We know that as a nation, we invest well over $2 trillion each year in healthcare. But where exactly do our health care dollars go? Where are they well-spent and where are they wasted?
In recent months I’ve been trying to answer those questions by looking at healthcare spending sector by sector, analyzing how much we spend on physicians’ services (here and here); on hospitals (here and here) ; and what share our health care dollars is eaten up by insurers’ “administrative costs and overhead.”
This post will take a hard look at spending on nursing homes. As the chart below reveals, the nursing home sector accounts for roughly 6 percent, or $124.9 billion of the more than $2 trillion that we invest annually in healthcare. As always, the question is “Are we getting good value for our money?” Given how vulnerable nursing home patients are, questions about quality deserve special attention.
Quality of Care
The news is almost as depressing as The Savages. (A powerful film, starring Philip Seymour Hoffman, Laura Linney, and Philip Bosco about a brother and sister who are faced with putting their father in a nursing home.)
Begin with a recent GAO report. Last month the Government Accountability Office reported that when Congressional investigators double-checked nursing home reports from state inspectors, they found widespread “understatement of deficiencies,” including malnutrition, severe bedsores, overuse of prescription medications and abuse of nursing home residents.”
The New York Times reports that “GAO found that state employees
had missed at least one serious deficiency in 15 percent of the
inspections checked by federal officials. In nine states, inspectors
missed serious problems in more than 25 percent of the surveys analyzed
from 2002 to 2007.”
(According to GAO the nine states most likely to miss serious
deficiencies were Alabama, Arizona, Missouri, New Mexico, Oklahoma,
South Carolina, South Dakota, Tennessee and Wyoming.) Nationwide, fully
one-fifth of the homes were cited for serious deficiencies last year.
Lewis Morris, chief counsel to the inspector general of the Department of Health and Human Services, describes what
inspectors have seen: “We have found nursing home residents who were
grossly dehydrated or malnourished. We’ve found patients with maggot
infestations in wounds and dead flesh. We’ve found residents with
broken bones that went un-mended.”
Legislators are talking about raising the maximum fine—now usually
$10,000—to $25,000 for a “serious deficiency” and to $100,000 for one
that resulted in a patient’s death. One hundred thousand dollars —not a
very high price to pay for taking a human life.
Meanwhile, Bruce A. Yarwood, president of the American Health Care
Association, a trade group for nursing homes, protests such a harsh
approach: “We should not be increasing fines, adding auditors and
encouraging a ‘gotcha’ mentality. We should be testing new, less
punitive ways to measure and improve the quality of care.”
This is one point of view. Alternatively, rather than fining nursing
homes where “deficiencies” lead to deaths, we might simply close them
While Prices Rise, New Owners Take Over the Industry
Just a few weeks ago, U.S. Congressman Bart Stupak raised a red flag at an oversight hearing on nursing home care, pointing out
that in recent years “a wave of new owners and investors has begun
purchasing nursing home chains – both large and small – successful and
unsuccessful. These firms are private, unregulated, and new to the
nursing home market.”
As Stupak, who is chairman of the House Energy and Commerce Committee’s
Subcommittee on Oversight and Investigation, went on to explain: “Many
worry that the top priority for these new owners will be profits,
rather than providing the staffing and resources necessary to ensure
top quality care for our loved ones. Frequently, they use complex
corporate structures, separating the nursing home real estate from the
operating companies and putting multiple layers of limited liability
partnerships between themselves and the day-to-day operations of the
This makes it difficult to figure out who owns many of these homes. And
if you can’t identify the owner, who do you hold accountable when
mistreatment leads to “unnecessary amputations”? Patients and families
who try to sue have found themselves lost in a legal labyrinth.
“The impact of these new owners on the quality of care and safety of
nursing home residents is still unclear,” Stupak added. “Some companies
re-invest their profits into the facilities and focus on quality
patient care. Others, unfortunately, skim off the profits to line the
pockets of investors or plow the money into separate ventures that have
nothing to do with nursing home care.
“What is certain, however, is that the Centers for Medicaid and
Medicare (CMS) and the states lack the tools to keep up with the rapid
changes in the industry – to know who actually owns the country’s
nursing homes and who should be held accountable for the residents in
Meanwhile, the price of nursing home care is rising. A survey by
Genwroth Financial released last month shows that this year, the
average annual cost for a private room in a nursing home hit $76,460,
or $209 per day this year—a 17 percent increase over the $65,185 cost
Who Pays and Who Profits?
Who is paying billions for what might diplomatically be called “uneven care?”
You and I, of course. As the chart below shows, taxpayers pick up the
tab for 63 percent of nursing home care by funding Medicaid, SCHIP,
Medicare and the VA. Nursing home patients and their families pay
another 26 percent of the bills out of pocket.
Source: National Health Expenditure Accounts, 2006, CMS. Available on CMS website.
Medicaid (and SCHIP) is responsible for such a big chunk of nursing
home payments because Medicaid is far more generous than Medicare in
covering long-term care. Medicare only pays for “skilled nursing
facility care”—that is, care that’s needed by patients for a limited
amount of time following an injury or illness (For instance, they may
need a physical therapist to help correct strength and balance problems
or a speech therapist to regain the ability to communicate after a
But Medicare does not reimburse for “custodial care”—the long-term
assistance many nursing home patients needs with daily living (bathing,
eating, walking, dressing, etc).
Medicaid, on the other hand, will cover custodial care at home and in
nursing homes for certain patients—but only after a patient has run
through his own resources and is “poor enough” to qualify for Medicaid.
Even then, low-income seniors don’t get a free pass: an individual must
continue to put all income toward the cost of nursing home care, except
for a small personal needs allowance (typically $30 per month).
Who profits from a system that bankrupts the elderly while consuming billions in tax-payer dollars?
“The wave of new owners” Congressman Stupak referred to at his
hearing. Twenty years ago, Stupak explains, “the typical nursing home
was owned by a sole proprietor or family, and was not part of a chain.
Today over 50 percent of nursing homes are part of a chain, and many of
those are in the hands of private equity investors.”
to the Center for Disease Control, by 2006, two-thirds of the nation’s
15,899 nursing homes were in the hands of private investors. The new
owners include prominent private equity firms like Warburg Pincus and
the Carlyle Group. The remaining one-third were owned either by the
government or by non-profit organizations.
Stupak acknowledges that when private “chain ownership has the
potential to improve quality of care by allowing the sharing of
resources and expertise across facilities.” But “at the same time,
chains have the potential to hide common problems and obscure
responsibility for inadequate care.”
Last fall, the New York Times ran a superb story that
confirmed Stupak’s worst fears. Examining more than 1,200 nursing homes
purchased by large private investment groups since 2000—plus more than
14,000 other homes—reporters compared investor-owned homes against
national averages in multiple categories.
As the table below shows, the ratio of nursing home residents
to RNs was significantly higher at the investor-owned homes (20:1) than the
national average (13:1), as was the share of long-term residents who
suffered from health deficiencies, anxiety and depression, or needed
more help with daily activities such as simply moving around their
rooms. In the investor-owned homes, patients were deteriorating.
The piece highlighted the tale of Habana Health Care Center, a
150-bed nursing home in Tampa, Fla., that had been purchased by a group
of large private investment firms who snapped it up, along with 48
other nursing homes, in 2002.
The investors saw a “golden opportunity”—and they were right. Investors
and operators were soon earning millions of dollars a year from their
How did they do it? By cutting costs. “Within months,” the New York Times
reported, “the number of clinical registered nurses at the home was
half what it had been a year earlier, according to records collected by
the Centers for Medicare and Medicaid Services. Budgets for nursing
supplies, resident activities and other services also fell, according
to Florida’s Agency for Health Care Administration.”
Predictably, residents did not do as well. “Over three years,” the Times
reports, “15 at Habana died from what their families contend was
negligent care in lawsuits filed in state court.” The paper quoted
Vivian Hewitt, who sued Habana in 2004 when her mother died after a
large bedsore became infected by feces: “They’ve created a hell-hole.”
The acquisition of a nursing home such as Habana Health Center by
private investment firms is becoming commonplace. Last year the Carlyle
Group, the nation’s largest private equity firm, acquired the nation’s
biggest nursing home chain, HCR Manor Care, for $6.3 billion. In 2006,
the firm Fillmore Capital Partners paid $1.8 billion to scoop up
another of the nation’s biggest chains. The Times sums
up the trend: “In recent years, large private investment groups have
agreed to buy 6 of the nation’s 10 largest nursing home chains, Private
investment groups own at least another 60,000 beds at smaller chains
and are expected to acquire many more companies as firms come under
shareholder pressure to sell.”
And these Wall Street types have learned how to turn handsome profit
while caring for the elderly: “large chains owned by an investment
company in 2005 earned $1,700 a resident, according to reports filed by
the facilities. Those homes, on average, were 41 percent more
profitable than the average facility.”
That firms prune nursing home staff in order to jack up short-term
profits shouldn’t come as a surprise. The operating principle of
private equity firms is “the flip”: buy a company, strip it down, make
it profitable, and then “flip” it by cutting it loose with an IPO
[initial public offering] which gives the private equity firm a huge
payday. “It’s possible that Manor Care will be back on the block within
five years or so,” says John J. O’Connor, vice president of McKnight’s
Long-Term Care News. “An even bigger sale in half a decade will be good
for the lawyers, accountants and top management people who are in on
In some industries, when a bloated company is purchased, stripped and
flipped, the “down-sized” company is, in fact, more efficient. But in
the health care industry, as for-profit hospitals have discovered, when
you try to trim the nursing staff, patients die. Healthcare, like
education, is labor-intensive. There is no way around it. Thus, the
fundamental premise of private equity firms is at odds with the needs
of the nursing home industry.
Some on Wall Street understand that healthcare is “different.” In an interview
with Bill Moyers, John Bogle, founder of Vanguard, the world’s largest
mutual fund company, commented on the Times article about
investor-owned nursing homes: “it’s a national disgrace. Simply put.
And there are some things that must be entrusted to government and some
things that must be entrusted to private enterprise. And what we see
here, at least in my judgment, is that we’ve taken medical care—a
profession in which the patient is the object of the game —and turn[ed]
it into a business. And so, it’s the bottom line [that matters]. I’ve
often said we’re in a bottom line society. We’re measuring the wrong
“We all know that in the professions, the idea has been service to the
client before service to self. That’s what a profession is,” Bogle
continued. “That’s what medicine was . . . That’s what trusteeship
used to be inside the mutual fund industry. But, we’ve moved from that
to a big capital accumulation — self interest — creating wealth for the
providers of these services when the providers of these services are in
fact subtracting value from society. So, it doesn’t work.”
Moyers summed up what Bogle was saying: “So, the private equity nursing
homes have added to their wealth. But, they’ve subtracted from society
the care for people who need it.
“That is exactly correct,” Bogle replied.
The Nursing Home business is a tough business. It’s hard enough to run a good nursing home, let alone make a profit on it.
Indeed, the sordid history of nursing homes suggests that those who
have succeeded in making nursing homes lucrative usually have done so
at the expense of patients. As Bogle puts it, “there are some things
that must be entrusted to government.”
Long-term care for the elderly is a “public good,” and in this case,
since taxpayers are paying for it, government should, at the very
least, be regulating it. The Centers for Medicare and Medicaid Services
needs to make a much larger investment in inspections which, in the
end, will pay for themselves. Without tight regulation, fraud will
continue, tax-payer dollars will be wasted, and helpless patients will
suffer. Electronic medical records would make the task much easier.
The fact that nursing homes are regulated by the states only adds to
the confusion about quality. Federal standards are needed, laying out
precisely how many RNs, LPNs and paraprofessionals are required to
provide good “custodial” as well as “skilled-nursing” care for a
certain number of patients. And then those regulations must be strictly
enforced. Just one example of what happens without Federal oversight:
last month Florida cut nearly $164 million from Medicaid reimbursement rates for nursing homes and gave the homes permission to cut staffing levels.
Medicaid’s stingy payment schedule also makes it very difficult to recruit and retain nursing home workers, according to The National Commission for Quality Long-Term Care. While reimbursement rates vary by facility, in New York City,
one nursing home administrator reports that he earns $400 each day for
rehabilitation patients covered by Medicare—compared to $250 each day
for nursing home residents covered by Medicaid. Ultimately, we need to
fold Medicaid into Medicare, and pay doctors, nurses and
paraprofessionals who care for Medicaid patients the same rates that we
pay those who treat Medicare patients.
In its 2007 report, the Commission stresses that we must find a way to
“Achieve wage parity between long-term care and acute Care.” The
Commission goes on to point out that: “Wages and benefits of the
paraprofessional work-force are particularly problematic given the
level of responsibility they are expected to assume, the heavy
workloads they must endure and high injury rates. Almost 30 percent
live at or below the poverty line. They are less likely to have health
insurance than the average worker in the United States, and 75 percent
have no employer-sponsored pensions.” No wonder turnover is high.
If we think the nation’s elderly deserve compassionate, competent care,
we must find a way to fund eldercare for those who cannot afford to pay
for it themselves. This will include many upper-middle-class seniors
who live beyond the age of 85 (This is when seniors are most likely to
begin to need assistance with everyday activities.) Even those who
have been conscientious about saving probably will find that they
haven’t saved enough to cover 15 years in a nursing home where staff
are fairly compensated—and patients are respected.
For the healthiest, less expensive alternatives to nursing
homes—including assisted living centers and day-care for seniors who
live with their children—are likely to become more and more popular.
In-home care also can be affordable if a senior has an extra bedroom
and can offer room and board in addition to a small salary. “Immigrants
are a particularly important source of labor in the home care sector,”
the National Commission for Quality Long-Term Care points out. “They
are a growing force in the nursing profession. They may be more willing
than U.S.-born natives to work in care giving occupations with lower
wages. Changes in immigration laws can have a big impact on their
As Americans live longer we, as a society, will need to think seriously
and creatively about long-term care. Trying to turn it into a
profit-center is probably not the answer.