
    Ms. HARRINGTON. They were separated to an extent when you 
had cost-based reimbursement for Medicare. But once Congress 
moved to the prospective payment for Medicare, they just set 
the Medicare rate. Medicaid sets its rate, which is mostly 
prospective, and the nursing homes can do what they want. This 
is what exacerbated the problem.
    Mr. STARK. You think that was a bad move?
    Ms. HARRINGTON. Absolutely. A 25 percent drop in our 
staffing when that happened, because they are allowed to move 
the money from the direct care over into the profit center now. 
There is no control over how they spend the money.
    Mr. STARK. Could the witnesses help me here? It is my sense 
that Medicare patients have a higher acuity and require more 
care?
    Ms. HARRINGTON. Yes. In theory that's right, but in 
practice they have more staffing.
    Mr. STARK. Let's get through the theory first.
    When it all gets ``funged,'' we pay one rate, and Medicaid, 
I think, almost universally pays a lower rate.
    Ms. HARRINGTON. About a third.
    Mr. STARK. It would seem to me that perhaps you save a 
little on the Medicare side to cover your costs on the Medicaid 
side; that if we separated that somehow, we could be sure that 
the Medicare dollars were going as Congress--as we would 
intend. Say, look, if these are the cases that are entitled to 
this Medicare rate, and the States will have to do--in 
conference with Mr. Dingell as they choose, but I don't--would 
this do harm to the system?
    Ms. HARRINGTON. You could separate it, but the real problem 
is you give them--you have this complex formula for giving them 
a rate, which is based on their staffing, the client staffing 
needs and therapy needs. Once you give them the rate, they can 
take the money and run, and that is what is happening.
    Mr. STARK. Would any of the witnesses like to add anything 
to enlighten the Chair or my colleagues before we adjourn and 
send you off to lunch?
    Mr. JOHNSON. Yes, sir.
    Mr. STARK. General Johnson.
    Mr. JOHNSON. Yes, one thing. There has been some reference 
made to the explosion of lawsuits in the context of nursing 
homes over the past few years. Mississippi is one of the States 
that has enacted tort reform. Also now almost all of the 
nursing homes require binding arbitration agreements before 
taking a patient.
    So, the issue is not so much as, ``we are going to get some 
runaway verdicts, so therefore we need to look out for the 
nursing homes in that regard'' as it is, ``what would be the 
source for a true or legitimate recovery as found by an 
unbiased arbitrator? Should there be funds available in the 
form of insurance, a bond or attachment of assets in that 
event?'' So, I think it is a very different situation; the 
landscape now in Mississippi is quite different than it was 3 
years ago.
    Mr. STARK. Well, I am going to go off the record and 
adjourn the hearing.
    [Whereupon, at 12:30 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    




                           Statement of AARP
    On behalf of AARP's nearly 40 million members, thank you for 
holding this important hearing today on nursing home quality. It has 
been 20 years since the enactment of national standards for nursing 
home quality in the Omnibus Budget Reconciliation Act of 1987 (OBRA 
'87). While the quality of care in our nation's nursing homes has 
improved over the last 20 years, significant progress still needs to be 
made. The recent New York Times article examining the sub-par quality 
of care in nursing homes owned by private equity firms is the latest 
reminder that quality of care in our nation's nursing homes is an 
ongoing issue. Approximately 16,000 nursing homes in this country 
provide care to about 1.5 million of our most vulnerable citizens. 
Federal and State governments have a responsibility to help ensure high 
quality for these residents, especially since Medicaid, and to a lesser 
extent Medicare, pay for a majority of nursing home services. This 
hearing offers an opportunity to assess the quality problems still 
lingering and to examine potential solutions to improve quality for all 
nursing home residents.
A Call to Action
    On September 23rd, the New York Times published an 
expose detailing the results of its own investigation into the quality 
of care in nursing homes purchased by private investors, including 
private equity firms. The Times investigation found that private 
investor owned nursing homes cut expenses and staff, scored worse than 
national rates in 12 of 14 quality indicators, and created complex 
corporate structures that obscured who controlled them and who is 
ultimately responsible for the quality of care they provide. These 
findings and others in the article are disturbing, but unfortunately 
are not new. Private equity firms are not the first nursing home owners 
to use complex corporate ownership and real estate structures--some 
nursing home chains have used structures like this already.
    AARP supports congressional hearings--like this one--to examine 
nursing home quality problems, including concerns raised about 
facilities owned by private equity firms, and begin to look for ways to 
address these problems. Concerns about nursing home quality are not 
limited to any one State, owner or type of owner, and quality problems 
can harm residents regardless of where they occur. We believe that 
investigation by the Government Accountability Office (GAO) could also 
shed additional light on these issues and potentially offer 
constructive steps to improve quality.
Examples of Quality Problems
    In recent years, media stories, GAO reports, and investigations by 
the Department of Health and Human Services' Office of Inspector 
General have revealed specific nursing home quality issues. Many 
facilities do provide high quality of care and quality of life to their 
residents. Some facilities are even transforming their culture to offer 
smaller more homelike settings with private rooms, more choice for 
residents, and more control to staff that is more likely to stay at the 
facility and provide consistent high quality care. However, there are 
also facilities that show significant quality deficiencies on their 
annual inspections that can cause harm to residents. Effective 
enforcement of quality standards and remedies, including closure, is 
important for these and all facilities.
    Some nursing homes and their owners have taken steps that can make 
it more difficult for regulators and consumers to hold these facilities 
accountable for quality care. For example, corporate restructuring 
where a nursing home chain splits itself into single purpose entities 
(some owning the individual nursing home, others leasing and operating 
the facility, yet others holding the real estate) can obscure and 
complicate the answer to the question, ``Who is responsible for the 
quality of care?'' in any particular facility. The answer may not be 
just one entity or group of individuals, and they may not be easy to 
identify. When a regulator looks to assess a penalty for a deficiency, 
or consumers and their families seek to hold facilities accountable for 
poor quality of care, it can be more difficult for the regulator to 
collect a penalty or for the consumers to hold facilities liable for 
quality of care.
    Disclosure requirements can provide important information about who 
has an ownership interest or controls a company or facility. But when a 
facility is owned by a private equity firm, the facility is no longer 
subject to certain public disclosure requirements. One should be able 
to identify the individuals or corporate entities that are responsible 
and accountable for the operation and quality of care in the facility. 
Transparency and accountability are vital for all facilities, 
regardless of their ownership.
    Staffing in nursing homes also has an important impact on quality. 
Better staffing levels and well-trained staff with low turnover can 
improve quality of care for nursing home residents. Yet facilities may 
not always have sufficient staff, and additional resources provided to 
facilities for staff do not always result in staffing improvements.
    It is also important to have reliable and up-to-date data on 
staffing levels in facilities--not just data that is collected once a 
year when a facility receives its annual survey. Accurate and reliable 
staffing data is important to consumers and their families when they 
choose a nursing home for their loved one. In addition, the Medicare 
Payment Advisory Commission (MedPAC) has recommended that the 
Department of Health and Human Services (HHS) Secretary direct skilled 
nursing facilities (SNFs) to report nursing costs separately from 
routine costs when completing the SNF Medicare costs reports. MedPAC 
also notes that it would be useful to categorize these costs by type of 
nurse (registered nurse, licensed practical nurse, and certified 
nursing assistant). This information would allow MedPAC to examine the 
relationship between staffing, case mix, quality, and costs.
    In addition, staffing in nursing homes and other long-term care 
settings could be improved by addressing the serious need for an 
adequate, stable, and well-trained workforce. Direct care workers, such 
as personal care assistants, home care and home health aides and 
certified nurse assistants, provide the bulk of paid long-term care. 
Long-term care workers should receive: adequate wages and benefits; 
necessary training and education, including opportunities for 
advancement; more input into caregiving; more respect for the work they 
do; and safer working conditions.
    Despite the reforms in OBRA '87 and improvements in care since that 
time, GAO has found that a small but significant share of nursing homes 
continue to experience quality-of-care problems. Last year, one in five 
nursing homes in this country was cited for serious deficiencies--
deficiencies that cause actual harm or place residents in immediate 
jeopardy. GAO has also noted state variation in citing such 
deficiencies and an understatement of them when they are found on 
Federal comparative surveys but not cited on corresponding State 
surveys. In addition, some facilities consistently provide poor quality 
care or are ``yo-yo'' facilities that go in and out of compliance with 
quality standards. Almost half the nursing homes reviewed by GAO for a 
March 2007 report--homes with prior serious quality problems--cycled in 
and out of compliance over 5 years and harmed residents.
    These are examples of some of the challenges and issues that should 
be addressed to improve nursing home quality. In some cases, better 
enforcement of existing standards and requirements may solve the 
problem. In other cases, additional steps may be needed to address the 
problem.
    Finally, we note that some nursing home residents may choose and be 
able to get the services they need in a home- and community-based 
setting with sufficient support from family and/or professional 
caregivers.
State Role
    States play an important role in ensuring nursing home quality. For 
example, States license nursing homes to operate, conduct the annual 
surveys of nursing homes, and are also a payer and overseer of quality 
through the Medicaid program. State laws and regulations regarding 
nursing home quality vary, but there may also be useful models and 
lessons learned from State experiences. Rhode Island passed omnibus 
nursing home legislation in 2005 that took several steps, including 
requiring nursing home applicants to set financial thresholds and 
providing the State with additional tools to detect and address 
potential deficiencies, such as the appointment of an independent 
quality monitor at the facility's expense.
Ideas for Consideration
    This hearing and others can help Congress learn about some of the 
problems and challenges to providing quality of care in our country's 
nursing homes, and help identify possible ideas and solutions that 
Congress, the Centers for Medicare and Medicaid Services (CMS), and 
others might pursue to improve nursing home quality, accountability, 
transparency, and staffing. AARP suggests the following ideas for 
consideration:

      Ensure that Medicare provider enrollment documents 
capture complete information on all entities and individuals with a 
significant direct or indirect financial interest in a nursing facility 
or chain;
      Require nursing facilities and chains to update their 
enrollment data at least every 3 years regardless of whether or not 
there has been a change in ownership;
      Review and revise current Medicare provider agreements to 
take account of new corporate organizational structures to ensure 
accountability for compliance with all Medicare requirements;
      Accelerate implementation of the Provider Enrollment 
Chain and Ownership System (PECOS) to include all enrollment data for 
nursing homes and chains;
      Link PECOS provider enrollment data to nursing home 
survey results and other relevant data to allow for better analysis of 
trends in outcomes in nursing home quality;
      Require nursing homes to report quarterly in electronic 
form data on staffing by type of nursing staff (registered nurses, 
licensed practical nurse, and certified nurse aides), turnover and 
retention rates, and the ratio of direct care nursing staff to 
residents. Require CMS to disclose this improved staffing data on the 
Nursing Home Compare website for consumers;
      Revise Medicare cost reports for nursing facilities to 
require separate cost centers for nursing services, other direct care 
services, and indirect care services;
      Audit staffing and cost report data at least every 3 
years and impose sanctions for failure to report or for filing false 
information;
      Use civil monetary penalties collected for nursing home 
quality violations under Medicare to directly address urgent needs of 
nursing home residents;
      Enact the Elder Justice Act (S. 1070/H.R. 1783) and the 
Patient Safety and Abuse Prevention Act (S. 1577/H.R. 3078); and
      Finally, effectively enforce existing nursing home 
quality standards and penalties for violating these standards, and 
provide adequate resources to enforce these standards.
Conclusion
    AARP is pleased with the renewed attention and interest that 
Congress has shown in nursing home quality. We look forward to working 
with Members of this committee and your colleagues on both sides of the 
aisle to further improve the quality of life and quality of care for 
our nation's nursing home residents.

                                 
               Statement of Center for Medicare Advocacy
    The recent investigative report in The New York Times describing 
the new phenomenon of private equity firms' taking over multi-State 
nursing home chains and the declining quality of care for residents 
that results \1\ has brought to the public's attention two important 
issues--the nursing home industry's use of public reimbursement for 
private gain, rather than to provide high quality care to residents, 
and the poor quality care experienced by residents of many nursing 
homes.
---------------------------------------------------------------------------
    \1\ Charles Duhigg, ``More Profit and Less Nursing at Many Homes,'' 
The New York Times (Sep. 23, 2007), http://www.nytimes.com/2007/09/23/
business/23nursing.html?_r=1&oref=slogin. As the Wall Street Journal 
observed, ManorCare was a desirable take-over target for the Carlyle 
Group because it owns most of its real estate and because 73% of its 
revenues come from Medicare and private-pay residents, compared to 53% 
for some of its competitors. Theo Francis, ``Real Estate Is Driver Of 
ManorCare Buyout Deal; Nursing-Home Firms, Attractive at Moment, Are 
Acquisition Targets,'' The Wall Street Journal (July 3, 2007). An 
editorial in McKnight's Long Term Care expressed the concern that if 
the Carlyle Group acts like ``a typical private equity firm, . . . we 
can expect to see aggressive cost-cutting including layoffs.'' John 
O'Connor, ``Opinion--The Big Picture: ManorCare and the future,'' 
McKnight's Long-Term Care (Aug. 8, 2007), http://
www.mcknightsonline.com/content/index.php?id=24&tx _ 
ttnews[swords]=Manor%20Care &tx _ ttnews[pointer] = 1&tx _ ttnews[tt _ 
news] = 4040&tx _ ttnews[backPid] = 25&cHash = 2184780248.
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    The separation of nursing home management from nursing home 
property is highlighted by the phenomenon of private equity's recent 
interest in the nursing home industry, but the issue is not unique to 
private equity firms. The mechanism has been actively promoted as a way 
for nursing home companies to avoid liability from public regulatory 
agencies as well as from private litigants.\2\ Over the years, chains 
other than private equity firms have used multiple corporations to hide 
assets and avoid creditors and have used public reimbursement to 
purchase unrelated businesses.
---------------------------------------------------------------------------
    \2\ Joseph E. Casson and Julia McMillen, ``Protecting Nursing Home 
Companies: Limiting Liability through Corporate Restructuring,'' 
Journal of Health Law, Vol. 36, No. 4, page 577 (Fall 2003), http://
www.proskauer.com/news _ publications/published _ articles/content/2003 
_ 12_02.
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    In a 3-day series published November 18-20, 2007, the Hartford 
Courant reported that Haven Healthcare, a Connecticut-based chain 
caring for nearly 2,000 residents in Connecticut, provided seriously 
inadequate care at 10 of its 15 facilities in the State.\3\ The chain 
failed to pay multiple creditors and the owner is accused of diverting 
reimbursement to fund his investment in a country music recording 
company in Nashville, Tennessee and personal real estate. On the third 
day of the series, the chain and its 44 related entities filed for 
bankruptcy.\4\
---------------------------------------------------------------------------
    \3\ Lisa Chedekel and Lynne Tuohy, ``No Haven for the Elderly; 
Nursing Home Troubles Show Flaws in State Oversight,'' Hartford Courant 
(Nov. 18, 2007), http://www.courant.com/news/custom/topnews/hc-
haven1.artnov18,0,1229473.story?coll=hc_tab01_layout.
    \4\ Lynne Tuohy and Lisa Chedekel, ``Nursing Home Takeover Sought; 
After Haven Files for Bankruptcy, Blumenthal Wants Trustee to Control 
Facilities,'' Hartford Courant (Nov. 22, 2007), http://www.courant.com/
news/custom/topnews/hc-haven1122.artnov22,0,5263895.story; Lisa Che- 
dekel and Lynne Tuohy, ``Haven Debt Woes,'' Hartford Courant (Nov. 20, 
2007), http://www.courant.com/news/custom/topnews/hc-
haven3.artnov20,0,2146972.story?coll=hc _ tab01 _ layout. Haven 
Healthcare's bankruptcy filing is at http://www.courant.com/media/
acrobat/2007-11/33896687.pdf.
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    The private equity takeover of nursing home chains has led to many 
calls for more ``transparency'' in ownership of nursing homes. 
Requiring full and comprehensive disclosure of ownership information is 
a useful, but not sufficient, step to improving quality of care and 
quality of life for residents. More specific substantive changes are 
also required to ensure that residents receive the care they need.
    There is no single answer to problems of poor quality of care and 
poor quality of life in nursing homes; multiple efforts are needed. 
Many solutions have already been identified. Congress should

    1. Enact meaningful nurse staffing ratios. Congress needs to enact 
specific staffing ratios to ensure that facilities employ sufficient 
numbers of professional and paraprofessional nurses to provide care to 
residents.
    Nurse staffing is the single best predictor of good quality of 
care. Residents need to be cared for by professional nurses and by 
sufficient numbers of well-trained, well-supervised, and well-supported 
paraprofessional workers.
    The current standard in Federal law is ``sufficient'' staff to meet 
residents' needs, including one registered nurse eight consecutive 
hours per day seven days per week.\5\ This standard, enacted in 1987 as 
part of the Nursing Home Reform Law, has not worked to ensure that 
facilities have sufficient numbers of well-qualified and well-trained 
staff.
---------------------------------------------------------------------------
    \5\ 42 U.S.C. Sec. Sec. 1395i-3(b)(4)(C)(i), 1396r(b)(4)(C)(i)(1), 
Medicare and Medicaid, respectively.
---------------------------------------------------------------------------
    In 2001, the Centers for Medicare & Medicaid Services (CMS) 
submitted a report to Congress documenting that more than 91% of 
facilities fail to have sufficient staff to prevent avoidable harm and 
that 97% of facilities do not have sufficient staff to meet the 
comprehensive requirements of the Nursing Home Reform Law.\6\
---------------------------------------------------------------------------
    \6\ CMS, Appropriateness of Minimum Nurse Staffing Ratios in 
Nursing Homes, Phase II Final Report, pages 1-6, 1-7 (Dec. 2001), 
http://www.cms.hhs.gov/CertificationandComplianc/12_ NHs.asp (scroll 
down to Phase II report) [hereafter CMS 2001 Nurse Staffing Report].
---------------------------------------------------------------------------
    Raising reimbursement rates in the hope that facilities will 
increase their staffing levels as a result does not improve staffing. 
Congress increased Medicare reimbursement rates in 2000, specifically 
for nurse staffing.\7\ The Government Accountability Office (GAO) found 
that staffing levels remained stagnant and that staffing increased only 
when States mandated explicit staffing ratios or made other policy 
changes specifically directed at increasing nurse staffing.\8\
---------------------------------------------------------------------------
    \7\ Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Pub.L. 106-554, App. F, Sec. 312(a), 114 Stat. 
2763, 2763A-498.
    \8\ GAO, Available Data Show Average Nursing Staff Time Changes 
Little after Medicare Payment Increase, GAO-03-176, page 3 (Nov. 2002), 
http://www.gao.gov/new.items/d03176.pdf. Nurse staffing time increased 
by 1.9 minutes per day; registered nurse time decreased and licensed 
practical nurse and aide time increased.
---------------------------------------------------------------------------
    The staffing ratios that CMS and other experts identified nearly a 
decade ago need to be mandated and implemented.\9\
---------------------------------------------------------------------------
    \9\ Using empirical data, the 2001 CMS staffing report identified 
3.55-4.1 hours per resident day as the number of nurse staffing hours 
needed to prevent avoidable harm to residents. In the simulation 
component of the staffing study, CMS identified, as appropriate ratios 
of certified nurse assistants to residents to meet the requirements of 
Federal law, 8:1 on the day shift, 10:1 on the evening shift, and 20:1 
on the night shift. CMS, 2001 Nurse Staffing Report, supra note 8. 
These ratios are similar to those identified by an expert panel 
convened by the John A. Hartford Institute for Geriatric Nursing, 
Division of Nursing, at New York University: 4.13 hours per resident 
day for direct nursing care staff (ratios for direct care staff, 5:1 on 
the day shift; 10:1 on the evening shift; and 15:1 on the night shift). 
Charlene Harrington, Christine Kovner, Mathy Mezey, Jeanie Kayser-
Jones, Sarah Burger, Martha Mohler, Robert Burke, and David Zimmerman, 
``Experts Recommend Minimum Nurse Staffing Standards for Nursing 
Facilities in the United States,'' The Gerontologist, Vol. 40, No. 1, 
2000, 5-16.

    2. Require accountability for public reimbursement. Congress needs 
to ensure that public reimbursement through Medicare and Medicaid 
funding is spent, as Congress intends, on the care of people who live 
in nursing homes. In testimony before this Subcommittee, Professor 
Charlene Harrington described the concern: Medicare reimbursement is 
based on specific amounts for various components of care, such as nurse 
staffing, but once a facility receives Medicare reimbursement, it can 
spend the money in whatever way it chooses. Professor Harrington called 
for cost centers and for rules prohibiting facilities from shifting 
reimbursement from one cost center to another (e.g., from staffing to 
administration). The Center for Medicare Advocacy supports Professor 
Harrington's recommendation that Congress ensure that public funds are 
used for their intended purpose.
    Recent reports about the purchase of ManorCare by the Carlyle Group 
indicate that when the sale is completed, ManorCare's CEO Paul Ormond, 
whose compensation was $18,800,000 last year, may receive between 
$118,000,000 and $186,000,000 through the exercise of stock 
options.\10\
---------------------------------------------------------------------------
    \10\ Homer Brickey, ``ManorCare sale would enrich execs; Toledo 
firm's officials may receive more than $200 million for stock,'' The 
Toledo Blade (July 6, 2007), http://toledoblade.com/apps/pbcs.dll/
article?AID=/20070706/BUSINESS03/707060449/-1/BUSINESS.

    3. Increase and stabilize funding for survey and certification 
activities. The budget for survey and certification activities needs to 
be increased at the State and Federal levels to allow for sufficient 
numbers of well-trained, multi-disciplinary staff to conduct annual, 
revisit, and complaint surveys. At present, the Federal Government 
spends less than \1/2\ of 1% monitoring care in nursing homes, compared 
with the amount spent on the care itself.\11\
---------------------------------------------------------------------------
    \11\ National spending on nursing home care in 2005 was $80.6 
billion ($21.6 billion for Medicare; $59.0 billion for Medicaid). 
Georgetown University Long-Term Care Financing Project, ``National 
Spending for Long-Term Care'' (Fact Sheet, Feb. 2007), http://
ltc.georgetown.edu/pdfs/natspendfeb07.pdf. The Federal survey budget 
for States for all survey activities is $293 million for fiscal year 
2008. Budget of the United States Government, Fiscal Year 2008, 
Appendix (Department of Health and Human Services), page 23, http://
www.whitehouse.gov/omb/budget/fy2008/pdf/appendix/hhs.pdf. In general, 
more than three-quarters of State survey agency time is focused on 
nursing homes.
---------------------------------------------------------------------------
    Limited survey budgets lead to insufficient numbers of survey 
staff. Without a strong survey system to detect deficiencies, and the 
enforcement actions that may be imposed for documented deficiencies, 
many facilities will not provide care to residents in compliance with 
Federal standards.\12\
---------------------------------------------------------------------------
    \12\ Helena Louwe, Carla Perry, Andrew Kramer (Health Care Policy 
and Research, University of Colorado Health Sciences Center), Improving 
Nursing Home Enforcement: Findings from Enforcement Case Studies page 
44 (March 22, 2007), http://www.medicareadvocacy.org/
SNF_FinalEnforcementReport.03.07.pdf (``Although `the case studies 
revealed that enforcement actions, if executed, have only a limited 
positive effect . . . it must be recognized that nursing home behavior 
changes seldom occurred without a formal citation.' '' [hereafter 
University of Colorado, Improving Nursing Home Enforcement]).

    4. Strengthen the enforcement system. Congress needs to ensure that 
enforcement is swift, certain, comprehensive, and meaningful. In the 
1987 Nursing Home Reform Law, Congress required the Secretary and 
States to take a stronger enforcement approach to deficiencies: it 
required that the Secretary and States have a comprehensive strategy 
for enforcement; enact and use a full range of intermediate sanctions; 
impose more significant sanctions for deficiencies that are repeated or 
uncorrected; and shorten the time between identifying the problem and 
imposing remedies. The Federal regulations did not implement this 
statutory mandate and have failed to ensure compliance with Federal 
standards of care.
    In its most recent nursing home report,\13\ the GAO reiterated once 
again, as it has consistently and repeatedly reported since 1998, that 
the enforcement system is too lax and too tolerant of poor care for 
residents and that it allows most facilities to avoid meaningful 
consequences for their deficiencies.
---------------------------------------------------------------------------
    \13\ GAO, Efforts to Strengthen Federal Enforcement Have Not 
Deterred Some Homes from Repeatedly Harming Residents, GAO-07-241 
(March 2007), http://www.gao.gov/new.items/d07241.pdf [hereafter GAO 
2007 Report]. The GAO has issued more than a dozen reports on nursing 
home survey and certification issues since 1998. These reports are 
listed at pages 92-93 of the 2007 report.

      Deficiencies are not cited. The GAO \14\ and State 
Auditors \15\ repeatedly report that surveyors fail to identify and 
cite many deficiencies.
---------------------------------------------------------------------------
    \14\ See, e.g., GAO, Nursing Home Deaths: Arkansas Coroner 
Referrals Confirm Weaknesses in State and Federal Oversight of Quality 
of Care, GAO-05-78 (Nov. 2004), http://www.gao.gov/new.items/
d07241.pdf. See also University of Colorado, Improving Nursing Home 
Enforcement, supra note 12.
    \15\ See, e.g., California State Auditor, Department of Health 
Services: Its Licensing and Certification Division Is Struggling to 
Meet State and Federal Oversight Requirements for Skilled Nursing 
Facilities, 2006-106 (April 2007), http://www.bsa.ca.gov/pdfs/reports/
2006-106.pdf [hereafter California Auditor 2007]; Colorado State 
Auditor, Nursing Facility Quality of Care: Department of Public Health 
and Environment, Department of Health Care Policy and Financ- 
ing (Performance Audit) (Feb. 2007), http://www.leg.state.co.us/OSA/
coauditor1.nsf/All/D2FC96140165870D8725728400745D8C/$FILE/
1767%20NurseHomePerf%20Feb%202007.pdf [hereafter Colorado Auditor 
2007].
---------------------------------------------------------------------------
      Deficiencies are described as less serious than they 
actually are. Many deficiencies are identified as causing no harm to 
residents when, in fact, they cause harm.\16\
---------------------------------------------------------------------------
    \16\ GAO, Nursing Home Quality: Prevalence of Serious Problems, 
While Declining, Reinforces Importance of Enhanced Oversight, GAO-03-
561 (2003), http://www.gao.gov/new.items/d03561.pdf; California 
Auditor, supra note 15; Colorado Auditor; supra note 15.
---------------------------------------------------------------------------
      Deficiencies that are cited do not lead to sanctions or 
lead to only minimal sanctions. Remedies that are discretionary are 
imposed infrequently; per day and per instance civil money penalties 
are often imposed at the lower ends of the allowable range; and 
temporary management is almost unknown. The Secretary does not impose 
denial of payment for all Medicare and Medicaid beneficiaries, as 
authorized by law.\17\
---------------------------------------------------------------------------
    \17\ GAO 2007 Report, supra note 13.

    While CMS could use additional enforcement tools, such as the state 
remedy of denial of all admissions, the GAO has repeatedly shown that 
CMS and State survey agencies do not use the full range of remedies 
they currently have.
    Despite these serious shortcomings, recent research demonstrates 
that the survey and enforcement system is essential to securing 
compliance by nursing facilities. Without the system, facilities do not 
make necessary changes.\18\
---------------------------------------------------------------------------
    \18\ University of Colorado, Improving Nursing Home Enforcement, 
supra note 14.
---------------------------------------------------------------------------
The nursing home industry advocates for weakened enforcement and calls 
        for alternative, ineffectual, ``voluntary'' collaboration 
        between survey agencies and nursing homes
    The nursing home industry opposed the comprehensive enforcement 
provisions of the Nursing Home Reform Law as the law was being enacted 
in 1987 and it has continued its opposition ever since, often trying to 
weaken the law or undermine it, or both. For example, the American 
HealthCare Association unsuccessfully challenged the per instance civil 
money penalty regulation that the Health Care Financing Administration 
promulgated in 1999.\19\ Over the years, the industry has also 
developed a series of voluntary ``quality initiatives''--Quest for 
Quality, Quality First, Advancing Excellence in America's Nursing 
Homes--that promise a commitment to high quality care, but that 
undermine the regulatory system by establishing alternative criteria 
for evaluating nursing facilities. In contrast to the criteria 
established by the regulatory system, these industry criteria reflect 
secret goals and targets for improvement that are voluntary, self-
reported and unaudited, and lack public accountability.\20\
---------------------------------------------------------------------------
    \19\ American Healthcare Association v. Shalala, D.D.C., Civil No. 
1:99CV01207 (GK) (case dismissed, March 6, 2000), unsuccessfully 
challenging final regulations published at 64 Fed. Reg. 13,354 (March 
18, 1999), 42 C.F.R. Sec. Sec. 488.430(a), 488.438(a)(2).
    \20\ Center for Medicare Advocacy, The ``New'' Nursing Home Quality 
Campaign: Deja vu All Over Again (Sep. 21, 2006), http://
medicareadvocacy.org/AlertPDFs/2006/06_09.21.SNF QualityCampaign.pdf.
---------------------------------------------------------------------------
    Voluntary efforts, such as those used by Quality Improvement 
Organizations (QIOs), do not improve care for residents. A recent 
evaluation of the National Nursing Home Improvement Collaborative found 
that the QIO's $1,400,000 project to reduce the incidence and 
prevalence of pressure ulcers in 35 nursing facilities (all members of 
multi-State chains) ``did not significantly affect the overall rate of 
[pressure ulcers or PUs],'' although it ``substantially reduced the 
rate of Stage III and IV PUs.'' \21\ The researchers, who are primarily 
affiliated with the QIO community, recommend excluding Stage I and II 
pressure ulcers from publicly-disclosed pressure ulcer rates. They also 
recommend reporting ``process'' measures, rather than ``outcome'' 
measures of pressure ulcer prevalence and incidence. These changes 
would make facilities appear to be doing a better job in addressing 
pressure ulcers--and reported pressure ulcer rates would suddenly 
fall--but they would not improve actual outcomes for residents. The 
American HealthCare Association applauds nursing homes' collaborative 
work with QIOs and ``encourages CMS to swiftly adopt the study's 
recommended changes for measuring pressure ulcers.'' \22\
---------------------------------------------------------------------------
    \21\ Joanne Lynn, Jeff West, Susan Hausmann, David Gifford, Rachel 
Nelson, Paul McGann, Nancy Bergstrom, and Judith A. Ryan, 
``Collaborative Clinical Quality Improvement for Pressure Ulcers in 
Nursing Homes,'' Journal of American Geriatric Society 55:1663-1669 
(2007) (quoted language at 1668).
    \22\ AHCA, ``American HealthCare Association Praises Collaborative 
Efforts with Quality Improvement Organizations to Enhance Patient 
Outcomes'' (News Release, Oct. 22, 2007), http://www.ahcancal.org/News/
news--releases/Pages/22Oct2007.aspx.
---------------------------------------------------------------------------
Conclusion
    The New York Times identified problems in nursing home care when 
private equity firms take over nursing homes. These problems extend 
beyond private equity firms and reflect problems throughout the nursing 
home industry. Congress needs to act in order to ensure that standards 
of care, including staffing levels, are high and that they are 
meaningfully and effectively enforced.
About the Center for Medicare Advocacy, Inc.
    The Center for Medicare Advocacy is a non-profit, non-partisan 
organization that works to obtain fair access to Medicare and necessary 
health care for older people and people with disabilities. The Center, 
founded in 1986, provides education, analytical research, advocacy, and 
legal assistance to help older people and people with disabilities 
obtain necessary health care. The Center focuses on the needs of 
Medicare beneficiaries, people with chronic conditions, and those in 
need of long-term care. The Center provides training on Medicare and 
health care rights throughout the country and serves as legal counsel 
in litigation of importance to Medicare beneficiaries nationwide.

                                 

                                                      HCR ManorCare
                                                  November 19, 2007

Hon. Pete Stark
Chairman
Health Subcommittee
Committee on Ways and Means
United States House of Representatives

Hon. David Camp
Ranking Member
Health Subcommittee
Committee on Ways and Means
United States House of Representatives

Washington, DC

Dear Chairman Stark and Ranking Member Camp:

    I write to clarify a number of factually inaccurate or misleading 
comments made by witnesses and third parties during the November 15, 
2007 hearing on ``Trends in Nursing Home Ownership and Quality.'' In 
particular we would like to address issues related to the transaction; 
its structure and transparency; the financial viability of the Company; 
and issues related to the operation of the Company after losing. I 
would be grateful if you would include this letter in the formal 
hearing record.
Separation of the Real Estate and Operating Entities
    Witnesses at the hearing suggested that ManorCare and Carlyle were 
separating real estate and operating assets in an effort to minimize 
transparency and limit liability. Nothing could be further from the 
truth.
    While there will be changes in the corporate structure post-
transaction, ManorCare will continue to own and manage both the 
operations and real estate of the company. Responsibility and 
accountability will continue to lie with ManorCare.
    More specifically, each operating company will be:

      An indirect, wholly-owned subsidiary of HCR ManorCare, 
Inc.
      Insured by HCR ManorCare, Inc.'s general and professional 
liability coverage described below. ManorCare will be insured at the 
same level post-transaction as it is today.
      Managed by the same ManorCare leadership team currently 
in place.

    In order to finance the transaction, ManorCare has arranged 
financing secured by ManorCare's real property. The real property will 
be owned by indirect, wholly-owned limited liability subsidiaries. 
Because the real estate financing is secured only by real estate, our 
lenders required that the real property be organized in newly-formed 
limited liability entities tied to the specific mortgage for each of 
the lenders.
    This structure in no way affects the day-to-day operations of the 
skilled nursing facilities. It is also not a shield against ultimate 
liability of ManorCare--all of the assets will still be owned 100% by 
the parent company HCR ManorCare, Inc.
    ManorCare shares your goals with respect to transparency and have 
ensured that State regulators responsible for approval of the 
transaction have all essential information on our structure and 
ownership.
    ManorCare's current general and professional liability program 
consists of $125 million primary and excess insurance including a $5 
million self-insured retention as well as $100 million in property risk 
insurance provided by some of the largest and highest rated insurers 
and re-insurers in the marketplace. The current coverage is unaffected 
by the change of ownership and will continue in place after the closing 
of the transaction.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Financial Strength of the Company
    After this investment, HCR ManorCare will be the most financially 
solvent long-term care company in the United States. The Carlyle Group 
will be investing approximately $1.3 billion in equity in the company--
twice the current level of equity that is on our balance sheet at the 
present time.
    Our ability to service our increased debt results from the fact 
that we will no longer be making interest payments associated with 
prior debt; repayments of our debt; or share buybacks that we have 
effected over the past 5 years. During this period of time, the amounts 
that the Company has paid for these items (which will not occur in the 
future) will equal or exceed the new debt service on an annual basis. 
HCR ManorCare will be able to adequately fund our obligations and 
ensure continued quality care to our patients and families. Our 
financial viability has been reviewed by an independent third party, 
Duff and Phelps, which has provided to our independent Board of 
Directors an opinion attesting to the solvency and viability of the 
Company subsequent to the transaction. Our Board of Directors have 
dutifully represented the interests of our shareholders and our Company 
in ensuring that this arrangement with The Carlyle Group is in the best 
interests of all stakeholders, including our patients, families and 
employees as well as our shareholders.
Quality of Care
    Testimony at the recent hearing referred to a recent New York Times 
article with intimations that the findings of The New York Times 
research presage poor care at transactions involving private equity 
firms. As the Committee has been made aware, the findings of The New 
York Times have been put into serious question as a result of reports 
completed by both the Agency for Health Care Administration of the 
State of Florida and by the firm, LTCQ, which is led by researchers 
from Harvard and Brown Universities and which specializes in data 
analysis of long-term care companies. We urge the Subcommittee to 
thoroughly assess and validate the assertions of The New York Times. 
Private investment in the long-term care sector has been a critical 
factor in providing essential capital since 1940 and remains a vital 
element today whether in the form of equity or debt. It is interesting 
that both of the studies referenced above indicate that there is no 
evidence to support that the quality of care suffers when a facility is 
owned by a private equity firm or an investment company.
    In terms of our Company, HCR ManorCare is a leader in quality 
short-term post-acute services and long-term care. With more than 500 
overall sites of care in 32 States, nearly 60,000 caring employees, and 
facilities spanning a care continuum of skilled nursing and 
rehabilitation centers, assisted living facilities, outpatient 
rehabilitation clinics, and hospice and home care agencies, HCR 
ManorCare was first in the industry to broadly measure patient care 
outcomes, with a continuing emphasis on meeting their care goals. Our 
Company has invested in clinical skills and technology to produce 
desired outcomes for patients who require more complex medical care and 
intensive rehabilitation, and does so in an environment that is more 
home-like than traditional providers (e.g., acute care hospitals). We 
provide high-acuity care to many of our patients, as well as chronic 
care services and we do so in a cost-effective manner ensuring that 
individuals receive care at the most appropriate setting.
    Our principal mission is to have our patients use long-term care 
services as an interim step between the acute care setting and their 
primary residence. Our company discharges 150,000 patients a year from 
our skilled nursing facilities. We are very proud that nearly two-
thirds of these individuals stay in our centers for less than 40 days 
and half less than 30 days. Our strong medical, nursing and 
rehabilitation programs facilitate a shorter-term use of our centers, 
which enables us to provide more care to individuals throughout the 
United States. As part of our commitment to the best in care, we are 
expanding technology in our organization, increasing the use of 
physician and nurse extenders, broadening our information 
dissemination, improving the lives and involvement of our employees and 
working to bring improved programs of care and services to our patients 
and their families.
Management and Expertise
    As a shareholder, The Carlyle Group intends to build on HCR 
ManorCare's strong record. Carlyle believes that the best investment 
approach is to allow HCR ManorCare to continue doing what it is already 
doing so successfully--delivering quality care--and they intend to 
maintain the model that has shown proven results. The current 
management team at HCR ManorCare will continue to operate the company, 
and there will be no staffing reductions within our caregiver ranks due 
to the investment. We felt it was important to assure our patients and 
families that at no time have we considered, nor will we implement, a 
staffing reduction in our centers as a result of this transaction. To 
that end, we provided assurances in writing to them, copies of which 
are included with the accompanying materials.
    The HCR ManorCare Board will continue its Quality Committee and 
additionally appoint an independent and well-regarded committee of 
experts to advise the Quality Committee and Board on quality of care. 
And HCR ManorCare will continue publishing its Annual Report on 
Quality, a copy of which is available to the public on our website.
    Again, we want to reiterate that within our transaction we will 
have the same management, staffing, policies and procedures and 
protocols and controls as well as additional oversight within our Board 
of Directors.
    We view our participation in the overall health care system very 
seriously. We are pleased to have worked with your agency in the 
initial Quality First program and have moved forward to ensuring that 
all of our skilled nursing centers are involved with the Advancing 
Excellence program. We are committed to quality measurement and 
initiatives and will continue to work to increase transparency for our 
patients, families and referral groups on the issue of quality.
Summary
    HCR ManorCare has provided exceptional and comprehensive health 
care services to millions of individuals over its history. We 
acknowledge and take seriously our responsibility to ensure that the 
care provided to our patients and families is consistent with all 
appropriate rules and regulations as well as all appropriate medical 
and clinical standards. We also believe that our structure, financial 
viability, governance, and commitment to quality provide our patients 
and their families with the assurances that the Subcommittee on Health 
of the Ways and Means Committee is seeking from financial sponsors and 
management professionals.
    In closing, we are appreciative of this opportunity to provide 
additional information on the transaction between HCR ManorCare and the 
Carlyle Group, and appreciate this opportunity to reaffirm our 
commitment to continue managing the company with the same dedication to 
quality care, staffing levels, employee benefits, capital investment 
and the caring culture that has made HCR ManorCare the most uniquely 
successful and respected provider in our industry.
    Please let us know if you have any questions or if we can elaborate 
further on any of these key points.

            Sincerely,

                                                Stephen L. Guillard
                                           Executive Vice President
                                            Chief Operating Officer

                                 
     Statement of National Association of Portable X-Ray Providers
    Chairman Stark, Ranking Member McCreary and distinguished Members 
of the Subcommittee on Health, the National Association of Portable X-
ray Providers (NAPXP) is submitting testimony concerning the effect of 
nursing home ownership trends on nursing home accountability and its 
impact on our industry.
    NAPXP is a national non-profit association representing portable/
mobile x-ray providers. NAPXP members supply portable x-ray, ultrasound 
and EKG services to nursing homes and home care patients. The members 
of NAPXP are small and micro businesses whose companies provide 
services to the elderly in a safe, convenient fashion, as they, 
literally, provide care at patients' bedsides. Portable x-ray providers 
allow for the Medicare and Medicaid programs to obtain cost savings 
(estimated at $2 billion annually) as well as patient convenience 
(patients do not need to leave the nursing home or their own home in 
order to obtain the necessary services). However, the members of the 
association rely on Medicare reimbursement significantly as their 
services are provided principally to Medicare beneficiaries. As such 
nursing home accountability becomes a large issue for many of our 
members.
    As you are aware, the nursing home industry has and continues to go 
through transformations. Many facilities have gone out of business, 
sold to other corporate entities or have declared bankruptcy. These 
ownership trends have impacted our industry in a negative way as well 
as the beneficiaries we provide our services to. We rely on the nursing 
homes to provide us accurate information in order to bill the Medicare 
program. Whether a patient is under a Part A stay or under their 
Medicare Part B benefit--makes a difference in the way we bill the 
Medicare program for our services. As a result, when the facility tells 
us that the patient is a Part B patient--and thus we bill the Medicare 
program--we rely on that information as accurate. However, recently, 
the Medicare Recovery Audit Contractors have been issuing Medicare 
overpayment determinations to providers that service nursing homes. The 
reason--the patient was under a Part A stay when the provider billed 
Medicare Part B.
    Because we obtain patient status information from the nursing home, 
we must rely on the facility to provide accurate information in order 
to be paid. The Medicare common working file contains information such 
as patient coverage status but it is not a ``real time'' data base. In 
fact it can take up to 2 years to build a patient file in the common 
working file. As such, we must rely on the information the nursing home 
provides. Unfortunately, once the overpayment determination letters are 
issued providers are expected to pay back the money to the Medicare 
program. Yet it was a nursing home reporting error, not an error by the 
provider that caused the incorrect billing. Our members have tried to 
recoup the monies from the nursing homes that provided us with 
inaccurate information, but are having a tough time recouping that 
money from the nursing homes. The reason--the overpayment 
determinations can go back years, and many of the facilities have 
changed ownership, are not in business any longer, or have declared 
bankruptcy. In essence, as a result of the ownership issues that are 
pervasive in the nursing home industry, providers are being held 
accountable for erroneous reporting by the facility.
    Moreover, companies have been purchasing nursing homes in poor 
financial health and do not take over their financial obligations. The 
nursing homes declare bankruptcy. The new company wipes the slate clean 
and the companies providing services to the nursing homes--such as 
ours--bear the financial burdens.
    NAPXP members have also been adversely affected by changes in 
ownership by nursing facilities. Many of our members have reported that 
nursing homes are terminating their contracts with portable x-ray 
companies due to a change in facility ownership that now requires the 
facility to contract exclusively with an x-ray provider that is owned 
by the parent company of the nursing facility. Under these financial 
arrangements, nursing facilities are reportedly not given an option to 
select a provider based on quality of care and cost, but must only use 
a provider that is tied to the financial ownership of the facility. 
Many of our members have been told that the treating physicians and 
other clinical staff would like to maintain the current providers--as 
they are providing good quality of care--yet are being forced to change 
due to the financial goals of the new ownership. These clinicians feel 
as though their medical judgment is being compromised. We urge the 
Health Subcommittee to investigate this thoroughly and examine the 
impact such arrangements may have on the quality of care provided to 
nursing home residents. We believe that the impact is significant and 
would like to provide a couple of examples.
    Many of the nursing homes are being forced to abandon the quality 
of care that they are accustomed to just to feed the ``bottom line'' or 
based on some financial relationship the new owners have with another 
provider. Providers that often offer services in the evenings or 
weekends are no longer providing their services to the nursing homes as 
a result of these ownership changes and their focus on the bottom line. 
This can increase the costs to the Medicare program. Case in point is a 
patient that needs to have an x-ray and the provider does not offer 
weekend services. The patient may be required to be transported to the 
hospital to have this service done--rather than simply having the 
service conducted bedside. Medicare will incur the cost of the 
transportation to the hospital as well as the emergency room costs and 
all of the staff required for the services.
    If a patient becomes sick on a Friday night with possible 
pneumonia, the facility may decide to wait to x-ray the patient until 
Monday--further compromising the patient's health. Or, the facility may 
simply put the patient on antibiotics, unnecessarily, thinking the 
patient may have pneumonia when a simple x-ray would confirm this 
diagnosis. Yet without weekend services the facility chose to wait 
until Monday to confirm the diagnosis.
    A patient may have a warm red leg. A sonogram could be utilized to 
rule out a venous thrombosis. In all of these situations, clinical 
judgment may be compromised due to the provider that is servicing the 
facility. In many cases one of these ownership changes occurred and a 
facility, as stated above, is being forced to utilize a provider based 
on either the financial goals of the new owners or a financial 
relationship the new owners have with another provider.
    Many of the new purchasers of nursing homes do not have any health 
care experience and are looking at nursing homes as an investment. An 
investment to make money and not necessarily to provide the best 
quality of care services possible.
    The NAPXP recognizes that the focus of this hearing is on ownership 
trends and their impact on quality and accountability on care. However, 
we believe the issues we raised need to be addressed.
    The NAPXP applauds the Subcommittee for holding this hearing today 
and for the commitment of Subcommittee members to address the ownership 
trends that are plaguing the industry.

                                 

                Wisconsin Institute of Certified Public Accountants
                                              Federal Tax Committee
                                         Milwaukee, Wisconsin 53202
                                                  November 30, 2007

The Honorable Senators Max Baucus and Chuck Grassley
U.S. Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Charles Rangel and Jim McCrey
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Gentlemen:

    As an attorney for numerous small manufacturers and on behalf of 
the Federal Tax Committee of the Wisconsin Institute of Certified 
Public Accountants, I am responding to requests for comments to the Tax 
Technical Corrections Act of 2007 (H.R. 4195/S. 2374).
    If signed into law, section 8 of the Tax Technical Corrections Act 
of 2007 would eliminate the incentive aspect of IC-DISCs for tens of 
thousands of closely-held manufacturers, a sector of the economy 
crucial to long-term growth and prosperity. This comment explains why 
the proposed legislation is inappropriate and would go against the 
longstanding policy of aiding domestic manufacturers of exported goods.

    1. The Proposed Legislation Hurts U.S. Manufacturers of Exported 
Products. Manufacturers are the bedrock of a prosperous economy. 
Manufacturing jobs generally pay higher wages and have more generous 
benefits than jobs in other sectors. Furthermore, manufacturing jobs 
are considered especially valuable because they import wealth from 
around the world. Through their interactions with others, manufacturers 
spur demand in the retail, service and not-for-profit sectors. Now, 
however, with manufacturers closing U.S. plants and moving production 
to less expensive foreign locations, this ripple effect is working in 
reverse, magnifying the economic disruption caused by manufacturer 
exodus. The proposed legislation would effectively eliminate a key 
export incentive that helps put domestic manufacturers in an economic 
position closer to that of their foreign counterparts. Eliminating the 
incentive aspect of IC-DISCs will negatively effect domestic 
manufacturers, leading to reduced exports, lower productivity and fewer 
jobs.
    2. The Proposed Legislation is Unnecessary. More than merely 
providing a ``technical correction,'' the proposed legislation would 
work a substantive change by eliminating an export benefit that has 
existed without question. Nothing in the text or legislative history of 
the Jobs and Growth Tax Relief Reconciliation Act of 2003 suggests that 
the current tax rate on dividends paid from an IC-DISC is something 
that requires correction.
    Furthermore, the Joint Committee's description of the Tax Technical 
Corrections Act of 2007 tries to argue that the proposed legislation is 
similar to the denial of a dividends received deduction on dividends 
received from an IC-DISC found in Code section 246(d). That section 
does deny the dividends received deduction with respect to dividends 
received from IC-DISCs because those dividends have not yet been 
subject to corporate-level tax. Code section 246(d)'s sole purpose is 
to prevent corporate shareholders of IC-DISCs from avoiding corporate-
level tax on IC-DISC dividends altogether. However, this problem does 
not exist with respect to non-corporate IC-DISC shareholders because 
there is no corporate-level tax to avoid.
    3. The Proposed Legislation Goes Against the Longstanding Policy of 
Aiding Domestic Manufacturers of Exported Goods. A review of the 
history of export incentives shows that Congress has a longstanding 
policy of aiding domestic manufacturers of exported goods and has only 
abandoned this policy after significant pressure from our foreign 
trading partners. Our foreign trading partners have not objected to the 
rate of tax paid by individuals on dividends received from IC-DISCs, 
making abandonment of this policy through the proposed legislation 
inappropriate.
    In 1971, Congress enacted the domestic international sales 
corporation (``DISC'') regime in an attempt to stimulate U.S. exports. 
A DISC afforded U.S. exporters some relief from U.S. tax on a portion 
of their export profits by allocating those profits to a special type 
of domestic subsidiary known as a DISC. In the mid-1970s, foreign 
trading partners of the United States began complaining that the DISC 
regime was an illegal export subsidy in violation of the General 
Agreement on Tariffs and Trade (``GATT'').
    In 1984, Congress enacted the foreign sales corporation (``FSC'') 
regime as a replacement for the DISC regime in response to the GATT 
controversy. The FSC regime required U.S. exporters to establish a 
foreign corporation that performs certain activities abroad in order to 
obtain a U.S. tax benefit. Rather than repeal the DISC regime, Congress 
modified it to include an interest charge component, making all DISCs 
from that point forward IC-DISCs. Manufacturers often did not take 
advantage of the IC-DISC because until recently other regimes, such as 
the FSC and ETI exclusion, were more attractive.
    In 1998, the European Union filed a complaint with the World Trade 
Organization (``WTO'') asserting that the FSC regime, similar to the 
original DISC regime that preceded it, was an illegal export subsidy in 
violation of the GATT. In 1999, the WTO released its report on the 
European Union's complaint, ruling that the FSC regime was an illegal 
export subsidy that should be eliminated by 2000.
    In 2000, Congress responded to the WTO's ruling by enacting the FSC 
Repeal and Extraterritorial Income Exclusion Act of 2000. The new 
extraterritorial income (``ETI'') exclusion afforded U.S. exporters 
essentially the same tax relief as the FSC regime. Consequently, the 
ETI exclusion did not end this trade controversy as the WTO 
subsequently ruled that the ETI exclusion was an illegal export subsidy 
that should be eliminated.
    In 2004, Congress enacted the American Jobs Creation Act of 2004 
(``2004 Act''), which phased out the ETI exclusion while phasing in a 
domestic production deduction (``DPD''). With the elimination of the 
ETI exclusion, the only remaining incentive for exports was the IC-
DISC. Rather than encouraging exports, the DPD allows a deduction for 
certain domestic production activities. While exporting manufacturers 
may take advantage of the DPD, the tax relief (and concomitant 
incentive to export) of the DPD is far less than that afforded by the 
IC-DISC.
    As the foregoing history shows, Congress has only removed export 
incentives under significant pressure from our foreign trading 
partners. As our foreign trading partners have not objected to the tax 
rate on dividends received from IC-DISCs, it is inappropriate for 
Congress to abandon its longstanding policy of aiding domestic 
manufacturers of exported goods.
    4. The Proposed Legislation Is Not A Technical Correction Because 
It Is Not Revenue Neutral. Because technical corrections are necessary 
to ensure that a tax statute operates as originally intended, there 
should not be a revenue gain or loss associated with a technical 
correction. This is because the revenue impact of a technical 
correction has already been included in the Joint Committee's revenue 
estimates of the provision in the original legislation to which the 
technical correction relates. Consequently, any provision that produces 
revenue is not a technical correction.
    The sole purpose of section 8 is to raise the tax rate on dividends 
paid by IC-DISCs to individuals. Such an increase in the tax rate will 
raise revenue. Therefore, the provision is not a technical correction 
and not appropriate for this Act.
    Here in the Midwest, America's heartland, we are home to more than 
one-third of all manufacturing jobs in the United States and generate 
more than $100 billion in revenue from exports each year. Considering 
the recent history of trade deficits and the weakening U.S. dollar, 
exports are the only positive aspect of the U.S. economy. The proposed 
legislation will harm tens of thousands of hard-working small 
businesses whose value to the economy cannot be overstated. 
Furthermore, the proposed legislation has no basis in the text or 
legislative history of the Jobs and Growth Tax Relief Reconciliation 
Act of 2003 and penalizes exporters who reasonably relied on the law. 
Accordingly, section 8 of the Tax Technical Corrections Act of 2007 
should not be enacted into law.

            Yours very truly,

                                               Robert J. Misey, Jr.

                                 
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