[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
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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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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.
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\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.
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\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\
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\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.
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\5\ 42 U.S.C. Sec. Sec. 1395i-3(b)(4)(C)(i), 1396r(b)(4)(C)(i)(1),
Medicare and Medicaid, respectively.
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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].
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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\
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\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.
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The staffing ratios that CMS and other experts identified nearly a
decade ago need to be mandated and implemented.\9\
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\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\
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\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\
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\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.
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\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].
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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.
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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\
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\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\
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\18\ University of Colorado, Improving Nursing Home Enforcement,
supra note 14.
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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\
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\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.
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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.