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Investor-Owned Nursing Homes Draw Scrutiny as Deals Flourish

April 6, 2021, 9:36 AM

Congressional Democrats are using their new majority to resurrect an old grievance: whether private equity ownership of nursing homes—and their investors’ laser focus on profits—are hurting the quality of care.

Medicare patients were 10% more likely to die at private-equity owned nursing homes in the first 90 days, implying more than 20,000 Medicare patient deaths “due to PE ownership” over a 17-year study period, according to a February research paper published by the National Bureau of Economic Research (NBER).

Additional scrutiny could complicate the nursing home industry’s push for an extra $15 billion a year in Medicaid funding to shore up longstanding quality, infection-control, and financial problems at their facilities. Those problems were magnified by Covid-19, which has killed more than 181,000 residents in long-term care facilities, according to the Kaiser Family Foundation.

The research and renewed congressional interest comes after years of double-digit acquisitions and buyouts of long-term care facilities by private equity firms, a trend that accelerated last year as the financially challenged nursing home industry struggled through the Covid-19 pandemic.

“It’s past time for a bright light to be shined on how private equity ownership in our health-care system affects patient safety, cost and jobs,” said Rep. Bill Pascrell, (D-N.J.), who chairs the House Ways and Means Committee’s oversight subcommittee.

“Private equity’s business model involves buying companies, saddling them with mountains of debt, and then squeezing them like oranges for every dollar,” he said at a recent subcommittee hearing.

“This trend towards more private equity looks to me like something that the Finance Committee should be digging into,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said at a March hearing. “This is an area that has not gotten the oversight and the accountability that is needed.”

Deals Reached $1.5 Billion

After 2019 saw 33 private equity acquisitions of nursing homes valued at just over $483 million, in 2020, 43 deals valued at more than $1.5 billion occurred, according to PitchBook, a financial data research firm that tracks business deals. Private equity investment in the broader health services sector reached a five-year high last year, with 100 deals valued at $7.1 billion, according to Bloomberg data.

The industry says private equity buyouts are sometimes the only way to keep struggling facilities from going under. But some researchers have found resident care suffers under short-term equity owners that try to maximize profits by selling off nursing home assets, adding to the facilities’ debt, and charging hefty “monitoring fees"—all of which can lead to reductions in staffing.

Sen. Ron Wyden (D-Ore.), speaks to members of the media at the U.S. Capitol in Washington.
Photographer: Stefani Reynolds/Bloomberg via Getty Images

The role of private equity in health care and other areas has been a concern for Democrats for several years. In 2019, Sen. Elizabeth Warren (D-Mass.) and Rep. Mark Pocan (D-Wis.) sponsored broader legislation that would have required private investment funds to share in the liabilities of companies under their control.

And last year, Ways and Means Committee Chair Richard Neal (D-Mass.) sponsored a bill that would have required private equity firms with controlling interest in certain medical service providers to file public information on income, assets, and debt with the Internal Revenue Service. At Neal’s request, the Medicare Payment Advisory Commission will devote a chapter to private equity’s impact on Medicare in its June report to Congress.

Complex Structures

The NBER research paper examined government data from nearly 1,700 nursing homes acquired by equity firms from 2000 to 2017. It found use of anti-psychotic drugs, residents’ pain, and Medicare billings generally increased at these facilities, while nurse hours per patient days, patient mobility, and compliance with Medicare quality standards all declined.

Concerns like these have prompted calls for the Centers for Medicare & Medicaid Services to require more thorough reporting of nursing home profits, spending, and their corporate ownership structure, since U.S. taxpayers provide most of the industry’s revenue through Medicare and Medicaid.

The complex organizational structures have been “a perennial problem” in “identifying the owners of nursing home chains that provide substandard care,” said Eric Rollins, a principal policy analyst with the Medicare Payment Advisory Commission.

“Regulators have been reluctant to interfere with ownership transactions” among for-profit nursing homes, “but it may be time to do so,” in the interest of greater transparency, R. Tamara Konetzka, a health economics professor at the University of Chicago, told the Finance Committee.

But there have been “relatively few” new private equity investments in skilled nursing facilities in recent years and “their overall interest in nursing homes may be waning,” Rollins said during an April 2 MedPAC meeting.

Focus on Solutions?

The private equity industry says it’s girding up flailing long-term care homes. In a recent blog, the American Investment Council said private equity firms invest in “nursing homes to help rescue, build or grow businesses, often providing much-needed capital to strengthen struggling companies and employ Americans.”

The council said the NBER research hadn’t been peer reviewed and doesn’t include data on Medicaid patients, who comprise a majority of long-term nursing home residents. The paper is “inconsistent with recent peer-reviewed academic research that shows that private equity-backed companies are delivering high-quality care to nursing home residents, particularly during the COVID-19 crisis,” it said.

The nursing home industry also is pushing back. Less than 10% of the nation’s 15,000 nursing homes are owned by private equity investors, said Mark Parkinson, president and CEO of the American Health Care Association, which represents more than 14,000 nursing homes, in a statement for Bloomberg Law.

For facilities struggling due to low Medicaid reimbursement rates and Covid-19, “private equity firms have been the only viable solution to prevent them from permanently closing their doors,” Parkinson said. “Rather than focus on ownership structure, we should focus on solutions that will increase our nation’s investment in long-term care.”

Competition Matters

Equity-owned nursing homes “compete more aggressively to the benefit of consumers when competition is strong, while exploiting market power more aggressively to the detriment of consumers if competition is weak,” researchers from UCLA and Duke University found.

That could help explain separate research that found equity-owned nursing homes fared better during Covid-19 outbreaks than other facilities, said Ashvin Gandhi, an economist and assistant professor at the UCLA Anderson School of Management who co-authored both studies.

“Whether private equity is good or bad for consumers depends on what the financial incentives dictate they should do,” Gandhi said in an email. “Private equity is trying to maximize their profit. In this regard our findings make sense. There isn’t any profit in COVID outbreaks that devastate your residents and staff, and it’s plausible that PE-owners were motivated to leverage their financial resources and operational expertise to try to avoid outbreaks.”

Unlike conventional for-profit ownership, private equity managers only expect to own a nursing home for up to six years, said Atul Gupta, an assistant professor of health-care management at the University of Pennsylvania’s Wharton School.

Heavily Leveraged

Private equity companies typically borrow 80% or more of the purchase price for a facility, and their average capital investment is usually less than 20%, said Gupta, who co-authored the NBER research. The loan debt is then placed on the nursing home’s balance sheet, which leaves equity investors with less financial risk if a facility fails.

Investors also tend to generate large cash flows while they own facilities by selling assets, like the building itself, and then requiring the facility to pay rent on the property it once owned, Gupta said. The proceeds are often used to the pay down the loans, but then the facility has a large lease payment in addition to the debt service payments and management, or “monitoring fees,” it must pay, he said.

The added debt burden often requires the facility to cut operating costs, typically direct-care employees like nursing aides, in order to meet the new financial obligations. These added costs, effectively, steer operating costs away from patient care, Gupta said.

Private equity firms may also require nursing homes to buy goods and services from other companies that the firm owns. These “related party transactions” may “increase costs if the prices charged by the other companies exceed market rates,” Rollins said.

Equity investors also use “dividend recapitalizations” to take on more debt that’s used to pay dividends to investors, said Sabrina Howell, assistant professor of finance at New York University, in testimony before the House Ways and Means Committee.

All these financial moves introduce “really high-powered, profit-maximizing incentives,” for equity investors, said Howell, a co-author of the NBER research. “These incentives can be good for consumers in industries in which product quality is transparent, markets are competitive and there’s no government subsidy. However, health care has none of these features.”

To contact the reporter on this story: Tony Pugh in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Cheryl Saenz at