Attorney Ernie Tosh says the imprecise nursing home financial reports required by states and the federal government are like “the last inch of an octopus tentacle.”
“You see the suction cups and figure it has to be a cephalopod. But I don’t know if it’s an octopus. Is it a cuttlefish? Is it a squid? I don’t know. You can’t tell. You can’t see enough,” Tosh said. “You have to see the whole body.”
The reports’ cloudy details on profits, ownership, and payments to “related parties” make it hard to identify individuals behind nursing home ownership groups and to secure damages for injured residents, said Tosh, whose national practice, Bedsore.Law, specializes in lawsuits alleging shoddy and negligent nursing home care.
Obscuring nursing home ownership through “layers and layers of shell companies” is “a problem for every lawyer who does this kind of work on the plaintiff side. And it’s deliberate, to hide the assets of the nursing homes,” said Brian Brown, an attorney and founding partner with Brown & Barron LLC in Baltimore.
The Centers for Medicare & Medicaid Services wants to address these transparency concerns with tougher financial reporting requirements for nursing homes. Its proposed rule (RIN 0938-AU90) would require nursing homes to publicly list people or entities with operational, financial, or managerial control over a facility, including those that lease and sublease property to the facility or provide accounting or clinical consulting services.
It would also require public disclosure of nursing home ownership or management by private equity investors or real estate investment trusts. Both ownership models have raised concerns about their quality of care and high costs.
If finalized, the CMS proposal would make it easier for consumers to compare and evaluate nursing homes, and to hold owners accountable when problems arise. But the expected rule is eliciting uncertainty, and even skepticism, from attorneys who sue the facilities—and whose clients would supposedly benefit from the new guidelines. The attorneys, like some patient groups, say even stronger reporting and financial requirements are needed for meaningful change.
Pressing for Laws, Not Rules
Brown, however, is optimistic. If the regulations are implemented properly, he said nursing homes “will no longer be able to hide behind the shell companies, the layers, and make us do all this forensic work to find out where compensation could be obtained for our clients.”
Attorney Susan Kang Gordon of Orinda, Calif., isn’t so sure. She said her team took more than 100 depositions in one nursing home elder abuse case but “still doesn’t know who the owner is” because nursing home attorneys set up companies “to shield” the true owners—and where the Medicare and Medicaid revenue went.
She said laws, not rules, are needed to ensure taxpayer funds to nursing homes can be properly accounted for. “Only when we know where the money is flowing to, can we determine the true ownership of a facility. Until then, we will never know,” Gordon said.
Gordon also questioned the ability of the CMS to enforce the proposed changes. She said much of the newly required disclosures would contain false information that goes unverified because the CMS doesn’t have the manpower to check their accuracy or completeness. “What good is a rule if you’re not going to do any work to check it? They don’t have the infrastructure to even vet any of this,” Gordon said.
The CMS proposal would also mandate more detail on nursing home transactions with “related parties” in which facility owners often have a financial interest. These deals could conceal actual costs to residents and the profits they generate, the Biden administration said previously. Per CMS policy, the agency did not comment on the pending rule proposal.
Minimum Insurance
Michael Bonamarte, managing partner at Levin & Perconti in Chicago, said the CMS final rule should include minimum insurance requirements for nursing homes to ensure the “financial viability” of facilities that sometimes carry insufficient coverage, or none at all.
He also called for stricter transfer-of-ownership requirements to ensure that when facilities file for bankruptcy or go out of business, the seller or buyer has the ability to satisfy any outstanding claims. Bonamarte said the rule should also hold owners of nursing home real estate liable for punitive damages along with facility operators and licensees.
Tosh, the Dallas-area co-founder of Bedsore.Law, called the proposed rule “progress in the right direction,” but added “it’s fairly minimal progress.” He said it won’t fully reveal the often dozens of holding companies and limited liability corporations that help protect nursing home chains from litigation.
And he doesn’t think it will untangle the complicated movement of assets that can hide and misrepresent a nursing home’s actual finances. That kind of financial maneuvering makes it harder to disprove the industry’s claim that it’s struggling financially, Tosh said.
The leading industry trade group keeps hammering that point as it calls for an upcoming federal nursing home staffing requirement to be fully funded.
The American Health Care Association & National Center for Assisted Living says a labor shortage and rising labor costs are forcing nursing homes to close their doors, downsize, and turn away residents. In a recent survey, the group reported more than half of providers said they were operating at a loss, while 45% said they couldn’t continue for more than a year at the current pace.
Tosh is unconvinced. “Why would private equity be investing in a ‘losing industry’ when its only purpose is to double or triple its money in four to seven years? Because it’s not a losing industry,” Tosh said.
“They’ve used those cost reports—the last inch of the tentacle—and they’ve held that up and said, ‘Look, we’re losing money. We need more Medicare money. We need more Medicaid money. I’m going to have to close my nursing homes.’ And the legislatures fell for it year after year after year. And it’s a scam.”
Call for State, Federal Action
Tosh travels the country, speaking at conferences to attorneys and with state officials and lawmakers, trying to convince them that the fix for greater industry transparency will require federal and state action.
He urges states to require nursing home “ownership transparency down to the individual,” including everyone in the private equity investment pool. He also wants states to require financial statements audited by an outside firm that cover the “top of the ownership to the bottom” and all related parties.
In May, Colorado implemented legislation requiring Medicaid-certified nursing homes to submit “any documentation necessary to ensure the state’s interest in transparency, stability, and sound fiscal stewardship.”
That can include audited financial statements prepared by an independent accountant for a facility, management company, or related party doing business with the nursing home. The same documentation requirement could apply to a nursing home’s parent company if it receives state Medicaid payments.
Colorado House Speaker Julie McCluskie (D), who introduced the legislation, said lawmakers were often asked to increase state Medicaid funding for nursing homes because facilities were in financial trouble. The Covid-19 pandemic and resulting labor market shortages increased those calls.
But “we really felt that in order to review those rates and provide additional funding” lawmakers “needed to better understand their operations,” McCluskie said.
While it was “uncomfortable” for facilities to share their financial records, the process helped lead lawmakers to require more thorough cost, revenue, and ownership reporting from nursing homes, she said.
State Laws
Even before Covid-19 killed more than 200,000 nursing home residents and staff, some states were already taking notice.
In 2014, Connecticut passed legislation requiring nursing home annual reports to include profit and loss statements from related parties that were paid $50,000 or more for providing goods or services. The legislation describes “related parties” as any company related to a nursing home “through family association, common ownership, control or business association” with the facility’s owners, operators or officials.
In 2019, New York passed legislation requiring nursing homes to report to state health officials any “common or familial ownership” between facility operators and those that provide services to the facility. Facility operators must attest to the accuracy of the information each year.
The pandemic spurred more states into action. In May 2021, New Jersey required facilities to provide organizational charts for companies looking to buy a nursing home, and to list any facilities the buyer has owned in the last five years. More transparency legislation in 2022 required New Jersey nursing home websites to include owner-certified financial statements and their most recent cost reports.
In 2021, California implemented legislation requiring facilities to file “an annual consolidated financial report that includes data from all operating entities, license holders, and related parties.” It must include a visual depiction of the facility’s organizational chart, and an organization official must attest to its completeness.
A Misguided Focus?
LeadingAge, which represents nonprofit aging services providers, including nursing homes, has backed the CMS push to make facility ownership information more transparent. But the AHCA & NCAL, which represents for-profit nursing homes, has said focusing on private equity and real estate investment trusts is misguided because less than 5% of nursing homes are owned by private equity firms and about 12% are owned by real estate investment trusts, or REITs.
The American Investment Council said in a 2021 blog that 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.”
In its comment letter on the proposed rule, the council said the CMS should focus disclosure efforts on all private nursing home owners rather than single out those that fit the agency’s proposed definition of private equity companies.
The group also proposed eliminating REITs from the reach of the rule, or narrowing the definition of an REIT to include only those “that could exert influence over the day-to-day operations of the facility.”
Without such changes, “the Proposed Rule would lead to a deluge of vague and unreliable disclosures from a hodgepodge of unrelated categories of investors, undermining CMS’ goal of collecting clear and useful information,” the group’s letter said.
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