Many Medicare providers have business structures that are complex, obscuring ownership and control, according to a new report from the Medicare Payment Advisory Commission (MedPAC). That’s a problem because the federal government’s process of enrolling or contracting with them has not caught up.
In its June report to Congress, the commission examined the role of private equity (PE) in the Medicare program, doing so based on a March 2020 request from the Committee on Ways and Means chairman. The report covered the role of PE investing in the nursing home, hospital and physician practice sectors.
PE firms own about 11% of nursing homes, according to the report. But that number – and the estimates of ownership for the other two sectors – is likely low due to the lack of a single comprehensive source of ownership information, MedPAC noted.
PE investment as a whole has been growing over the decades, with particular growth in the health care sector, the report said.
“One major reason health care has become a focus of PE investment in the U.S. is the projected demand for services related to the aging population,” the authors wrote. “Before the current pandemic, the combination of stable and often growing demand for health care, the use of insurance, and the prominence of fee-for-service (FFS) payment meant predictable cash flow to health care providers.”
In addition, the fragmented nature of various health care spaces and technology changes make the sector a target for funds that are able to consolidate providers into larger bargaining entities, MedPAC said.
In both 2020 and 2021, respondents to Skilled Nursing News’ executive outlook survey predicted that private equity would be the dominant buyer of skilled nursing assets.
The findings on the effects of PE ownership on financial and quality of care indicators are mixed for nursing homes, and “the research literature is somewhat dated,” the authors added.
The commission was asked to identify gaps in Medicare’s data and in the Centers for Medicare & Medicaid Services (CMS) change of ownership (CHOW) approval process, gaps that would make it harder to identify PE investments.
MedPAC found that CMS has not typically used the information in the Provider Enrollment, Chain and Ownership System (PECOS) for program analysis, or to research the prevalence of ownership types. Additionally, the group found, there is no centralized data source by which CMS can verify ownership details, which are typically self-reported.
“As a result, there have been longstanding issues associated with the accuracy and completeness of PECOS’s ownership data,” MedPAC wrote. “Across many types of owners, health care providers and suppliers have changed the ways in which they structure themselves so as to limit their legal liability. Providers that have common ownership are now structured in ways that do not make this ownership obvious.”
In practice, this has seen an increasing number of nursing homes, hospitals and other providers restructuring from one entity into multiple single-purpose entities (SPEs). That allows investors to pool resources while limiting liability, according to MedPAC.
“Based on our interviews with attorneys who advise PE investors, some stakeholders believe that CMS’s enrollment system displays a lack of understanding about how health care providers are structured today,” MedPAC wrote. “For example, in the case of PE funds, identifying all individuals with an ownership stake of at least 5% would include limited partners such as pension funds and wealthy individuals even though they are typically passive investors.”
MedPAC noted that as a result of some high-profile nursing home bankruptcies in the past few years, some state governments, such as Kansas and Ohio, have made changes to nursing home licensing and ownership requirements that require more disclosure.
But the effects of those changes remain unknown, MedPAC said.
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