BY CHRISTOPHER H. SCHMITT

Bad care and grim incidents of death and neglect have long been staples in many of America's 17,000 nursing homes. But much less is known about the financial legerdemain that goes on behind the scenes. Although public funding has effectively made nursing home care a full-blown government program, the money comes with no guarantees of quality. With the industry's emotion-tugging, multimillion-dollar lobbying campaign now in the home stretch, U.S. News conducted a home-by-home examination of the industry's finances. The magazine analyzed hundreds of thousands of pages of nursing home financial statements and shared the results with current and former regulators, patient advocates, congressional staffers, and others knowledgeable about the industry. The findings:

 

• The nursing home industry is profitable and growing, with operators spinning a far brighter tale for Wall Street than for Capitol Hill. Many nursing homes are earning exceptionally healthy profit margins, often 20 and 30 percent.

   

   

• There is no strong evidence, as the industry claims, that inadequate federal payments for care of the elderly poor are dragging down profits. Likewise, there is no evidence that patients are markedly sicker today.

   

   

• Even as they report tough financial times in their official government filings, many nursing home operators steer big chunks of their revenues to themselves or related businesses before they calculate the bottom line.

   

   

• The government funding cuts the nursing home industry has described as catastrophic actually amount to about 1 percent of current revenue.

   

A generation ago, nursing homes attracted little attention and operated far from the mainstream of American life. Today, with the nation's population aging rapidly, government funding for nursing care has exploded and nursing homes and their many problems are a concern across the land. Through the Medicare program for the elderly and the Medicaid program for the poor, taxpayers now foot the bill for about two thirds of all nursing home care–a dependence on government greater than even the largest military contractors have on the Pentagon. About 3.5 million people will live in a nursing home over the course of a year, meaning an estimated 15 percent of all U.S. families will have a relative in a home. State and federal financing of this system reached $58 billion last year; nursing home residents and their families contributed some $34 billion more. About two thirds of nursing homes are for-profit ventures; roughly half belong to national or regional chains.

October 1 looms as what the industry calls the Medicare "cliff," when $1.4 billion in temporary extra annual funding for Medicare nursing home patients will expire unless Congress decides to continue ponying up. Next year, an additional $1 billion in funding is on the line, making for a total of $2.4 billion annually that's in play. "If these cuts go forward, quality and availability of [nursing home] care will be threatened, and the nation will be forced to deal with the possible collapse of an entire essential sector of healthcare," warns the nursing home industry's main trade group, the American Health Care Association. "We're running out of solutions," says Stephen L. Guillard, CEO of Boston-based Harborside Healthcare. "They've squeezed the system so badly, there are no expenses left [to cut]."

Asked about U.S. News's findings, Thomas Scully, administrator of the federal Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), agreed that the industry's finances are not nearly as dire as many industry executives say. "Plenty of nursing homes are doing fine," he says. Nancy-Ann DeParle, the agency's administrator from 1997 to 2000, reviewed the findings and concurred. The industry's financial claims are "not justified," she said, adding, "I don't find them persuasive."

If Medicaid patients are money losers, then a nursing home's quotient of Medicaid patients ought to drag down its bottom line, industry experts acknowledge. But in examining nursing homes' financial statements, U.S. News found no relationship between a home's profits, or the size of its losses, and the portion of its patients covered by Medicaid. Using officially certified financial data submitted to federal regulators, the magazine calculated profit or loss margins for thousands of homes, then matched those results against each home's Medicaid patient load. In statistical parlance, there was virtually no correlation between the two.

Industry executives insist that Medicaid patients reduce their profits, but they say they have never studied the issue this way and can't explain why such a link can't be seen. "The numbers we have are totally inconsistent," says Allen Dobson, an industry consultant. Medicaid is driven primarily by the states, which set widely different reimbursement rates. But overall, the industry says, Medicaid payments cover only 93 percent of the cost of providing care.

But the industry's claim of ever-worsening sickness doesn't hold up. One measure of "acuity," as it's called in the trade, is patients' ability to handle the daily activities of life, like whether they can eat or use the toilet without help, whether they have behavioral problems, or joints so rent with pain or swelling that they can't move their hands, arms, or legs.

Based on these factors, a U.S. News examination of millions of patient evaluations from the past three years found that acuity levels have been, essentially, flat. For instance, the percentage of patients who are bedridden held steady at about 5 percent. The percentage with pressure sores–which can become life-threatening wounds exposing bone and organs–was level at just under 10 percent. The portion of patients with incontinence hovered just under 60 percent; those with infections around 17 percent. Largely the same picture emerges from a recent national study by researchers at the University of California-San Francisco.

The nursing home industry endorses such measures as a way to view acuity, but officials nevertheless say that they don't accurately reflect the changing nursing home population. Instead, executives say, measures of acuity must consider the new, more intensive care being provided. But even so, there has been little increase. For instance, a sickness statistic cited by the industry itself, which takes into account the special treatments, has been increasing by just 0.33 percent annually. At the University of North Carolina-Chapel Hill, researchers have tracked a slight increase in special-care needs, but they note that these patients aren't a large part of the overall population. "These are all relatively small moves," says Kerry Kilpatrick, a UNC health policy professor.

Other evidence that acuity isn't soaring comes from a recent study by the General Accounting Office, the investigative arm of Congress. The agency's investigators studied how patients' care needs were initially classified. They found that for the single biggest group of Medicare patients–those in rehabilitation therapy, which account for three quarters of Medicare-covered stays–markedly fewer patients were be- ing assigned to the highest acuity categories. Instead, many more are being assigned to medium severity groups. Investigators believe this is likely because homes have concluded that the middle groups yield the best profit margin.

Still, industry executives are adamant that acuity continues to worsen. "The notion that acuity is somehow going down or has leveled off is just BS," says Donald Muse, a leading industry consultant.

Today, in looking at a slice of the nursing home universe–that is, homes with only Medicare-paid beds–the University of California researchers found that despite the higher payments, the time nurses and nurse aides spent with patients decreased. The drop was steepest–16 percent, from an average of 3.1 hours per patient per day to 2.6 hours–among nurse assistants, the front-line troops in nursing homes, who provide most routine daily care. "It is very clear they have dropped staffing," says Charlene Harrington, one of the researchers.

It's not entirely clear where the money has gone. However, in a recent study of how homes spend their funds, the GAO found that facilities spending more typically did so not on nursing care but on things like administration and financing. That mirrors another U.S. News finding: A fifth of the nursing homes examined in the magazine's survey spent 20 percent or more of patient revenue on administrative costs.

In the case of nursing homes, these arrangements typically involve at least one of three things: exporting profits from a local nursing home to a corporate parent, divvying up some of the parent's costs among its local homes, or the local home's purchase of goods and services. There is a legitimate place for these transactions, patient advocates and industry executives agree. For example, homes can save money by acting as a group, and there can be good reason to bill back some of a parent firm's costs to the local home. In other cases, though, such deals among nursing home insiders raise the question of whether the arrangements are designed to siphon money from a home, depriving patients of benefits. The idea, says Catherine Hawes, a Texas A&M University professor and former fraud investigator, is "you never have anything show up as a profit." Instead, she says, "it's a 'management expense,' or it's buying food from yourself. They show these really skinny operating margins, so they can always plead poverty." Industrywide, executives say, profits average 3 percent.

Self-dealing is widespread; about 7 of every 10 homes engage in these kinds of transactions, the magazine found. The Community Care Center of Muncie, a 122-bed nursing home in the Indiana heartland, has been cited by regulators for poor patient nutrition, bedsores, and failure to keep residents from unsafe conditions. Like other nursing home operators, Douglas Bradburn has complained that government reimbursements are insufficient, even suing the state over the issue. So it is perhaps not surprising that the home reported it lost money, some $700,000 for 2000.

But that's not the whole story. In its normal course of business, the home paid Bradburn and a company he heads sums equal to fully half the home's revenue. Bradburn says it was for things like equipment and real estate, but the level of the payments is highly unusual, say people familiar with the industry. Similarly, at other homes in his small chain, Bradburn regularly sent himself or his company 30 cents on the dollar and more; in all, about $4.4 million for 2000 alone. Bradburn, who today is battling state regulators over quality and reimbursement issues, says all the transactions have been proper and allowed his homes to save money. State officials, citing the court action, declined to comment.

Two common practices U.S. News documented are rental of facilities from related companies and paying management or consulting fees to related parties. In Hollis, N.Y., the operator of the 314-bed Holliswood Care Center, Veena Ahuja, paid herself $1.2 million in 1999 and an additional $629,000 in 2000, according to the home's most recent financial statements. It's not clear if the payments were for salary or some other purpose, but the median nursing home administrator's salary is $67,714, according to the New Jersey-based Hospital & Healthcare Compensation Service. The home paid an additional $500,000 to a relative's consulting company. Ahuja declined to answer questions about the home's finances, but said the family-run facility "has an excellent record of resident care." New York regulators recently found minor billing problems at the home but otherwise have not taken any financial action against the facility.

Not far away, in Jamaica Estates, N.Y., Stanley and Judith Dicker own Hillside Manor Rehabilitation and Extended Care Center. Through affiliated management and real-estate companies, the nursing home paid the Dickers $2.8 million in rent and $4.9 million in management fees in 2000. The nursing home has also loaned at least $4 million interest free to a Dicker-owned company. It is not clear how much of the income went to business expenses; through a spokesman, the Dickers declined comment. In a civil matter, they recently agreed to repay the state more than $11 million for Medicaid payments improperly made to them from 1996 to 2001, for Hillside and another home they own. The case involved big management fees that resulted in inflated government reimbursements.

These kinds of financial transactions aren't limited to for-profit nursing homes. Near Baltimore, Oak Crest Village combines independent living and nursing home care in a nonprofit facility run, as it claims, "exclusively for educational, scientific, and charitable purposes." But Oak Crest distributes millions in management fees and other charges to affiliated for-profit ventures run, in part, by the same executives. Several other facilities, all part of Erickson Retirement Communities Inc., operate in like fashion. In addition to receiving an exemption from corporate income tax, the company's nonprofit status also enables it to obtain tax-exempt financing. Jeffrey Jacobson, Erickson's managing director, says the nonprofit/for-profit tandem is a way to lessen the financial risk of developing the facilities. Local community boards call the shots, he says, and independence is not an issue. But experts say that such tax-exempt financing is typically meant for other kinds of nonprofits and certain manufacturing firms and that Erickson's weaving of the nonprofit and for-profit entities, while legal, may violate the spirit of the law. "The laws were designed for the Girl Scouts and the Boy Scouts and true nonprofits, but the line has become pretty blurred," says Jack Donovan, president of the Council of Development Finance Agencies.

Industry executives say that, until they were approached by U.S. News, they were not familiar with concerns about self-dealing. But they insist that even if nursing homes have been cutting cushy deals, safeguards in the reimbursement process would strip out those costs before taxpayers ever foot the bill. Assuming the controls are working, that's only partially true. The U.S. News survey found that financial statements that are supposed to flag instances of egregious self-dealing are littered with errors. The mistakes, which involve hundreds of millions of dollars, are especially large at for-profit homes. Nursing homes are supposed to report the amount of all related-party transactions, then flag those costs that regulators may deem excessive. But in thousands of cases, U.S. News found, the calculations provided by nursing homes were incorrect or the amount of related-party dealing reported was inconsistent. Asked about the errors, industry executives say the Centers for Medicare and Medicaid Services, which collects the information from individual homes, must have corrupted the records. CMS says it doesn't have enough staff time to unravel the issue.

Scully, the CMS administrator, says the new Medicare reimbursement process should help flush out abuses because with reimbursements specified in advance, there will be no incentive to inflate costs through cushy deals. But, he concedes, the already-established payment levels may already have bogus costs built in. Scully says his agency has not studied related-party transactions in any detail. Also, while the federal Medicare system now uses the new system, many states still base their Medicaid payments to nursing homes on the costs those homes report. "It's extremely difficult to figure out what the right amount is," Scully says. "We can't get into deciphering [thousands] of nursing homes."

The story is similar for Kindred Healthcare Inc., another of the big chains, which recently emerged from bankruptcy proceedings, and which also has complained about government payments. With the stock market in a historic bear market, Kindred has blown past Wall Street profit estimates and re-established its financial footing much better than expected. "Our progress has been excellent," CEO Edward L. Kuntz told analysts recently. "We're obviously pleased."

Bankruptcies by Kindred and other large chains–and the prospect of new ones in the future–are Exhibit A for those who say Congress must approve more funding. But in studying industry finances, the GAO recently found that the level of federal payments wasn't the problem. At the root instead were bad business decisions and higher costs–including piling up lots of debt in a campaign of pricey acquisitions. The GAO noted, for example, that Sun Healthcare Group Inc. invested heavily in providing the kind of expensive services that produced big reimbursements under the old system but not in the new. It also cited Vencor Inc., known today as Kindred, which reorganized into two parts, causing rental expenses to quadruple. "There were some serious cowboys in the business in the mid-'90s," Scully says.

Meanwhile, still more financial questions are emerging, with indications that nursing homes may be taking advantage of the new Medicare reimbursement system to get paid for services never delivered. Since the introduction of the new system in 1998, nursing homes have increasingly been able to use estimates of the amount of therapy they expect to provide patients. This estimate is part of initial patient assessments on which reimbursements are based. But GAO investigators, in looking back at estimates of therapy versus how much was actually provided, recently found a quarter of patients never got the amount of therapy they were originally assessed as needing. "It's pretty appalling," says Toby Edelman, a Washington attorney for the Center for Medicare Advocacy, which helps Medicare beneficiaries. "If they're not giving the therapy they're being paid to provide, why should we keep giving them money?" The industry is blasting the report as incomplete, erroneous, and biased.

Because nursing home care has been so troubled for so long, despite soaring government payments, some are calling for new approaches to break the cycle. One idea: Tie federal reimbursements to actual staffing levels. Homes that can prove higher staffing, such as through payroll records, would get higher government reimbursements. "We should change the incentives," says Christopher Cherney, a veteran nursing home administrator in California. Industry leaders, though, say tying their hands with care guarantees will stand in the way of important tasks like building or renovating facilities.

CMS's Scully, reflecting the Bush administration's antipathy toward direct regulation of business, is pushing a different idea. Facts and statistics about individual homes should be widely published, he says. If homes don't spend their money well, quality will suffer, the word will get out, and "people will vote with their feet," he says, although critics call that approach naive, simplistic, and passive.

As Congress considers whether to keep the money flowing, it will be forced to balance complaints about care and pressure from growing federal budget deficits against the industry's emotional specter of shuttered homes and grandmothers forced into the streets. The political calculus is especially difficult this year. Congressional elections loom in November; if anyone votes, it's the elderly, and the industry has been trying to exploit that wedge. Still, "there's got to be more financial accountability," says U.S. Rep. Henry Waxman, a California Democrat influential in nursing home matters. The nursing home payments could also get knotted in another volatile issue of keen senior interest: coverage of prescription drug costs. Through it all, however, two things seem clear: Few like the state of America's nursing homes. And industry truisms about why care is so bad turn out to be not so axiomatic after all.