The tragic impact of the coronavirus pandemic in New York’s nursing homes has revived debate about how the industry operates, including how it handles the Medicaid and Medicare money that makes up the bulk of its revenue.

A particular concern relates to the proliferation of “related companies” in the nursing home business.

It’s increasingly common, in New York as in other states, for nursing homes operators to structure themselves as networks of interlocking companies. They typically establish a separate company to own each facility in their chain, and sometimes create additional companies to hold the real estate. Other side businesses supply shared services such as physical therapy, payroll processing or liability insurance.

In many cases, these various companies are owned by the same set of people – or by their family members and business partners – and outwardly function as a single organization.

These practices have become a focus of criticism from watchdog groups and some policymakers. They contend that nursing homes operators use “related company” transactions to divert money away from patient care and disguise the true profitability of their businesses.

In recognition of these risks, federal officials have directed nursing homes to keep their payments to related companies in line with market prices.

According to CMS reporting guidelines, payments to related companies “must not exceed the amount a prudent and cost-conscious buyer would pay for comparable services, facilities, or supplies that could be purchased elsewhere.” Critics contend that this guideline is widely disregarded.

Industry officials defend the use of related companies as a strategy for limiting exposure to lawsuits, managing tax bills or saving money on supplies by buying in bulk. They point out that the transactions are subject to extensive disclosure requirements, potential audits by the Office of Medicaid Inspector General and in some cases advance review by the Health Department.

A review of nursing home financial reports gathered by the state sheds light on this policy debate.

The reports for 2020 show that some related companies barely broke even or lost money while others realized double-digit margins. Profit rates were especially high among the real estate firms that held title to the facilities and collected rent from the operating companies.

Overall, the use of related companies was widespread and growing, and they accounted for about two-thirds of operators’ net income.

Key patterns and trends include:

  • Seventy-two percent of the state’s for-profit nursing homes do at least some business with companies that have common or overlapping ownership.
  • The homes’ payments to related companies totaled more than $1 billion, or 16 percent of their operating expenses.
  • These secondary businesses typically made most of their money – and in some cases all of their money – from nursing homes with related ownership rather than arm’s-length business deals.
  • The aggregate profit margin for these secondary companies was 19.5 percent, compared to 2.3 percent for their affiliated nursing homes.
  • Owners who engaged in related-company transactions collectively made more money from side businesses than from the nursing homes themselves.
  • In New York City and Long Island, nursing homes renting their facilities from related companies paid an average of 50 percent and 42 percent more per patient-day, respectively, than those renting from unrelated landlords.
  • On average, for-profit nursing homes doing business with related companies spent less on staffing and received lower federal quality ratings than not-for-profit or government-owned facilities. However, they spent more on staffing and received higher quality ratings than for-profit homes with no related-company business.
  • Related-company spending by New York nursing homes jumped 164 percent between 2011 and 2020, the second-fastest growth rate of any state.

As the primary regulator and source of funding for nursing homes, the state should make sure that its policies encourage operators to provide the best possible care with the money available.

The patterns discussed in this report raise concern that the current system fails to adequately incentivize care quality, leaving it vulnerable to business strategies that prioritize financial maneuvering over the best interests of patients.

The big picture

Related-party transactions are commonplace in New York’s nursing home industry, particularly among for-profit facilities.

In 2020, 72 percent of the state’s for-profit nursing homes disclosed business with one or more related companies or organizations (see Table 1). (Another 49 not-for-profit homes disclosed related-party payments, but all went to not-for-profit parent organizations or health systems. Because of the different nature of these transactions, they were omitted from this report’s analysis.)

 

Payments from for-profit nursing homes to related companies totaled almost $1.1 billion, or 16 percent of their total expenses for the year.

In aggregate, the nursing homes involved in these transactions reported $153 million in profit from $6.7 billion in revenue, a 2.3 percent margin.

The related companies doing business with those same homes reported $306 million in profit from $1.6 billion in revenue – including income from buyers with independent ownership – for a margin of 19.5 percent.

In other words, the owners made twice as much money from related businesses as they did from the nursing homes themselves.

The details of one ownership group

A closer look at the inner workings of one nursing home chain provides one illustration of how these transactions work.

Efraim Steif and Uri Koenig jointly own 17 nursing homes across Upstate – from Spring Valley in Rockland County to Wellsville in Allegany County – with a total of 3,100 beds.

In 2020, the Steif-Koenig facilities reported $292 million in operating revenue. Forty-nine percent of their income came from Medicaid, the state-federal health plan for the low-income and disabled, and 19 percent from Medicare, the federal health plan for the elderly.

Nine of the homes reported ending 2020 in the black, while eight lost money. Their aggregate profit was $1.7 million, or less than 1 percent of revenues.

At the same time, the 17 homes did business with a dozen related companies, including 11 in which Steif, Koenig or both held ownership stakes (see Table 2). The homes spent $57 million on rent, services and goods from the related companies, which was 20 percent of the homes’ combined operating expenses.

 

Some of these ancillary companies roughly broke even while others reported profit margins as high as 63 percent. In aggregate, their profits amounted to just over $10 million. Based on their reported ownership percentages, Steif’s share of those profits would have been $7.2 million and Koenig’s $2.8 million.

These figures seem to be incomplete. One of the Steif-Koenig facilities, the Van Duyn Center for Rehabilitation and Nursing in Syracuse, reported paying $5.4 million in rent to a limited liability company that owns its building – which, based on federal reporting, appears to be owned by Steif. Although Van Duyn declared the payment as a related-party transaction, it did not disclose the finances of the recipient, making it unclear how much the real estate company realized as profit.

In addition, Steif and Koenig both draw salaries from multiple homes in their network. Eleven facilities listed Steif as a paid employee, paying him $1.1 million for a combined 140 hours per week. Koenig was paid just under $1 million for 60 hours a week at 10 facilities (see Table 3).

 

Overall, during the worst year of the pandemic, the two partners netted at least $13.8 million in profits and salaries from their combined nursing home businesses.

Steif and Koenig’s business practices have come under scrutiny from Attorney General Letitia James, who is investigating complaints of neglect and abuse at the Van Duyn Center.

In court papers, James’ office said it is probing whether Van Duyn was understaffed “because the owners … diverted through related-party transactions – for purposes of personal profit – substantial Medicaid funds that were intended for patient care.” 

The company has denied James’ charges.

“Any allegation that Van Duyn’s ownership diverted funds that were intended to be used to hire staff is entirely false,” Van Duyn officials said in a statement to the Syracuse Post-Standard. “It is common industry practice for nursing homes to share support services such as information technology, billing, quality assurance, payroll and financial management that are often contracted from companies that may share ownership.”

The national picture

The federal government also requires nursing homes to disclose related-company transactions as part of annual financial reports to the Centers for Medicare and Medicaid Services (CMS). Although the federal reports are less detailed than the state’s, they give a sense of how New York fits into the national picture. 

They show that for-profit related-party transactions are growing faster in New York’s nursing home industry than in all but a handful of other states.

This is partly because the share of New York nursing homes owned by for-profit companies has been growing, from 55 percent in 2011 to 66 percent in 2020.

However, spending on related-party transactions has risen even faster. Between 2011 and 2020, the dollar amount paid to for-profit related companies in New York shot up by $613 million or 164 percent, which was the highest dollar increase and the second-highest percentage increase in the U.S.

In 2011, payments by for-profit homes to related companies accounted for 3 percent of total nursing home expenses in New York, about half the national rate. As of 2020, that percentage had doubled to 6 percent, catching up to the U.S. average.  

Staffing patterns 

Employment data reported to the state show that for-profit nursing homes as a group spend proportionally less on staffing than either not-for-profit or government-owned facilities.

However, it’s not clear that related-party transactions account for this gap.

As seen in Chart 1, for-profit homes of all types spend less per patient-day on wages and benefits than not-for-profit and government-owned facilities. (The compensation rate for government facilities is especially high, largely because of much heavier spending on employee benefits.) 

 

Within the category of for-profit homes, however, facilities with related-company transactions spent 7 percent more on compensation per patient-day than those without such transactions. 

The former group also scores better than the latter in the federal quality rating system – which is based in part on staffing levels (see Chart 2). 

 

 

Rent patterns 

Rent constituted a majority of all related-company spending. In 2020, 237 for-profit nursing homes spent a total of $605 million on rental payments to real estate companies with shared ownership.  

In many cases, the real estate companies collecting that rent reported realizing large margins. 

The Dry Harbor Nursing Home, for example, rented its 360-bed facility in Queens from a company called Dry Harbor Realty LLC. According to federal records, the home and the realty company are owned by the same person, Jonathan Strasser.  

In 2020, the nursing home reported paying Dry Harbor Realty $11.4 million in rent, which was one-fifth of its operating expenses for the year. 

While the home ended the year with a profit of $1.5 million, the realty company showed a profit of $7.7 million – or 66 percent of what it was paid in rent. 

Exploring the data

Although the state gathers extensive data on self-dealing by nursing homes, the results of that reporting rarely come up in policy discussions.

In December 2019, for example, then-Governor Andrew Cuomo signed legislation requiring, among other things, that nursing home operators notify the Health Department “of any common or familial ownership of any corporation, other entity or individual providing services to the operator or the facility.” The fact that homes were already reporting at least some of that information was not mentioned in the bill language or its supporting memorandum.

In a January 2021 report on COVID-19 in nursing homes, the attorney general’s office faulted some owners for using related-company payments to increase their profits at the expense of patient care. The report called for “additional and enforceable transparency” about such transactions but did not discuss existing reporting requirements or explain why they were inadequate.

One reason the reporting hasn’t gotten more attention is the unwieldy way in which it is published. The Health Department posts its nursing home financial reports in the form of raw data that are unusable without considerable decoding and sifting. The accompanying data “dictionary” lists more than 500,000 possible fields, and the typical nursing home’s report uses several thousand of them.

With the help of industry experts, the Empire Center extracted key information from the state’s 2020 data set, including how much each nursing home paid to related companies, how much profit those companies realized, and how ownership overlapped. The center has posted spreadsheets of that information on its website as a research tool for policymakers, journalists and interested citizens.

Policy implications

The patterns documented in this report raise questions about the state’s oversight of an important sector of the health-care industry.

A rising share of the state’s nursing home operators are outsourcing expenses to other companies in which they also have ownership stakes – a practice that carries a risk of waste and abuse.

Government policy says such payments to related companies must be “prudent and cost-conscious,” but the hefty profit margins realized by some of the ancillary firms raise doubt that this standard is being consistently followed.

Meanwhile, the homes involved in the transactions generally have lower staffing levels and quality ratings than the state average.

This type of self-dealing is increasingly common among nursing homes across the country, but the practice is growing faster in New York than in almost any other state.

And all of this has unfolded under the eyes of state officials, who gather detailed information on related-company transactions, but seemingly make little use of it to shape policy or inform the public.

Given the stakes for the tens of thousands of vulnerable New Yorkers – and for the taxpayers who finance the bulk of their care – the state should review its oversight of related-company transactions in the nursing home industry.

The underlying driver of industry practices is a system of regulations and reimbursement policies largely controlled by the state – a system that appears to lack adequate incentives for delivering high-quality care at a reasonable cost. Short of a total overhaul of that system, smaller-scale reforms could be constructive.

As a first step, the Health Department should publish a summary of its extensive data on nursing home finances in a way that’s accessible and usable for policymakers, watchdogs and average citizens. It should also prepare annual reports that summarize patterns and highlight trends.

Second, the department should commission a public study of nursing home economics – including an analysis of how business practices are shaped by state laws and regulations.

This study should examine in particular whether the state’s method for setting Medicaid reimbursements – which includes a component to cover capital costs – creates an incentive for homes to pay excessive rent.

The study should also consider how to improve the monitoring of related-party transactions to avoid waste and abuse. Should the state dedicate more resources for auditing the financial reports? Or should it establish clearer guidelines for which transactions qualify as “prudent and cost-conscious”?

Finally, lawmakers should be wary of unintended consequences. As part of its response to the pandemic last year, the Legislature required homes to spend at least 70 percent of their revenue on patient care, including 40 percent on “resident-facing staffing,” while capping profit margins at 5 percent per year.

This policy – which took effect in January – has the potential to encourage more outsourcing to related companies, because it incentivizes owners to realize profits through ancillary companies rather than from the nursing homes themselves.

The state has the data it needs to develop smarter, more effective oversight of its nursing home industry. It should be putting that data to use on behalf of the residents who live in those facilities and the taxpayers who shoulder most of the costs.

 

 

About the Author

Bill Hammond

As the Empire Center’s senior fellow for health policy, Bill Hammond tracks fast-moving developments in New York’s massive health care industry, with a focus on how decisions made in Albany and Washington affect the well-being of patients, providers, taxpayers and the state’s economy.

Read more by Bill Hammond

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