The attorney general’s just-filed lawsuit against the Villages of Orleans nursing home has implications that reach far beyond a single facility in western New York.

In addition to charging “egregious” neglect and mistreatment of patients, James’ suit also accuses the Villages’ owners of financial fraud based on outsourcing arrangements that are widely used by for-profit homes.

If her legal argument holds up in court, hundreds of other New York homes would have to consider whether their business structures put them at risk of similar litigation.

At issue are so-called “related-party transactions,” in which nursing homes buy goods and services from side companies with the same or overlapping ownership.

A recent Empire Center study found that 72 percent of New York’s for-profit nursing homes reported doing business with related companies in 2020. 

These side companies are typically far more profitable than the nursing homes themselves. Among operators of for-profit homes, related companies accounted for two-thirds of their collective profits, or $306 million.

Over the past seven years, according to James’ court filing, the owners of the Villages netted $18.6 million from related companies – almost 22 percent of the home’s total revenue – even as residents allegedly suffered and died for lack of adequate staffing and basic supplies.

This amounted to fraud, the suit contends, because much of the diverted money came from Medicaid and Medicare, and the owners were legally obliged to use those funds for patient care. 

According to the attorney general’s office, the Villages of Orleans was purchased from Orleans County in 2014 by a group of 12 investors: Bernard Fuchs, Joel Edelstein, Israel Freund, Gerald Fuchs, Tova Fuchs, David Gast, Sam Halper, Ephram Lahasky, Benjamin Landa, Joshua Farkovits, Teresa Lichtenstein and Debbie Korngut.

Gast, Halper and Lahasky are described in the suit as the most active owners. Perhaps the best known is Landa, who is founder and CEO of Sentosa Care, one of the state’s largest nursing home chains. Collectively the Villages’ 12 owners hold stakes in at least 22 other New York homes.

As commonly happens, the 2014 purchase involved two companies: one that would hold the license and operate the home, and a second, Telegraph Realty, that would own the property and buildings and lease them to the first. The suit says both firms were owned by the same group of people – a fact that was not disclosed to state officials at the time.

The suit charges that the owners imposed a “predatory” lease requiring the nursing home to pay “exorbitant” rent, resulting in hefty profits that the real estate company paid out to the owners. 

The Villages’ financial filings for 2020 show that Telegraph collected $2.7 million in rent and realized a profit of $1.6 million, or 59 percent.

A review of state records shows that lease arrangements of this type are not unusual. More than one-third of New York’s nursing homes are paying rent to landlords with the same or overlapping ownership, and dozens of those landlords are reporting profit margins of 50 percent or higher. 

For example, in 2020 the Dry Harbor nursing home in Queens paid $11.4 million in rent to a related company, of which $7.7 million or 66 percent was reported as profit.

The Villages’ 2020 rent payments equated to $83 per patient-day, which is the highest rate in the Finger Lakes region. On average statewide, nursing homes renting from related companies paid $46 per patient-day, compared to $36 paid by homes with arm’s-length leases.

The Villages separately paid management consulting fees to another related company, the CHMS Group, which the attorney general also described as excessive and fraudulent. In total, the two companies have $18.6 million to the 12 owners since 2015.

The attorney general’s suit also highlights signs of poor quality care at the Villages – including disturbing accounts of individual neglect, a one-star rating from the federal government and multiple deficiency citations from the state Health Department.

By the latter two indicators, the Villages was below average but not exceptional. As of last month, 119 of the state’s nursing homes, or one in five, had a one-star rating from the federal Centers for Medicare & Medicaid Services. 

The Villages was cited for 22 deficiencies over the last three inspection cycles, which is higher than the statewide average of 15 but lower than the counts for more than 100 other New York homes.

These patterns – of widespread low quality ratings combined with widespread profit-taking through related companies – suggest that the legal arguments in the attorney general’s lawsuit would potentially apply to a wide swath of New York’s nursing homes.

Yet suits of this kind require years of work, and it’s not clear that the attorney general can bring enough of them to have a deterrent effect. The attorney general’s Medicaid Fraud Control Unit has been investigating complaints against a Syracuse home since 2017, and is still fighting in court to enforce subpoenas.

In a 2021 report on nursing homes, James urged the Legislature to establish minimum staffing ratios and impose additional transparency requirements as a more efficient approach to enforcement. The Legislature followed that advice, but implementation of those new laws has been held up in court.

The case against the Villages also raises questions about the effectiveness of oversight by the Health Department, which is the state’s primary regulator of nursing homes.

The department collects detailed financial reports from nursing homes, including their dealings with related companies, yet it evidently raised no objection to how much money the Villages’ owners were extracting as profit.

The department also repeatedly cited the the Villages for care deficiencies without achieving a long-term impact on its level of quality – which suggests that its penalties to were too modest.

In January 2021, the Villages was hit with $87,000 in federal and state fines for failing to properly protect residents during the initial coronavirus outbreak in the spring of 2020.

That was the steepest such fine issued in New York, but it amounted to only about three weeks’ worth of the profit the owners realized on rent payments.