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46–778 2009

TRENDS IN NURSING HOME OWNERSHIP 

AND QUALITY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

NOVEMBER 15, 2007 

Serial No. 110–66 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

JANICE MAYS, Chief Counsel and Staff Director 

BRETT LOPER, Minority Staff Director 

SUBCOMMITTEE ON HEALTH 

FORTNEY PETE STARK, California, Chairman 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

RAHM EMANUEL, Illinois 

XAVIER BECERRA, California 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

RON KIND, Wisconsin 

DAVE CAMP, Michigan 

SAM JOHNSON, Texas 

JIM RAMSTAD, Minnesota 

PHIL ENGLISH, Pennsylvania 

KENNY HULSHOF, Missouri 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

Advisory of November 8, 2007, announcing the hearing ...................................... 2 

WITNESSES 

Charlene Harrington, Ph.D., Professor of Sociology and Nursing, Department 

of Social and Behavioral Sciences, University of California, San Francisco, 

California .............................................................................................................. 12 

John Schnelle, Ph.D., Professor of Medicine and Director of the Vanderbilt 

Center for Quality Aging, Vanderbilt University, Nashville, Tennessee ........ 22 

Scott A. Johnson, Special Assistant Attorney General, State of Mississippi, 

Jackson, Mississippi ............................................................................................. 27 

Arvid Muller, Assistant Director of Research, Service Employees International 

Union ..................................................................................................................... 40 

SUBMISSIONS FOR THE RECORD 

American HealthCare Association, statement ...................................................... 100 

AARP, statement ..................................................................................................... 104 

Center for Medicare Advocacy, statement ............................................................. 106 

HCR ManorCare, letter ........................................................................................... 110 

National Association of Portable X-Ray Providers, statement ............................. 113 

Wisconsin Institute of Certified Public Accountants, letter ................................. 115 


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TRENDS IN NURSING HOME OWNERSHIP 

AND QUALITY 

THURSDAY, NOVEMBER 15, 2007 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HEALTH, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:13 a.m., in 

Room 1100, Longworth House Office Building, Hon. Fortney Pete 

Stark (Chairman of the Subcommittee), presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HEALTH 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943 

November 08, 2007 

HL–18 

Stark Announces Hearing on Trends in 

Nursing Home Ownership and Quality 

House Ways and Means Health Subcommittee Chairman Pete Stark (D–CA) announced today that the Subcommittee will hold a hearing to examine the effect of 

nursing home ownership trends on nursing home quality and accountability. The 

hearing will take place at 10:00 a.m. on Thursday, November 15, 2007, in 

Room 1100, Longworth House Office Building. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Subcommittee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

Medicare covers care in skilled nursing facilities (SNFs) for beneficiaries who need 

short-term skilled nursing care or rehabilitation services on a daily basis in an inpatient setting. In 2005, Medicare covered 2.5 million SNF admissions, and nearly 70 

million SNF days. 

The Congressional Budget Office projects Medicare SNF spending of $21.1 billion 

for fiscal year 2008, with spending growing at an annual average rate of 6.0 percent 

through 2017. Medicare and Medicaid pay for the majority of nursing home care in 

the United States. 

According to the Medicare Payment Advisory Commission, Medicare margins for 

SNFs reached 12.9 percent in 2005. For-profit SNFs, which constitute 68 percent 

of facilities, had margins of 15.5 percent, as compared to nonprofit homes, with margins of 4.5 percent. For 2007, MedPAC projects Medicare SNF margins of 11 percent. 

Nursing home chains constitute slightly more than half of the industry. In recent 

years, several major nursing home chains have restructured or reorganized as a result of mergers, bankruptcies, and acquisitions. HCR ManorCare, one of the largest 

chains, will soon be purchased by the Carlyle Group in a $6.3 billion acquisition described in both companies’ press releases as one that will convert ManorCare from 

a publicly-traded company to a private, equity-owned company. 

Acquisitions and related increases in debt have often been accompanied by 

changes in ownership and management, cost controls, and corporate restructuring, 

including the sale of assets and real estate and the establishment of limited liability 

companies. As a major purchaser of nursing home services, the implications of these 

changes on quality and accountability of care are of great importance to the Medicare program. The New York Times recently investigated the effect of private investment in certain nursing homes, reporting that the heightened focus on cost controls 

led to staffing cuts and concurrent declines in quality care. The New York Times 

also reported that corporate restructuring created difficulties for State regulators 

and beneficiaries in identifying accountability and liability for quality of care. 

‘‘It’s been far too long since Congress has focused on nursing home quality issues,’’ stated Chairman Stark in announcing the hearing. ‘‘I am concerned 


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about quality issues and lack of accountability, particularly as more and 

more beneficiaries are now living in private equity-owned homes. While we 

must not prejudge anything, these changes provide ample reason for us to 

reinitiate close oversight of this industry to make sure that interests of 

beneficiaries are protected.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on trends in nursing home ownership and quality of, and 

accountability for, patient care, including the effect of the relatively new trend of 

private equity ownership. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, 

‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Thursday, November 29, 2007. Finally, please note that due to the change in House mail policy, 

the U.S. Capitol Police will refuse sealed-package deliveries to all House Office 

Buildings. For questions, or if you encounter technical problems, please call (202) 

225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, and telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

* * * NOTE * * * The Committee seeks to make its facilities accessible to persons 

with disabilities. If you are in need of special accommodations, please call 202–225– 

1721 or 202–226–3411 TTD/TTY in advance of the event (four business days notice 

is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed 

to the Committee as noted above. 

f 


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Mr. STARK. With an apology to my colleagues and our guests for 

the late start, I would like to begin our hearing on the issue of 

nursing home quality. Thank you for joining us in the first of a series of hearings on nursing home quality issues. It has been 20 

years since the passage of the Nursing Home Reform Act, and I 

guess over a decade since we have held any hearings on nursing 

home issues on the Committee on Ways and Means. Despite improvements in areas of quality, there is still much to be done. I 

think our return to this issue is long overdue. 

I don’t want to prejudge any segment of the industry or anyone 

in the industry, but I am concerned about a trend that is underway. In recent years, several nursing home chains have changed 

their corporate structure in ways that may obfuscate the real ownership and management of the individual facilities. I will talk more 

just for a second at the conclusion of my remarks about that by 

itself. It seems that—I will talk more about that in a minute. 

Without this transparency and accountability, it is hard to hold 

chains accountable for the quality of care of an individual unit. I 

worry that this move to more large private equity firm ownership 

will exacerbate that trend. It has been suggested that there is a 

negative effect on quality that may result from these corporate 

structures. I was alarmed to read The New York Times article earlier this year that suggested the decline in quality among private 

equity-owned nursing homes. I guess in a nutshell, they are suggesting that the private equity firms spin off the real estate to leverage the value of the real estate to pay for the acquisition, and 

in so doing either increase the interest payments needed by the individual units to support the increased mortgages or increase, if 

they spin it off into a REIT, for instance, they increase the rent to 

the individual units to sustain their purchase obligations. 

I have no quarrel with that if it doesn’t result in their reducing 

the funds they spend for the needed facilities and needed employment to maintain quality of care. I don’t intend to question what 

they do as a business practice. But I do worry that the end result 

could create an incentive to cut costs, as we like to say. The only 

costs that I know that they can cut are either in nursing care or 

food or tender loving care. I don’t know how you legislate tender 

loving care. This industry operates largely on the government’s 

dime. Sixty percent of the spending on nursing homes annually 

comes from the government, and the remainder is out-of-pocket or 

from private insurance. At any time nearly 80 percent of the residents in nursing homes are supported by public funds. 

The same nursing home industry is enjoying very healthy Medicare—and I have to underline Medicare because there is a distinct 

difference here between Medicare and Medicaid throughout the industry. But with margins of nearly 13 percent at the last reportable period, and we hear indirectly they are close to that even in 

the most recent figures that are available, the for-profit nursing 

homes are doing even better, with Medicare margins north of 15 

percent. For those of you who follow the hospital margins, we are 

used to dealing with acute care hospitals in the neighborhood of 

somewhere between zero and far out would be 5 percent margins. 

The industry is publicly supported, and therefore must be held accountable to the public for the care it provides. The nursing home 


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chains should be striving to improve care and not cut corners to increase profits at the expense of the seniors and people with disabilities. I plan to continue looking into the issue of nursing home 

quality and accountability. We have already received some policy 

recommendations from a coalition of consumer groups. I would like 

to review those. 

I would like to enter into the record a letter from the National 

Consumer Voice for Quality Long-Term Care, a letter addressed to 

Mr. Camp and myself. Without objection I would make that part 

of today’s record. 

[The information follows:] 


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Mr. STARK. Mr. Camp and I would also like to see if we could 

initiate further professional investigations into this issue. I think 

we will do that today. Let me just return for a moment to this 

issue, and that is, as I said, there may be a lot of business reasons 

for large corporations or chains who acquire hundreds of nursing 

home entities to separate each one of those entities into a separate 

corporation or separate them into different corporations in different 

States. That is their business. They may do it for tax reasons, 

which is perfectly, as long as they pay their legal taxes that they 

owe, that is okay, too. But to the extent that either intentionally 

or as a result it limits both financial liability and/or professional 

liability by shielding small units, say a 50-bed hospital out of a 

chain that may have thousands of beds so that either the State enforcement agency or a court in a tort liability—in a liability suit 

can’t get at assets either to pay the fine or to assess penalties for 

behavior that is originated at the owning level, but not—you can’t 

get to them because of corporate shields, to that extent I might 

suggest that they can go ahead and to that, but then each major 

chain would have to provide a bond, for example, for each unit in 

the chain equal to somewhere north of the total equity of that institution. 

So, that for whatever reason, if they want a separate corporate 

entity that doesn’t own any real estate that you could get after, 

doesn’t have any assets against which you can levy a fine or a 

court judgment, they would have to bond themselves up to the 

many millions of dollars of equity that their corporate parent might 

have. So, we could probably accommodate both issues, the business 

reasons that the multiple chain corporations would like to have and 

also what the State regulators would like to have, and what the 

people who would like to use the courts as a way to see that people 

provide good care. 

So, I think that there are a lot of ways that we can work together 

to do this, and I think everybody, the industry, who, by the way, 

were invited. The industry’s advocates and many of the large corporations were invited to be here today, and they chose not to. 

HCA had submitted written testimony, which is in the record. I 

yield now for any comments he would like to make to my Ranking 

Member, Mr. Camp. 

Mr. CAMP. Thank you, Mr. Chairman. Like you, I was troubled 

by the recent articles in The New York Times, and particularly the 

one entitled ‘‘At Many More Homes More Profit and Less Nursing,’’ 

which really does paint a disturbing picture of the care being delivered at two Florida nursing homes. The author makes the argument that private equity homes are purchasing nursing homes, 

slashing their budgets, firing their staff, and leaving residents with 

substandard care all in order to increase profits. 

In addition to this preference for profit over quality care, the article suggests private equity firms reorganize the corporate structure of nursing homes to shield owners and their assets from liability in suits arising from patients receiving inadequate care. While 

this is an important story for us to hear, I am concerned that it 

is not the whole story. In response to the article, the Florida Agency for Health Care Administration recently issued an investigative 

report that examined these issues. This detailed report found that, 


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and I quote, ‘‘there is no evidence to support that the quality of 

nursing home care suffers when a facility is owned by a private equity firm or an investment entity.’’ 

Instead, this report found that other factors, like the percentage 

of Medicaid patients and the age and location of the facility were 

more likely to have an impact on nursing home quality. I am disappointed that story will not be examined at today’s hearing. I am 

especially frustrated that the American Healthcare Association and 

the Alliance For Quality Nursing Home Care, who are supposed to 

represent the nursing home industry, both declined our offers to 

testify today. This failure does a disservice to the entire nursing 

home industry and the Members of this Committee who will now 

not be able to hear their side of this important issue. I would just 

like to ask unanimous consent to admit into the record a statement. This is the eighth hearing on nursing home issues since 

2003, including a hearing in May of ’07, which the president of the 

American Healthcare Association did testify before this Committee. 

So, I would ask unanimous consent that that memo be placed in 

the record. 

[The information follows:] 


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Mr. CAMP. While it is extremely important to have transparency 

of ownership and clear patient protections, I am concerned that it 

is simply attacking private equity ownership, or for that matter 

making it easier for care givers to be unionized, and ignores the 

root problem and will do little, if anything, to improve the quality 

of nursing home care or lower health care costs. Given our narrow 

focus today, I fear this hearing is more about political payback 

than the patients suffering from inadequate care. 

I hope that the Chairman will work with me in attempting to get 

to the bottom of this larger issue. It certainly deserves our attention. As a first step I would ask that he join me in drafting a joint 

letter to the GAO, asking them to explore nursing home quality as 

it relates to ownership and other factors. With that I yield back the 

balance of my time. 

Mr. STARK. Thank you. The gentleman as usual is correct, we 

have had hearings on nursing homes, but they have been entirely 

focused on payment issues, which are important, and not necessarily on the quality or quality regulations or the results of various studies. I would like to introduce our panel. 

Mr. THOMPSON. Mr. Chairman? 

Mr. STARK. Mr. Thompson? 

Mr. THOMPSON. Thank you, Mr. Chairman. I want to thank 

you for holding today’s hearing. I think quality of care in nursing 

homes is something that is important to all of us. But I just want 

to state for the record, and would like to hear from you, Mr. Chairman, if you would, I just think it is very important that this Committee recognize that we share jurisdiction with another Committee on this issue. One of the big—you can’t divorce the two 

issues of quality and the issues of pay in this discussion. The reality is we look at one side of it. 

The Commerce Committee has the Medicaid side of it. I think 

this Committee needs to do everything we possibly can to make 

sure that we encourage our colleagues on the Commerce Committee 

to do a better job with the Medicaid component. That is a big problem in this whole debate. As long as there is going to be a need 

for these care homes, and believe me there is going to be as long 

as we all keep getting older and there are no other—not you, Mr. 

Chairman—and there are not other alternatives, this is a very, 

very important industry in our community and in our families. We 

need to have a more holistic, I think, approach in how we deal with 

this. 

So, I would like to encourage you, Mr. Chairman, and Mr. Camp, 

the Ranking Member, to please use the power and force of this 

Committee and all of its memberships to get our colleagues in the 

Commerce Committee to address this other side of the financial 

equation. 

Mr. STARK. Well, the gentleman’s remarks are well taken. I 

have great fear of taking on the entire Michigan delegation, much 

less the Ranking Member or the Chair of the Energy and Commerce Committee, all in one term of Congress. But I have been encouraging Energy and Commerce to do a better job for over 35 

years, and I will continue to do that. You are correct that we have 

a joint jurisdiction, and our reimbursement part is very small. But 

our concern, I think, that is shared equally with Energy and ComVerDate Nov 24 2008 00:20 Mar 26, 2009 Jkt 046778 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\46778.XXX 46778

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merce right now is the quality issue and what we can do there. If 

it is indeed overall payment, I don’t think, although we are called 

on often to pay for other Committees’ legislative mandates—I will 

address the issue as long as you raise it—that we can have Medicare in the position of bailing out lower Medicaid payments. 

I just would give you an example. I don’t know how many States 

anybody can think of where Medicaid pays a physician more than 

Medicare. There may be a State, but I haven’t heard of it lately. 

Now if we were going to suddenly have to raise Medicare physician 

reimbursement to cover low payments by States we could break the 

Medicare system in short order. So, while that jurisdictional problem will come up, and I think we should all be cognizant of it, I 

think we just have to go ahead based on our role for those Medicare beneficiaries who need these services. I agree. 

Okay. I am supposed to agree with him. I am following pretty 

well. He says I should listen to my staff. Now let me introduce our 

witnesses and see if I can get through that one without a correction. I am going to call on the witnesses in the order on which they 

appear on our list. The first one is Ms. Charlene Harrington, who 

is a professor of sociology and nursing at the Department of Social 

and Behavioral Sciences at the University of California in San 

Francisco. Dr. Harrington will provide an overview of ownership 

and quality trends. Professor John Schnelle, did I pronounce that 

correctly. 

Mr. SCHNELLE. Close. 

Mr. STARK. Close. Okay. Professor of medicine and director of 

the Vanderbilt Center for Quality Aging at Vanderbilt University 

in Nashville, Tennessee. Mr. Scott Johnson, a Special Assistant Attorney General from the State of Mississippi. He will explain how 

companies have moved to more complex corporate structures and 

what it presents to a regulator in trying to build quality care. Mr. 

Arvid Muller, the assistant director of research for the SEIU are, 

more affectionately known as the Service Employees International 

Union. He will report and discuss the effects of corporate structure 

on care in the nursing home industry. We are going to ask each 

of the witnesses to summarize in about 5 minutes, if they can. 

Without objection, their entire prepared testimony will appear in 

the record. We can get more of the issues that are of interest to 

you as we inquire after your testimony. Professor, or Dr. Harrington, as you prefer, would you like to lead off? 

STATEMENT OF CHARLENE HARRINGTON, Ph.D., PROFESSOR 

OF SOCIOLOGY AND NURSING, DEPARTMENT OF SOCIAL 

AND BEHAVIORAL SCIENCES, UNIVERSITY OF CALIFORNIA 

Ms. HARRINGTON. Yes. Thank you very much. I am pleased to 

be here to testify today as an individual researcher who is concerned that the recent purchase of nursing home chains by private 

equity companies will have a negative effect on the quality of care 

for nursing home residents. Today I will present trends in nursing 

home quality and ownership, and discuss three areas. One, adequate nurse staffing levels and electronic staff reporting; two, 

transparency and responsibility in ownership; and three, financial 

accountability for government funding. 


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Over 16,000 nursing homes, with over 1.8 million beds, will take in about $132 billion in revenues this year. Sixty-two percent of 

that is paid by Medicare and Medicaid and government, which covers 78 percent of all the residents. In spite of the high cost of care, 

literally dozens of studies have documented the persistent quality 

problems in many nursing homes. The poor care is related to low 

staffing levels and the 25 percent drop in RN staffing since the 

year 2000. Nursing homes are not required to provide the level of 

staffing paid for by Medicare rates, and few nursing homes in the 

United States meet the staffing levels recommended by experts. 

For-profit companies are 66 percent of nursing homes and for-profit 

chains now operate 52 percent of the beds. For-profit chains have 

lower nurse staffing than for-profit independent facilities and nonprofit chains. In fact, for-profit chains provide only 57 percent of 

the RN hours and 78 percent of the total hours that nonprofit facilities provide in the United States. In 2006, the 50 largest nursing home chains operated 30 percent of the Nation’s facilities. 

By 2007, six of the 10 largest chains were either purchased or 

in the process of being purchased by private equity companies. 

These companies used strategies similar to those used by the publicly-traded chains to enhance profits. Many own a range of related 

companies, and they target Medicare and private payers to increase their revenues, while they control their staffing levels and 

expenditures. Private equity companies may have a negative impact on staffing and quality. 

We examined 105 nursing facilities purchased by one private equity company in 2006. The average RN staffing dropped by 8 percent, and the total nurse staffing dropped by 7 percent after purchase. After the sale, the average RN staffing was only 75 percent, 

and total staffing was 85 percent of the national average. 

At the same time, total deficiencies increased from over 500 to 

over 1,000 deficiencies. Serious deficiencies increased by 80 percent 

after the purchase. These findings raise two concerns. First, the 

private equity firms do not have the expertise and experience to 

manage complex nursing home organizations. Second, these firms 

are likely to cut staffing to increase profits, which can harm residents. Another troubling and dramatic trend is the conversion of 

individual facilities into limited liability companies, which protect 

the parent companies from litigation. Many nursing home chains 

have dropped their liability coverage entirely to discourage litigation. 

Some chains have moved facility assets into separate real estate 

investment trusts, or REITs, and REIT profits are largely hidden 

by the lease arrangements, and the REIT protects the assets from 

litigation. Medicare prospective payment does not limit the nursing 

home profit margins, and the GAO reported that the 10 largest forprofit chains had margins of 25 percent in the year 2000. Our research shows that nursing homes with profit levels of 9 percent or 

more have significantly more total deficiencies and more serious 

deficiencies. 

So, private equity firms seek high profits, and they are under no 

obligation to report the profits because they don’t report to the 

SEC. Private equity companies have multiple investors and holding 

companies and multiple levels of companies. This complexity makes 


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it difficult to know who the owners are, who is responsible for the 

management and the operation of the nursing homes, and who is 

responsible for the property and the assets. Moreover, CMS has no 

ownership tracking, monitoring, and reporting system for nursing 

homes. 

The following five areas need to be addressed by Congress: Establish minimum Federal standards for nursing homes recommended by researchers and experts. 

Two, require nursing homes to report all types of nurse staffing 

by shift from payroll records. These should be electronically submitted on a quarterly basis so that CMS can monitor staffing levels. 

Three, require ownership reporting for all nursing homes, including the private equity investors and all the related companies and 

REITs. CMS needs to develop an accurate and timely database for 

ownership reporting, tracking, and oversight. 

Four, a surety bond could be posted by each nursing facility to 

ensure that the funds are available to pay for civil money penalties, 

temporary managers, litigation, and other costs. 

Finally, establish four cost centers for Medicare nursing home reporting, one for direct care, for indirect care, for capital, and for administrative costs. Nursing homes should be prevented from shifting funds from direct and indirect services to pay for administrative costs, capital, and profits. Audits should be conducted. 

In summary, the growth of nursing homes home chains, and now 

the purchase of chains by private equity companies represents a 

substantial threat to the quality of care for residents. Congress 

needs to take action to protect the residents. Thank you. 

Mr. STARK. Thank you very much, Professor Harrington. 

[The prepared statement of Ms. Harrington follows:] 

Prepared Statement of Charlene Harrington, Ph.D., Professor of Sociology 

and Nursing, Department of Social and Behavioral Sciences, University 

of California, San Francisco, California 

I am pleased to be asked to testify today as an individual researcher who is concerned about the poor quality of care in many nursing homes in the U.S. and about 

the potential negative impact that the recent purchase of nursing homes by private 

equity companies may have on nursing home residents. First, I would like to discuss 

some of the trends in the quality of nursing home care and ownership. Second, there 

are three areas that need to be addressed to ensure high quality nursing home care, 

including: (1) adequate nurse staffing levels in nursing homes and electronic reporting of staffing data; (2) transparency and responsibility in ownership, and (3) increased financial accountability for government funding of nursing homes. 

TRENDS IN NURSING HOME FACILITIES, BEDS, AND OWNERSHIP 

U.S. nursing homes have grown dramatically from a cottage industry of local 

‘mom and pop’ providers prior to 1965 to large corporations, fueled by the 1987 expansion of the Medicare nursing home benefit and its cost-based reimbursement system. In 2006, there were 16,269 nursing home facilities with over 1,760,000 certified 

and 52,000 uncertified beds in the U.S.1 Although the total number of nursing home 

beds has shown little growth over the past decade, there has been a sharp decline 

in the number of hospital-based nursing home beds (from 13 percent of all beds in 

1995 to only 9 percent in 2006).2,3

Occupancy rates for certified nursing home beds were only about 85 percent in 

2006, having dropped from 90 percent in 1995 in spite of the growth in the aged 

population.2,3 This shows that there is excess capacity and increased competition 

among nursing homes to attract and retain residents. The decline in demand for 

nursing home care is related to the growth in residential care and assisted living 

facilities and the expansion of home and community based services that serve as 

alternatives to nursing home care. 


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TRENDS IN QUALITY OF CARE AND STAFFING 

Literally dozens of studies by researchers, the U.S. Government Accountability 

Office, the U.S. Inspector General for Health and Human Services, and others have 

documented persistent quality problems in a sizable subset of the nation’s nursing 

homes since the U.S. Senate Committee on Aging first began holding hearings on 

nursing homes in the early 1970s.4–7 A recent GAO (2007) report found, for example, 

that many nursing homes have serious deficiencies and sanctions, but that states 

tend to under report quality problems because of weaknesses in the survey and enforcement system.8 Often quality problems are not detected and when they are, the 

scope and severity of problems are underrated. Nursing homes with serious quality 

problems continued to cycle in and out of compliance, causing harm and sometimes 

death to residents.8

In spite of recent efforts to increase nurse staffing levels in nursing homes, the 

total average staffing has remained flat, at 3.6 to 3.7 hours per resident day (hprd) 

since 1997, and some homes have dangerously low staffing levels.2,3 The shocking 

situation is that the RN staffing hours per resident day (0.6 hprd) in U.S. nursing 

homes have declined by 25 percent since 2000,2,3 and this in turn has led to a reduction in nursing home quality.9,10 The decline in staffing levels is directly related to 

the implementation of the Medicare prospective payment system (PPS) for nursing 

homes. Although Medicare rates are based on each facility’s resident needs for nursing and therapy services, nursing homes are not required to provide the level of care 

paid for by the Medicare rates. The declining RN levels in nursing homes and chronic quality of care problems show the need for establishing higher minimum Federal 

staffing standards than are currently required. 

Research has shown that higher staffing hours per resident, particularly Registered Nursing (RN) hours, have been positively and significantly associated with 

overall quality of care,11–14 lower worker injury rates, and less litigation actions. An 

important study conducted by Abt Associates for CMS (2001) reported that a minimum of 4.1 hours per resident day were needed to prevent harm to residents with 

long stays (90 days or more) in nursing homes.13 Of the 4.1 hprd total, 0.75 RN 

hours per resident day and 0.55 LVN hours per resident day are needed to protect 

residents from substantial harm and jeopardy.13 At the time of the study, 97 percent 

of U.S. nursing homes did not meet this standard.13 There is compelling evidence 

that staffing levels are a better measure of quality than the clinical quality measures that are commonly used by CMS (e.g. pressure sores).14 Nursing homes often 

do not report quality measures accurately and some facilities manipulate their quality measures to increase their Medicare and Medicaid payments and/or to show 

higher quality scores on the Medicare public reporting system. 

TRENDS IN NURSING HOMES OWNERSHIP 

For-profit companies have owned the majority of the nation’s nursing homes for 

many years and operate 66 percent of facilities compared to non-profit (28 percent) 

and government-owned facilities (6 percent) in 2006. Many studies have shown that 

for-profit nursing homes operate with lower costs and staffing, compared to nonprofit facilities, which provide higher staffing, higher quality care, and have more 

trustworthy governance.15–18

Chains. For-profit corporate chains emerged as a dominant organizational form 

in the nursing home field during the 1990s. Chains were promoted with the idea 

that they would have lower operating costs than independent facilities, because they 

could pursue goals including efficiency and access to capital through the stock market. The proportion of chain-owned facilities increased from 39 percent in the 1990s 

to 51 percent of the nation’s nursing homes in 1995.19 In 1997, most chains were 

for-profit and relatively small (2–10 homes), operating in one or just a few states. 

Nursing home chains were established primarily through acquisitions and mergers 

of individual facilities or other chains (not new construction), and they have exerted 

considerable influence over the industry.19 Chains increased to 56 percent of the 

total in 2001 and then declined to 52.5 percent (i.e., 8,700 facilities) of all nursing 

homes in 2006.2,3

In the late 1990s, as the nursing home industry received widespread criticism for 

intractable quality problems and low staffing, several large chains entered into large 

settlement agreements with the Federal Government for fraud and others had corporate compliance ‘monitors’ imposed by the Department of Justice.20 Two common 

managerial practices among large nursing home chains in the 1990s were to acquire 

facilities with the goal of converting Medicaid beds into higher-revenue generating 

Medicare beds, and to adopt ‘creative’ financing sources including the establishment 

of real estate investment trusts (REITS) that own the land and/or buildings.21

In 2000, five of the nation’s largest chains elected to operate under bankruptcy 

protection, involving 1,800 nursing homes.22–25 Although it is acknowledged that 


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large chains suffered financially from the 1997 introduction of Medicare prospective 

payment system (PPS), the General Accounting Office (U.S. GAO) argued that Medicare PPS rates were ‘adequate,’ and that the large chains’ bankruptcies stemmed 

from ‘poor’ business strategies including rapid expansion and sizeable transactions 

with third parties.25,26

For-profit nursing home chains have had lower staffing than for-profit independent facilities and non-profit chains. In 2006, U.S. for-profit nursing home chains 

had an average of .62 RN hrpd and total hours of 3.77. This compares to 0.60 RN 

hprd in for-profit independent nursing facilities and 1.08 RN hrpd in non-profit facilities in the U.S. For-profit independent nursing facilities had a total of 3.85 hrpd 

and non-profit facilities had a total of 4.8 hrpd. This shows that for-profit chains 

have 57 percent of the RN hours that non-profits provide and 78 percent of the total 

hours that non-profit facilities provide.1

Publicly-Traded Chains. The largest nursing home chains have been publiclytraded companies. My colleagues and I conducted an historical (1995–2005) case 

study of one of the nation’s largest publicly-traded nursing home chains and we 

found that shareholder value was pursued by using three inter-linked strategies at 

the expense of quality. 

First, the company began with a few facilities and grew to become one of the top 

five largest nursing home chains in 1998. This rapid growth was accomplished primarily by debt-financed mergers which placed a burden on the facilities to pay of 

their debts.27 Second, the chain used labor cost constraint through low nurse staffing levels to increase its net income, which caused quality problems.27 California 

data showed that even as the poor quality of care in the company’s facilities was 

sanctioned by Federal corporate compliance agreements and legal actions by the 

state attorney general, the company maintained low nurse staffing levels, which in 

many cases were below the minimum level required by state law. They also had 

high staff turnover rates and poor quality, which was indicated by multiple deficiencies and fines for harm and jeopardy.27 The low staffing level was a particular 

problem because the chain focused on admitting Medicare residents with high acuity, so that their facilities needed to have higher than average staffing levels to provide quality care, but they did not adjust staffing to reflect resident acuity. 

The third managerial practice used by the company was to treat regulatory sanctions as normal costs of business.27 The company had regulatory actions imposed by 

a number of states for poor quality of care as evidenced by regulatory violations (including many that jeopardized the health and safety of residents), and despite this, 

the facilities did not address their quality problems. Additionally, the corporate governance of the company was sanctioned through governmental actions for fraud and 

improper billing and shareholder legal actions were taken for misrepresentation of 

its financial status and lack of disclosure. These findings show the need for extended oversight of the corporate governance structure and performance of large 

nursing home chains.27

PRIVATE EQUITY PURCHASES OF NURSING HOME CHAINS 

In 2006, of the 50 largest nursing home companies, 12 were publicly traded, 31 

were private and 7 were nonprofit. These companies had about 30 percent of the 

nation’s nursing home residents.28 In 2006, the top 10 nursing home chains had 

218,729 beds. Only one chain was a non-profit organization, 3 were privately-held 

companies and 6 were publicly-traded companies.28 By 2007, private equity companies had purchased 6 of the largest chains (including Mariner Health Care, Beverly 

Enterprises, Genesis HealthCare, and ManorCare), which represented about 9 percent of the nation’s nursing home beds.29

Private equity investment firms are those that issue and invest in securities. The 

companies invest the money they receive on a collective basis and investors share 

in the profits and losses in proportion to their investment, with no oversight by the 

Securities and Exchange Commission. There is no Federal requirement to report information to CMS on whether the licensee of a nursing home is owned by an investment company or by a more traditional company. 

Private equity companies use strategies similar to those used by publicly-traded 

nursing home chains to enhance profits. Like other large nursing home chains, 

these companies have diversified with a range of related companies offering hospice 

care, residential care, rehabilitation, Alzheimer’s units, outpatient therapy, home 

health services and other services and facilities.28 These related companies have 

complex relationships with the nursing homes and the inter-relationships allow for 

self-referrals to related companies as a way to enhance revenues and profits. 

These companies target Medicare and private payers to increase their revenues 

(over Medicaid with its lower rates) while they control their expenditures. With 

Medicare, patient acuity is higher so staffing should be higher for these residents, 


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and yet private equity companies, like publicly held nursing home chains, are likely 

to keep their staffing below the national average and to keep other costs low to enhance profits. 

QUALITY AND STAFFING IN NURSING HOMES OWNED BY PRIVATE EQUITY FIRMS 

The purchase of nursing homes by private equity companies raises serious questions about the staffing and quality of these facilities. To examine the staffing and 

quality in one chain purchased by a private equity firm in 2006, we examined 105 

nursing facilities owned by the company in the 18-month period prior to its purchase compared with the period after its purchase (from 2006 through June 2007).1

After its purchase, average RN staffing dropped by 8 percent, LVN staffing dropped 

by 6.5 percent, nursing assistant staffing dropped by 7.5 percent, and total nurse 

staffing dropped by 7 percent. After the purchase, the average RN staffing hours 

in the company’s facilities were only 75 percent of the national average staffing 

hours (0.6 hrpd) and 60 percent of the minimum level recommended by experts for 

(.75 hrpd) for RN staffing. Total staffing hours were only 85 percent of the national 

average (3.7 hprd) and only 77 percent of the level recommended by experts (4.1 

hrpd).1 These facilities were substituting nursing assistants with little training for 

registered nurses in order to lower costs. Extensive research shows this can result 

in harm and jeopardy to residents. 

At the same time, total deficiencies for those 105 facilities increased from over 500 

to over 1,000 deficiencies after the purchase by the private equity firm. Deficiencies 

that caused more than minimal harm, harm, or immediate jeopardy increased by 

80 percent after the purchase by the private equity firm. 

Before this large publicly-traded nursing home company was purchased by a private equity company, it had a long history of quality problems as well as fraud and 

abuse. It was investigated and charged by the U.S. Department of Justice (DOJ) for 

fraud and abuse allegations and currently remains under a DOJ Corporate Integrity 

Agreement (CIA), because of poor quality in its nursing homes. In addition, the company had a history of poor labor relations and work place safety and has been investigated by both the National Labor Relations Board and the Occupational Safety 

and Health Administration (OSHA). The company has also been involved in cases 

of resident neglect, and entered into settlement agreements in two states and has 

been under investigations in five other states. This company has had some of the 

largest litigation awards in the U.S. by many patients for poor quality. In California, the company was sued by the CA attorney general and entered into one the 

largest settlements in CA history. During the past 5 years, the company’s facilities 

have been subject to continual monitoring by California officials because of court 

compliance orders. It has also had a long history of providing inadequate staffing 

levels throughout the country and, in particular, in California. It is far from clear 

that the new private equity company has the necessary expertise and experience to 

provide oversight and to improve the quality delivered to residents by this chain. 

These findings raise several concerns about the purchase of nursing homes by private equity firms. First, private equity firms do not have the expertise and experience to manage complex nursing home organizations caring for frail and seriously 

ill residents, and they are reliant upon the management of the nursing homes for 

the management of quality that was not demonstrated prior to the purchase of the 

chain. Second, these firms appear likely to cut staffing to increase their profits. Cutting staffing, supplies, equipment and other needed services can result in serious 

problems to residents and even deaths, such as in the Florida investor-owned nursing home where 15 resident deaths occurred in three years as a result of poor care.1

LIMITED LIABILITY CORPORATIONS 

Another troubling and dramatic trend is the conversion of corporations, especially 

chains, into limited liability companies (LLCs). Limited liability companies (LLCs) 

and partnerships (LLPs) have structures similar to corporations but owners have 

limited personal liability for the debts and actions of the LLC. These companies are 

designed to limit personal liability for breaches of contracts or torts, and especially 

have been established in some states where litigation has been common. For example, in Florida most nursing homes are LLCs in 2007 (349 LLCs/LLPs compared 

with 292 nursing home corporations and 31 other types of nursing homes).30 Separate LLCs for each nursing facility in chains that are publicly-traded or owned by 

private equity companies protect the parent companies from liability and limit litigation by residents and families who seek redress for poor and negligent quality of 

care. Another troubling new practice by nursing home chains has been to drop their 

liability coverage as a way to prevent or discourage litigation. 


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Real Estate Investment Trusts 

Some private equity-owned chains and publicly-traded chains have established 

separate real estate investment trusts (REITS) by moving facility assets (buildings 

and land) into the trusts. Although some of these have been in place for a number 

of years, this trend appears to be accelerating with the purchase of nursing homes 

by private equity companies. In situations where the assets are owned by a separate 

entity other than the operating company, the rent or lease is fixed by a lease payment with an annual escalator. In other cases, some of the landlords have a participating rent feature that requires the tenant (lessee) to pay a portion of the increased cash flow from the business as an additional part of the rent payment. If 

the cash flow after payment of all facility-based expenses exceeds a certain amount, 

then it is shared on some basis between the group that owns the asset and the 

group that operates the business. These arrangements divert funds from direct care. 

REITS are a concern for several reasons. The REIT may encourage an operator 

to cut back on staffing, food, or other expenses as a means of increasing profitability 

to the REIT. Second, in these arrangements, profits acquired by the REITs are 

largely hidden by the lease arrangements. Third, the REIT maintains the assets and 

thereby protects the assets from litigation actions that might be taken against the 

operator. 

Excess Profits 

Medicare PPS does not limit the profit margins that nursing homes can make. A 

GAO study of Medicare profit margins found that the median margins for freestanding SNFs were 8.4 percent in 1999 and increased to 18.9 percent in 2000. The 

10 largest for-profit chains had margins of 18.2 percent in 1999 and 25.2 percent 

in 2000.25,26 These high profit levels direct funds away from direct resident care. 

For-profit nursing homes in California have significantly lower quality of care 

than non-profit homes based on the number of deficiencies and the number of serious deficiencies that may result in serious harm or jeopardy to residents. Our research found that nursing homes with profit levels or 9 percent or more (in the top 

14 percent of homes in terms of profits) had significantly more total deficiencies and 

more serious deficiencies, but this relationship was not found in non-profit facilities.16 Excess profit-taking has a dangerous negative effect on nursing home quality. 

Profit taking at 19–25 percent levels, reported by chains,25,26 raises serious concerns 

about the dangers to residents and shows the need to monitor and limit profit levels 

for certified nursing homes. 

Private equity firms are under no obligation to publicly report the profits they 

achieve from their investments, and are unlikely to report, which makes monitoring 

excess profit-taking difficult. Moreover, the buying and selling of pre-existing commitments to private equity (secondary market) can also occur that can make the 

nursing homes less financially stable. One concern is that some private investors 

may enter into the nursing home business for a short time period in order to extract 

profits and then sell, leaving the companies with fewer resources to carry out their 

operations, which will later compromise care. 

CONFUSING OWNERSHIP AND LACK OF RESPONSIBILITY 

Shielded by private equity companies, the ownership of nursing homes has now 

become so complex that it is increasingly difficult to identify the owners of nursing 

homes. For example, a review of the corporate filings to states for changes in ownership showed multiple investors, holding companies, and multiple levels of companies 

involved in the ownership of the nursing homes for a single chain. Many of these 

companies have converted the facilities to LLCs and moved the property to separate 

LLC property companies (i.e., REITs). This level of complexity makes it difficult to 

know who the owners are, who is responsible for the management and operation of 

the nursing homes and responsible for the management of the property and assets. 

The lack of transparency in the ownership responsibilities makes regulation and 

oversight by state survey and certification agencies problematic. It is difficult for individuals to determine who is ultimately responsible for taking care of their family 

members in a nursing home. 

Moreover, CMS has no ownership tracking, monitoring, and reporting system for 

nursing homes. The CMS OSCAR report which has the licensee listed is inaccurate 

and incomplete. (In one case, OSCAR showed only 1⁄3 of the facilities that were 

owned by a chain compared to the chain’s own website). Thus, it is extremely difficult for CMS and state survey and certification agencies to monitor the actions of 

chains, to track changes in ownership, and to conduct evaluations of companies applying for certification as new owners. CMS and state evaluations of the appropriateness of new ownership applications are even more difficult with private equity 

companies which have no prior track record in providing nursing home care. 


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AREAS FOR OVERSIGHT 

Three major areas need to be addressed by Congress: (1) adequate nurse staffing 

levels in nursing homes and electronic reporting of staffing data; (2) transparency 

and responsibility in ownership, and (3) increased financial accountability for government funding of nursing homes. 

STAFFING 

Staffing Standards. Unfortunately, the Centers for Medicare and Medicaid 

Services has not established minimum federal staffing standards that would ensure 

that nursing homes meet the 4.1 hours per resident day (hprd) recommended by researchers and experts,13,14,31 mostly because of the potential costs. Considering that 

most nursing homes are for-profit and have significantly lower staffing and poorer 

quality of care than non-profits, these facilities are unlikely to voluntarily meet a 

reasonable level of staffing. If staffing levels are to improve, minimum federal staffing standards are needed. 

Accurate Quarterly Electronic Staffing Reports. The current CMS reporting system, which only requires nursing homes to report on 2 weeks of nurse staffing at the time of the annual survey, is inadequate and sometimes inaccurate.13

These reports are not audited and are collected during annual state surveys when 

nursing homes often temporarily increase their staffing. Nursing homes should be 

required to make complete reports of staffing hours for all types of staff and for total 

staff for each shift on a daily basis from payroll records to ensure accuracy. These 

should be required to be submitted to CMS by nursing homes on a quarterly basis, 

using a standard electronic reporting format. Nursing homes should certify the accuracy of their reports under penalty of serious fines. Staff turnover and retention 

rates are also important indicators of quality which should also be extracted and 

reported from payroll data of nursing homes. CMS has developed the capacity to collect and report this data so Congress should mandate the reporting. 

Staffing data can be used for two purposes. First, it is needed to monitor staffing 

levels and to investigate facilities that have lower staffing or that show substantial 

declines in staffing. This allows for better oversight of facilities that may cut staffing and then develop quality problems. Second, it will improve the accuracy of the 

staffing that is publicly reported on www.Medicare/NHcompare.gov. Providing consumers with information about quality of care is an important way to give consumers more power in making informed decisions about nursing home care. 

Detailed Deficiency Reports. Low staffing and high turnover results in poor 

quality. CMS should be reporting the detailed survey agency deficiency reports 

(Form 2567) on its Medicare nursing home compare website. These reports provide 

clearer information on the types of violations and the quality of care for residents 

than the summary information currently reported by CMS on Medicare nursing 

home compare website. 

OWNERSHIP TRANSPARENCY AND RESPONSIBILITY 

The complex new ownership relationships, particularly those established by private equity firms, need to be taken into account to increase the transparency and 

responsibility of facilities for the quality of care and the financial liabilities of the 

facilities. All owners including all private equity companies and investors should be 

annually reported to CMS for certification by Medicare and Medicaid. All related 

parties with direct and indirect financial interests in a nursing facility should be 

identified to CMS and disclosed to the public on the Medicare nursing home compare website. The parent companies, the operators of nursing homes, and all the 

multiple companies including the real estate investment trusts that have an interest 

in the nursing home should be responsible for nursing home care. One approach is 

to require these parties to sign the Medicare/Medicaid provider agreements, which 

should be renewed annually. CMS should refuse to sign the annual provider agreements where nursing facilities and their parent companies have been involved in 

causing harm or jeopardy to residents or found to be involved in fraud and abuse. 

CMS needs to establish an accurate and timely ownership tracking, monitoring, 

and reporting system for nursing homes, which should include all parties involved 

in the operation of each nursing home and their owners including private equity 

companies and REITs. CMS and state survey and certification agencies need to 

monitor the actions of nursing homes, to track changes in ownership, and to conduct 

evaluations of companies applying for certification as new owners. 

Another option is to require a surety bond to be posted by each nursing facility 

operator. The bond would ensure that facilities pay for civil monetary penalties, 

fines, temporary managers or receivers, attorney fees, litigation judgments and 

damage awards. This would also address the increasing problem of nursing facilities 

that do not carry liability insurance. 


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FINANCIAL ACCOUNTABILITY 

The National Health Statistics Group at the Centers for Medicare and Medicaid 

Services (CMS) estimated that the U.S. will spend $132 billion on nursing home 

care in 2007 (excluding counting care in hospital based facilities).32 Of the total 

nursing home expenditures in 2005, 16 percent was paid by Medicare and 46 percent was paid by Medicaid and other public programs.33 Moreover, government is 

paying for 78 percent of all residents at any given point in time.2 Because government is paying an increasingly large proportion of the total nursing home costs, it 

is important that nursing homes be more fully accountable for the public funds they 

receive. 

Medicare developed a complex and elaborate system for establishing its PPS nursing home payment rates, but requires little financial accountability. As noted above, 

under Medicare PPS, nursing homes do not need to ensure that the amount of staff 

and therapy time is equal to the amount that is allocated under the Medicare rates. 

Moreover, nursing homes are not required to spend a specific proportion of their 

funds on direct and indirect care to assure quality. This is also the case in many 

states under Medicaid payment rules. Since the adoption of Medicare PPS, RN staffing levels have declined by 25 percent and quality of nursing home care has declined.2,3 Because Medicare does not limit nursing home profit margins, facilities 

have an incentive to cut staffing and expenses to increase profits. 

Cost Centers. One approach to make nursing homes more financially accountable under Medicare PPS systems is to establish cost centers. Four general cost centers could be established for reporting purposes: (1) direct care services (e.g. nursing, activities, therapy services), (2) indirect care (including housekeeping, dietary, 

and other services), (3) capital costs (e.g. building and land costs), and (4) administrative costs. Medicare should determine prospectively the amount of funds allocated 

for each of these costs centers. Nursing homes should be required to report by cost 

center and they should be prevented from shifting Medicare funds from direct and 

indirect services to pay for administrative costs, capital costs, or profits. Reports on 

profits from all parts of the nursing facility’s operation should be disclosed, including profits on the real estate and buildings (REITs) and other related parties. 

Audits. To ensure that the reimbursement rates are used for the intended purposes, retrospective audits should be conducted to collect Medicare and Medicaid 

funds not expended on direct and indirect care. Penalties should be issued for diverting funds from direct and indirect services. 

Summary 

In summary, the growth in nursing home chains and the purchase of chains by 

private equity companies represents a substantial threat to quality of care in nursing homes. Current nurse staffing levels are not adequate to ensure high quality 

and private equity companies may cut staffing further to increase profits. In nursing 

homes, the decline in registered nurses and the failure to improve staffing shows 

the need for greater regulatory standards and incentive systems. As ownership has 

become more complex with private equity companies that do not have the same reporting requirements as publicly-held companies, steps must be take to assure ownership transparency and responsibility. Finally, greater financial accountability is 

needed to ensure that Medicare and Medicaid funds are spent on direct and indirect 

care and not diverted to paying for real estate, administration, and profits. We must 

ensure that nursing homes deliver high quality of care for our family members, 

friends and ourselves when we need such care. 

References 

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and Reporting data from the Centers for Medicare and Medicaid Services. San Francisco, CA: University of California, November. 

2. Harrington, C., Carrillo, H., and Woleslagle, B. 2007. Nursing Facilities, Staffing, Residents, and Facility Deficiencies, 2000–06. San Francisco, CA: University of 

California. www.nccnhr.org. 

3. Harrington, C., Carrillo, H., Wellin, V. and Shemirani, B.B. 2002. Nursing Facilities, Staffing, Residents, and Facility Deficiencies, 1995 Through 2001. San Francisco, CA: University of California. www.nccnhr.org. 

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Industry Market Update. Nursing Facilities. Washington, DC: CMS, May 20. 

25. U.S. General Accounting Office. 2000. Nursing Homes: Aggregate Medicare 

Payments Are Adequate Despite Bankruptcies. Testimony Before the Special Committee on Aging, U.S. Senate. GAO/T–HEHS–00–192. Washington, DC: U.S. General Accounting Office, September 5. 

26. U.S. General Accounting Office. 2002. Skilled Nursing Facilities: Medicare 

Payments Exceed Costs for Most but Not All Facilities. Report to Congressional Requestors. GAO/HEHS–03–183. Washington, DC: General Accounting Office, December. 

27. Kitchener, M., O’Meara, J., Brody, A., Lee, H.Y., Harrington, C. 2007. Shareholder Value and the Performance of a Large Nursing Home Chain. Health Services 

Research. In press. 

28. LaPorte, M. 2007. ManorCare Soars Above the Pack by 18,000 Beds. Top 50 

Nursing Facility Chains 2006. Provider. 33–41. 


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29. Duhigg, C. 2007. At Many Homes, More Profit and Less Nursing. New York 

Times. September 23, A1–A20, A21. 

30. Florida Agency for Health Care Administration (FAHCA) 2007. Long Term 

Care Review: Florida Nursing Homes Regulation, Quality, Ownership, and Reimbursement. Tallahassee, FL: AHCA. https://exchange.ucsf.edu/exchange/Charlene. 

Harrington/Inbox/FW:%20Today%27s%20New%20York%20Times%20Article.EML/1_ 

multipart_xF8FF_4_Florida%20Agency%20White%20Paper%2010-30-07.pdf/ 

C58EA28C-18C0-4a97-9AF2-036E93DDAFB3/Florida%20Agency%20White%20 

Paper%2010-30-07.pdf?attach=1 

31. Harrington, C., Swan, J.H., and Carrillo, H. 2007. Nurse Staffing Levels and 

Medicaid Reimbursement Rates in Nursing Facilities. Health Services Research. 43 

(3):1105–1129. 

32. Poisal, J.A., Truffer, C., Smith, S. et al and the National Health Expenditure 

Accounts Team. (2007). Health spending projections through 2016: modest changes 

obscure Part D’s impact. Health Affairs. 26 (2):w242–w253. 

33. Catlin, A., Cowan, C., Heffler, S., Washington, B. and the National Health Expenditure Accounts Team. (2007). National health spending in 2005: the slowdown 

continues. Health Affairs. 26 (1):142–153. 

f 

Mr. STARK. Mr. Schnelle, how is that? 

Mr. SCHNELLE. Schnelle, actually. 

Mr. STARK. Schnelle. Okay. I am getting pretty close. Professor 

Schnelle, would you proceed? 

STATEMENT OF JOHN SCHNELLE, PROFESSOR OF MEDICINE 

AND DIRECTOR, VANDERBILT CENTER FOR QUALITY AGING, 

VANDERBILT UNIVERSITY 

Mr. SCHNELLE. Thank you. I am a behavioral psychologist. 

Mr. STARK. But you got to punch the button on your microphone. 

Mr. SCHNELLE. Excuse me. I am a behavior psychologist at 

Vanderbilt University with a special interest in nursing home care 

quality and analyzing the factors that control provider and consumer decisions about care quality. I have worked directly with 

nursing home residents and staff for over 30 years to document 

staff labor costs and outcomes when care is provided consistent 

with regulatory guidelines. This experience, as well as my daily 

interaction with licensed nurses, and aides have led me to the conclusion that there are not enough staff to provide all the care mandated in regulatory guidelines, and that furthermore incentives 

exist that prevent realistic solutions to this problem at both the 

provider and regulatory level. 

The major points to be made in my presentation is that the minimum staffing requirements to implement the basic care described 

in regulatory guidelines is five to six residents per nurse aide during waking hours even if one assumes very high staff productivity. 

The acuity level of at least long-term stay residents, how sick 

they are, do not dramatically change these minimum staffing levels. They do change maximum, but not the minimum. Most nursing 

homes are staffed significantly below this minimum level to provide 

the basic care. But here is the important point about incentives. 

The measures most sensitive to staffing levels in nursing homes 

are quality of life measures that can only be collected by directly 

talking to residents and staff or observing care delivery. 

Examples of such measures include asking incontinent residents 

deemed capable of interview how many times someone helps them 


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to the toilet. The further removed we are as researchers, surveyors 

or owners have from the daily care being provided within the facility, the more likely we are to underestimate the effects of staffing 

on resident life quality and staff productivity. 

In the case of owners, there may be incentives for facility managers to reduce one of their higher operating costs, which is staffing, under the false premise that this reduction will not impact 

care quality. This latter point is perhaps the most relevant to the 

purpose of today’s hearing. My original report on the relationship 

between staffing and quality was published in 2001 by CMS. We 

used computerized simulation methods that are used in business 

and industry and the best data available about how much time it 

takes to actually take somebody to the bathroom and do other basic 

care. 

We used very conservative estimates of productivity—or very liberal estimates of productivity. We assumed very high productivity 

among the nursing home staff. Despite our evident to be very conservative, we came up with the number that you need five to six 

residents per aide to provide all the care that is in regulatory 

guidelines. The typical nursing home is staffed at eight to ten residents per one aide. We projected, there would be very many people 

who would do without basic care, getting out of bed in the morning, 

given adequate feeding assistance at those ratios. The worse the 

ratios, the much worse it became because of efficiency reasons. This 

study has been validated several times by direct observations. We 

have gone into nursing homes in California specifically who are 

staffed high and staffed low. Most of the ones staffed high are either 100 percent private pay or for-profit—or not for profit, and we 

found that in the higher staffed homes that they do significantly 

better on 16 out of 18 process measures, like how often patients are 

talked to, the tender loving care that you were talking about. 

However, what they don’t do better on necessarily are Minimum 

Data Set quality indicators that are widely used to measure quality. These indicators are heavily influenced by resident frailty and 

sickness burden. Nursing home residents, in our experience, get 

acutely sick about twice a year, can dramatically affect their functioning. Basically, even a well-managed home might not do well on 

those indicators. 

In a recent study by Mukamel and her associates, even the providers who generate the information for the quality indicators 

rated resident acuity and coding errors as more influential in affecting these quality indicators than the actual care provided by 

staff. There are controversial arguments about the validity of measures used to monitor nursing home quality, but it is clear to me 

that important differences in residents’ quality of life due to staffing differences would be missed if one relies solely on quality indicators generated by providers or even survey deficiencies. There 

are numerous important implications from a behavioral point of 

view relevant to how provider behavior is affected by the fact that 

staffing is much more related to the care that the residents receive, 

such as dining and toileting assistance, than MDS quality indicators or deficiency measures. 

However, I think the most important incentive that exists is that 

people who are not in direct contact with the daily life of residents 


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may make business decisions to reduce staffing based on false data. 

Arguments could always be made to justify a lower staffing 

through improvements in work efficiency and good leadership or 

training, and on site administrators can be easily misled by incentives to make staffing reductions based on these false arguments. 

These cost control incentives are not inappropriate. Any good business would do them. But any good business has to do them based 

on accurate data about what their consequences are on care. I don’t 

think there is accurate data about what consequences they have on 

care. We reported in several reports that data recorded about nursing home daily care activities, how often people are toileted, how 

much feeding assistance they got are not accurate. They are not accurate because these records are used for compliance purposes 

rather than improvement purposes, and if you record things for 

compliance purposes, the goal is to make everything look good. It 

is not to identify problems for improvement. In defense of nursing 

homes, I think they are put into an unrealistic state where what 

their expectations for care exceeds what their resources are for 

care, and they are more or less forced into the situation where compliance has to be the goal of these records. But the consequence of 

this is simple to me. 

If people who are removed from the daily reality of nursing home 

care are making the staffing decisions based on these data, they 

might make decisions to reduce staffing that are wrong from a 

business and quality perspective, but will not be detected by the 

measures that currently exist. The possibility of such poor staffing 

decisions may increase due to the nature of the equity company or 

organizational structures that are the focus of today’s hearing because there may be more people who do not have personal experience with the realities of nursing home care making these financial 

decisions. 

I say ‘‘may’’ because to be quite frank, I have read all this, and 

I have a very hard time understanding the structure of the equity 

companies. So, at least there seems to me the potential for that to 

exist. What is the solution? There are two ways to immediately address the issue, I think, make transparent and accurate nursing 

home reports of staffing level and costs both at the facility and the 

chain level, and allow consumers easy access to this data. I think 

improving the accuracy and objectivity of the survey process and 

documenting care quality problems at the resident level, how often 

they are toileted, how often they are talked to, how much time they 

spend in bed would get at quality measures that currently are 

being missed and ignored. Thank you. 

Mr. STARK. Thank you very much. 

[The prepared statement of Mr. Schnelle follows:] 

Prepared Statement of John Schnelle, Ph.D., Professor of Medicine and Director of the Vanderbilt Center for Quality Aging, Vanderbilt University, 

Nashville, Tennessee 

I am Dr. John Schnelle, Director of the Center for Quality Aging and Professor 

of Medicine at Vanderbilt University. I am a behavioral psychologist with special 

interests in nursing home care quality and analyzing the factors that control provider and consumer decisions about care quality. I particularly appreciate the opportunity to talk about staffing and quality in nursing homes. 

I have worked directly with nursing home residents and staff for over 30 years 

to document the staff labor costs and resident outcomes when care is provided conVerDate Nov 24 2008 00:20 Mar 26, 2009 Jkt 046778 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 E:\HR\OC\46778.XXX 46778

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sistent with regulatory guidelines and best practice recommendations. This experience, as well as my daily interaction with licensed nurses, nurse aides and residents, has led me to the conclusion that there are not enough staff to provide all 

of the care mandated in regulatory guidelines and that incentives exist that prevent 

realistic solutions to this problem at both the provider and regulatory level. 

Both nursing home residents and direct care staff would reiterate this same message about the inadequacy of existing staffing levels if given the opportunity to do 

so in a non-threatening context. It is my goal today to give voice to their concerns 

about staffing limitations and how low staffing affects their ability to provide quality care to residents and residents’ associated quality of life. The major points to 

be made in this presentation are the following: 

1. The minimum staffing requirements to implement the basic care described in 

regulatory guidelines is 5–6 residents per nurse aide during waking hours even 

if one assumes very high staff productivity. 

2. The acuity level of long-stay residents do not dramatically change these minimum staffing requirements; thus, most nursing homes are staffed significantly 

below the minimum levels to provide basic care for all residents in need. 

3. The measures most sensitive to staffing levels are quality of life measures that 

can only be collected by talking directly to residents and staff or observing care 

delivery. Examples of such measures include asking incontinent residents 

deemed capable of interview how many times each day someone helps them to 

use the toilet or observing feeding assistance care provided during meals for 

residents at risk for unintentional weight loss. The further removed we are as 

researchers, surveyors or owners from the daily care being provided within a 

facility the more likely we are to under estimate the effects of staffing on resident life quality and staff productivity. In the case of owners, there may be incentives for facility managers to reduce one of their highest operating costs, 

which is staffing, under the false premise that this reduction will not impact 

care quality. This latter point is perhaps the most relevant to the purpose of 

today’s hearing. 

My original report on the relationship between staffing and quality was published 

in a 2002 report for CMS.1 In this report, we identified from research studies the 

time required to implement incontinence care, dining assistance, exercise and repositioning for pressure ulcer prevention to all residents who were rated by nursing 

home staff as needing such assistance. We used computerized simulation technology 

to model an unrealistically high productivity work environment and predicted the 

number of staff needed to consistently provide care in all of these daily care areas 

at the frequency and intensity necessary to produce positive clinical outcomes (e.g., 

lower the prevalence of incontinence). We were conservative in our estimates of the 

time to provide care (e.g. 18 minutes per meal for people who needed dining assistance) and optimistic in our projections of how productive staff could be in a work 

environment that is characterized by high staff turnover and poor organization in 

daily work processes. Despite our effort to project staffing needs under the best of 

circumstances, we determined that from 2.9 direct care (nurse aide) hours per resident per day (in a home with a low number of dependent residents) to 3.1 direct 

care (nurse aide) hours per resident per day (in a home with a high number of dependent residents) was minimally necessary to provide good care. These numbers 

translate into a direct care (nurse aide) staffing ratio of about 5–6 residents to one 

nurse aide. In homes staffed at the average level for the nation’s facilities we were 

also able to project how many residents would not receive care. These findings 

showed that in homes staffed at a level of 8 residents to one aide (a typical ratio) 

20% of residents dependent on staff for eating would not receive assistance at all 

meals. The number of residents who would not receive assistance in many basic 

daily care areas increased dramatically as staffing decreased further. 

These staffing and care quality projections have been validated in recent studies 

wherein independent research staff assessed staffing levels and the quality of daily 

care delivery.2 These studies compared care quality measures between facilities 

staffed above the minimum levels (2.9–3.1 hours per resident/day) and facilities 

staffed below these levels (2.1–2.3 hours per resident/day). Results showed that the 

higher staffed facilities provided significantly better care based on 13 of 16 care 

process measures. For example, residents in the higher staffed homes received significantly more dining assistance, exercise, and spent more time out of bed during 

the day.3 In addition, residents in higher staffed homes also reported that they received more toileting and mobility assistance and had more choices about meals. 

While these daily care process measures showed significant differences between 

low and high staffed homes, it is important to note that research also shows there 

are not large differences in Minimum Data Set defined quality indicators (e.g., prevVerDate Nov 24 2008 00:20 Mar 26, 2009 Jkt 046778 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HR\OC\46778.XXX 46778

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alence of incontinence) between low and high staffed homes. These MDS indicators 

reflect clinical outcomes for the resident population within a facility and currently 

are being used to monitor nursing home care quality. Unfortunately, these indicators are heavily influenced by resident frailty and sickness burden and thus relatively insensitive to the quality of care provided by even the best homes. In a recent study by Mukamel and her associates, even the providers who generate the information for the quality indicators rated resident acuity and coding errors as more 

influential in affecting these quality indicators than the actual care being provided 

by staff.4

There are controversial arguments to be made about the validity of measures used 

to monitor nursing home care quality, but it is clear that important differences in 

residents’ quality of life due to staffing level differences would be missed if one relied solely on quality indicators generated by providers or even survey deficiencies. 

Survey deficiencies have been documented in several reports by the GAO and CMS 

to be inaccurate and inconsistent and one must ask the question why the quality 

of care problems frequently documented by research teams is frequently not detected in the survey process.5 A recent study by CMS evaluating the survey process 

has been conducted to help answer this question and points to directions for improving survey accuracy and consistency. A more objective and realistic survey process 

would be an important step to both improving the ability of providers to provide better care and the sensitivity of the survey in documenting quality differences between homes. This study is under review and will be released soon. 

There are numerous important implications relevant to how provider behavior is 

affected by the fact that staffing is much more related to the care that residents 

receive, such as dining and toileting assistance, than to the MDS-defined indicators 

and deficiency measures widely used to judge nursing home care quality. However, 

one of the most important implications is that people who are not in direct and frequent contact with residents and staff and who are insulated from their concerns 

about quality may believe that staffing can be reduced without affecting quality. In 

fact, staffing reductions from already low levels that exist in most homes may not 

be reflected by poorer quality indicator scores because many indicators are uniformly poor due to low staffing and it would be difficult to make them worse by reducing staffing even further. The most obvious example of this phenomenon is for 

incontinence quality indicators. These indicators show that 80 plus percent of residents dependent on staff for toileting assistance are incontinent despite the fact that 

many could be continent if provided consistent toileting assistance. Residents have 

been observed to receive an average of only 1 to 2 assists to the toilet per day which 

is not adequate to maintain continence.6 Low staffing levels according to both direct 

care staff interviews and independent observations of care provision explain the low 

toileting assistance rate and the fact that the number of residents incontinent could 

not get much worse if staffing were reduced even further. However, further staffing 

reductions would result in even fewer residents receiving care considered basic for 

dignity and quality of life. 

It would be a logical yet misguided business decision to reduce costs by reducing 

staffing because quality measures heavily influenced by factors other than the quality of care actually received by residents and which are uniformly poor do not dramatically change. Arguments can always be made to justify lower staffing through 

‘‘improvements in work efficiency’’ and ‘‘good leadership or training’’; and, on-site administrators can be easily misled by incentives to make staffing reductions based 

on these false arguments. Such cost control incentives are already prevalent in the 

nursing home industry and they are not necessarily inappropriate. However, we do 

not know to what extent these incentives are effective or appropriate because we 

do not have accurate measures of the impact of staffing decisions on the quality of 

care residents actually receive in daily care practice. 

Unfortunately, a strong argument can be made that these accurate measures are 

not available.7,8 One consequence of this is that there is a risk that decision makers 

who are under financial pressure and who are removed from the daily reality of 

nursing home care will design incentives to induce operators to reduce staffing costs 

which are wrong from both a business and quality perspective. The possibility of 

such poor staffing decisions may increase due to the nature of the equity company 

organizational structures that are the focus of today’s hearing because there may 

be more people who do not have personal experience with the realities of nursing 

home care making these financial decisions. This can only lead to inappropriate and 

misguided decisions to reduce costs by reducing staffing and lead to even poorer 

care quality for many elderly residing in our nation’s nursing homes. There are two 

ways to immediately address this issue: 


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1. Make transparent and accurate nursing home reports of staffing levels and 

costs at both the facility and chain level and allow consumers easy access to 

these data. The preliminary work to allow for such a staff reporting system has 

been largely done and awaits implementation. 

2. Improve the accuracy and objectivity of the survey process in documenting care 

quality problems, particularly problems created by low staffing levels. The protocols used by survey staff to improve their documentation of the care that 

residents actually receive also could be used by providers to judge the effects 

of staffing decisions if these protocols meet basic specificity criteria that would 

allow for their replication. Some of these protocols have been developed and 

currently are being evaluated for use by surveyors. 

References: 

1. Schnelle JF, Simmons SF, Cretin S. Minimum Nurse Aid Staffing Required to 

Implement Best Practice Care in Nursing Homes. Chapter in Report to Congress: 

Phase II Final. Appropriateness of Minimum Nurse Staffing Ratios in Nursing 

Homes. Prepared by Abt Associates, Inc. Cambridge, MA. December 2001. Volume 

I, Chapter 3. p3.1–3.67. 

3. Bates-Jensen B, Schnelle J, Alessi CA, Al-Samarrai NR, Levy-Storms L. The 

Effects of Staffing on In-Bed Times Among Nursing Home Residents. J Am Geriatr 

Soc 2004; 52:931–938. 

4. Mukamel D, Spector W, Zinn J, Huang L, Weimer D, Dozier A. Nursing Homes’ 

Response to the Nursing Home Compare Report Card. Journal of Gerontology 2007; 

62B (4)S218–S225. 

5. Louwe H, Parry C, Kramer A, Feuerberg M. Improving Nursing Home Enforcement: Findings From Enforcement Case Studies. UCDHSC, Division of Health Care 

Policy and Research. CMS Report March 22, 2007. 

6. Schnelle JF, Cadogan MP, Yoshii J, Al-Samarrai NR, Osterweil D, Bates-Jensen BM, Simmons SF. The Minimum Data Set Urinary Incontinence Quality Indicators: Do They Reflect Differences in Care Processes Related to Incontinence? Medical Care 2003; 41(8):909–922. 

7. Schnelle JF, Osterweil D, Simmons SF. Improving the Quality of Nursing 

Home Care and Medical Record Accuracy with Direct Observational Technologies. 

The Gerontologist 2005; 45(5):576–582. 

8. Schnelle JF, Continuous Quality Improvements in Nursing Homes: Public Relations or Reality? JAMDA. 2007; 8(1):S2–S5. 

f 

Mr. STARK. General Johnson? 

Mr. JOHNSON. That was a perfect pronunciation of my name, 

by the way. 

Mr. STARK. All right. Good. 

STATEMENT OF SCOTT JOHNSON, SPECIAL ASSISTANT 

ATTORNEY GENERAL, STATE OF MISSISSIPPI 

Mr. JOHNSON. First, let me extend greetings from my boss, the 

Honorable Jim Hood, Attorney General for the State of Mississippi. 

I appreciate being here today. I have worked as a Special Assistant 

Attorney General, especially when I was Director of the Medicaid 

Fraud Control Unit in our office, closely with our Mississippi State 

Department of Health. The State Department of Health is the entity in Mississippi which inspects nursing homes and which levies 

fines for misconduct found, substandard conduct, and also levies 

penalties for deficiencies until such time as those deficiencies are 

corrected. 

I am here today to testify about the potential dangers associated 

with undercapitalization of nursing homes, specifically with respect 

to the growing trend of ownership by private equity firms and the 

subsequent divestiture of assets. To make that clear to the Subcommittee what that means is that we have a situation or trend 

going on where the nursing home licensee, the entity who is reVerDate Nov 24 2008 00:20 Mar 26, 2009 Jkt 046778 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\46778.XXX 46778

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sponsible for possibly or would be responsible for a fine or a penalty levied by the State regulator, is divesting itself of assets. In 

other words, it exists in name only because it is selling off its real 

estate holdings, possibly its equipment, and any other tangible assets that it has to various limited liability companies. 

Now what are you left with then when a potential creditor and 

I say creditor, the State, when it is owed money, is a creditor just 

like a plaintiff that has got a successful judgment would be a creditor. What are you left with when attempting to collect these fines 

or penalties? Well, what we have found in Mississippi is there has 

been a sufficient income stream to date from Medicare and Medicaid payments. 

In Mississippi, we have a lag time that is up to 90 days on the 

time in which from services being rendered to services being paid 

by Medicare or Medicaid to the providers. Therefore, if we have levied a fine or penalty, we have a hammer of being able to come in 

and collect that money. We can intercept the money, in other 

words. 

So, we don’t have a problem at this point. Where we would have 

a problem is if there was a situation where there were fines or penalties which exceeded the amount of money which was due from 

Medicaid or Medicare. In other words, if the fine that was levied 

or the penalties that were levied exceeded the income stream. Well, 

then what are we left with to be able to collect the funds from? 

This is what plaintiffs, this is what plaintiffs who have obtained 

successful judgments, this is the situation they find themselves in. 

Our primary concern as a State regulator is to make sure that the 

nursing homes are operating at at least minimal—or providing at 

least minimal—standards of care. 

So, we come in and we are looking at the baseline. You know, 

some of the other people at this table, or I guess the other people 

at this table are, you know, looking above the baseline, trying to 

improve, as we should as a society because either we are going to 

die or we are all going to become elderly. We know we ought to 

look out for the present elderly and look out for ourselves in the 

future also. 

So, as a State regulator, we come in and we look and make sure 

there is a maintenance of minimal standards. Our then primary 

concern is if we assess a penalty or a fine, can we collect that penalty or fine? Now, if for whatever reason the income stream is not 

sufficient to extinguish levied penalties or fines there are some options that could be taken. One would be the assets of the nursing 

home. This is what we had in the past. You could place a lien on 

the actual assets of the home. Another option would be that each 

individual home could be bonded for an amount sufficient to cover 

any penalties or fines that were levied. A third option would be insurance, which would cover civil or regulatory penalties. 

Now the problem with, when I mentioned the first alternative of 

levying a lien—or placing a lien, I should say, on the assets of a 

corporation—with the trend that we are seeing, there are no assets 

of the corporation. You cannot place a lien on something that does 

not exist. So, in this complex—the other thing that I believe the 

Subcommittee should consider is with the complex corporate structures that routinely exist—there is no way to follow the assets. 


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There is a concept in law called piercing the corporate veil. In the 

paper that I provided I set out—I didn’t do a national survey because it was time-prohibitive—but in Mississippi, there are four 

ways that you can go after assets that have been divested from a 

corporation. 

The only one that would potentially be available in this context, 

in my opinion, would be if you could show the assets were fraudulently divested, in which you would have to be able to show—the 

State regulator would have to be able to show, or any other creditor—that the assets were conveyed for a less than fair market 

value. That is almost impossible to do with nursing homes because 

nursing homes are not fungible entities. How do you prove the 

value; how do you prove that the assets were conveyed for less 

than a fair market value? It would be very tenuous to do so. 

One last point I want to make clear is I am here speaking on behalf of State regulators, and not the plaintiffs’ bar. The reason that 

there is an extreme dichotomy between the two is the State regulator, we, our job is to identify misconduct and to attempt to, 

through remedial action, correct that misconduct, or to identify deficiencies and put the nursing home on notice of those deficiencies. 

And say for example, you have got a door: Alzheimer’s patients are 

being able to escape out through the door; one is eventually going 

to get hit by an automobile; fix the door. If you don’t, we are going 

to fine you so much per day. The cost associated with regulatory 

agencies as levied against nursing homes is a very small fractional 

amount when you look at it in comparison to what the cost of the 

potential harm is. For example, if the person escapes from the 

nursing home because of a problem with the door, we come in and 

levy a relatively small fine. What happens with the person who has 

eloped when they do get hit by the automobile? That is an issue 

that I am not able to address today. I would just point out that 

comparing what we do as regulators to what people do—what we 

do in trying to prevent harm, versus the recoupment of payment 

to make someone whole for having suffered harm is not comparing 

apples to oranges, it is comparing grapes to watermelons. Thank 

you. 

[The prepared statement of Mr. Johnson follows:] 


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Mr. STARK. Thank you very much. I would hope that Mr. Muller 

can tell us the difference between a grape and a watermelon and 

enlighten us in any way you would like. Turn on your mike and 

proceed. 

STATEMENT OF ARVID MULLER, ASSISTANT DIRECTOR OF 

RESEARCH, SERVICE EMPLOYEES INTERNATIONAL UNION 

Mr. MULLER. Thank you, Mr. Stark, Ranking Member Camp 

and other distinguished Members of the Committee. Thank you for 

giving me the opportunity to appear before you today. I am the assistant director of research for the Service Employees International 

Union, SEIU. SEIU represents almost one million health care 

workers, including more than 150,000 nursing home workers. 

Twenty years after Congress passed landmark nursing home legislation, the modest but real progress made since 1987 is being 

threatened by a new breed of nursing home operator, private equity. The private equity business model seeks to make extreme 

profit at the expense of nursing home residents, their families, care 

givers and taxpayers. 

On September 23rd, The New York Times published an investigative story confirming what many caregivers in our Nation’s nursing 

homes already know. Medicare and Medicaid resources that are intended to support vulnerable Americans are being diverted to the 

private benefit of wealthy investors. The New York Times found 

that among other concerns with private equity ownership of nursing homes, there are serious quality of care problems. SEIU, in a 

new report, Equity and Inequity: How Private Equity Buyouts 

Hurt Nursing Home Residents, which we are submitting as supplemental testimony, confirmed the findings of The New York Times 

article. 

[The information follows:] 


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Mr. MULLER. SEIU analyzed OSCAR deficiency data available 

from CMS. We looked at two major nursing home chains, Mariner 

Health Care and Beverly Enterprises, which were bought buy private equity firms. In December 2004, Mariner Health Care, comprised at that time of 252 facilities with about 30,000 nursing home 

beds across 19 States was taken private by National Senior Care, 

a private equity firm. To analyze the impact of the buyout of Mariner, we compared the number of Federal resident care violations 

from the annual inspections prior to being bought out by private 

equity with the number of violations found during their most recent annual inspections. 

The results were distressing. We found a 29.4 percent increase 

in violations of Federal resident care standards during their most 

recent inspections. This was more than double the 11.9 percent increase in violations among non-Mariner homes in the States in 

which Mariner operates. The next analysis we did was to look at 

the severity of the violations. Violations of resident care, otherwise 

known as deficiencies, have four levels of severity: Deficiencies with 

potential for minimal harm; deficiencies with potential for actual 

harm; deficiencies that cause actual harm; and finally, the most serious deficiencies, those that cause immediate jeopardy. 

As you can see from this slide, we looked at all four categories 

and discovered that not only are there more deficiencies in the now 

private equity-owned Mariner homes, but the most serious deficiencies, those causing actual harm or immediate jeopardy, increased the most. Deficiencies that caused actual harm increased 

by 66.7 percent for Mariner homes, while only increasing 1.5 percent for non-Mariner homes. Immediate jeopardy deficiencies increased by 87.5 percent, compared to a 13.3 percent increase for 

non-Mariner homes. 

As you can see from the next slide, over the same period the percent of Mariner facilities cited for 10 or more deficiencies during an 

inspection increased from 25.1 percent prior to the sale to 43.8 percent of facilities after the sale. Non-Mariner homes in the same 

States saw a much smaller increase over that time, from 21.6 of 

all facilities to 25.9 percent of all facilities. As The New York Times 

article indicated, Mariner’s performance post-buyout is not an 

anomaly, and for more details I refer you to our report. 

Furthermore, holding private equity firms accountable for poor 

quality of care is exceedingly difficult. Private equity firms restructure nursing homes to maximize profit, but in the end, create a 

maze of control and ownership that makes it difficult to hold nursing homes and private equity companies accountable for providing 

quality care. 

A December 2006 study prepared by Harvard Medical School experts for the U.S. Department of Health and Human Services detailed these impacts. Quote, Integrated Health Services, Mariner 

Health Care, and most recently Beverly are examples where equity 

groups purchased chains with the intention of separating the real 

estate and operations, with the goals of limiting liability and enhancing profitability. 

Now, private equity firms are poised to become even more dominant in the nursing home industry, as the Carlyle Group, one of 

the world’s largest private equity buyout firms, moves to complete 


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the $6.6 leveraged buyout of HCR ManorCare, one of the Nation’s 

largest nursing home care providers. ManorCare claims it has no 

intention of changing its operating structure or of separating its 

nursing home’s real estate from management. But ManorCare’s 

own public filings indicate it plans a significant restructuring as 

part of the deal. 

As you can see from this slide, documents filed by ManorCare 

with State regulators indicate that the company’s restructuring 

will send each nursing home’s operation to an entirely new corporate entity and will separate real estate and operations into two 

completely separate companies, with multiple layers of corporate 

ownership between these companies and the parent company. This 

four-tiered structure may shield ManorCare’s assets and distance 

itself from liability because part of Carlyle’s restructuring plan involves creating multiple limited liability corporations. Limited liability means just that, limited. If patients can only get redress 

from the entity operating the home, that entity may have no real 

estate assets, and little ability to pay. 

While I am neither a lawyer or an accountant, and thus cannot 

testify as to the legal aspects of this corporate restructuring, I do 

know, based on a study of other nursing home buyouts, that these 

proposed structures raise some troubling questions. For example, 

will the Federal Government, State regulators, residents and their 

families be able to hold Carlyle accountable with its maze of limited liability corporations? How can the Federal Government and 

the States ensure transparency and accountability in this buyout 

and others? Our research demonstrates that care suffers under private equity’s ownership, and at the same time these companies appear to shield themselves from liability for their poor care. 

Congress must exercise its oversight authority to ensure that 

Medicare and Medicaid dollars are spent as intended, to provide 

high quality care. As Congress considers a Medicare bill, we urge 

you to include Medicare reforms that increase transparency and accountability. Last week SEIU, in conjunction with other advocacy 

organizations, sent your Committee a letter outlining our suggestions for reform. 

We would like to submit that letter as supplemental testimony 

for the official record of this hearing. 

[The information follows:] 

* * * * * * * Not available at the time of printing * * * * * * * * 

Mr. MULLER. We would urge you to use the nursing home revisit fees as a tool to hold private equity homes accountable for 

quality of care and safety. Taxpayers trust that Medicare and Medicaid dollars will go toward providing seniors and the disabled with 

the quality care they deserve. Profits should not come at the expense of nursing home residents, their families, caregivers and taxpayers. I thank you for inviting me here today to testify about 

SEIU’s concerns about private equity ownership of nursing homes. 

Thank you. 

[The prepared statement of Mr. Muller follows:] 


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1This number, obtained from publicly available CMS data, represents the number of beds at 

248 of the 252 facilities that were part of the deal. Four facilities that were part of the deal 

have since closed, and we are unable to find bed counts for those facilities. 2Francis, Theo. ‘‘Real Estate Is Driver of ManorCare Buyout Deal—Nursing-Home Firms, Attractive at Moment, Are Acquisition Targets.’’ Wall Street Journal, July 3 2007, A2. 3 Aug 23 07 download of OSCAR. 

4 Centers for Medicare and Medicaid Services, State Operations Manual, ‘‘Appendix P—Survey 

Protocol for Long Term Care Facilities—Part I—(Rev. 22, 12–15–06),’’ Section IV: Deficiency 

Categorization. 5 Centers for Medicare and Medicaid Services, State Operations Manual, ‘‘Appendix P—Survey 

Protocol for Long Term Care Facilities—Part I—(Rev. 22, 12–15–06),’’ Section IV: Deficiency 

Categorization. 6 Centers for Medicare and Medicaid Services, State Operations Manual, ‘‘Appendix P—Survey 

Protocol for Long Term Care Facilities—Part I—(Rev. 22, 12–15–06),’’ Section IV: Deficiency 

Categorization. 7 Based on information from ‘‘About the Nursing Home—Inspections,’’ Centers for Medicare 

and Medicaid Services Nursing Home Compare data, downloaded 10/29/2007. 

Prepared Statement of Arvid Muller, Assistant Director of Research, 

Service Employees International Union 

Thank you for giving me the opportunity to appear before you today. I am the 

Assistant Director of Research for the Service Employees International Union 

(SEIU). SEIU represents almost one million health care workers, including more 

than 150,000 nursing home workers. 

Twenty years after Congress passed landmark nursing home reform legislation, 

the modest but real progress made since 1987 is being threatened by a new breed 

of nursing home operator—private equity firms. The private equity business model 

seeks to make extreme profit at the expense of nursing home residents, their families, caregivers, and taxpayers. On September 23, The New York Times published 

an investigative story confirming what many caregivers in our nation’s nursing 

homes already know: Medicare and Medicaid resources that are intended to support 

vulnerable Americans are being diverted to the private benefit of wealthy investors. 

The New York Times found that among other concerns with private equity ownership of nursing homes, there are serious quality of care deficiencies. SEIU, in a new 

report ‘‘Equity and Inequity: How Private Equity Buyouts Hurt Nursing Home Residents,’’ which we are submitting as supplemental testimony for the official record 

of this hearing, confirmed the findings of the NYT article. SEIU analyzed Online 

Survey, Certification, and Reporting (a.k.a. OSCAR) data available from the Centers 

for Medicare and Medicaid Services (CMS). We looked at two major nursing home 

chains, Mariner and Beverly Enterprises, which were bought by private equity 

firms. In December 2004, Mariner Health Care Inc. (252 facilities with 29,685 1

nursing home beds across 19 states) was taken private by National Senior Care Inc., 

a private equity firm.2 To analyze the impact on quality care of National Senior 

Care’s buyout of Mariner, we compared the number of federal resident care violations from the annual inspection prior to being bought by private equity with the 

number of resident care violations found during their most recent annual inspection 

for each of the homes. The results were distressing. We found a 29.4% increase in 

violations of federal resident care standards during the most recent inspections 

since it was acquired by National Senior Care. This was more than double the 

11.9% increase in violations in the other homes in the states in which Mariner operates.3

The next analysis we did was to look at the severity of the violations. Violations 

of resident care, (a.k.a. deficiencies) have four levels of severity. 

The first, deficiencies with ‘‘potential for minimal harm’’ are those that have the 

potential for causing no more than a minor negative impact on a resident.4

Next are deficiencies with ‘‘potential for actual harm’’ reflecting non-compliance 

on the part of the nursing home in a way that causes, or has the potential to cause, 

no more than minimal physical, mental, or psycho-social harm to a resident.5

Then there are deficiencies that ‘‘cause actual harm’’ causing real injury to fragile 

nursing home residents.6 Examples of actual harm citations include: 

• Failure to give each resident enough fluids to keep them healthy and prevent 

dehydration. 

• Failure to give residents proper treatment to prevent new bed (pressure) sores 

or heal existing bed sores. 

• Make sure that residents who cannot care for themselves receive help with eating/drinking, grooming and hygiene.7


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8 Centers for Medicare and Medicaid Services, State Operations Manual, ‘‘Appendix P—Survey 

Protocol for Long Term Care Facilities—Part I—(Rev. 22, 12–15–06),’’ Section IV: Deficiency 

Categorization. 9 Based on information from ‘‘About the Nursing Home—Inspections,’’ Centers for Medicare 

and Medicaid Services Nursing Home Compare data, downloaded 10/29/2007. 10 Ibid. 

Finally we have deficiencies that ‘‘cause immediate jeopardy’’ meaning that something the nursing home did or failed to do put residents’ health, safety, and lives 

directly in harm’s way. These deficiencies require immediate correction.8

Examples of immediate jeopardy citations include: 

• (1) Failure to hire only people who have no legal history of abusing, neglecting 

or mistreating residents; or (2) failure to report and investigate any acts or reports of abuse, neglect or mistreatment of residents. 

• Failure to protect each resident from all abuse, physical punishment, and being 

separated from others.9

We looked at all four categories and discovered than not only are there more deficiencies in the now private equity-owned Mariner homes, but the most serious deficiencies—those causing immediately jeopardy, increased the most. TALK THRU 

CHART/SLIDE. 

Deficiency Type 

Mariner 

% Increase 

Post Buyout 

Non-Mariner 

% Increase 

All Deficiencies 29.4% 11.9%

Potential for Minimal Harm ¥8.0% ¥13.3%

Potential for Actual Harm 33.6% 18.0%

Actual Harm 66.7% 1.5%

Immediate Jeopardy 87.5% 13.3%

Over the same period, the percent of Mariner facilities cited for 10 or more deficiencies during an inspection increased from 25.1% prior to sale to 43.8% of facilities. Other facilities operating in the same states as Mariner saw a much smaller 

increase over that time, from 21.6% of all facilities cited for 10 or more deficiencies 

to 25.9% of all facilities. 

There are real people behind these violations who suffered needlessly. After one 

facility failed to prevent and properly treat a resident’s bed sores, the resident’s 

wound worsened so much that the resident had to have his leg amputated above 

the knee. And 3 weeks after the resident’s leg was amputated, the resident developed three more pressure sores on his other foot. 

As the NYT articles indicated, Mariner’s performance post-buyout is not an anomaly. When we looked at the impact of the sale of Beverly Enterprise to Fillmore Capital Partners, we saw a similar increase in federal violations during their most recent inspections when compared to inspections immediately prior to the sale. Since 

Beverly’s sale to a private equity company in March 2006, their most recent annual 

inspections show a 19.4% increase in violations, more than double the 8.2% increase 

in violations cited in other homes located in the states where Beverly operates.10

The quality of care at nursing homes is a serious concern throughout the industry, 

but this analysis of the CMS data, indicates an even greater cause for alarm at private equity-owned firms. 

And holding private equity firms accountable for poor quality of care is exceedingly difficult. Private equity firms restructure nursing homes to maximize profit 

but in the end create a maze of control and ownership that makes it difficult to hold 

nursing homes and private equity companies accountable for providing quality care. 

A December 2006 study prepared by Harvard Medical School experts for the U.S. 

Department of Health and Human Services, detailed these impacts: 

‘‘Integrated Health Services, Mariner Health Care, and, most recently, 

Beverly, are examples where equity groups purchased chains with the inVerDate Nov 24 2008 00:20 Mar 26, 2009 Jkt 046778 PO 00000 Frm 00084 Fmt 6633 Sfmt 6621 E:\HR\OC\46778.XXX 46778

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11http://aspe.hhs.gov/daltcp/reports/2006/NHdivest.htm 12 Counsel to Counsel Magazine. ‘‘A Study in Complexity: Mariner Health Care Inc. and Powell Goldstein LLP’’ by Scott M. Gawlicki, March 2005, pages 27–29. 13Standard & Poors, ‘‘Presale: Credit Suisse First Boston Mortgage Securities Corp.,’’ published December 7, 2004, reprinted from RatingsDirect, page 6. 14 Counsel to Counsel Magazine. ‘‘A Study in Complexity: Mariner Health Care Inc. and Powell Goldstein LLP’’ by Scott M. Gawlicki, March 2005, pages 27–29. 15Mariner Health Care Inc. Form DEFM14A filed with SEC on 10/22/04, p. 5. 16 Review of Licensure & Certification Applications submitted to California Department of 

Health Services by several former Mariner facilities, including Diamond Ridge HealthCare Center (Pittsburg) application signed 12/5/05, Excell HealthCare Center (Oakland) application 

signed 1/10/07 and Hayward Hills HealthCare Center (Hayward) application signed 3/6/07. 17 Counsel to Counsel Magazine. ‘‘A Study in Complexity: Mariner Health Care Inc. and Powell Goldstein LLP’’ by Scott M. Gawlicki, March 2005, pages 27–29. 18 Cost growth figures are based on analysis of 2001–2005 Medicare cost report data for 212 

facilities currently operated by National Senior Care and purchased from Mariner in December 

2004. Analysis excluded facilities that did not report complete data in all years analyzed. Capital-related costs for buildings and fixtures and interest-related expenses were taken from Sheet 

A, column 2, lines 1 and 53 of the cost report. Data was summed for facilities submitting multiple cost reports and costs were annualized by facility. 19 ‘‘ManorCare Buyout has Local Effect,’’ Williamsport Sun Gazette, October 11, 2007. 20ManorCare 14A filing, dated 9/14/2007, pp. 62–64. 

tention of separating the real estate and operations with the goals of limiting liability and enhancing profitability.’’ 11

As the new owners of Mariner, National Senior Care hired roughly 80 attorneys 

from a half-dozen law firms to help design and execute a complicated web of corporate structures that took nearly 7 months to complete. To help pay for the deal, 

National Senior Care immediately sold approximately two-thirds of the homes they 

had purchased to another company called SMV Property Holdings.12 SMV set up 

separate real estate holding companies for each of the properties purchased 13 and 

then leased the facilities back to Mariner or SavaSenior Care,14 an affiliate of National Senior Care.15 Adding to the structural complexity, documents submitted to 

California regulators indicate that at least some former Mariner homes are actually 

run by subsidiary operating companies that are unique to each location.16 Not surprisingly, the lawyers who helped set up the National Senior Care deal called it one 

of the most complicated transactions they had ever been involved in.17

While we don’t know the exact amount of rent that the Mariner homes paid to 

these related parties—all owned by National Senior Care—the building and fixturerelated capital costs that Mariner reported on its Medicare cost reports rose by 60% 

the year after National Senior Care took over. (For comparison purposes, in the previous 3 years it had increased by a total of only 11%.) In addition, interest expense 

payments, an indicator of how much debt has been incurred, increased by 145% 

from 2004 to 2005, the year after the buyout. At the same time, the number of Mariner facilities that reported any interest expenses in 2005 was more than four times 

the number that had reported interest expenses in any of the previous 3 years.18

Private equity firms are poised to become even more dominant in the nursing 

home industry as the Carlyle Group one of the world’s largest private equity buyout 

firms, moves to complete the $6.6 billion leveraged buyout of HCR ManorCare, the 

nation’s largest nursing home care provider. This buyout should raise serious concerns for nursing home staff trying to provide quality care; for state surveyors 

whose job it is to provide ongoing oversight on behalf of Medicare; for the taxpayers 

who fund the bulk of this care and; most importantly, for the residents who may 

suffer as Carlyle Group and ManorCare executives pay themselves millions while 

saddling ManorCare with billions in debt. It is unclear how ManorCare could service 

such high debt without affecting the quality of care. 

In response to The New York Times investigation, ManorCare has claimed in communications to employees that it has no intention of changing its ‘‘operating structure’’ or of separating its nursing homes’ real estate from management.19

But ManorCare’s own SEC filings and filings in the states reveal that it 

plans a significant ‘‘restructuring’’ as part of the deal.20 While I am neither 

a lawyer nor an accountant, and thus cannot testify as to the legal aspects 

of this corporate restructuring, I do know based on study of other nursing 

home buyouts that this corporate restructuring should raise serious concerns. It appears from the documents filed by ManorCare that the company’s ‘‘restructuring’’ will send each nursing home’s operations to an entirely new corporate entity and will separate real estate and operations 

into two completely separate companies, with multiple layers of corporate 

ownership between these companies and the corporate parent. Applications for nursing home licenses in Maryland, Michigan, Washington, and 


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West Virginia lay out a four-tiered structure for Carlyle to shield 

ManorCare’s assets and distance itself from any liability for poor care in 

ManorCare homes (talk thru slide): 

(1) Create a corporation as a holding company to own the entire ManorCare 

chain; 

(2) Create limited liability corporations for the operations of individual 

ManorCare homes; 

(3) Create limited liability corporations for the real estate holdings of individual 

ManorCare homes; 

(4) Create another affiliated corporation to lease all the properties from the ownership corporations, and then sublease to the operating corporations. 

Part of Carlyle’s restructuring plan involves creating multiple limited liability corporations, and ‘‘limited liability’’ means just that, limited—if patients can get redress only from the entity operating the home, that entity may have no real estate 

assets. Will the federal government, state regulators and residents and their families be able to hold Carlyle accountable with a maze of LLCs? How can the federal 

government and the states ensure transparency and accountability in this buyout 

and others? 

The New York Times and our research demonstrate that care suffers under private equity’s ownership and at the same time these companies appear to shield 

themselves from liability for their poor care. Congress must exercise its oversight 

authority to ensure that Medicare and Medicaid dollars are spent as intended—to 

provide high quality care. As Congress considers a Medicare bill, we urge you to include Medicare reforms that increase transparency and accountability. Last week, 

SEIU, in conjunction with other advocacy organizations sent your Committee a letter outlining our suggestions for reform. We would like to submit that letter as supplemental testimony for the official record of this hearing. We also urge you to use 

the nursing home ‘‘revisit fees’’ as a tool to hold private equity-owned homes accountable for quality of care and safety. Taxpayers trust that Medicare and Medicaid dollars will go toward providing seniors and the disabled with the quality care 

they deserve. Profit should not come at the expense of nursing home residents, their 

families, caregivers, and taxpayers. I thank you for inviting me here to testify about 

SEIU’s concerns about private equity ownership of nursing homes. 

f 

Mr. STARK. Thank you very much. I don’t want to say I don’t 

care what the ownership structure of nursing homes—what form it 

takes. I am concerned about several things. As a person who a 

thousand years ago organized a bank, I was able to fool the regulators into thinking I was a good person. You know, of high responsibility and ethics and morals. But there was a requirement you 

couldn’t start a bank if you were a crook. I suspect to get a legal 

license, Mr. Hulshof has to prove what we all know, that he is an 

honorable, respectable gentleman or he couldn’t have got admitted 

to the Bar. I don’t know what we do in hospitals or other areas, 

but in many areas, it is the individuals who will be responsible for 

the management who have to be vetted. 

I suspect that that should be true in nursing homes, that those 

individuals who will make decisions about how money is spent or 

how money is invested ought to pass some kind of muster. That is 

step one. Two, I think you ought to be able to get a hold of these 

people in a meaningful way. If you have got a billion dollar corporation and you are going to assess piddly little fines of a couple 

hundred bucks a day, that doesn’t make any difference to them. 

But if they are subject to, you know, if you got a good lawyer like 

Mr. Hulshof after them, and you have got some million dollar judgment against them and there is only $50,000 in the bank, that 

doesn’t do you much good. It won’t even pay his fees, much less pay 

anything to the person who was damaged. 


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So, it seems to me that you have the management quality assurance of however you do that; and secondly, you have to have some 

way, whether it is bonding or insurance, and bonding makes some 

sense to me, but I am not that familiar with what they cost and 

how easy it is to enforce a judgment or a fine against a bonding 

company. But if you can do that, then it is oh, never mind to me, 

again, whether the operator of the nursing facility is paying rent 

or paying interest or owns the property, the real estate free and 

clear, as long as regulators or aggrieved or harmed patients can get 

after them. 

The other issues, and I don’t think they have anything to do, I 

don’t think we can identify them very clearly, at least I think we 

get into a brouhaha, is basing factors of quality or minimum standards of service based on ownership. I suspect that there are standards, whether it is food that is prepared in a sanitary, hygienic, 

and sufficient manner; whether the building has proper safety precautions like fire escapes and that sort of thing; whether there is 

adequate staffing. 

I don’t want to get into the—I don’t think that Congress wants 

to decide whether you need RNs or other types of professionally 

trained people. Somebody should be able to set minimum standards 

of care as you suggest, General Johnson, and baseline, and hopefully we could go from there. But where we can provide to State 

regulators the opportunity to enforce their mandates because they 

can’t collect on a fine or they can’t cause enough financial impetus 

for the owner or the director to do the right thing, I think it is incumbent on us to do that. I think that means that we have to set 

some sort of standards for each unit and relate the ability to get 

the assets to the owner, to the aggregate of the facility and/or facilities. If it is the CEO of Carlyle, then the CEO of Carlyle ought 

to be at risk, it seems to me, for what happens in the lowliest, 

smallest subsidiary in his or her arrangement of corporations. That 

will get their attention, I suspect, more than just issuing a statement of concern, which sounds very nice, but which is unenforceable. 

So, I appreciate all of your testimony, and if anybody disagrees 

with that they can raise their hand. Otherwise I am going to recognize Mr. Camp to agree with me. You can add to this later, but I 

know a lot of my colleagues want to question or inquire. Mr. Camp? 

Mr. CAMP. Thank you, Mr. Chairman. I just have a few questions, and my time is limited, so Ms. Harrington, I would like to 

better understand—or Dr. Harrington, I would like to better understand the magnitude of the issue before us today. Can you please 

tell me what percentage of nursing home beds are owned by private investment groups, if you know, nationwide? 

Ms. HARRINGTON. Nationwide we don’t know right now. But 

that is partly because CMS does not have a tracking system, and 

private equity owners do not have to be listed as the licensee. 

Mr. CAMP. Looking at The New York Times article, they said 

that six of the ten largest chains had been purchased, which is 

about 141,000 beds—— 

Ms. HARRINGTON. Yes, that is right. 

Mr. CAMP [continuing]. Which would be about 9 percent. 

Ms. HARRINGTON. Yes, that is right. 


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Mr. CAMP. They said in the smaller chains, they have bought an 

additional 60,000 beds. So, it looks like currently about 200,000 

beds. Would that be fair? Which would be roughly 15 percent of the 

beds nationwide in private investment. Dr. Schnelle, you make the 

point that adequate staffing levels in nursing homes decline. As 

those decline, so does the quality of care. Can you tell me what 

would the effect of a $6.5 billion reduction in Medicare nursing 

home payments do to the ability—on staffing ratios? 

Mr. SCHNELLE. I can’t give you a number. Obviously, it would 

make them significantly worse than they are now. But my other 

point was you might not recognize how much worse care would be 

with existing measures. The care that would be significantly worse 

would be at the bedside level. 

Mr. CAMP. Is whether the staff in the facilities are union or nonunion a part of your study? Would that make any difference? 

Mr. SCHNELLE. Wasn’t part of my study. 

Mr. CAMP. So, you didn’t look at it? 

Mr. SCHNELLE. No. 

Mr. CAMP. In your opinion do you think it would make a difference? 

Mr. SCHNELLE. I am not sure. 

Mr. CAMP. All right. You published a report for CMS in 2002? 

Mr. SCHNELLE. Yes. 

Mr. CAMP. Which you make recommendations for minimum 

staffing levels in nursing homes. 

Mr. SCHNELLE. Yeah. 

Mr. CAMP. Did you estimate how much it would cost to provide 

those new minimum staffing requirements? 

Mr. SCHNELLE. I didn’t, but CMS did. It would cost significantly more. 

Mr. CAMP. Do you know if any of the recommendations in your 

report have been adopted by CMS? 

Mr. SCHNELLE. No, they have not been adopted. 

Mr. CAMP. Okay. Do hospitals have minimum staffing requirements, if you know? 

Mr. SCHNELLE. Yes. In some States at least. In California they 

do. 

Mr. CAMP. In most States do they? 

Mr. SCHNELLE. I don’t know. 

Mr. CAMP. Mr. Johnson, in Mississippi, are nursing homes licensed? 

Mr. JOHNSON. Yes. 

Mr. CAMP. Who licenses nursing homes in Mississippi? 

Mr. JOHNSON. The State Department of Health. 

Mr. CAMP. Are there State insurance requirements as a part of 

the license? 

Mr. JOHNSON. To my knowledge, no. 

Mr. CAMP. So, in Mississippi there are no bond or insurance requirements? 

Mr. JOHNSON. No, sir. 

Mr. CAMP. All right. Are you aware of other State laws with regard to nursing home licensing? 

Mr. JOHNSON. No, sir. I did not research that. 


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Mr. CAMP. All right. Well thank you, Mr. Chairman. At this 

time I will yield back my time. Thank you. 

Mr. STARK. Mr. Thompson, would you like to inquire? 

Mr. THOMPSON. Thank you, Mr. Chairman. I want to pick up 

on the issue of the minimum standards, the staffing, relationship 

between staffing and quality of care. I think a couple of you had 

mentioned that this was an issue in your statements. I read recently a study, I think it was published earlier this year, stating 

that the nursing shortage would be about 350,000 across the country by the year 2020. In California there was another study that 

was just recently done that says in our State alone, we are going 

to face a shortage of about 11,000 nurses over the next 5 years. 

In the nursing home industry there are currently some 100,000 

RN and nurse-related positions that are open in facilities across 

the country. They are open because people that run those facilities 

can’t find individuals to fill those positions. So, irrespective of how 

you come down on the issue of minimum standards or ratios, we 

are facing a pretty big shortage of nursing personnel. If we are 

going to, I think, address the issue of quality care, we are going 

to have to figure out how to close that gap. 

I would like to hear from the witnesses if you have any ideas as 

to what this Committee can do to help to close that gap and to address the workforce shortages as it pertains to nurses. 

Ms. HARRINGTON. I would like to address that. Coming from 

the school of nursing and having thought about this a lot, we have 

done studies of the relationship of staffing turnover and wages, and 

the main problem is the wages in nursing homes are too low, significantly lower than hospital wages, and that causes high turnover. 

But the workload is the major factor that causes the turnover. 

If you don’t have adequate staff, then the employees, the RNs as 

well as the nursing assistants, do not stay. So, we have to have 

adequate staffing levels, and that is a big problem. 

Low pay is the reason we have the current vacancies. Now, there 

is a problem in the future, but if we don’t address the working conditions, the wages, right now, then we are not going to have nurses 

be willing to go into nursing in the future. That is what is going 

to cause the shortage. 

Mr. THOMPSON. Again, it is not just in nursing homes, it is an 

across-the-board shortage. 

Ms. HARRINGTON. There is a shortage, but in nursing homes 

it is acute because they are paying such low wages, and there are 

about 300,000 nurses that don’t work. They don’t work right now 

because the working conditions are not good. 

Mr. THOMPSON. What determines if it is an acute shortage and 

just a shortage? If I am going to the hospital next month for a 

problem, and there isn’t an adequate number of nurses, from my 

perspective it is pretty acute. 

Ms. HARRINGTON. But you have to have a hospital, and a 

nursing home has to be willing to hire enough staff so that the 

nurses are willing to stay there and work, and that is what they 

are not doing right now. 

Mr. THOMPSON. So, that the workload and wages, as you see 

it, are the big issues. 


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Ms. HARRINGTON. Those are the big issues. 

Mr. THOMPSON. So, any reduction in either side of the financial 

ledger for nursing homes, be it Medicaid or Medicare, is going to 

further impact us? 

Ms. HARRINGTON. Well, it already has, because nursing homes 

have already dropped the RN staffing by 25 percent, but we don’t 

know where the money goes. It is not necessarily that they need 

money, it is that they need to be accountable for the money that 

Medicare has already given them for the staffing. Right now they 

don’t have to staff at the level that Medicare has paid them for. 

Mr. THOMPSON. Would anyone else like to comment? 

Mr. JOHNSON. Yes, Representative. In my work when I was Director of the Medicaid Fraud Control Unit, I, on a regular basis, 

was present in nursing homes. One of the reasons that it is difficult to get nurses to stay there is because a lot of residents are 

nonambulatory, so it is a very physically demanding position. 

Also, in some nursing homes—a lot of nursing homes—you have 

Alzheimer’s units, or you have persons who are suffering with dementia for whatever reason, and they are very difficult to deal 

with. So, when you have the opportunity to go work in a hospital 

setting, with the things that you have to deal with normally on a 

daily basis, versus the nursing home setting, and the hospital is 

paying significantly more, why would you go work at the nursing 

home? 

So, I agree that it is a matter of, one, money. However, I am not 

saying that the nursing homes don’t have the money to actually 

pay these people. If you want someone to do a job, if you want it 

properly staffed, if you pay enough, the people will come. So, I am 

not saying that they don’t have enough money to pay. They may 

be unwilling to reduce their profit margins to pay significant 

enough money to get the nurses to come—— 

Mr. THOMPSON. With all due respect, sir, there is a national 

nursing shortage, not just in nursing homes, but across the board. 

So, if you are going to make that argument, you have to make it 

across the board. If there is one nursing job that is vacant and paying more with better working conditions, I don’t care where it is, 

you are going to create the situation that you are talking about. 

My question was more of a macro question: How do we deal with 

the overall nursing shortage so we can supply the nurses, because 

as you stated in your testimony, there is a relation between staffing and quality of care. It is not enough just to say you have got 

to pay more money. 

My time has run out. Thank you, Mr. Chairman. 

Mr. STARK. Thank you. 

Mr. JOHNSON. May I respond? 

Mr. STARK. Did you want to respond? I don’t know who you 

were addressing that to. 

Mr. English, how many votes do we have? 

I am going to ask if Mr. English would like to inquire, and then 

we have three votes which should take us about 25 minutes. So, 

we will recess and try and reconvene. 

Mr. ENGLISH. I thank the Chairman. 

I realize our time is short here, but, Dr. Harrington, looking at 

your studies, they strangely confirm some of the concerns that I 


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have had about nursing home quality over the years, although I 

have probably identified maybe a different specific focus for how to 

deal with that problem. I know that your studies are kind of blind 

to the conclusion that the purchase of nursing home chains by private equity companies are a substantial threat to the quality of 

care because of the financial incentives for profits. Also I think you 

conclude they lack the experience and expertise to oversee nursing 

homes. 

Looking at the same set of facts, I had come to the conclusion 

that the payment system needed to have incentives for quality, and 

for that reason in the last Congress I introduced a pay-for-performance initiative that would create the financial incentives for nursing homes to move in the direction of quality. I am not sure that 

from an ideological standpoint everyone would like the idea of financial incentives, but I wonder, looking objectively at your studies, isn’t it fair to say that your concerns about profits would be addressed by a pay-for-performance structure, given especially since 

nursing homes have in place already some fairly detailed quality 

standards, and that this might be an easier test case for pay-forperformance than many other health care services? 

But also more to the point, don’t all nursing homes, regardless 

of ownership, have to abide by these same Federal and State regulations or face financial penalties or even risk expulsion from the 

Medicare and Medicaid programs? 

So, I guess my question is, looking at the facts, aren’t there potential carrots and sticks both to address the quality problem perhaps more directly than focusing on ownership? 

Ms. HARRINGTON. Well, the Federal staffing standards are totally inadequate. You only have to have one RN on duty 8 hours 

a day, 7 days a week, and that could be a 1,000-bed facility or a 

50-bed facility. 

Mr. ENGLISH. What about State regulations? 

Ms. HARRINGTON. The States vary in their regulations. Some 

have very good regulations, like Florida right now, it has very good 

regulations; but others have almost no regulation, they just go 

along with the Federal standards. Most surveyors do not look at 

the staffing, they don’t have time to audit the staffing and the facilities staff up at the time of the survey. So, the data we have on 

staffing is not accurate, which is why we want electronic reporting 

of staffing. 

I think a pay-for-performance focus, if it is focused on staffing 

and turnover rates, I think that might be a good way to go. It depends on how it is structured, though, because if the pay is not a 

high enough incentive, and there is a better incentive just to take 

it off in profits, I don’t think the nursing homes will change their 

behavior. So, it could work, depending on the structure. 

Mr. ENGLISH. Your research concludes that nursing homes with 

higher profits have lower quality of care, and you recommend limiting the amount of profit a nursing home can make. For some of 

us that is a little bit of a quaint proposal, but you are looking exclusively at the Medicare margin. 

I think if the industry were here today, they would make the 

counterargument that they rely on high Medicare margins to offset 

low Medicaid margins. I think you would have to concede what 


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some of the States have been doing on Medicaid reimbursements 

is very, very troubling. 

As Medicaid pays for the bulk of long-term care provided in nursing homes, wouldn’t you concede that it is important to look at 

overall margins to get a complete view of profit levels? 

Ms. HARRINGTON. Yes, I agree. But I think if you set up cost 

centers under Medicare and not allow the shifting of funds across 

the cost centers, many States would set up the same type of arrangement. Right now, as long as the nursing homes can take the 

money and use it for profit, they have no incentive to keep the 

staffing up. So, that would help solve the problem at both the Medicaid and the Medicare level. 

Mr. ENGLISH. Thank you for your presentation, and thank you, 

Mr. Chairman, for allowing me to inquire. 

Mr. STARK. Mr. Camp and I are usually able to agree on most 

everything. We are trying to agree on whether we have three votes 

or four votes on the floor, but in any event I suspect it will be 

shortly after quarter of 12:00 that we can reconvene. So, the Committee will stand in recess subject to the call of the Chair at approximately 11:45. 

[Recess.] 

Mr. STARK. As soon as we can find our witnesses or round up 

some new ones, we will reconvene. 

The Committee will resume, but before I recognize Mr. Hulshof 

to inquire, I would like to repeat a statement that I made at the 

opening of this hearing. I have heard since then that, quite frankly, 

many lobbyists and members of the nursing home community have 

been whining and suggesting that they were not invited to this 

hearing, and nothing could be further from the truth. 

The Minority staff has advised us that they called and asked the 

representatives and advocates for the nursing home community if 

they had any witnesses, and they said, no. We called and asked, 

and never in the history of this Committee have we sent engraved 

formal invitations, we have always done it by phone. For any member of the nursing home community to suggest that they are not 

invited is absolutely false, and I just want to make sure that that 

is clearly on the record. They will be welcomed back at any time 

that they think would be nice for them to let us know their position, but they were invited and chose not to be here, and I—in fairness to both of them, Minority and Majority, that is not correct. 

With that I recognize Mr. Hulshof. 

Mr. HULSHOF. Thank you, Mr. Chairman. Let me state for the 

record that both you, Mr. Chairman, and Mr. Camp were accurate; 

there were four votes, but only three recorded. 

Mr. Johnson, I left Oxford, Mississippi, with my law degree about 

7 years before you graduated summa cum laude with your business 

degree, and I have great fondness of my time in the State of Mississippi. 

You create in your written statement on page 4 beginning, an interesting hypothetical analysis, a corporate structure, and I think 

the gist of that hypothetical is that a nursing home licensee establishes the corporate structure to divest its assets for the purpose 

of limiting its financial liability in the event of a lawsuit. 


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I don’t want to comment on our legal brethren in the State of 

Mississippi and the proliferation of plaintiffs’ lawsuits in that 

State, but some States do—I am not sure if Mississippi does, but 

I know Missouri and other States have actually allowed those 

transferred assets to be fair game in a lawsuit. Does Mississippi 

allow that, for instance—does not? 

Mr. JOHNSON. No, sir, not unless you can show that the transfer was fraudulent. 

Mr. HULSHOF. Okay. 

Mr. JOHNSON. That would require that you show that it was 

conveyed at an amount largely below what anyone would consider 

fair market value. 

Mr. HULSHOF. You asked some really interesting questions, 

and perhaps we should visit beyond the scope of this hearing. One 

of the questions that you have left lingering, in fact you said lingering inquiry, can the interest of nursing home residents be adequately protected through rigorous enforcement of minimum standards by State regulatory agencies? Can they? 

Mr. JOHNSON. Yes, I touched on that briefly in my opening 

statement in that as a regulatory agency, State regulators as a 

whole, we come in and we identify misconduct, substandard care, 

deficiencies, and we take a proactive stance then to remedy that 

substandard care, misconduct, deficiencies. However, often the 

harm has already occurred. 

Mr. HULSHOF. Right. 

Mr. JOHNSON. So, the question then becomes—I am probably 

not the best person to answer this question, but, you know, I was 

in private practice for several years prior to taking a position with 

the Attorney General’s Office, and I do know that the following is 

true. You can have a tremendous injury, someone that comes in 

with paralyzation or severe burns or whatnot, to see a plaintiff’s 

attorney, and if there is nothing that you can get from the 

tortfeasor, the person who is at fault, then you don’t even sign the 

victim up; you don’t become their attorney. 

So, the question then becomes if we are only looking at this from 

a standpoint of can we maintain the line on holding nursing homes 

to a minimum standard. The vast majority of the time—through 

regulatory action, I believe the answer is yes. 

Mr. HULSHOF. Could I cut you off right there, if you don’t mind, 

because I am limited on time, so I appreciate your answer. 

Mr. JOHNSON. Sure. 

Mr. HULSHOF. Let me go on to a couple more areas quickly. 

Mr. JOHNSON. Okay. 

Mr. HULSHOF. Dr. Harrington, in my last colloquy between my 

colleague Mr. English and yourself, you indicated or at least suggest your idea that Medicare should perhaps limit nursing home 

profits. For consistency sake, should Congress and CMS also take 

similar actions to limit the profit margins of hospitals and physicians? 

Ms. HARRINGTON. Well, I don’t want to comment on hospitals 

and physicians, but I know that the vast majority of nursing home 

revenues comes from the government, whereas hospitals and physicians’ revenues don’t necessarily come from the government. We 

know for sure that the nursing homes are cutting staffing. So, if 


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you did not want to limit profits, if you simply set up the cost centers so that money could not be taken from the direct and indirect 

care cost centers, that would, in fact, help tremendously. 

Mr. HULSHOF. Mr. Muller, in the few moments I have remaining, I have read your witness statement, it is very well documented 

and very well cited. I did not see a citation—you quote extensively 

from The New York Times, but I see no citation to the Palm Beach 

Post. Are you familiar with the editorial that came out Tuesday, 

November 13th, in the Palm Beach Post, sir? 

Mr. MULLER. No, I am not. 

Mr. HULSHOF. If the Chairman would indulge. SEIU, through 

you, have been quite critical of Mariner and Carlyle, and yet the 

editorial talks about SEIU support for the buyout of nursing home 

chain Genesis HealthCare by Formation Capital, which is a private 

equity firm, because apparently some secret deal or deal that I 

guess the secret terms of which have recently been allowed. I find 

a little inconsistent in your testimony you talk about and address 

this shielded liability issue, and yet when the service employees 

union actually signed off on the private equity buyout of Genesis, 

the agreement included a provision that SEIU would walk the halls 

of the California Assembly to lobby for reduced legal liability for 

nursing homes in the State of California. 

Do you care to address that inconsistency? 

Mr. MULLER. I am not aware of those policy issues, but I do 

know that we have been working to try to improve quality care as 

a union representing 150,000 nursing home workers who are on 

the frontlines and are dealing with these issues all day long. We 

are very invested in trying to figure out all the different ways we 

can to try to improve the quality of care, and we will work with 

whomever we can to try to do that. 

Mr. HULSHOF. Probably not a fair question given that you have 

not seen it, so, Mr. Chairman, if it is not part of the record, I would 

ask the Palm Beach Post editorial of Tuesday, November 13th, 

2007, be included for whatever purpose it may serve in the record. 

Mr. STARK. Without objection. 

[The information follows:] 


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Mr. STARK. Mr. Emanuel, would you like to inquire? 

Mr. EMANUEL. Thank you, Mr. Chairman. 

This is more of a statement up front. Having a bill on the floor 

that deals with the mortgage crisis, one of the problems of the 

mortgage crisis is that the debt was so dispersed and securitized 

that there was no single holder; that, therefore, nobody knew who 

to negotiate with on behalf of the homeowner. One of the purposes 

of the hearing, that was a piece of the problem, not the only problem. But the financial instruments had become so sophisticated 

that where there is no single holder of the mortgage and nobody 

living in the home had somebody to deal with when it came to the 

problem we have today. 

Here in this hearing we are talking about the different—totally 

legal, but different structures that are put in place by folks who 

own these nursing homes, and yet when it comes to holding that 

nursing homeowner accountable for the care given, because of the 

structure, there is nobody accountable. 

Ms. HARRINGTON. Exactly. 

Mr. EMANUEL. I appreciate Dr. Harrington is the first I will 

call on since she is nodding, ‘‘Exactly.’’ She a very sophisticated, 

very smart woman. I am sure you are sophisticated. 

The fact is that on the floor we are dealing with a problem that 

has beset now the entire mortgage and homeownership industry, 

and yet here we are dealing with this specifically as it relates to 

the nursing home industry. The fact is that Chairman Frank, who 

is on the floor dealing with this, has said, what has happened in 

the last 5 years is an amazing amount of sophistication brought to 

different financial instruments, some of it helping people to buy 

homes. But through that securitization what we also have is a situation where the regulations haven’t stayed in pace with the different financial instruments or ownership structures that had been 

moving. 

It is okay that private equity would go into buying up nursing 

homes, chains, et cetera. There is nothing wrong with that. But if 

nobody is accountable for the care delivered, then the very purpose 

of the nursing home is merely for profit and not for delivery of a 

service and a product. One of the ways to make sure that that service and product that in many ways the taxpayers are paying for is 

to ensure that there is somebody at the other end of the line that 

is accountable. 

So, to anybody who would like to grab this, because you are not 

going to stop private equity from coming in or a REIT structure for 

that matter, but what regulations or oversight would you recommend so we are on top of the game that—what is going on in 

the private sector so that folks who are paying the bill, the taxpayers, feel like their money is being well spent in delivering, and 

the reason they are willing to do this is because a service is being 

provided to the elderly? 

Dr. Harrington. 

Ms. HARRINGTON. Well, we want to see that all the companies 

involved with a nursing home be disclosed, and that CMS develop 

a tracking system for all the owners and companies involved. 

Another way to improve things would be to make these people 

sign the provider agreement. Right now the licensee is the only one 


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that signs the provider agreement. So, the REIT is not involved. 

The multiple holding companies are not involved. So, if all parties 

had to sign the Medicare provider agreement, that would be a step 

forward. 

Mr. STARK. Can you yield at that point? Is there a Medicare, 

a Medicaid provider agreement in California, Medi-Cal as well? 

Ms. HARRINGTON. There is a Medicare and Medicaid provider 

agreement. 

Mr. STARK. They are different? 

Ms. HARRINGTON. No. Some nursing homes do not take Medicaid, and in that case it would only be a Medicare provider agreement, but if they are duly certified, they would sign one provider 

agreement. 

Mr. EMANUEL. What you are suggesting, though, is that one 

way to do this is that whoever signs that provider agreement between CMS and X, that is the responsible party? 

Ms. HARRINGTON. Well, right now only the licensee has to sign 

it. So, all these multiple levels of companies don’t have to sign it, 

so they don’t have any responsibility in a sense. 

Mr. EMANUEL. Even though the owner is ultimately responsible 

for providing the service? 

Ms. HARRINGTON. Right. CMS doesn’t even know who they 

are, so there is no tracking system that you know who the owners 

are. 

Mr. EMANUEL. Anybody else? 

Mr. Johnson. 

Mr. JOHNSON. In Mississippi, by statute, we have a rule that 

in order for a certificate of need to be obtained or for a transfer to 

happen with respect to a nursing home, that any entity that is 

going to have a 5 percent or greater ownership has to be disclosed. 

Mr. EMANUEL. But what about ultimate—I don’t want to say 

legal, but accountable, some level of accountability beyond just the 

ownership? I understand the 5 percent threshold, but where is it 

for the purpose of accountability that if the service is subpar, if 

there are violations to the senior citizens for their health and welfare, beyond the 5 percent, where is the accountability for insuring 

that that care is going to be improved beyond the fact that you documented that your own 8 percent, 9 percent, 12 percent? There 

isn’t, is there? 

Mr. JOHNSON. There is not. So, as a State regulator, other than 

making sure that these companies meet the minimal standards 

threshold and thereby allow them to continue receiving their Medicaid, Medicare income stream, that is it. However, as far as any 

mechanism for—say, for example, if it is a wrongful death case, 

and a company is not insured, then there is no way to go after the 

assets. 

Mr. EMANUEL. Mr. Chairman, I would—in this hearing, I 

would assume hopefully one of the things that comes out of this— 

and I yield back the remainder of my time, if I have any—the sense 

that you are accountable—am I over—if I am over—— 

Mr. STARK. Go ahead. 

Mr. EMANUEL. Is that somehow we have to bring into line accountability with the profit, and I have no problem. Actually there 

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tunity. That is not the problem. The problem is to make sure that 

we have in place the same level of accountability and same level 

of interest if accountability is measured that you can be motivated 

by profit and do well, that is not the problem, but the fact is that 

you are also accountable for the service you deliver and that somebody is minding the store here. 

Mr. STARK. As usual the gentleman’s aim at the nail is quite 

accurate. 

Mr. Camp, did you have further inquiry? 

Mr. CAMP. Yes. I would just state that I think there are a labyrinth of regulations and rules covering nursing homes. I think we 

obviously—I would agree with my colleagues that the form of ownership is not as much of a concern to me or who is the owner as 

much as the fact that the compliance with existing rules and regulations occurs. Certainly the licensee is responsible for complying 

with all of Medicare’s rules and Medicaid’s rules and regulations. 

Mr. EMANUEL. Will the gentleman yield? 

Mr. CAMP. Yes. 

Mr. EMANUEL. I think all sides want to make sure that, A, 

there is good service delivered, and if there is a problem, that we 

know what is happening and that somebody is accountable. But as 

you will appreciate, and I think you do, that if, in fact, the structure is created to merely protect the investors from not just liability, from any accountability, that is then a problem. 

Mr. CAMP. Yes. 

Mr. EMANUEL. Okay. 

Mr. CAMP. I think we just don’t have enough information. I 

think there are States that require insurance, have insurance requirements in order to be licensed. Obviously Mississippi apparently does not. But why isn’t the State legislature then taking action then to require—if they have been able to put in a requirement that ownership be disclosed, why not also have minimal insurance requirements? 

So, I think we need to get some more information in terms of 

what is the state of play around the country in terms of what are 

States doing. Clearly your point about it is about the care and the 

quality of care that is delivered, I think that really needs to be the 

focus of this Committee. 

Mr. HULSHOF. Would you yield? 

Mr. CAMP. Yes. 

Mr. HULSHOF. I will say to my friend from Illinois, I agree in 

principle with your statement, but regulation for regulation’s sake, 

there could be, for instance, differing opinions. Congress wanted to 

address the WorldCom issue, and so as a result—or Enron, and as 

a result we passed Sarbanes-Oxley, and there have been varying 

opinions about whether that accountability measure, if the good 

has outweighed the possible harm. 

Then to address Mr. Camp’s point, having some consistency in 

enforcement, I know firsthand some years ago because we did some 

constituent advocacy in Missouri, a nursing home privately owned, 

but by a family company was written up by a very aggressive regulator because they had provided a pat of butter on the tray of the 

meal of a diet-restricted patient and faced, in my view, enormous 

fines. 


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So, again, the goal is the same. I would say to my friend from 

Illinois, those residents deserve—and especially because of taxpayer moneys going to support their care—the enforcement of important safety regulations. But I agree with my friend from Michigan that in law school they used to say, bad cases make bad law. 

I am not sure. Anecdotally we can all probably talk about tough 

cases, but I would like to see some more data before we run headlong into some sort of regulatory issue. Thanks. 

Mr. CAMP. I would just say that some of the reasons these legal 

entities have been created is because of the explosion of lawsuits 

we have seen throughout society, many with merit, but many without merit, and how do we sort through that. So, that is also a concern I think we need more information on. 

I would be happy to yield. 

Mr. EMANUEL. To your one point about data, I am not saying 

this is the Bible from The New York Times, but it does compare 

privately owned nursing homes versus the national standards by 

other nursing homes, and it shows the care there. So, I am not saying—I am open for State-by-State data, company-by-company comparison, et cetera. 

Two, as to the Sarbanes-Oxley reforms, we may have taken a 

hammer to a problem, but if you talk to a number of CEOs who 

have problems with provisions of the bill, all would acknowledge 

two things: One, that forcing the CEO to put his or her signature 

at the bottom of the page knowing they are responsible for a report 

is far more important than any other item in there, that they knew 

if their name was on there, they had to go through that document 

and not just let the CFO and the treasurer at the company do that; 

two, as a wake-up call to the Board that they had accountability. 

So, I would say that although you can point to problems, I would 

say that, in fact, although it may have overshot the runway in 

some areas, it got the job done, and everybody knows that what 

happened through a long period of time there were successes there, 

that the Board and the CEO were accountable for what happened 

and what was documented and reported to the Securities and Exchange Commission. 

Second, I am not looking for regulation for regulation purposes. 

I would be open to setting a minimum standard, and then every 

State, if they wanted to exceed that standard—we don’t mean to 

pick on you, Mr. Johnson, or your State, but if Mississippi doesn’t 

require some level of insurance, but other States do, since Medicare 

is paid for by the Feds and Medicaid at least 50 percent is paid by 

the Feds, I think we have not just statutory, but fiduciary responsibility to the taxpayers that there is a standard. You want to exceed 

the standard, that is what the legislature is for. If you just want 

to hit the bar, that is your job, too. 

Mr. CAMP. Thank you, Mr. Chairman. 

Mr. STARK. Thank you. 

I would just like to add to this, and, again, the witnesses feel free 

to chime in, just a couple of issues. Mr. Hulshof wondered whether 

we set rates, and we do for hospitals. We actually do set DRG 

rates. 

To Mr. Camp’s issue of how they could survive a $61⁄2 billion cut, 

it wasn’t a cut, it was just a freeze of what they are getting now. 


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The difference was this: Acute care hospitals had a margin of about 

5 percent and the nursing homes 15 percent. The Medicare part of 

acute care was negative, so we let them have the full market basket—we didn’t, but MEDPAC recommended it—whereas it was better at a 15 percent margin for Medicare for nursing homes, so we 

didn’t give it to them. 

Now, we didn’t sit around and noodle that through with our own 

calculators here. We got that advice through MEDPAC, and we 

have changed that every year. We have made adjustments, and in 

effect it is a form of rate setting. 

As to minimum standards and regulations, I am overjoyed. We 

got a response from the American HealthCare Association about 

their successes in improving quality, and one of the successes they 

state is that they say that there is a decline in the use of physical 

restraints. Well, guess what? In 1987, we mandated that in the 

law, and I suspect that is why there has been a decline in the use 

of physical restraints, and not just through some restraint fairy 

putting that message under the pillows of them. So, that some regulations, as we do with acute care hospitals, we have conditions of 

participation. 

It seems to me that if we have been, and I think I have been, 

incorrectly looking at private equity funds, I don’t really think that 

is the issue here today. We may have some examples of wealthy 

investors with a lot of assets adjusting nursing homes to make 

more profit. That could be an individual. It could be Bill Gates or 

Warren Buffett could do that, too, I suppose, as an individual. 

The question is, at least in my mind and I think Mr. Camp, 

ought we to have some minimum standards as we do for acute care 

hospitals for nursing homes to participate in Medicare? Those 

ought to set whatever we find or whatever our advisors—the nursing home industry certainly should be part of that—and set that 

in the record. 

Then the question of penalties, and how does General Johnson 

or others—how do they enforce those? If somebody has devised a 

loophole so they can shield themselves from enforcement, it seems 

to me we could structure that in a way that would make the rules 

enforceable. 

Mr. HULSHOF. Would you yield, Mr. Chairman? 

Mr. STARK. Yes, I will yield. 

Mr. HULSHOF. Very briefly, and I apologize to the witness for 

hearing this sort of out-and-out discussion, but I think it is useful. 

But you are exactly right, Mr. Chairman, DRG rates or a host of 

reimbursements are set, and so if you see a Medicare patient, you 

know, for instance, what you are going to be reimbursed for a particular procedure, rate setting and market baskets. Quite frankly, 

as a real aside, tangential aside, I think unfortunately our health 

care decisions are often driven by the reimbursement rates, but I 

have said that on other occasions. 

When you talk about profit margin and what is too much or too 

little in the citation of 13 percent or 15 percent for nursing homes, 

a couple weeks ago sitting in those chairs we had some representatives of some big insurance companies providing Medicare Advantage, and I seem to recall during that testimony one company in 

particular said they weren’t making even a 3 percent profit margin. 


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So, I bristle a bit. I am reluctant to embrace the idea of determining the profit margin, yes, on rates and reimbursements, and 

even, as Dr. Harrington pointed out, often a provider will see a 

Medicaid patient knowing that Medicare is going to help kind of 

pay for the bills and to keep the doors open. 

So, I think this has been a very useful hearing, but I hope we 

are not going to get too far afield by Congress, in its infinite wisdom, deciding what the private sector or the profit margins or percentages should be, and I appreciate the gentleman yielding. 

Mr. STARK. I concur with the gentleman. 

I did want to ask Dr. Harrington, because I had mentioned it to 

staff and one of my colleagues who hasn’t returned from the vote, 

but in California are there many entities that are solely Medi-Cal 

or solely Medicare; is that common or—— 

Ms. HARRINGTON. No. At the current time nationally it is 95 

or 98 percent that are duly certified. 

Mr. STARK. Would it serve any purpose of separating these entities; in other words, even if they had to operate under the same 

roof and said, wait a minute, you have to have separate beds, separate rooms, separate staff for Medicare, which I think gets the 

more acute patients? 

Ms. HARRINGTON. They were separated to an extent when you 

had cost-based reimbursement for Medicare. But once Congress 

moved to the prospective payment for Medicare, they just set the 

Medicare rate. Medicaid sets its rate, which is mostly prospective, 

and the nursing homes can do what they want. This is what exacerbated the problem. 

Mr. STARK. You think that was a bad move? 

Ms. HARRINGTON. Absolutely. A 25 percent drop in our staffing 

when that happened, because they are allowed to move the money 

from the direct care over into the profit center now. There is no 

control over how they spend the money. 

Mr. STARK. Could the witnesses help me here? It is my sense 

that Medicare patients have a higher acuity and require more care? 

Ms. HARRINGTON. Yes. In theory that’s right, but in practice 

they have more staffing. 

Mr. STARK. Let’s get through the theory first. 

When it all gets ‘‘funged,’’ we pay one rate, and Medicaid, I 

think, almost universally pays a lower rate. 

Ms. HARRINGTON. About a third. 

Mr. STARK. It would seem to me that perhaps you save a little 

on the Medicare side to cover your costs on the Medicaid side; that 

if we separated that somehow, we could be sure that the Medicare 

dollars were going as Congress—as we would intend. Say, look, if 

these are the cases that are entitled to this Medicare rate, and the 

States will have to do—in conference with Mr. Dingell as they 

choose, but I don’t—would this do harm to the system? 

Ms. HARRINGTON. You could separate it, but the real problem 

is you give them—you have this complex formula for giving them 

a rate, which is based on their staffing, the client staffing needs 

and therapy needs. Once you give them the rate, they can take the 

money and run, and that is what is happening. 


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Mr. STARK. Would any of the witnesses like to add anything to 

enlighten the Chair or my colleagues before we adjourn and send 

you off to lunch? 

Mr. JOHNSON. Yes, sir. 

Mr. STARK. General Johnson. 

Mr. JOHNSON. Yes, one thing. There has been some reference 

made to the explosion of lawsuits in the context of nursing homes 

over the past few years. Mississippi is one of the States that has 

enacted tort reform. Also now almost all of the nursing homes require binding arbitration agreements before taking a patient. 

So, the issue is not so much as, ‘‘we are going to get some runaway verdicts, so therefore we need to look out for the nursing 

homes in that regard’’ as it is, ‘‘what would be the source for a true 

or legitimate recovery as found by an unbiased arbitrator? Should 

there be funds available in the form of insurance, a bond or attachment of assets in that event?’’ So, I think it is a very different situation; the landscape now in Mississippi is quite different than it 

was 3 years ago. 

Mr. STARK. Well, I am going to go off the record and adjourn 

the hearing. 

[Whereupon, at 12:30 p.m., the hearing was adjourned.] 

[Submissions for the Record follow:] 


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f 


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Statement of AARP 

On behalf of AARP’s nearly 40 million members, thank you for holding this important hearing today on nursing home quality. It has been 20 years since the enactment of national standards for nursing home quality in the Omnibus Budget Reconciliation Act of 1987 (OBRA ’87). While the quality of care in our nation’s nursing 

homes has improved over the last 20 years, significant progress still needs to be 

made. The recent New York Times article examining the sub-par quality of care in 

nursing homes owned by private equity firms is the latest reminder that quality of 

care in our nation’s nursing homes is an ongoing issue. Approximately 16,000 nursing homes in this country provide care to about 1.5 million of our most vulnerable 

citizens. Federal and state governments have a responsibility to help ensure high 

quality for these residents, especially since Medicaid, and to a lesser extent Medicare, pay for a majority of nursing home services. This hearing offers an opportunity 

to assess the quality problems still lingering and to examine potential solutions to 

improve quality for all nursing home residents. 

A Call to Action 

On September 23rd, the New York Times published an expose ́ detailing the results of its own investigation into the quality of care in nursing homes purchased 

by private investors, including private equity firms. The Times investigation found 

that private investor owned nursing homes cut expenses and staff, scored worse 

than national rates in 12 of 14 quality indicators, and created complex corporate 

structures that obscured who controlled them and who is ultimately responsible for 

the quality of care they provide. These findings and others in the article are disturbing, but unfortunately are not new. Private equity firms are not the first nursing home owners to use complex corporate ownership and real estate structures— 

some nursing home chains have used structures like this already. 

AARP supports congressional hearings—like this one—to examine nursing home 

quality problems, including concerns raised about facilities owned by private equity 

firms, and begin to look for ways to address these problems. Concerns about nursing 

home quality are not limited to any one state, owner or type of owner, and quality 

problems can harm residents regardless of where they occur. We believe that investigation by the Government Accountability Office (GAO) could also shed additional 

light on these issues and potentially offer constructive steps to improve quality. 

Examples of Quality Problems 

In recent years, media stories, GAO reports, and investigations by the Department of Health and Human Services’ Office of Inspector General have revealed specific nursing home quality issues. Many facilities do provide high quality of care and 

quality of life to their residents. Some facilities are even transforming their culture 

to offer smaller more homelike settings with private rooms, more choice for residents, and more control to staff that is more likely to stay at the facility and provide 

consistent high quality care. However, there are also facilities that show significant 

quality deficiencies on their annual inspections that can cause harm to residents. 

Effective enforcement of quality standards and remedies, including closure, is important for these and all facilities. 

Some nursing homes and their owners have taken steps that can make it more 

difficult for regulators and consumers to hold these facilities accountable for quality 

care. For example, corporate restructuring where a nursing home chain splits itself 

into single purpose entities (some owning the individual nursing home, others leasing and operating the facility, yet others holding the real estate) can obscure and 

complicate the answer to the question, ‘‘Who is responsible for the quality of care?’’ 

in any particular facility. The answer may not be just one entity or group of individuals, and they may not be easy to identify. When a regulator looks to assess a penalty for a deficiency, or consumers and their families seek to hold facilities accountable for poor quality of care, it can be more difficult for the regulator to collect a 

penalty or for the consumers to hold facilities liable for quality of care. 

Disclosure requirements can provide important information about who has an 

ownership interest or controls a company or facility. But when a facility is owned 

by a private equity firm, the facility is no longer subject to certain public disclosure 

requirements. One should be able to identify the individuals or corporate entities 

that are responsible and accountable for the operation and quality of care in the facility. Transparency and accountability are vital for all facilities, regardless of their 

ownership. 

Staffing in nursing homes also has an important impact on quality. Better staffing 

levels and well-trained staff with low turnover can improve quality of care for nursing home residents. Yet facilities may not always have sufficient staff, and addiVerDate Nov 24 2008 00:20 Mar 26, 2009 Jkt 046778 PO 00000 Frm 00108 Fmt 6633 Sfmt 6621 E:\HR\OC\46778.XXX 46778

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tional resources provided to facilities for staff do not always result in staffing improvements. 

It is also important to have reliable and up-to-date data on staffing levels in facilities—not just data that is collected once a year when a facility receives its annual 

survey. Accurate and reliable staffing data is important to consumers and their families when they choose a nursing home for their loved one. In addition, the Medicare 

Payment Advisory Commission (MedPAC) has recommended that the Department 

of Health and Human Services (HHS) Secretary direct skilled nursing facilities 

(SNFs) to report nursing costs separately from routine costs when completing the 

SNF Medicare costs reports. MedPAC also notes that it would be useful to categorize these costs by type of nurse (registered nurse, licensed practical nurse, and 

certified nursing assistant). This information would allow MedPAC to examine the 

relationship between staffing, case mix, quality, and costs. 

In addition, staffing in nursing homes and other long-term care settings could be 

improved by addressing the serious need for an adequate, stable, and well-trained 

workforce. Direct care workers, such as personal care assistants, home care and 

home health aides and certified nurse assistants, provide the bulk of paid long-term 

care. Long-term care workers should receive: adequate wages and benefits; necessary training and education, including opportunities for advancement; more input 

into caregiving; more respect for the work they do; and safer working conditions. 

Despite the reforms in OBRA ’87 and improvements in care since that time, GAO 

has found that a small but significant share of nursing homes continue to experience quality-of-care problems. Last year, one in five nursing homes in this country 

was cited for serious deficiencies—deficiencies that cause actual harm or place residents in immediate jeopardy. GAO has also noted state variation in citing such deficiencies and an understatement of them when they are found on federal comparative surveys but not cited on corresponding state surveys. In addition, some facilities 

consistently provide poor quality care or are ‘‘yo-yo’’ facilities that go in and out of 

compliance with quality standards. Almost half the nursing homes reviewed by GAO 

for a March 2007 report—homes with prior serious quality problems—cycled in and 

out of compliance over 5 years and harmed residents. 

These are examples of some of the challenges and issues that should be addressed 

to improve nursing home quality. In some cases, better enforcement of existing 

standards and requirements may solve the problem. In other cases, additional steps 

may be needed to address the problem. 

Finally, we note that some nursing home residents may choose and be able to get 

the services they need in a home- and community-based setting with sufficient support from family and/or professional caregivers. 

State Role 

States play an important role in ensuring nursing home quality. For example, 

states license nursing homes to operate, conduct the annual surveys of nursing 

homes, and are also a payer and overseer of quality through the Medicaid program. 

State laws and regulations regarding nursing home quality vary, but there may also 

be useful models and lessons learned from state experiences. Rhode Island passed 

omnibus nursing home legislation in 2005 that took several steps, including requiring nursing home applicants to set financial thresholds and providing the state with 

additional tools to detect and address potential deficiencies, such as the appointment of an independent quality monitor at the facility’s expense. 

Ideas for Consideration 

This hearing and others can help Congress learn about some of the problems and 

challenges to providing quality of care in our country’s nursing homes, and help 

identify possible ideas and solutions that Congress, the Centers for Medicare and 

Medicaid Services (CMS), and others might pursue to improve nursing home quality, accountability, transparency, and staffing. AARP suggests the following ideas 

for consideration: 

• Ensure that Medicare provider enrollment documents capture complete information on all entities and individuals with a significant direct or indirect financial interest in a nursing facility or chain; 

• Require nursing facilities and chains to update their enrollment data at least 

every 3 years regardless of whether or not there has been a change in ownership; 

• Review and revise current Medicare provider agreements to take account of new 

corporate organizational structures to ensure accountability for compliance with 

all Medicare requirements; 

• Accelerate implementation of the Provider Enrollment Chain and Ownership 

System (PECOS) to include all enrollment data for nursing homes and chains; 


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1 Charles Duhigg, ‘‘More Profit and Less Nursing at Many Homes,’’ The New York Times (Sep. 

23, 2007), http://www.nytimes.com/2007/09/23/business/23nursing.html?_r=1&oref=slogin. As the 

Wall Street Journal observed, ManorCare was a desirable take-over target for the Carlyle Group 

because it owns most of its real estate and because 73% of its revenues come from Medicare 

and private-pay residents, compared to 53% for some of its competitors. Theo Francis, ‘‘Real Estate Is Driver Of ManorCare Buyout Deal; Nursing-Home Firms, Attractive at Moment, Are Acquisition Targets,’’ The Wall Street Journal (July 3, 2007). An editorial in McKnight’s Long Term 

Care expressed the concern that if the Carlyle Group acts like ‘‘a typical private equity firm, 

. . . we can expect to see aggressive cost-cutting including layoffs.’’ John O’Connor, ‘‘Opinion— 

The Big Picture: ManorCare and the future,’’ McKnight’s Long-Term Care (Aug. 8, 2007), http:// 

www.mcknightsonline.com/content/index.php?id=24&tx_ttnews[swords]=Manor%20Care&tx_ ttnews[pointer]=1&tx_ttnews[tt_ news]=4040&tx_ttnews[backPid]=25&cHash=2184780248. 2 Joseph E. Casson and Julia McMillen, ‘‘Protecting Nursing Home Companies: Limiting 

Liability through Corporate Restructuring,’’ Journal of Health Law, Vol. 36, No. 4, page 577 

(Fall 2003), http://www.proskauer.com/news_publications/published_articles/content/2003_12_02. 3Lisa Chedekel and Lynne Tuohy, ‘‘No Haven for the Elderly; Nursing Home Troubles Show 

Flaws in State Oversight,’’ Hartford Courant (Nov. 18, 2007), http://www.courant.com/news/custom/topnews/hc-haven1.artnov18,0,1229473.story?coll=hc_tab01_layout. 

• Link PECOS provider enrollment data to nursing home survey results and 

other relevant data to allow for better analysis of trends in outcomes in nursing 

home quality; 

• Require nursing homes to report quarterly in electronic form data on staffing 

by type of nursing staff (registered nurses, licensed practical nurse, and certified nurse aides), turnover and retention rates, and the ratio of direct care 

nursing staff to residents. Require CMS to disclose this improved staffing data 

on the Nursing Home Compare website for consumers; 

• Revise Medicare cost reports for nursing facilities to require separate cost centers for nursing services, other direct care services, and indirect care services; 

• Audit staffing and cost report data at least every 3 years and impose sanctions 

for failure to report or for filing false information; 

• Use civil monetary penalties collected for nursing home quality violations under 

Medicare to directly address urgent needs of nursing home residents; 

• Enact the Elder Justice Act (S. 1070/H.R. 1783) and the Patient Safety and 

Abuse Prevention Act (S. 1577/H.R. 3078); and 

• Finally, effectively enforce existing nursing home quality standards and penalties for violating these standards, and provide adequate resources to enforce 

these standards. 

Conclusion 

AARP is pleased with the renewed attention and interest that Congress has 

shown in nursing home quality. We look forward to working with Members of this 

committee and your colleagues on both sides of the aisle to further improve the 

quality of life and quality of care for our nation’s nursing home residents. 

f 

Statement of Center for Medicare Advocacy 

The recent investigative report in The New York Times describing the new phenomenon of private equity firms’ taking over multi-state nursing home chains and 

the declining quality of care for residents that results 1 has brought to the public’s 

attention two important issues—the nursing home industry’s use of public reimbursement for private gain, rather than to provide high quality care to residents, 

and the poor quality care experienced by residents of many nursing homes. 

The separation of nursing home management from nursing home property is highlighted by the phenomenon of private equity’s recent interest in the nursing home 

industry, but the issue is not unique to private equity firms. The mechanism has 

been actively promoted as a way for nursing home companies to avoid liability from 

public regulatory agencies as well as from private litigants.2 Over the years, chains 

other than private equity firms have used multiple corporations to hide assets and 

avoid creditors and have used public reimbursement to purchase unrelated businesses. 

In a 3-day series published November 18–20, 2007, the Hartford Courant reported 

that Haven Healthcare, a Connecticut-based chain caring for nearly 2,000 residents 

in Connecticut, provided seriously inadequate care at 10 of its 15 facilities in the 

state.3 The chain failed to pay multiple creditors and the owner is accused of diverting reimbursement to fund his investment in a country music recording company 


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4Lynne Tuohy and Lisa Chedekel, ‘‘Nursing Home Takeover Sought; After Haven Files for 

Bankruptcy, Blumenthal Wants Trustee to Control Facilities,’’ Hartford Courant (Nov. 22, 2007), 

http://www.courant.com/news/custom/topnews/hc-haven1122.artnov22,0,5263895.story; Lisa Chedekel and Lynne Tuohy, ‘‘Haven Debt Woes,’’ Hartford Courant (Nov. 20, 2007), http:// 

www.courant.com/news/custom/topnews/hchaven3.artnov20,0,2146972.story?coll=hc_tab01_layout. Haven Healthcare’s bankruptcy filing is 

at http://www.courant.com/media/acrobat/2007-11/33896687.pdf. 5 42 U.S.C. §§ 1395i–3(b)(4)(C)(i), 1396r(b)(4)(C)(i)(1), Medicare and Medicaid, respectively. 

6 CMS, Appropriateness of Minimum Nurse Staffing Ratios in Nursing Homes, Phase II Final 

Report, pages 1–6, 1–7 (Dec. 2001), http://www.cms.hhs.gov/CertificationandComplianc/12_ 

NHs.asp (scroll down to Phase II report) [hereafter CMS 2001 Nurse Staffing Report]. 7Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub.L. 

106–554, App. F, § 312(a), 114 Stat. 2763, 2763A–498. 8GAO, Available Data Show Average Nursing Staff Time Changes Little after Medicare Payment Increase, GAO–03–176, page 3 (Nov. 2002), http://www.gao.gov/new.items/d03176.pdf. 

Nurse staffing time increased by 1.9 minutes per day; registered nurse time decreased and licensed practical nurse and aide time increased. 9 Using empirical data, the 2001 CMS staffing report identified 3.55–4.1 hours per resident 

day as the number of nurse staffing hours needed to prevent avoidable harm to residents. In 

the simulation component of the staffing study, CMS identified, as appropriate ratios of certified 

nurse assistants to residents to meet the requirements of federal law, 8:1 on the day shift, 10:1 

on the evening shift, and 20:1 on the night shift. CMS, 2001 Nurse Staffing Report, supra note 

8. These ratios are similar to those identified by an expert panel convened by the John A. Hartford Institute for Geriatric Nursing, Division of Nursing, at New York University: 4.13 hours 

per resident day for direct nursing care staff (ratios for direct care staff, 5:1 on the day shift; 

10:1 on the evening shift; and 15:1 on the night shift). Charlene Harrington, Christine Kovner, 

Mathy Mezey, Jeanie Kayser-Jones, Sarah Burger, Martha Mohler, Robert Burke, and David 

Zimmerman, ‘‘Experts Recommend Minimum Nurse Staffing Standards for Nursing Facilities in 

the United States,’’ The Gerontologist, Vol. 40, No. 1, 2000, 5–16. 

in Nashville, Tennessee and personal real estate. On the third day of the series, the 

chain and its 44 related entities filed for bankruptcy.4

The private equity takeover of nursing home chains has led to many calls for 

more ‘‘transparency’’ in ownership of nursing homes. Requiring full and comprehensive disclosure of ownership information is a useful, but not sufficient, step to improving quality of care and quality of life for residents. More specific substantive 

changes are also required to ensure that residents receive the care they need. 

There is no single answer to problems of poor quality of care and poor quality of 

life in nursing homes; multiple efforts are needed. Many solutions have already been 

identified. Congress should 

1. Enact meaningful nurse staffing ratios. Congress needs to enact specific 

staffing ratios to ensure that facilities employ sufficient numbers of professional and 

paraprofessional nurses to provide care to residents. 

Nurse staffing is the single best predictor of good quality of care. Residents need 

to be cared for by professional nurses and by sufficient numbers of well-trained, 

well-supervised, and well-supported paraprofessional workers. 

The current standard in federal law is ‘‘sufficient’’ staff to meet residents’ needs, 

including one registered nurse eight consecutive hours per day seven days per 

week.5 This standard, enacted in 1987 as part of the Nursing Home Reform Law, 

has not worked to ensure that facilities have sufficient numbers of well-qualified 

and well-trained staff. 

In 2001, the Centers for Medicare & Medicaid Services (CMS) submitted a report 

to Congress documenting that more than 91% of facilities fail to have sufficient staff 

to prevent avoidable harm and that 97% of facilities do not have sufficient staff to 

meet the comprehensive requirements of the Nursing Home Reform Law.6

Raising reimbursement rates in the hope that facilities will increase their staffing 

levels as a result does not improve staffing. Congress increased Medicare reimbursement rates in 2000, specifically for nurse staffing.7 The Government Accountability 

Office (GAO) found that staffing levels remained stagnant and that staffing increased only when states mandated explicit staffing ratios or made other policy 

changes specifically directed at increasing nurse staffing.8

The staffing ratios that CMS and other experts identified nearly a decade ago 

need to be mandated and implemented.9

2. Require accountability for public reimbursement. Congress needs to ensure that public reimbursement through Medicare and Medicaid funding is spent, 

as Congress intends, on the care of people who live in nursing homes. In testimony 

before this Subcommittee, Professor Charlene Harrington described the concern: 

Medicare reimbursement is based on specific amounts for various components of 

care, such as nurse staffing, but once a facility receives Medicare reimbursement, 

it can spend the money in whatever way it chooses. Professor Harrington called for 


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10 Homer Brickey, ‘‘ManorCare sale would enrich execs; Toledo firm’s officials may receive more than $200 million for stock,’’ The Toledo Blade (July 6, 2007), http://toledoblade.com/apps/ 

pbcs.dll/article?AID=/20070706/BUSINESS03/707060449/-1/BUSINESS. 11 National spending on nursing home care in 2005 was $80.6 billion ($21.6 billion for Medi- care; $59.0 billion for Medicaid). Georgetown University Long-Term Care Financing Project, 

‘‘National Spending for Long-Term Care’’ (Fact Sheet, Feb. 2007), http://ltc.georgetown.edu/pdfs/ 

natspendfeb07.pdf. The federal survey budget for states for all survey activities is $293 million 

for fiscal year 2008. Budget of the United States Government, Fiscal Year 2008, Appendix (Department of Health and Human Services), page 23, http://www.whitehouse.gov/omb/budget/ 

fy2008/pdf/appendix/hhs.pdf. In general, more than three-quarters of state survey agency time 

is focused on nursing homes. 12 Helena Louwe, Carla Perry, Andrew Kramer (Health Care Policy and Research, University 

of Colorado Health Sciences Center), Improving Nursing Home Enforcement: Findings from 

Enforcement Case Studies page 44 (March 22, 2007), http://www.medicareadvocacy.org/ 

SNF_FinalEnforcementReport.03.07.pdf (‘‘Although ‘the case studies revealed that enforcement 

actions, if executed, have only a limited positive effect . . . it must be recognized that nursing 

home behavior changes seldom occurred without a formal citation.’ ’’ [hereafter University of Colorado, Improving Nursing Home Enforcement]). 13GAO, Efforts to Strengthen Federal Enforcement Have Not Deterred Some Homes from 

Repeatedly Harming Residents, GAO–07–241 (March 2007), http://www.gao.gov/new.items/ 

d07241.pdf [hereafter GAO 2007 Report]. The GAO has issued more than a dozen reports on 

nursing home survey and certification issues since 1998. These reports are listed at pages 92– 

93 of the 2007 report. 14See, e.g., GAO, Nursing Home Deaths: Arkansas Coroner Referrals Confirm Weaknesses in 

State and Federal Oversight of Quality of Care, GAO–05–78 (Nov. 2004), http://www.gao.gov/ 

new.items/d07241.pdf. See also University of Colorado, Improving Nursing Home Enforcement, supra note 12. 15See, e.g., California State Auditor, Department of Health Services: Its Licensing and Certification Division Is Struggling to Meet State and Federal Oversight Requirements for Skilled 

Nursing Facilities, 2006–106 (April 2007), http://www.bsa.ca.gov/pdfs/reports/2006–106.pdf 

[hereafter California Auditor 2007]; Colorado State Auditor, Nursing Facility Quality of Care: 

Department of Public Health and Environment, Department of Health Care Policy and Financing (Performance Audit) (Feb. 2007), http://www.leg.state.co.us/OSA/coauditor1.nsf/All/ 

D2FC96140165870D8725728400745D8C/$FILE/1767%20NurseHomePerf%20Feb%202007.pdf 

[hereafter Colorado Auditor 2007]. 

cost centers and for rules prohibiting facilities from shifting reimbursement from 

one cost center to another (e.g., from staffing to administration). The Center for 

Medicare Advocacy supports Professor Harrington’s recommendation that Congress 

ensure that public funds are used for their intended purpose. 

Recent reports about the purchase of ManorCare by the Carlyle Group indicate 

that when the sale is completed, ManorCare’s CEO Paul Ormond, whose compensation was $18,800,000 last year, may receive between $118,000,000 and $186,000,000 

through the exercise of stock options.10

3. Increase and stabilize funding for survey and certification activities. 

The budget for survey and certification activities needs to be increased at the state 

and federal levels to allow for sufficient numbers of well-trained, multi-disciplinary 

staff to conduct annual, revisit, and complaint surveys. At present, the federal government spends less than 1⁄2 of 1% monitoring care in nursing homes, compared 

with the amount spent on the care itself.11

Limited survey budgets lead to insufficient numbers of survey staff. Without a 

strong survey system to detect deficiencies, and the enforcement actions that may 

be imposed for documented deficiencies, many facilities will not provide care to residents in compliance with federal standards.12

4. Strengthen the enforcement system. Congress needs to ensure that enforcement is swift, certain, comprehensive, and meaningful. In the 1987 Nursing 

Home Reform Law, Congress required the Secretary and states to take a stronger 

enforcement approach to deficiencies: it required that the Secretary and states have 

a comprehensive strategy for enforcement; enact and use a full range of intermediate sanctions; impose more significant sanctions for deficiencies that are repeated or uncorrected; and shorten the time between identifying the problem and 

imposing remedies. The federal regulations did not implement this statutory mandate and have failed to ensure compliance with federal standards of care. 

In its most recent nursing home report,13 the GAO reiterated once again, as it 

has consistently and repeatedly reported since 1998, that the enforcement system 

is too lax and too tolerant of poor care for residents and that it allows most facilities 

to avoid meaningful consequences for their deficiencies. 

• Deficiencies are not cited. The GAO 14 and State Auditors 15 repeatedly report 

that surveyors fail to identify and cite many deficiencies. 


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16GAO, Nursing Home Quality: Prevalence of Serious Problems, While Declining, Reinforces 

Importance of Enhanced Oversight, GAO–03–561 (2003), http://www.gao.gov/new.items/ 

d03561.pdf; California Auditor, supra note 15; Colorado Auditor; supra note 15. 17GAO 2007 Report, supra note 13. 18 University of Colorado, Improving Nursing Home Enforcement, supra note 14. 19 American Healthcare Association v. Shalala, D.D.C., Civil No. 1:99CV01207 (GK) (case dismissed, March 6, 2000), unsuccessfully challenging final regulations published at 64 Fed. Reg. 

13,354 (March 18, 1999), 42 C.F.R. §§ 488.430(a), 488.438(a)(2). 20 Center for Medicare Advocacy, The ‘‘New’’ Nursing Home Quality Campaign: De ́ja` vu All 

Over Again (Sep. 21, 2006), http://medicareadvocacy.org/AlertPDFs/2006/06_09.21.SNF 

QualityCampaign.pdf. 21 Joanne Lynn, Jeff West, Susan Hausmann, David Gifford, Rachel Nelson, Paul McGann, 

Nancy Bergstrom, and Judith A. Ryan, ‘‘Collaborative Clinical Quality Improvement for Pressure Ulcers in Nursing Homes,’’ Journal of American Geriatric Society 55:1663–1669 (2007) 

(quoted language at 1668). 22 AHCA, ‘‘American HealthCare Association Praises Collaborative Efforts with Quality Improvement Organizations to Enhance Patient Outcomes’’ (News Release, Oct. 22, 2007), http:// 

www.ahcancal.org/News/news_releases/Pages/22Oct2007.aspx. 

• Deficiencies are described as less serious than they actually are. Many deficiencies are identified as causing no harm to residents when, in fact, they cause 

harm.16

• Deficiencies that are cited do not lead to sanctions or lead to only minimal sanctions. Remedies that are discretionary are imposed infrequently; per day and 

per instance civil money penalties are often imposed at the lower ends of the 

allowable range; and temporary management is almost unknown. The Secretary 

does not impose denial of payment for all Medicare and Medicaid beneficiaries, 

as authorized by law.17

While CMS could use additional enforcement tools, such as the state remedy of 

denial of all admissions, the GAO has repeatedly shown that CMS and state survey 

agencies do not use the full range of remedies they currently have. 

Despite these serious shortcomings, recent research demonstrates that the survey 

and enforcement system is essential to securing compliance by nursing facilities. 

Without the system, facilities do not make necessary changes.18

The nursing home industry advocates for weakened enforcement and calls 

for alternative, ineffectual, ‘‘voluntary’’ collaboration between survey 

agencies and nursing homes 

The nursing home industry opposed the comprehensive enforcement provisions of 

the Nursing Home Reform Law as the law was being enacted in 1987 and it has 

continued its opposition ever since, often trying to weaken the law or undermine it, 

or both. For example, the American HealthCare Association unsuccessfully challenged the per instance civil money penalty regulation that the Health Care Financing Administration promulgated in 1999.19 Over the years, the industry has also developed a series of voluntary ‘‘quality initiatives’’—Quest for Quality, Quality First, Advancing Excellence in America’s Nursing Homes—that promise a commitment to 

high quality care, but that undermine the regulatory system by establishing alternative criteria for evaluating nursing facilities. In contrast to the criteria established by the regulatory system, these industry criteria reflect secret goals and targets for improvement that are voluntary, self-reported and unaudited, and lack public accountability.20

Voluntary efforts, such as those used by Quality Improvement Organizations 

(QIOs), do not improve care for residents. A recent evaluation of the National Nursing Home Improvement Collaborative found that the QIO’s $1,400,000 project to reduce the incidence and prevalence of pressure ulcers in 35 nursing facilities (all 

members of multi-state chains) ‘‘did not significantly affect the overall rate of [pressure ulcers or PUs],’’ although it ‘‘substantially reduced the rate of Stage III and 

IV PUs.’’ 21 The researchers, who are primarily affiliated with the QIO community, 

recommend excluding Stage I and II pressure ulcers from publicly-disclosed pressure 

ulcer rates. They also recommend reporting ‘‘process’’ measures, rather than ‘‘outcome’’ measures of pressure ulcer prevalence and incidence. These changes would 

make facilities appear to be doing a better job in addressing pressure ulcers—and 

reported pressure ulcer rates would suddenly fall—but they would not improve actual outcomes for residents. The American HealthCare Association applauds nursing 

homes’ collaborative work with QIOs and ‘‘encourages CMS to swiftly adopt the 

study’s recommended changes for measuring pressure ulcers.’’ 22

Conclusion 

The New York Times identified problems in nursing home care when private equity firms take over nursing homes. These problems extend beyond private equity 


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firms and reflect problems throughout the nursing home industry. Congress needs 

to act in order to ensure that standards of care, including staffing levels, are high 

and that they are meaningfully and effectively enforced. 

About the Center for Medicare Advocacy, Inc. 

The Center for Medicare Advocacy is a non-profit, non-partisan organization that 

works to obtain fair access to Medicare and necessary health care for older people 

and people with disabilities. The Center, founded in 1986, provides education, analytical research, advocacy, and legal assistance to help older people and people with 

disabilities obtain necessary health care. The Center focuses on the needs of Medicare beneficiaries, people with chronic conditions, and those in need of long-term 

care. The Center provides training on Medicare and health care rights throughout 

the country and serves as legal counsel in litigation of importance to Medicare beneficiaries nationwide. 

f 

HCR ManorCare 

November 19, 2007 

Hon. Pete Stark 

Chairman 

Health Subcommittee 

Committee on Ways and Means 

United States House of Representatives 

Hon. David Camp 

Ranking Member 

Health Subcommittee 

Committee on Ways and Means 

United States House of Representatives 

Washington, DC 

Dear Chairman Stark and Ranking Member Camp: 

I write to clarify a number of factually inaccurate or misleading comments made 

by witnesses and third parties during the November 15, 2007 hearing on ‘‘Trends 

in Nursing Home Ownership and Quality.’’ In particular we would like to address 

issues related to the transaction; its structure and transparency; the financial viability of the Company; and issues related to the operation of the Company after losing. I would be grateful if you would include this letter in the formal hearing record. 

Separation of the Real Estate and Operating Entities 

Witnesses at the hearing suggested that ManorCare and Carlyle were separating 

real estate and operating assets in an effort to minimize transparency and limit liability. Nothing could be further from the truth. 

While there will be changes in the corporate structure post-transaction, 

ManorCare will continue to own and manage both the operations and real estate 

of the company. Responsibility and accountability will continue to lie with 

ManorCare. 

More specifically, each operating company will be: 

• An indirect, wholly-owned subsidiary of HCR ManorCare, Inc. • Insured by HCR ManorCare, Inc.’s general and professional liability coverage 

described below. ManorCare will be insured at the same level post-transaction 

as it is today. • Managed by the same ManorCare leadership team currently in place. 

In order to finance the transaction, ManorCare has arranged financing secured by 

ManorCare’s real property. The real property will be owned by indirect, whollyowned limited liability subsidiaries. Because the real estate financing is secured 

only by real estate, our lenders required that the real property be organized in 

newly-formed limited liability entities tied to the specific mortgage for each of the 

lenders. 

This structure in no way affects the day-to-day operations of the skilled nursing 

facilities. It is also not a shield against ultimate liability of ManorCare—all of the 

assets will still be owned 100% by the parent company HCR ManorCare, Inc. 

ManorCare shares your goals with respect to transparency and have ensured that 

State regulators responsible for approval of the transaction have all essential information on our structure and ownership. 

ManorCare’s current general and professional liability program consists of $125 

million primary and excess insurance including a $5 million self-insured retention 

as well as $100 million in property risk insurance provided by some of the largest 


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and highest rated insurers and re-insurers in the marketplace. The current coverage 

is unaffected by the change of ownership and will continue in place after the closing 

of the transaction. 


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Financial Strength of the Company 

After this investment, HCR ManorCare will be the most financially solvent longterm care company in the United States. The Carlyle Group will be investing approximately $1.3 billion in equity in the company—twice the current level of equity 

that is on our balance sheet at the present time. 

Our ability to service our increased debt results from the fact that we will no 

longer be making interest payments associated with prior debt; repayments of our 

debt; or share buybacks that we have effected over the past 5 years. During this 

period of time, the amounts that the Company has paid for these items (which will 

not occur in the future) will equal or exceed the new debt service on an annual 

basis. HCR ManorCare will be able to adequately fund our obligations and ensure 

continued quality care to our patients and families. Our financial viability has been 

reviewed by an independent third party, Duff and Phelps, which has provided to our 

independent Board of Directors an opinion attesting to the solvency and viability of 

the Company subsequent to the transaction. Our Board of Directors have dutifully 

represented the interests of our shareholders and our Company in ensuring that 

this arrangement with The Carlyle Group is in the best interests of all stakeholders, 

including our patients, families and employees as well as our shareholders. 

Quality of Care 

Testimony at the recent hearing referred to a recent New York Times article with 

intimations that the findings of The New York Times research presage poor care at 

transactions involving private equity firms. As the Committee has been made 

aware, the findings of The New York Times have been put into serious question as 

a result of reports completed by both the Agency for Health Care Administration 

of the State of Florida and by the firm, LTCQ, which is led by researchers from Harvard and Brown Universities and which specializes in data analysis of long-term 

care companies. We urge the Subcommittee to thoroughly assess and validate the 

assertions of The New York Times. Private investment in the long-term care sector 

has been a critical factor in providing essential capital since 1940 and remains a 

vital element today whether in the form of equity or debt. It is interesting that both 

of the studies referenced above indicate that there is no evidence to support that 

the quality of care suffers when a facility is owned by a private equity firm or an 

investment company. 

In terms of our Company, HCR ManorCare is a leader in quality short-term postacute services and long-term care. With more than 500 overall sites of care in 32 

states, nearly 60,000 caring employees, and facilities spanning a care continuum of 

skilled nursing and rehabilitation centers, assisted living facilities, outpatient rehabilitation clinics, and hospice and home care agencies, HCR ManorCare was first in 

the industry to broadly measure patient care outcomes, with a continuing emphasis 

on meeting their care goals. Our Company has invested in clinical skills and technology to produce desired outcomes for patients who require more complex medical 

care and intensive rehabilitation, and does so in an environment that is more homelike than traditional providers (e.g., acute care hospitals). We provide high-acuity 

care to many of our patients, as well as chronic care services and we do so in a 

cost-effective manner ensuring that individuals receive care at the most appropriate 

setting. 

Our principal mission is to have our patients use long-term care services as an 

interim step between the acute care setting and their primary residence. Our company discharges 150,000 patients a year from our skilled nursing facilities. We are 

very proud that nearly two-thirds of these individuals stay in our centers for less 

than 40 days and half less than 30 days. Our strong medical, nursing and rehabilitation programs facilitate a shorter-term use of our centers, which enables us to provide more care to individuals throughout the United States. As part of our commitment to the best in care, we are expanding technology in our organization, increasing the use of physician and nurse extenders, broadening our information dissemination, improving the lives and involvement of our employees and working to bring 

improved programs of care and services to our patients and their families. 

Management and Expertise 

As a shareholder, The Carlyle Group intends to build on HCR ManorCare’s strong 

record. Carlyle believes that the best investment approach is to allow HCR 

ManorCare to continue doing what it is already doing so successfully—delivering 

quality care—and they intend to maintain the model that has shown proven results. 

The current management team at HCR ManorCare will continue to operate the 

company, and there will be no staffing reductions within our caregiver ranks due 

to the investment. We felt it was important to assure our patients and families that 

at no time have we considered, nor will we implement, a staffing reduction in our 


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centers as a result of this transaction. To that end, we provided assurances in writing to them, copies of which are included with the accompanying materials. 

The HCR ManorCare Board will continue its Quality Committee and additionally 

appoint an independent and well-regarded committee of experts to advise the Quality Committee and Board on quality of care. And HCR ManorCare will continue 

publishing its Annual Report on Quality, a copy of which is available to the public 

on our website. 

Again, we want to reiterate that within our transaction we will have the same 

management, staffing, policies and procedures and protocols and controls as well as 

additional oversight within our Board of Directors. 

We view our participation in the overall health care system very seriously. We 

are pleased to have worked with your agency in the initial Quality First program 

and have moved forward to ensuring that all of our skilled nursing centers are involved with the Advancing Excellence program. We are committed to quality measurement and initiatives and will continue to work to increase transparency for our 

patients, families and referral groups on the issue of quality. 

Summary 

HCR ManorCare has provided exceptional and comprehensive health care services 

to millions of individuals over its history. We acknowledge and take seriously our 

responsibility to ensure that the care provided to our patients and families is consistent with all appropriate rules and regulations as well as all appropriate medical 

and clinical standards. We also believe that our structure, financial viability, governance, and commitment to quality provide our patients and their families with the 

assurances that the Subcommittee on Health of the Ways and Means Committee is 

seeking from financial sponsors and management professionals. 

In closing, we are appreciative of this opportunity to provide additional information on the transaction between HCR ManorCare and the Carlyle Group, and appreciate this opportunity to reaffirm our commitment to continue managing the company with the same dedication to quality care, staffing levels, employee benefits, 

capital investment and the caring culture that has made HCR ManorCare the most 

uniquely successful and respected provider in our industry. 

Please let us know if you have any questions or if we can elaborate further on 

any of these key points. 

Sincerely, 

Stephen L. Guillard 

Executive Vice President 

f 

Chief Operating Officer 

Statement of National Association of Portable X-Ray Providers 

Chairman Stark, Ranking Member McCreary and distinguished Members of the 

Subcommittee on Health, the National Association of Portable X-ray Providers 

(NAPXP) is submitting testimony concerning the effect of nursing home ownership 

trends on nursing home accountability and its impact on our industry. 

NAPXP is a national non-profit association representing portable/mobile x-ray 

providers. NAPXP members supply portable x-ray, ultrasound and EKG services to 

nursing homes and home care patients. The members of NAPXP are small and 

micro businesses whose companies provide services to the elderly in a safe, convenient fashion, as they, literally, provide care at patients’ bedsides. Portable x-ray providers allow for the Medicare and Medicaid programs to obtain cost savings (estimated at $2 billion annually) as well as patient convenience (patients do not need 

to leave the nursing home or their own home in order to obtain the necessary services). However, the members of the association rely on Medicare reimbursement significantly as their services are provided principally to Medicare beneficiaries. As 

such nursing home accountability becomes a large issue for many of our members. 

As you are aware, the nursing home industry has and continues to go through 

transformations. Many facilities have gone out of business, sold to other corporate 

entities or have declared bankruptcy. These ownership trends have impacted our industry in a negative way as well as the beneficiaries we provide our services to. We 

rely on the nursing homes to provide us accurate information in order to bill the 

Medicare program. Whether a patient is under a Part A stay or under their Medicare Part B benefit—makes a difference in the way we bill the Medicare program 

for our services. As a result, when the facility tells us that the patient is a Part 

B patient—and thus we bill the Medicare program—we rely on that information as 


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accurate. However, recently, the Medicare Recovery Audit Contractors have been 

issuing Medicare overpayment determinations to providers that service nursing 

homes. The reason—the patient was under a Part A stay when the provider billed 

Medicare Part B. 

Because we obtain patient status information from the nursing home, we must 

rely on the facility to provide accurate information in order to be paid. The Medicare 

common working file contains information such as patient coverage status but it is 

not a ‘‘real time’’ data base. In fact it can take up to 2 years to build a patient file 

in the common working file. As such, we must rely on the information the nursing 

home provides. Unfortunately, once the overpayment determination letters are 

issued providers are expected to pay back the money to the Medicare program. Yet 

it was a nursing home reporting error, not an error by the provider that caused the 

incorrect billing. Our members have tried to recoup the monies from the nursing 

homes that provided us with inaccurate information, but are having a tough time 

recouping that money from the nursing homes. The reason—the overpayment determinations can go back years, and many of the facilities have changed ownership, 

are not in business any longer, or have declared bankruptcy. In essence, as a result 

of the ownership issues that are pervasive in the nursing home industry, providers 

are being held accountable for erroneous reporting by the facility. 

Moreover, companies have been purchasing nursing homes in poor financial 

health and do not take over their financial obligations. The nursing homes declare 

bankruptcy. The new company wipes the slate clean and the companies providing 

services to the nursing homes—such as ours—bear the financial burdens. 

NAPXP members have also been adversely affected by changes in ownership by 

nursing facilities. Many of our members have reported that nursing homes are terminating their contracts with portable x-ray companies due to a change in facility 

ownership that now requires the facility to contract exclusively with an x-ray provider that is owned by the parent company of the nursing facility. Under these financial arrangements, nursing facilities are reportedly not given an option to select 

a provider based on quality of care and cost, but must only use a provider that is 

tied to the financial ownership of the facility. Many of our members have been told 

that the treating physicians and other clinical staff would like to maintain the current providers—as they are providing good quality of care—yet are being forced to 

change due to the financial goals of the new ownership. These clinicians feel as 

though their medical judgment is being compromised. We urge the Health Subcommittee to investigate this thoroughly and examine the impact such arrangements may have on the quality of care provided to nursing home residents. We believe that the impact is significant and would like to provide a couple of examples. 

Many of the nursing homes are being forced to abandon the quality of care that 

they are accustomed to just to feed the ‘‘bottom line’’ or based on some financial relationship the new owners have with another provider. Providers that often offer 

services in the evenings or weekends are no longer providing their services to the 

nursing homes as a result of these ownership changes and their focus on the bottom 

line. This can increase the costs to the Medicare program. Case in point is a patient 

that needs to have an x-ray and the provider does not offer weekend services. The 

patient may be required to be transported to the hospital to have this service done— 

rather than simply having the service conducted bedside. Medicare will incur the 

cost of the transportation to the hospital as well as the emergency room costs and 

all of the staff required for the services. 

If a patient becomes sick on a Friday night with possible pneumonia, the facility 

may decide to wait to x-ray the patient until Monday—further compromising the patient’s health. Or, the facility may simply put the patient on antibiotics, unnecessarily, thinking the patient may have pneumonia when a simple x-ray would confirm this diagnosis. Yet without weekend services the facility chose to wait until 

Monday to confirm the diagnosis. 

A patient may have a warm red leg. A sonogram could be utilized to rule out a 

venous thrombosis. In all of these situations, clinical judgment may be compromised 

due to the provider that is servicing the facility. In many cases one of these ownership changes occurred and a facility, as stated above, is being forced to utilize a provider based on either the financial goals of the new owners or a financial relationship the new owners have with another provider. 

Many of the new purchasers of nursing homes do not have any health care experience and are looking at nursing homes as an investment. An investment to make 

money and not necessarily to provide the best quality of care services possible. 

The NAPXP recognizes that the focus of this hearing is on ownership trends and 

their impact on quality and accountability on care. However, we believe the issues 

we raised need to be addressed. 


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The NAPXP applauds the Subcommittee for holding this hearing today and for 

the commitment of Subcommittee members to address the ownership trends that 

are plaguing the industry. 

f 

Wisconsin Institute of Certified Public Accountants 

Federal Tax Committee 

Milwaukee, Wisconsin 53202 

November 30, 2007 

The Honorable Senators Max Baucus and Chuck Grassley 

U.S. Senate Committee on Finance 

219 Dirksen Senate Office Building 

Washington, DC 20510 

The Honorable Charles Rangel and Jim McCrey 

Committee on Ways and Means 

U.S. House of Representatives 

1102 Longworth House Office Building 

Washington, DC 20515 

Gentlemen: 

As an attorney for numerous small manufacturers and on behalf of the Federal 

Tax Committee of the Wisconsin Institute of Certified Public Accountants, I am responding to requests for comments to the Tax Technical Corrections Act of 2007 

(H.R. 4195/S. 2374). 

If signed into law, section 8 of the Tax Technical Corrections Act of 2007 would 

eliminate the incentive aspect of IC–DISCs for tens of thousands of closely-held 

manufacturers, a sector of the economy crucial to long-term growth and prosperity. 

This comment explains why the proposed legislation is inappropriate and would go 

against the longstanding policy of aiding domestic manufacturers of exported goods. 

1. The Proposed Legislation Hurts U.S. Manufacturers of Exported Products. Manufacturers are the bedrock of a prosperous economy. Manufacturing jobs generally 

pay higher wages and have more generous benefits than jobs in other sectors. Furthermore, manufacturing jobs are considered especially valuable because they import wealth from around the world. Through their interactions with others, manufacturers spur demand in the retail, service and not-for-profit sectors. Now, however, with manufacturers closing U.S. plants and moving production to less expensive foreign locations, this ripple effect is working in reverse, magnifying the economic disruption caused by manufacturer exodus. The proposed legislation would effectively eliminate a key export incentive that helps put domestic manufacturers in 

an economic position closer to that of their foreign counterparts. Eliminating the incentive aspect of IC–DISCs will negatively effect domestic manufacturers, leading 

to reduced exports, lower productivity and fewer jobs. 

2. The Proposed Legislation is Unnecessary. More than merely providing a ‘‘technical correction,’’ the proposed legislation would work a substantive change by eliminating an export benefit that has existed without question. Nothing in the text or 

legislative history of the Jobs and Growth Tax Relief Reconciliation Act of 2003 suggests that the current tax rate on dividends paid from an IC–DISC is something 

that requires correction. 

Furthermore, the Joint Committee’s description of the Tax Technical Corrections 

Act of 2007 tries to argue that the proposed legislation is similar to the denial of 

a dividends received deduction on dividends received from an IC–DISC found in 

Code section 246(d). That section does deny the dividends received deduction with 

respect to dividends received from IC–DISCs because those dividends have not yet 

been subject to corporate-level tax. Code section 246(d)’s sole purpose is to prevent 

corporate shareholders of IC–DISCs from avoiding corporate-level tax on IC–DISC 

dividends altogether. However, this problem does not exist with respect to non-corporate IC–DISC shareholders because there is no corporate-level tax to avoid. 

3. The Proposed Legislation Goes Against the Longstanding Policy of Aiding Domestic Manufacturers of Exported Goods. A review of the history of export incentives 

shows that Congress has a longstanding policy of aiding domestic manufacturers of 

exported goods and has only abandoned this policy after significant pressure from 

our foreign trading partners. Our foreign trading partners have not objected to the 

rate of tax paid by individuals on dividends received from IC–DISCs, making abandonment of this policy through the proposed legislation inappropriate. 


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In 1971, Congress enacted the domestic international sales corporation (‘‘DISC’’) 

regime in an attempt to stimulate U.S. exports. A DISC afforded U.S. exporters 

some relief from U.S. tax on a portion of their export profits by allocating those profits to a special type of domestic subsidiary known as a DISC. In the mid-1970s, foreign trading partners of the United States began complaining that the DISC regime 

was an illegal export subsidy in violation of the General Agreement on Tariffs and 

Trade (‘‘GATT’’). 

In 1984, Congress enacted the foreign sales corporation (‘‘FSC’’) regime as a replacement for the DISC regime in response to the GATT controversy. The FSC regime required U.S. exporters to establish a foreign corporation that performs certain 

activities abroad in order to obtain a U.S. tax benefit. Rather than repeal the DISC 

regime, Congress modified it to include an interest charge component, making all 

DISCs from that point forward IC–DISCs. Manufacturers often did not take advantage of the IC–DISC because until recently other regimes, such as the FSC and ETI 

exclusion, were more attractive. 

In 1998, the European Union filed a complaint with the World Trade Organization (‘‘WTO’’) asserting that the FSC regime, similar to the original DISC regime 

that preceded it, was an illegal export subsidy in violation of the GATT. In 1999, 

the WTO released its report on the European Union’s complaint, ruling that the 

FSC regime was an illegal export subsidy that should be eliminated by 2000. 

In 2000, Congress responded to the WTO’s ruling by enacting the FSC Repeal and 

Extraterritorial Income Exclusion Act of 2000. The new extraterritorial income 

(‘‘ETI’’) exclusion afforded U.S. exporters essentially the same tax relief as the FSC 

regime. Consequently, the ETI exclusion did not end this trade controversy as the 

WTO subsequently ruled that the ETI exclusion was an illegal export subsidy that 

should be eliminated. 

In 2004, Congress enacted the American Jobs Creation Act of 2004 (‘‘2004 Act’’), 

which phased out the ETI exclusion while phasing in a domestic production deduction (‘‘DPD’’). With the elimination of the ETI exclusion, the only remaining incentive for exports was the IC–DISC. Rather than encouraging exports, the DPD allows 

a deduction for certain domestic production activities. While exporting manufacturers may take advantage of the DPD, the tax relief (and concomitant incentive to export) of the DPD is far less than that afforded by the IC–DISC. 

As the foregoing history shows, Congress has only removed export incentives 

under significant pressure from our foreign trading partners. As our foreign trading 

partners have not objected to the tax rate on dividends received from IC–DISCs, it 

is inappropriate for Congress to abandon its longstanding policy of aiding domestic 

manufacturers of exported goods. 

4. The Proposed Legislation Is Not A Technical Correction Because It Is Not Revenue Neutral. Because technical corrections are necessary to ensure that a tax statute operates as originally intended, there should not be a revenue gain or loss associated with a technical correction. This is because the revenue impact of a technical 

correction has already been included in the Joint Committee’s revenue estimates of 

the provision in the original legislation to which the technical correction relates. 

Consequently, any provision that produces revenue is not a technical correction. 

The sole purpose of section 8 is to raise the tax rate on dividends paid by IC– 

DISCs to individuals. Such an increase in the tax rate will raise revenue. Therefore, 

the provision is not a technical correction and not appropriate for this Act. 

Here in the Midwest, America’s heartland, we are home to more than one-third 

of all manufacturing jobs in the United States and generate more than $100 billion 

in revenue from exports each year. Considering the recent history of trade deficits 

and the weakening U.S. dollar, exports are the only positive aspect of the U.S. economy. The proposed legislation will harm tens of thousands of hard-working small 

businesses whose value to the economy cannot be overstated. Furthermore, the proposed legislation has no basis in the text or legislative history of the Jobs and 

Growth Tax Relief Reconciliation Act of 2003 and penalizes exporters who reasonably relied on the law. Accordingly, section 8 of the Tax Technical Corrections Act 

of 2007 should not be enacted into law. 

Yours very truly, 

Robert J. Misey, Jr. 

Æ 


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