The practice of nursing home owners understating their profits to federal regulators by shifting income to related businesses may be more widespread than initially thought, and it’s affecting staffing.
In his recent article for Forbes, Howard Gleckman, a senior fellow at The Urban Institute, analyzes a new study on the practice of money being diverted to operator-owned ancillary businesses for the purpose of deriving profit.
“The federal government is taking steps to increase financial disclosure by nursing homes,” Gleckman wrote. “But it needs to do more to illuminate the nationwide scale of related party transactions. Ultimately, however, nursing home payments should be more closely tied to quality and patient and resident outcomes rather than reported costs.”
Gleckman’s views are shaped by a new research paper authored by health economist Ashvin Gandhi of UCLA and financial economist Andrew Olenski of Lehigh University. The paper investigated a method in which operators “tunnel” expenses to related parties and outlined the extent of this widespread practice throughout the healthcare industry.
According to the lead authors of the paper, this method was shown to conceal 63% of margins in one state, indicating that only 37% of actual nursing home profits were reported to regulators.
The authors used data from Illinois as federal nursing home financial reports were deemed unreliable. They found that 77% of firms in the state made related party payments in 2021, with the dollar value of these transactions surpassing $800 million in Illinois alone. However, there was significant variability in how aggressively this practice was employed, with some facilities being more aggressive than others.
Related party transactions involve overstating costs and understating profits reported to the government, primarily through real estate and management services. Gleckman wrote that the implications of these practices are significant, affecting government payments and regulations for nursing homes. The study suggests that if market prices were paid for rent and services instead of inflated prices through related party transactions, nursing homes could potentially increase staffing levels by about 30%.
The American Health Care Association has countered these claims, stating that such transactions are not common practice and are essential for the financial stability of long-term care facilities, which are often underfunded.
Companies featured in this article:
Centers for Medicare & Medicaid Services, The Urban Institute
