Over the last decade, nursing home ownership and operating structures have continued to evolve, including the development of more complex structures and an increase in private investment ownership of nursing homes. The federal government plays an important role in funding nursing home care and ensuring that residents in the nation’s approximately 16,000 nursing homes participating in the Medicare or Medicaid programs receive appropriate care; collection of nursing home ownership information is one part of this effort. Nursing homes must be licensed by the states in which they operate in order to participate in Medicare or Medicaid. The entity that is licensed to operate the facility is known as the provider. A provider can be an independent company that operates one facility or the provider can be part of a multiprovider chain organization. Some providers contract with separate entities to manage nursing homes. In addition, the provider may or may not own the real estate where care is delivered and any associated medical or other equipment. Nursing home real estate assets can be separated from nursing home operations for a number of reasons, including to limit liability or to obtain financing. The ownership and control relationships among these various entities can be complex. For example, the provider may own all or part of the entity it contracts with to operate the nursing home. Providers can be one of three business types—for profit, nonprofit, or government. The majority of nursing home providers—about two-thirds— are for-profit businesses. For-profit nursing home providers include a wide range of business ownership types from sole proprietorships to large publicly traded corporations. Within the for-profit provider type, private investment firms—generally investment firms whose ownership interests are not publicly traded on a stock exchange—have been acquiring both entire nursing home chains as well as individual homes since at least the late 1990s. Restructuring of the nursing home industry following bankruptcies among several large nursing home chains, as well as increased liability litigation in states such as Florida and Texas, which prompted some chains to sell their homes in these states, created an opportunity for private investment firms to acquire nursing homes that were being sold by these chains. In addition, reliable income streams from nursing home ownership made investment in the industry attractive for PI firms. In general, PI firms use a combination of investment capital and borrowed capital to acquire companies with the goal of making a profit and eventually returning that profit to investors and the firm. In contrast to publicly traded firms, PI firms generally are not subject to periodic disclosure and other SEC requirements, including public reporting of income, assets, and information about company operations and leadership. Consequently, information on the operations of PI firms— including a firm’s acquisition and sale of companies—is generally not as readily available as that of publicly traded firms. PI firm managers say this advantage allows them to make business improvements their publicly traded competitors may be less willing to make, such as developing investment strategies that are not tied to producing profits on a quarter-by- quarter basis. In recent years, attention has been given to a subclass of private investment called private equity. One investment strategy undertaken by private equity firms is the “leveraged buyout.” In a typical leveraged buyout, a private equity firm establishes a fund and obtains capital commitments from investors. These investors often include public and corporate pension plans, endowments and foundations, insurance companies, and individuals. The fund’s capital is then used in combination with borrowed capital to acquire majority or complete ownership of a company. However, most of the necessary financing for the acquisition comes from this borrowed capital, with the fund’s capital representing only a small portion of the total acquisition cost. After attempting to improve the financial performance of the company (which can be over a 3- to 5-year period but may be longer), the fund sells the company; any profits from the sale are returned to the fund and generally distributed to fund investors and the private equity firm. (See fig. 1.) To be eligible for Medicare and Medicaid payments, nursing homes are required to submit information on individuals or certain entities, such as corporations, that have an ownership or control interest in the provider. The Social Security Act requires all Medicare and Medicaid nursing homes to disclose information on the identities of persons who have an ownership or control interest in the nursing home in order to participate in the programs. Specifically, the act and related regulations define “a person with an ownership or control interest” to include a person (including certain entities) who has a direct or indirect ownership interest of 5 percent or more in the is the owner of a whole or partial interest in any mortgage, deed of trust, note, or other obligation secured by the nursing home or any of its property or assets, equal to 5 percent or more of the total property and assets; is an officer or director of the nursing home, if it is organized as a corporation; or is a partner in the nursing home, if it is organized as a partnership. In addition, the act specifies that, to the extent determined feasible under regulations of the Secretary of HHS, nursing home providers must disclose for each person with an ownership or control interest, the name of any other provider with respect to which that same person has an ownership or control interest. The Patient Protection and Affordable Care Act, enacted in March 2010, expanded the ownership and control reporting requirements for Medicare and Medicaid nursing homes by adding a new subsection to the statute. Within 2 years of enactment (March 2012), the act will require nursing home providers to report additional information on the nursing home, including the name and title of each member of the governing body of the nursing home; each person or entity who is an officer, director, member, partner, trustee, or who directly or indirectly manages, advises, or supervises any element of the practices, finances, or operations of the facility; and persons or entities—referred to as “additional disclosable parties”—that with respect to the facility exercise operational, financial, or managerial control; provide policies or procedures for operations; provide financial or cash management services; provide management, administrative, clinical consulting, accounting, or financial services; lease or sublease real property to the facility; or own an interest of 5 percent or more in the real estate. Moreover, the additional disclosable parties must report information on their organizational structure (including the legal structure by which the disclosing entity operates) and describe their relationship to the nursing home and to one another. For example, an additional disclosable party that is a (1) corporation must report its officers and directors and any shareholders whose ownership interest is equal to or exceeds 5 percent of the corporation, and (2) limited liability company, must report the percentage ownership interest for its members and managers. Within 2 years of the enactment of these new provisions, HHS is required to promulgate final regulations that require facilities to report the information to HHS in a standardized format. The act also requires the Secretary to establish procedures to make such information available to the public within 1 year after the date the final rules are promulgated and published. Until the date the information is made available to the public, nursing homes must have this information available for HHS and other parties, including the state in which the nursing home is located, upon request. Nursing homes report ownership and managing control information to CMS through the agency’s Medicare enrollment application when they apply to participate in the Medicare program. CMS stores this information in a national database called PECOS. The Medicare enrollment application requires nursing homes to report identifying information, such as their legal business name, licensure information, tax identification number, and any chain affiliation. Nursing homes must also report their ownership (by both individuals and organizations) and managing control information, as well as any adverse legal action taken against these entities. To report chain affiliation, nursing homes are asked to identify their “chain home office”—the entity responsible for providing centralized management and administrative services to homes under common ownership and common control. Nursing homes are required to submit updated information if they undergo a change of ownership or when there are any changes to ownership or other information previously provided on the Medicare enrollment application. (See table 1.) Nursing homes are required to sign the application, to certify, among other things, that the information in it is “true, correct, and complete.” CMS stores information collected through the Medicare enrollment application in the PECOS database. According to CMS, PECOS, implemented in 2002, was designed to serve three purposes: (1) collect information for a provider and record the associations between a provider and entities that have an ownership or control interest in the provider, including any chain associations; (2) allow CMS to make informed enrollment decisions based on a provider’s past and present business history, any reported exclusions, sanctions, and felonious behavior; and, (3) ensure that CMS makes correct payments under the Medicare program. PECOS replaced the multiple contractor systems that previously housed provider enrollment data, facilitating the nationwide screening of providers billing Medicare. The database contains information on nursing homes that have submitted a Medicare enrollment application to CMS since 2002. As of July 2010, about 81 percent of active Medicare- participating nursing homes were in PECOS. Statutes and CMS regulations indicate that certain ownership information must be provided to the public upon request. In a Federal Register announcement about PECOS, CMS noted its plan for the data to be shared with federal and state agencies as necessary to ensure proper payment of Medicare benefits, to assist with the administration of other federally funded health programs, or to assist with other activities within the state. Provider enrollment and oversight of nursing homes are managed by two different entities within CMS; state entities also have an oversight role. CMS’s Division of Provider and Supplier Enrollment, within the Office of Financial Management, is responsible for the Medicare enrollment process. CMS uses contractors to handle administrative tasks related to enrollment, including the collection and verification of enrollment applications and associated information submitted by providers. For example, in processing a provider’s Medicare enrollment application, CMS contractors are required to examine the adverse legal history as reported on the application for individuals and organizations having an ownership or control interest in the provider and refer matters to CMS as necessary; this adverse legal history could make the provider ineligible to participate in the Medicare program. Each contractor is responsible for these tasks within a certain geographic region of the U.S. CMS’s Survey and Certification Group is responsible for oversight of state survey activities and enforcement of nursing home quality. To participate in the Medicare program, nursing homes must pass regular inspections, also known as surveys, to ensure they comply with federal quality standards. These inspections are conducted by state survey agencies under contract with CMS. Most deficiencies identified, which can range from minor and isolated in scope to very serious and widespread throughout the nursing home, require the home to prepare a plan of correction. Results from state surveys of nursing homes are posted and routinely updated on CMS’s Nursing Home Compare Web site. About 1,900 unique nursing homes were acquired by PI firms from 1998 through 2008. While some of the acquisitions involved entire nursing home chains—which included both the operations and any owned real estate— other acquisitions involved only real estate. Ten PI firms accounted for most of the acquired nursing homes. Six of the 10 PI firms responded to questions and described similar investment rationales. Firms reported that they were more involved in operations after acquiring a chain than after acquiring real estate only. We identified 77 acquisitions of nursing homes by PI firms from 1998 through 2008, involving a total of 1,876 unique nursing homes. These acquisitions represent about 12 percent of the 15,711 nursing homes that participated in Medicare and Medicaid as of December 2008 and about 18 percent of for-profit nursing homes. Sometimes the same nursing homes were involved in more than one acquisition. For example, in some cases a nursing home operating company was purchased by a PI firm in one acquisition and the real estate for the same home was purchased by a different PI firm in a separate acquisition. In other cases, nursing homes were acquired more than once by different PI firms. For example, one set of nursing homes was acquired three separate times by three different PI firms from 1998 through 2008. Considering the 77 acquisitions cumulatively, the nursing homes involved would total over 2,500. Figure 2 shows the number of homes acquired, by year, over the 11-year time period. The majority of nursing homes (73 percent) were acquired by PI firms from 2004 through 2007, a period characterized by acquisitions of large nursing home chains. Considering only the most recent acquirers as of the end of 2008, 10 PI firms accounted for most nursing homes acquired from 1998 through 2008. Table 2 shows the names of the nursing home chains, if applicable, and the number of nursing homes acquired by the 10 firms from 1998 through 2008 and still owned as of the end of the period. In some cases, the PI firms owned only operations or only real estate as of December 2008. The 10 firms accounted for 89 percent of the 1,876 unique nursing homes acquired by PI firms during the period. Six of the top 10 PI firms acquired an entire nursing home chain or founded a company that became a nursing home chain. For example, the PI firm The Carlyle Group acquired the nursing home chain HCR ManorCare. Another PI firm, Warburg Pincus, cofounded Florida Healthcare Properties in 2001, which then became a chain by acquiring the operations for 49 nursing homes. Two of the top 10 PI firms acquired only the real estate and leased at least a portion of their nursing homes to operating companies acquired by other PI firms. Two firms—SMV/SWC and GE Capital, Healthcare Financial Services—acquired the real estate for 353 nursing homes and leased 299 (85 percent) of their properties to nursing home operating companies acquired by other top 10 PI firms. For example, GE Capital, Healthcare Financial Services leased 112 properties to operating companies acquired by Warburg Pincus. (Fig. 3 illustrates how Warburg Pincus and GE Capital, Healthcare Financial Services separately acquired the operations and real estate of the Centennial Healthcare nursing home chain.) Two of the top 10 PI firms both acquired a nursing home chain and made real-estate-only acquisitions. Formation Capital bought the Genesis nursing home chain, but it also partnered with GE Capital, Healthcare Financial Services to acquire the real estate of five nursing homes. A second firm, The Straus Group, invested in the CareOne nursing home chain but also separately purchased the real estate only of 58 nursing homes. According to information gathered from 2009 through 2010, 9 of the top 10 PI nursing home acquirers reported owning 1,503 nursing homes, compared to the 1,496 nursing homes that they acquired as of December 31, 2008. We were unable to obtain current ownership data from 1 of the top 10 PI nursing home acquirers. Most of the six PI firms that responded to our questions described similar reasons for investing in the nursing home industry; officials from five of these six PI firms cited increased demand for long-term care due to an aging population. For example, officials at one PI firm noted that no new homes had been built in recent years and anticipated that demand for senior housing would exceed the available supply. Officials at four PI firms told us they expected to hold their investments for time frames ranging from 3 to more than 20 years. However, one of these PI firms has already sold one of the portfolios it acquired and had planned on selling its other portfolios. (See app. I for more details on each firm’s nursing home investment rationale.) Of those that responded to our questions, four PI firms reported acquiring entire nursing home chains. Officials from all four of these firms reported holding seats on the chains’ corporate boards of directors. In general, they characterized their involvement as related to the strategic direction of the chain rather than overseeing day-to-day operations, which all four of these PI firms described as the dominion of each chain’s executive management. Three of the four PI nursing-home-chain acquirers said they kept the same executive management after they acquired a chain because it was already well managed; one firm believed the chain it acquired had quality-of-care challenges and ultimately hired a new chief executive officer, who is a physician. Some firms noted improvements made across chains since acquisition. For example, according to officials of one PI firm acquirer, among other things, it directed capital to hire directors of clinical education, train facility staff, and reduce staff turnover. Another firm helped create an independent quality committee to provide the board with independent expert guidance on assessing quality-of-care data. Two of the four PI nursing-home-chain acquirers reported dividing the operations and real estate into separate companies for tax or financing purposes while still retaining them under common ownership. Officials at these two firms noted the benefits of having nursing home operations and real estate under the same ownership. One commented that when operating and real estate companies are unaffiliated, tensions can arise over responsibility for improvements, reducing incentive to make improvements to the facility. One real-estate-only acquirer strongly disagreed with this statement and noted that a landlord with a triple net lease has a great incentive for ensuring the real estate is appropriately maintained. This firm said such leases clearly state the responsibilities of the real estate owner and the operator with respect to facility improvements and said that disagreements have been few and limited. The three PI firms (of those that responded to our questions) that made real estate-only acquisitions had no representation on the boards of the operating companies to which they leased real estate, and so were not in a position to directly control the resources or change the policies of these companies. All three real estate-only acquirers leased real estate to nursing home operators under “triple net” agreements, through which, in addition to rent, the operator agrees to pay all real estate taxes, property insurance, and maintenance on the property (including capital costs). Two firms’ leases calculated a base rent plus rent as a percentage of the operator’s adjusted net income or excess cash flow—ranging from 35 to as much as 50 percent. In addition, while officials at all three firms emphasized that they “do not tell the nursing home operators how to run their businesses,” officials at two of the three PI firms that acquired real estate indicated they monitor clinical performance at acquired homes. These officials said they would consider terminating a lease if poor or declining care persisted, although they had not encountered such a situation. The remaining real estate acquirer told us it had never monitored the quality of care provided by the operators to whom it leased facilities, but would like to start monitoring operations, given the risk to its investment should an operator it leases to lose its state license to operate a nursing home. PECOS provided a confusing picture of the ownership structures and chain affiliations of the six PI-owned nursing home chains we reviewed. For example, nursing homes had multiple owners listed in PECOS, but no indication of the hierarchy or relationships among the owners was provided. PI ownership of the homes, moreover, was not always readily apparent in the data. Some states we interviewed collect ownership information that better captures the relationships among owners, but states still report challenges untangling complex ownership structures. Adding to the difficulties deciphering the data, we also found that in some cases the data were incomplete—including ownership information for homes whose real estate was acquired by a PI firm and chain information for several homes. CMS’s ability to determine the accuracy and completeness of ownership data reported by nursing homes is limited. Even though our analysis of PECOS was informed by extensive research on PI nursing home acquisitions, the complex ownership structures established by some PI-owned nursing home chains we reviewed made PECOS data hard to decipher and PI ownership was not always evident. Nursing homes often have numerous owners listed, but no information provided in PECOS to indicate how they may be related. For the six chains we reviewed, the number of organizational owners listed per home ranged from 1 to 26, with an average of 8 organizational owners per home. The multitude of organizational owners may have reflected the complex ownership structures created by some nursing home companies. For example, one PI entity that owned a nursing home chain created: separate limited liability companies for the operation of each individual home in the chain; separate limited liability companies that owned the nursing home real a separate company that leased all the properties from the real estate holding companies and then subleased them to the operating companies; and a holding company set up to own the entire chain. Beyond inventorying these ownership entities, PECOS currently provides no information to indicate any hierarchy or relationships among the organizational owners listed, such as whether one entity is a parent or a subsidiary of another. Moreover, while entities with at least 5 percent direct or indirect ownership of the assets of the provider are listed in PECOS, the database does not include information on their specific ownership percentage, adding difficulty to determining the hierarchy and relationships among the owners listed. Because we had additional information, we were able in some cases to recognize the varying levels of ownership reported in the data, including entities that were holding companies, private investment funds with no employees, or entities that were investors in the private investment firm or an affiliate, relationships that were not otherwise apparent from the data. For example, the Washington State Investment Board, which invests state and local pension funds, was listed among the owners for homes acquired by one PI firm, and the California Public Employees Retirement System was listed among the owners for nursing homes acquired by another PI firm. According to the PI firms, these two entities are passive investors; that is, they do not play a role in management of the nursing home chains. Fully capturing these complex relationships among nursing home owners poses challenges for a data system such as PECOS. For example, in documents one PI-owned nursing home chain submitted to a state agency, the chain’s delineation of its ownership structure took several pages to describe and included a detailed chart of the ownership structure. CMS officials said that providers can supply such organizational charts when they submit Medicare enrollment information, but these documents are maintained outside of PECOS by CMS contractors; currently, PECOS does not have the capacity to store them. Some states that we interviewed that collect nursing home ownership information for licensure purposes collect information to capture relationships among owners. Officials at two states we interviewed maintain databases that attempt to capture the hierarchy of the ownership structure surrounding the nursing home. Missouri’s ownership database, for example, can be used to identify successive levels of ownership (see fig. 4), which is not possible to discern with the data in PECOS. State officials also told us, however, that they are challenged by complex ownership structures among nursing homes. State officials from Missouri, Maryland, New Jersey, Illinois, and California cited complex ownership structures—including multiple layers—as obscuring ownership or making oversight difficult. State officials also observed that nursing home chains have set up separate limited liability companies as operators of each home and they do not always obtain information that identifies the ultimate parent owner. For example, Illinois officials noted that they do not always obtain ownership information for the parent company, such as a private equity firm, and sometimes their records only show the individual limited liability company as the owner, such that a nursing home set up as an individual limited liability company in one town would not be linked to a home from the same chain set up as a limited liability company in another town. Expanded reporting requirements contained in the Patient Protection and Affordable Care Act and regulations to implement the act provide CMS with an opportunity to address some of these issues. In particular, the act requires homes to provide the identity of and information on “additional disclosable parties” and their relationship to the nursing home and one another. In addition, the act requires that nursing homes report the organizational structure of additional disclosable parties organized as limited liability companies including, for example, their members, and managers, and as applicable, their percentage ownership interest in the company. While these expanded reporting requirements may provide more insights into the relationships among some of the owners in PECOS, they may not capture the hierarchy and relationships across all the numerous owners currently being reported. PI ownership was often not readily apparent in PECOS. The Medicare enrollment application does not ask for information on the business type of organizational owners, including whether they are PI firms, so it is not possible to use PECOS to identify all PI-owned nursing homes. When we tried to identify the specific private investment firms we were aware of in the ownership data in PECOS, we found that the entities through which the PI firms acquired nursing homes were often listed. In some cases, associating these entities with the PI firm was relatively straightforward, as the entities had names that were readily identifiable with the PI firms. For example, among the many owners listed for homes in the HCR ManorCare chain, were the entities Carlyle Partners V MC, L.P. and Carlyle MC Partners, L.P., two private investment funds managed by The Carlyle Group, the PI acquirer of the chain. In contrast, PI ownership of other homes we examined was difficult to identify in PECOS. In four of the PI-owned chains we examined, PI firms or entities readily identifiable with the PI firms were not apparent among the organizational owners reported for any of the nursing homes in the chains or were listed for only a small fraction of the homes. The number of homes in these four-PI owned chains for which PI ownership was not readily apparent in PECOS accounted for 62 percent of the 1,003 nursing homes we examined. We were not able to fully explain this situation. It is possible that some PI firms, by virtue of how they structured their transactions to acquire the homes, may not have been required to be reported by the governing statute at the time. It is also possible that entities were reported that we did not recognize were related to the PI firm. On the other hand, PI firms may not have been reported, even if required, for other reasons, for example, due to confusion about the reporting requirements. Specifically, we found the following: Representatives of one PI firm that was not listed in PECOS among the owners for any of the homes in the chain it acquired said that a special purpose entity (SPE) was created for the acquisition of the chain and was reported as an owner on the Medicare enrollment application. The SPE, which was not readily identifiable with the PI firm, was reported for only about three-quarters of the chain’s homes. The representatives said that the PI firm itself did not own any interests in the SPE and so was not on the application. Individuals associated with the PI firm were listed as officers/directors for most of the homes in the chain. Another PI firm, which was also not reported as an owner for any of the homes in the chain it acquired, did own the SPE used to acquire the chain, according to officials of the nursing home chain. However, the officials said that after closing on the acquisition, the title to each of the homes was held by a subsidiary of the company that operates all the homes and therefore the SPE neither holds title to nor operates the homes but rather is an indirect owner. The SPE, which was not readily identifiable with the PI firm, was listed among the organizational owners in PECOS for a small portion of the homes. The statute currently requires the reporting of persons and certain entities that have an ownership or control interest of at least 5 percent, including indirect interests, in the assets of the provider entity. A third PI firm sold the real estate for most of the homes in the chain to another company shortly after the acquisition; the company then leased the facilities back to an affiliate of the PI firm. The affiliate was listed as an owner in PECOS for most of the homes in the chain; the PI firm was not. The individuals involved in the PI firm’s purchase of the nursing home chain are also principals of the affiliate, some of whom were reported in PECOS as individuals having an ownership interest for a portion of the homes in the chain. Finally, for one PI firm, the company the PI firm formed to fund its acquisition of the chain, which was readily identifiable with the firm, appeared as an owner in PECOS but for less than 20 percent of the homes in the chain. In this case, the chain’s representatives said they had been instructed by the CMS contractor to report only two levels of ownership above the nursing home. As a result, the ownership information reported by this chain was far from complete, and no common owner, including the PI firm, was apparent for all of the homes. The representatives of the chain said that they decided to submit complete ownership information for their homes, on their own initiative, and were in the process of doing so, working with a new CMS contractor. PECOS does not provide a clear picture of individuals in the ownership structure. The information in PECOS on individuals with an ownership or control interest in the provider is collected separately from and is not linked to information about organizational owners and does not provide a clear picture of where they fit in the ownership structure. Specifically, the Medicare enrollment application asks for the names and even the birth dates of individuals with an ownership or control interest— including those with 5 percent or more direct or indirect ownership in the provider, with a partnership interest in the provider, or who are directors or officers of the provider—but it does not ask for the organization they are affiliated with or their titles. As a result, it is not clear if individuals reported as having a 5 percent or more ownership or control interest are direct or indirect owners of the nursing home provider. In addition, CMS has not required providers to report information about individuals who are partners, officers, or directors of entities above the nursing home provider level, such as members of the nursing home chain’s board of directors, which in some cases would include representatives of the PI firm. Identification of these entities is important because they are ultimately responsible for the management of the chain. Providers may be reporting such individuals, but it was not possible for us to distinguish this in the data because they are broadly categorized as officers or directors with no information included on their affiliated organizations. This issue could be addressed when HHS implements the reporting provisions of the Patient Protection and Affordable Care Act. In contrast, two states we contacted—Missouri and Texas—collect more comprehensive information about individuals with ownership or control interests in the nursing home provider and in entities above the provider level. These states also collect information on the specific positions of reported individuals in these entities, such as president, secretary, member, or general or limited partner. In addition to the challenges in identifying PI owners in PECOS data, we found that the data were sometimes incomplete and that the information on chain ownership was not collected in a straightforward manner, making chain associations difficult to identify. One PI firm that acquired real estate only was not reported. A PI firm that leased nursing home real estate to a provider but that also had a security interest in the assets of the provider was not reported in PECOS; however, a security interest may constitute an ownership or control interest for purposes of Section 1124 that could obligate disclosure as an owner on the Medicare enrollment application. For example, we found that one firm was not reported in PECOS among the owners of the nursing homes within the chain for which it owned the real estate. However, a lease agreement indicates that the PI firm also had a security interest in the nursing home’s assets that could obligate reporting of the entity as the holder of an ownership or control interest. Officials with the PI firm told us that they were not familiar with the application’s reporting requirements. CMS officials noted that it may not be clear to providers that these entities must be reported, as the instructions on the application do not specifically indicate that a security interest is a reportable interest, and that going forward CMS may need to revise the application to make this explicit. The Patient Protection and Affordable Care Act requires that entities and individuals that lease or sublease real property to nursing homes be reported, whether or not they have a security interest or other reportable interests. Such information, however, will not be reported to HHS until after it issues a final rule implementing the act’s requirements, which may not be for several years. Some states currently collect information on nursing home real estate owners. For example, Illinois collects information on nursing home real estate owners, if different from the operator, and requires the submission of any lease agreements. Illinois officials told us that the state also requires operators to report individuals who directly or indirectly own at least 5 percent of the nursing home real estate and their percentage stake. With this information the state can then identify at the state level if the same individuals have ownership stakes in both the nursing home real estate and the operating company. CMS also has acknowledged real estate owners in issuing guidelines on its notification policy for poorly performing nursing homes designated as Special Focus Facilities. The guidelines direct notification to owners of the building and land if separate from the holder of the provider agreement and described such owners as an “accountable party.” PECOS chain information was not straightforward and sometimes was incomplete. PECOS was established in part to make provider-chain associations clear, but we found that making these associations in PECOS was not straightforward because of the way the data were collected; in addition, the chain data were sometimes incomplete. Rather than requiring providers to report all of the homes that are part of the same chain, CMS requires each home to report its chain home office. The chain home office is the entity responsible for providing centralized management and administrative services to providers under common ownership and common control. When we reviewed the chain data in PECOS for the six PI-owned chains for which we had information, we found that most, but not all, of the homes belonging to the same chain could be identified through their chain home office information, in particular by using the name of the chain home office administrator. Not all homes within the same chain were associated with the same chain home office. For example, most of the homes in the Trilogy Health Services chain were divided among three different chain home offices. The three groups of homes could not be effectively linked by the chain home office name or address fields in PECOS, but they did share the same chain home office administrator. CMS officials told us that the one way they have to link homes reported under different chain homes offices is if the homes have the same chain home office administrator listed. However, in some cases, homes belonging to the same PI-owned chain were reported under different chain home offices with different chain home office administrators, which can make linking all of the homes belonging to the same chain more challenging. Table 3 shows chain information in PECOS for the six nursing home chains we examined. In addition to the difficulty of using PECOS to identify all homes in a chain, we found that one large PI-owned chain did not report chain home- office information for more than 200 homes. Officials from the nursing home chain indicated that when the chain was acquired by the PI firm, most of the nursing homes were set up under separate licensees and had not yet been branded with the chain name, so the company made the decision not to report these homes as part of a chain. The officials said they have since reversed this decision and are in the process of updating the chain information for these homes. They noted that prior to the acquisition by the PI firm, they reported all the homes in the chain under one chain home office. Some of the problems we observed with the ownership and chain data in PECOS are due in part to CMS’s limited ability to recognize when the information reported by providers is incomplete or inaccurate. CMS’s contractors have several responsibilities for verifying information reported on the Medicare enrollment application. For example, contractors are required to check that the reported legal business names and tax identification numbers of providers and organizational owners match those in Internal Revenue Service documentation. CMS contractors are also responsible for following up with providers to resolve missing or inconsistent information. For example, a CMS official explained that if contractors independently came across ownership associations that should be reported, the contractor should contact the provider. A CMS official acknowledged, however, that the agency and its contractors may not always be aware of missing or inconsistent information. For example, the CMS official confirmed that the agency would not necessarily know if a provider’s chain affiliation was not reported. One CMS official explained that the agency does not have the resources to delve into the relationships of the entities reported to identify if there are any more owners not being reported. The official explained that CMS relies on the ownership information that is self-reported to CMS and that the agency is not “looking behind” what is reported to verify that the ownership information is complete. Contractor performance may also contribute to the completeness of the data in PECOS. As noted earlier, representatives of one nursing home chain told us that its CMS contractor instructed them to report only two levels of ownership above the nursing home provider, resulting in several entities going unreported as owners for many of the homes. In another example involving the same contractor, chain information was not reported for more than 200 homes. After some investigation, a CMS official confirmed that, based on the information reported on the Medicare enrollment application for these homes, the contractor should have followed up with the provider about the lack of data reported. However, the contractor’s office responsible for processing this provider’s applications had since closed, and the current contractor was not able to ascertain whether this follow up had occurred. Finally, in a third example, when we noted that a specific organizational owner was not reported for all homes in a chain, an official from the PI firm that acquired the chain said this entity was reported on all the Medicare enrollment applications submitted and suggested that the data may reflect the CMS contractor’s preference for what is entered into PECOS from the application. The performance of CMS contractors is overseen by project officers in the agency’s Center for Medicare Management, which developed a new on-site audit program to review contractors’ management of provider enrollment functions. According to a CMS official, the on-site audits are designed to pick up on instances in which contractors failed to follow up with providers about missing information on the Medicare enrollment application. The on-site audits, however, cover all provider types, not just nursing homes; focus on the processing of the application as a whole, not on particular sections of the application, such as the ownership sections; and, according to a CMS official, do not attempt to verify the accuracy or completeness of the ownership information reported on the application. According to a CMS official, as of August 2009, the agency had conducted two on-site audits under the new program. Beyond on-site audits CMS does not conduct checks on the PECOS database for internal consistency, such as whether nursing homes reported to be part of a chain in fact have a common owner reported. A CMS official said the agency would like to be able to conduct such checks but lacks the necessary resources given other priorities. The use of PECOS nursing home ownership data has generally been limited to the Medicare enrollment process and only CMS’s Division of Provider and Supplier Enrollment has routine access to the database. State survey agencies expressed interest in having routine access to nationwide ownership data, such as the information stored in PECOS because they lack a systematic way of learning about the performance of nursing homes in other states with the same owners as those applying to operate in their states. CMS officials told us that the PECOS database was not developed with the objective of providing access to external users, such as states or other offices within HHS. Although these officials indicated that CMS had no immediate plans to give states access to the database, they are considering how such access could be provided. Within HHS, use of the PECOS ownership data has been limited. Only CMS’s provider enrollment division has routine access to PECOS data. To date, the division has focused primarily, but not exclusively, on populating PECOS and has not developed any standardized internal reports on nursing home ownership data that could be shared within HHS. Specifically, ownership data are used when providers apply to participate in Medicare to screen out individuals or entities that are not approved to participate in the Medicare program. CMS contractors review the ownership information to identify if any reported owners are in the HHS OIG’s Medicare Exclusion Database or on General Services Administration’s (GSA) debarment list of entities debarred or excluded from receiving federal contracts. The contractors perform such reviews when the Medicare enrollment application is submitted and ownership information is entered into PECOS, but until recently did not perform subsequent checks as the GSA or OIG lists were updated. During a CMS program integrity check in June 2009, CMS found individuals and organizations that were in the OIG Medicare Exclusion Database or on the GSA debarment list and should have been denied association with a Medicare provider, but were nonetheless affiliated with active PECOS enrollment records. Prior to the enactment of the Patient Protection and Affordable Care Act, officials in CMS’s Survey and Certification Group told us that they did not consider ownership when looking at nursing home quality issues. In an April 2010 letter, however, the group’s director indicated that with respect to the expanded nursing home ownership disclosure requirements in the Patient Protection and Affordable Care Act, the group’s responsibilities include linking quality of care performance information with ownership data. Other CMS components and HHS organizations we spoke with also do not have access to PECOS or similar ownership data and have noted challenges to oversight and enforcement. For example, the CMS regional offices we spoke with reported relying on informally collected ownership information, and several expressed some interest in access to a national nursing home ownership database, such as PECOS, as a means to identify quality-of-care problems at homes under common ownership. One regional office official said it would be helpful to have all ownership percentage stakes disclosed. Officials from HHS’s OIG division that negotiates quality- of-care Corporate Integrity Agreements with nursing home chains, told us that they may learn about systemic issues across commonly owned homes through anecdotes or multiple referrals, but otherwise do not have a systematic way to determine if the owner of a home it investigates owns other nursing homes, which might cause the HHS OIG to expand its investigation. Furthermore, an official from CMS’s Office of Financial Management said that he often has to rely on Google Web searches to identify nursing home owners because he does not have access to PECOS despite his role in financial integrity. A CMS official from the agency’s Financial Management Systems Group told us that the agency was just starting a workgroup to examine the PECOS interests of other groups within CMS and how to provide access to accommodate those groups’ needs. The scope of this workgroup, however, does not extend to providing access to PECOS to groups outside CMS or other HHS offices, including OIG. While the state survey agencies we interviewed collect and use nursing home ownership data, that information is limited to nursing homes that operate in their states, but many nursing home companies operate in multiple states. Several state officials we interviewed expressed an interest in nationwide ownership data, such as the information stored in PECOS, as a means for more effective oversight. Many state agencies collect nursing home ownership information primarily through state licensure and renewal applications. Each state is responsible for establishing its own licensing requirements. Among the six states we interviewed who used ownership data, agency officials reported using the information for oversight purposes and to engage directly with the owners of nursing home chains to improve conditions at particular homes. For example, officials in Maryland, Illinois, and New Jersey cited cases where they used ownership information to contact the owners, including landlords, to address patterns of poor care within a home or across a chain. A Maryland official said that providing oversight at the higher chain level is important because they have observed instances of chain owners shifting staff from other nursing homes to the home where the state identified problems, resulting in problems showing up at the homes that lost staff resources. However, state agency officials in four states we interviewed told us that they have difficulty obtaining information on chains that operate homes in other states, even though many nursing home companies operate in multiple states. As a result, state agencies, which with CMS share responsibility for nursing home oversight, have limited information about the poor performance of nursing home owners in other states, including the owners who currently are applying to operate in their state. With limited access to ownership data, many of the state officials we interviewed told us that they learn about owners of poorly performing nursing homes informally. In a recent case investigated for quality and fraud issues by the Connecticut Attorney General’s Office, officials were only able to learn about a nursing home chain’s complex ownership structure, including the 44 related entities that owned the nursing homes, through bankruptcy documents. Connecticut state officials noted that they rely on gathering information on out-of-state owners from other states on a case–by-case basis. State agencies we spoke with expressed strong interest in routine access to national nursing home ownership data, such as PECOS, as a means for more effective oversight of entities controlling nursing homes. Officials in one state told us access to PECOS would enable them to check the ownership information nursing homes submit to the state and compare it to what homes are reporting to CMS. CMS officials confirmed that states do not have access to the PECOS database and, in fact, it was not developed with the objective of providing access to external users, such as states or other offices within HHS. According to CMS officials, states may request specific information in PECOS, such as a list of all nursing homes owned by a specific individual or entity, but no such requests have been made. As noted earlier, the agency has not developed any standardized reports on nursing home ownership that it could easily share with states. Rather, it would respond to each request on a case-by-case basis. Recognizing the growing interest in PECOS data, CMS is considering whether and how it could provide access to external parties, such as states. The official responsible for this effort said that it is a long- term project. Several state officials and a nursing home patient advocate told us that nursing home ownership information should be readily available to the public. The Patient Protection and Affordable Care Act requires that ownership and control information be publicly available no later than 1 year after the promulgation of final regulations that implement expanded collection of such data. Even prior to this act, federal law required CMS to make ownership information available to the public upon request. According to a CMS official, the agency has responded to public requests for nursing home ownership information by providing copies of individual Medicare enrollment applications after redacting any privacy protected information, such as owners’ Social Security numbers. CMS has received some extensive requests for information stored in PECOS, but when individuals were told the cost of redacting privacy protected information, the requests were withdrawn. We found that five of the six state agencies we interviewed—California, Illinois, Maryland, New Jersey, and Texas—have posted or are in the process of posting some of the statewide nursing home ownership information they collect on publicly available Web sites. According to a Maryland official, the state decided to post detailed nursing home ownership information on its Web site because it concluded that access to ownership information was a “consumer issue” and that residents and their families had a right to know who owns any given nursing home. New Jersey survey agency officials told us that the state had enacted a law in 2007 giving the public access to state-collected nursing home ownership information because a nursing home resident’s family wanted to move a relative to a nursing home with a different owner but found that they could not identify which nursing homes were owned by which owners. Consistent with the name private investment, the information on PI nursing home acquisitions is private—limited to what such firms choose to release. We found that the identification of PI firm nursing home acquisitions was difficult and that CMS’s PECOS database had limitations in identifying and helping users to decipher PI nursing home ownership structures. The ability of PECOS to shed any further light on these acquisitions is undermined by several factors, including the increasing complexity of nursing home ownership structures since the development of requirements for reporting such data, CMS’s focus on populating PECOS with limited oversight of the reporting and recording of the data, and limited use of the data. State experiences with the collection, use, and public disclosure of ownership data provide insights on how HHS could address these limiting factors. Moreover, our findings can help inform HHS as it develops regulations to implement the Patient Protection and Affordable Care Act and refines the Medicare enrollment application and PECOS to reflect the expanded reporting requirements on nursing home ownership and control contained in the act. Because limited information is available about companies that are not publicly traded, the acquisition of nursing homes by PI firms underscores the need for complete, accurate, and clear ownership and chain affiliation data. PECOS does not include information on the business type of organizational owners that would identify them as PI firms, making our research and the cooperation of PI firms essential to examining PI ownership and chain affiliation in the database. When we reviewed the data in PECOS for homes we knew were PI-owned, we noted the following limitations: Numerous owners were reported for each home with no information on the hierarchy of, or relationship among, the owners. However, some states that collect ownership data do attempt to capture the hierarchy of the ownership structure. Three of the six PI firms we reviewed were not listed in PECOS as the owners of any of the nursing homes they acquired and an entity readily identifiable with a fourth firm was listed as the owner for less than 20 percent of its homes. We were not able to ascertain whether or not all of these PI firms were required to be reported. However, the goal of collecting ownership and control information is undermined if all entities with reportable ownership or control interests are not reported, including the ultimate owners. Information on individual ownership is collected separately from, and is not linked to, organizational owners. Further, providers are not required to report individuals who are partners, officers, or directors above the nursing home provider levels, such as members of the board of directors who provide strategic direction to a nursing home chain. Homes belonging to the same chain were not always associated with the same chain home office, requiring us to link homes through the use of other data elements, such as the address of the chain home office or the chain home administrator. In addition, confusion about what was required to be reported on the Medicare enrollment application and CMS contractor performance contributed to problems with PECOS data. Although it may be difficult for CMS’s contractors to recognize when the information reported by providers is incomplete or inaccurate, oversight of these contractors with respect to their verification of ownership data is limited. The importance of CMS oversight is demonstrated by the fact that PI firms told us that (1) some of the data we found missing on the application had been submitted to CMS’s contractor or (2) data were missing because they were following their contractor’s instructions. Provisions in the recently passed Patient Protection and Affordable Care Act may provide an opportunity to address some of the problems we found. For example, the act requires that the organizational structure of what are termed “additional disclosable parties” be provided along with descriptions of the relationships of these parties to the nursing home and to each other. More detailed information on persons and entities with an ownership or control interest would clarify the relationships among some of the organizational owners listed in PECOS. The act also requires providers to identify members of the governing body of the nursing home. Only CMS’s Division of Provider and Supplier Enrollment has routine access to PECOS and this division has been largely focused on populating the database, which was about 81 percent complete as of July 2010. Although this division has made limited use of nursing home ownership data, CMS recognizes that other groups within the agency may have an interest in such data and has started a workgroup to study the issue. In addition, state survey agencies have expressed interest in more routine access to nationwide ownership data to improve nursing home oversight. For example, one state official told us that the state had made state- collected nursing home ownership data publicly available because consumers had a right to know if the owner of a home operated other nursing homes. Currently, CMS addresses both state and public requests for nursing home ownership data on a case-by-case basis and is unable to give states direct access to the database. CMS is aware of state interest in PECOS data and is beginning to think about how to provide such access. Although the utility to states and consumers of the ownership information in PECOS in its present state is debatable because the information is sometimes hard to decipher, the implementation of the Patient Protection and Affordable Care Act provides CMS with an opportunity to collect meaningful ownership information and to make it available in an intelligible way. We are making 11 recommendations to the Secretary of HHS and the Administrator of CMS. As the Secretary of HHS develops regulations to implement the expanded nursing home ownership reporting and disclosure requirements contained in the Patient Protection and Affordable Care Act, we recommend that the Secretary, given the complex arrangements under which nursing homes can be acquired and operated, consider requiring the reporting of the following five types of information: the organizational structure and the relationships to the facility and to one another of all persons or entities with direct or indirect ownership or control interests in the provider (as defined in the act), such that the hierarchy of all intermediate persons and entities from the provider level up to the chain and the ultimate owner is described; for entities reported as having ownership or control interests, specify whether or not the entities have an operational role; for example, special purpose entities created solely for the purpose of acquiring the nursing home but having no operational role should be identified as such; the percentage ownership interest in the provider for all entities and individuals who have an ownership or control interest (as defined in the act); the names and titles of the members of the chains’ governing body; and the organizational affiliation of individuals with an ownership or control interest (as defined in the act). To ensure proper administration of current reporting requirements, we recommend that the Administrator of CMS issue guidance on the circumstances under which the holder of a security interest in a provider may be considered to have a reportable interest. To ensure that all providers that belong to the same nursing home chain can be readily identified, we recommend that the Administrator of CMS require each provider to report the identity of other nursing homes that are part of the same chain. To improve the usability and accuracy of the ownership and control information collected and stored in PECOS, we recommend that the Administrator of CMS take the following three actions: Expand the scope of CMS’s existing workgroup intended to make PECOS data available within the agency by developing a comprehensive strategy for disseminating PECOS data to HHS, states, and the public; for example, CMS could develop and make available standardized reports on nationwide ownership data and could include ownership information on its Nursing Home Compare Web site. Examine state systems to identify best practices for the collection and public dissemination of nursing home ownership and chain information, including ways in which states make the hierarchy among owners more apparent. More closely monitor the activities of CMS contractors that review the ownership and control information submitted by providers that participate in Medicare and Medicaid to help ensure its accuracy and completeness. To help ensure that the requirements for the collection of ownership and control information from nursing home providers that participate in Medicare and Medicaid keep pace with evolving ownership structures, we recommend that the Administrator of CMS periodically review the requirements related to reporting on the agency’s provider enrollment form to ensure that it promotes accurate and complete reporting of nursing home ownership information consistent with the statute. We provided a draft of this report to HHS for comment and also invited the nine PI firms that cooperated with our study to review the draft. In its written comments, HHS concurred with all 11 of our recommendations and provided CMS’s response to those recommendations. HHS’s comments are reproduced in appendix II. In addition, five of the nine PI firms reviewed the draft and provided oral comments. Officials from some of the firms noted that our report offered a fair and balanced depiction of the subject matter, but some PI firm officials also expressed concerns about how PI firms were portrayed. Two of the six state survey agencies we interviewed provided technical comments on relevant excerpts of the draft report, which we incorporated as appropriate. CMS concurred with all of our recommendations and said that it planned to implement them in various ways, including through the development of new regulations or revisions to the Medicare enrollment process. Specifically, CMS said that it would consider mandating the reporting of the five types of information we specified in our recommendations, such as the names and titles of the members of the nursing home chain’s governing body, when developing regulations to implement the expanded ownership disclosure and reporting requirements in the Patient Protection and Affordable Care Act; require reporting of the holders of a security interest in a provider and identifying all the homes belonging to the same chain through revisions to the Medicare enrollment application and instructions; develop a strategy for examining the wider dissemination of ownership information, as well as an action plan for contacting states about their collection and dissemination of ownership and chain information; conduct additional monitoring of CMS contractors to include, but not be limited to, evaluating the ownership and control information submitted with enrollment applications as part of annual reviews of the enrollment process, other focused reviews of provider enrollment, and general contract oversight; and periodically review the Medicare enrollment application to ensure it is updated to reflect complete reporting of nursing home ownership information consistent with the statute. CMS also provided several technical comments, which we incorporated as appropriate. Officials from two of the five PI firms that provided oral comments said our report provided a fair and balanced depiction of PI ownership of nursing homes. Officials from one firm said the report described real- estate-only acquisitions well and officials from the other PI firm considered the report to be a thorough and comprehensive treatment of the subject matter. In general, PI firm officials commented on our portrayal of the firms, the data in PECOS on the nursing homes they owned, and expanded nursing home ownership reporting requirements in the Patient Protection and Affordable Care Act. Portrayal of PI firms. Officials from some PI firms expressed concerns that our report implied that PI ownership of nursing homes was somehow unique and therefore warranted special scrutiny. Officials from one firm stated that there was little difference between nursing homes owned by PI firms and those owned by public shareholders, beyond SEC reporting requirements for the latter. For example, officials from one firm noted that all homes, regardless of ownership, are subject to state licensure and disclosure requirements and routine surveys to ensure compliance with federal quality standards. Officials representing two firms also commented that the use of complex ownership structures is not unique to companies owned by PI firms. One official made the point that the nursing home’s ownership structure prior to its acquisition by a PI firm was in many ways just as complex and not at all unusual for a public company. Other officials noted that multiple layers of ownership exist across the corporate world and are not particular to the nursing home industry or to health care. Similarly, officials at one firm wanted us to note that PECOS ownership data and chain affiliation are hard to decipher for all nursing homes, not just those owned by PI firms. Because our study focused on the ownership of nursing homes by PI firms and how PI nursing home ownership was captured in PECOS, we did not examine how PECOS captures the ownership of nursing homes by other entities. As a result, our conclusions were limited to the complexity of PI ownership structures and the limited ability of PECOS to help to clarify the relationships among the entities and individuals reported as having an ownership or control interest. PI firms’ PECOS data. Officials representing two PI firms were concerned that our report implied that the ownership information in PECOS was not clear or was problematic because providers did not submit necessary information to CMS. Officials at one firm also thought the tone of the report suggested that PI firms were trying to hide information and stressed that they had disclosed all required information and were very forthcoming with information. Officials representing two PI firms also said that there was no way for firms to see whether the information they provided on the Medicare enrollment application was correctly entered into PECOS. Nursing home providers now have the option of using CMS’s internet-based PECOS to submit, change, and view their enrollment information online, but we did not review this system, which was implemented for nursing homes in April 2009. Our finding that the ownership data in PECOS were hard to decipher focused in large part on shortcomings in the collection of data for PECOS, such as the lack of information on how entities and individuals with reported ownership or control interests are related. We also found that in one case complete ownership information was not reported for homes in one PI-owned chain in part due to incorrect advice provided to a PI firm by a CMS contractor. In another instance, PI ownership was not reported because it may not have been clear that entities with a security interest should be reported. Finally, chain home office information, which is required to be reported was missing for most of the homes in the chain acquired by one PI firm. An official with the nursing home chain said that the company had separately provided information on the homes in the chain it acquired to another office in CMS but that this information had not been integrated into PECOS. The official commented in general about problems with information being siloed at CMS in separate data systems. Patient Protection and Affordable Care Act. Officials representing two of the PI firms noted their support for the expanded ownership reporting requirements included in the Patient Protection and Affordable Care Act, but officials at these firms also expressed caution on which entities or individuals should be subject to disclosure and how detailed reportable ownership data should be. For example, officials with one firm told us that decision makers, but not necessarily all owners or investors, should be reportable, and in particular, they did not believe that owners they considered passive investors, such as public pension funds, should be reported. An official from this PI firm suggested that what should matter from a policy perspective is the entity responsible for the care provided (the nursing home company) and the entity that controls it (the private investment firm). An official with another PI firm stressed the importance of a reporting system that makes clear which entities control or play a role in decision-making, and that even a system that displays a hierarchy and ownership percentages may not adequately reflect this role. The official stated that a designation such as managing partner denoted an entity with decision-making responsibility. We recommended that HHS consider requiring providers to identify whether reported ownership entities have an actual operational role, which we believe would help address this issue. An official representing another PI firm expressed a different view and said that CMS needs to capture more detailed ownership information similar to what some states collect so that it has complete information on all ownership layers. This comment is consistent with our recommendation that CMS examine states systems to identify best practices for the collection of nursing home ownership information. The PI firms also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Of the six firms that responded to our questions, most described similar investment rationales. While leasing arrangements with nursing home operators may have the potential to influence the operations of the homes, firms that acquired a chain reported that they were more involved in nursing home operations than firms that acquired real estate only. Table 4 summarizes PI firm responses on such issues as the time frames for closing out their investments, or exit strategy, and being on the board of directors of the nursing home chain. Investment Rationale. Four of the six PI firms (firms A, B, C, and D) acquired nursing home chains, and officials at all four described increased demand for long-term care due to an aging population as their attraction to those investments. To help meet demographic demand, officials at firms A and D said they sought high-quality chains that focused on providing post- acute care to high-acuity patients (those with clinically complex problems) and indicated that these chains had top notch management already in place. An official at firm C said the firm was attracted by the improvements it could make to the nursing home chain. Officials at all four PI firms characterized their investments as “long term,” but the number of years they planned to hold the investments differed. Officials at firm A said they planned to hold their investment 3 to 9 years, during which time the firm intended to expand the number of patients the chain served to meet the long-term growth potential of the industry. An official at firm C indicated that it was likely the firm would maintain its investment in the chain for at least 20 years. Officials at firms B and D did not specify a range or number of years. Structural Changes. Officials at firms A and C said they divided the operations and the real estate into separate companies for tax or financing purposes but kept those companies under common ownership. An official at firm C explained that the creation of separate operating and real estate companies was designed to attract investors who wanted exposure to only one side of the nursing home company. In hindsight, however, the official said that the separate entities created for the acquisition were not worth the legal costs and reporting requirements and that the firm planned on collapsing the operating and real estate companies to simplify the organizational structure. Officials at firms B and D did not mention any changes to the organizational structure of the chains they acquired. Officials at firms A and C explained the benefits from having operations and real estate under the same chain ownership. An official at firm A stated that it was unlikely that the real estate could be converted to another use and that therefore it made sense for the nursing home operator, who is licensed to run the home, to own the real estate. An official noted that an operating company that does not own its real estate is unable to use the property as collateral for a loan. Finally, officials at this PI firm told us that the chain’s common ownership structure should reassure patients that the chain would take responsibility for any problems that occur. An official at firm C said that the chain leases some of its nursing homes from unaffiliated real estate owners but that it planned to cease operations at those locations if it was unable to purchase the real estate. Another firm official noted that tension over responsibility for improvements can arise in any industry with unaffiliated operating and real estate companies—leaving the operator with less incentive to make those improvements. One real-estate-only acquirer strongly disagreed with this statement and noted that a landlord with a triple net lease has a great incentive for ensuring the real estate is appropriately maintained. This firm said such leases clearly state the responsibilities of the real estate owner and the operator with respect to facility improvements and said that disagreements have been few and limited. Involvement in Nursing Home Operations. Officials at all four PI firms that acquired a chain said that they held seats on the chains’ boards of directors. In general, they characterized their involvement as related to the strategic direction of the chain and indicated that they are not involved in day-to-day operations. They noted that the updates they receive at board meetings help to guide their decisions for the strategic direction of the chain. Strategic direction. Officials at all four PI firms described the chain’s executive management as the ultimate decision maker for the chain, and officials at firms A, B, and D indicated their involvement in nursing home operations primarily ensured that the chain continued the objectives it already had set for itself. Officials at firm A said they had helped the chain implement an ongoing transformation from a focus on custodial care to becoming primarily a provider of postacute care and rehabilitative services to higher acuity patients. This official said that the board of directors ensured that the staff at the facilities could meet this goal. Although the nursing home chain already had this goal in place as a publicly traded company, officials at the PI firm said that they helped to achieve this goal by allowing the chain to make investments more quickly. They also emphasized that the chain does not turn away residents to meet its strategic objective. Management changes. Officials at firms A, B, and D said they kept the same executive management after they acquired the chain because the chain was already well managed. An official who worked at the chain prior to firm A’s acquisition told us that the firm helped hire more regional office managers and more managers overall but also felt that minimal organizational changes had occurred after acquisition by the PI firm. In contrast, an official at firm C believed that the chain the firm acquired had quality of care challenges and later hired a physician as chief executive officer. An official at this firm indicated that the firm’s goal was to help transform the nursing home industry and, as a result, the firm recruited managers that held the same values. Quality-of-care monitoring. Officials at two firms gave specific examples of how they oversee quality of care. An official at firm C told us that the firm helped its chain introduce best practices and standardized training to nursing home staff. According to firm officials, the firm directed capital to, among other things, hire directors of clinical education, train facility staff to focus on the awareness of each patient’s individual needs, and reduce staff turnover. One senior official at this chain said that all the personnel, from the caregivers to management, have gone through a significant cultural change since the PI firm had acquired it. An official at the firm said that if the firm had not purchased this particular chain, a different PI firm would have taken over and he believes that the quality of care would have suffered. However, an official of the firm emphasized that each nursing home within the chain made more decisions about the care provided inside the home than did the chain’s board of directors. Officials at another firm explained that they receive reports on quality of care—including CMS’s 5-star ratings—to help guide management decisions. The firm helped create an Independent Quality Committee to provide the board with independent expert guidance on reading and assessing quality of care data. After examining the data, the board discusses how to address problems. An official with the chain said that it can take underperforming homes and improve them by sharing resources across the chain. Capital improvements. Officials at all four PI firms indicated that they were directly involved in capital improvements or expansion plans for the chains they acquired. Firm A said it helped the chain to undertake investments that furthered the chain’s long-term expansion strategy. This chain has sought approval from state governments to build several new facilities. Firm B said it mainly helps with decisions about the nursing homes’ capital structure and the capacity to fund the development of new homes. Investment Rationale. Three of the six PI firms (firms D, E, and F) made real-estate-only acquisitions. Officials of firms D and E described increased demand in long-term care due to an aging population as a factor that attracted them to those investments. For example, officials at firm D said the business and organizational models they developed brought needed investment into the nursing home industry after a decline in the late 1990s. Similarly, officials at firm E said that no new nursing homes had been built in recent years and that the demand for senior housing will exceed the available supply. In contrast, an official of firm F described the firm’s investments in nursing home real estate as an opportunity to acquire additional real estate; that is, they did not view their nursing home real estate acquisitions any differently than their acquisitions of commercial or residential real estate. These three firms had different exit strategies for their nursing home real estate investments. Although officials at firm D described one of their nursing home real estate investments as “long term,” they did not specify a time frame. However, they have sold other nursing home real estate investments in 1 to 5 years from the initial investment. Officials at firm E said they acquired nursing home real estate with the goal of selling the investments at a profit 3 to 5 years later. After declining growth in real estate value, the firm sold one portfolio of such investments about 2 years after the initial acquisition and had planned on selling its other portfolios. In contrast, an official at firm F said the firm’s acquisitions were a mechanism to collect rent and they had no intention of selling. Involvement in Nursing Home Operations. The three PI firms that made real-estate-only acquisitions had no representation on the boards of the operating companies to which they leased real estate. Through their lease arrangements with nursing home operators, however, they may have the potential to influence the operations of the homes. Lease arrangements. All three PI firms lease the real estate to nursing home operators under “triple net” agreements. Officials at firm E told us that triple net leases are the industry standard for nursing homes. Under these agreements, in addition to rent, the operator agrees to pay all real estate taxes, property insurance, and maintenance on the property (including capital costs). These officials said that because the average age of their facilities was 30 years, they required the operators to make an annual per-bed deposit for maintenance. This deposit was refunded when the nursing home operator submitted evidence (paid invoices) that it had undertaken maintenance. Firms D and E had leases with the nursing home operators that calculated a base rent plus rent as a percentage of the operator’s adjusted net income or excess cash flow—ranging from 35 to 50 percent. Officials at firm E said that they examined whether an operator could meet the terms of the lease before they made an initial investment in the property. According to officials at this PI firm, the major variable that influenced a nursing home operator was not the operator’s ability to pay debts and rent, but rather the level of reimbursement received for resident care. However, officials at a PI firm that purchased a nursing home chain told us that such leasing arrangements can have negative consequences. They explained that the real estate owner shares profits with minimal risk, but when revenues decline, nursing home operators are more likely to cut staff to pay the base rent and to maintain a level of profitability. Separation of real estate from operations. Officials at firms D and E told us that the separation of real estate and operations under unaffiliated companies benefited the operator by allowing greater access to capital for the nursing home. Officials at firm D said that they purchased nursing homes and separated the entities that owned the real estate from those that operated the facilities. They said they created this structure to attract financial lenders and investors back to the nursing home industry and reduce the risk associated with the closure of facilities because of high insurance premiums resulting from litigation. According to officials at this firm, this structure still ensured that the legal process could reach an accountable party to help address potential quality-of-care problems. Quality-of-care monitoring. While officials at all three firms reported that they do not tell the nursing home operators to whom they lease how to run their businesses, officials at firms D and E monitored the operators’ quality of care. Officials at both firms said that good quality of care resulted in good financial outcomes. They indicated that they would consider terminating a lease if poor or declining care persisted, but officials at neither firm said they had encountered such a situation. Officials at firm D said their involvement at the operating level is typically limited to oversight of their tenants through an affiliated asset management company. The asset managers are expected to monitor compliance with the lease, perform financial reviews and analyses, conduct on-site inspections of each facility’s physical plant, and continuously review each facility’s clinical performance. Officials at firm E said that the terms of their leases required nursing home operators to have plans of correction that addressed quality-of-care problems. Officials at this firm told us that they have clinical staff to help them interpret state survey reports of the nursing homes to which they lease real estate. If clinical care declined below a certain point at a home, the officials said that they would increase their monitoring. While these officials said they would ask the home’s operator how it planned to address resident care problems, they emphasized that they would not tell the operator what to do. In the more than 5 years they had owned nursing home real estate, an official at firm F told us that the firm had not monitored the quality of care provided by the operators to whom it leased facilities. However, the official said the firm would like to start monitoring operations, because— unlike their other commercial investments—they do not manage the operations of their nursing homes. Should an operator lose its state license to operate a nursing home, the official of the firm told us that their investment would be at risk, because it can be difficult to identify a new nursing home operator or to convert the property to another use. Although the official at this firm said the firm would intervene before an operator lost its license, the firm did not consider monitoring quality of care until approached by an independent third party that said it could help interpret operators’ state survey results. In addition to the contact name above, Walter Ochinko, Assistant Director; Jennie Apter; Ramsey Asaly; Joanne Jee; Dan Lee; Linda McIver; Luis Serna; Amy Shefrin; and Jessica Smith made key contributions to this report. Poorly Performing Nursing Homes: Special Focus Facilities Are Often Improving, but CMS’s Program Could Be Strengthened. GAO-10-197. Washington, D.C.: March 19, 2010. Nursing Homes: Addressing the Factors Underlying Understatement of Serious Care Problems Requires Sustained CMS and State Commitment. GAO-10-70. Washington, D.C.: November 24, 2009. Nursing Homes: Opportunities Exist to Facilitate the Use of the Temporary Management Sanction. GAO-10-37R. Washington, D.C.: November 20, 2009. Nursing Homes: CMS’s Special Focus Facility Methodology Should Better Target the Most Poorly Performing Homes, Which Tended to Be Chain Affiliated and For-Profit. GAO-09-689. Washington, D.C.: August 28, 2009. Medicare and Medicaid Participating Facilities: CMS Needs to Reexamine Its Approach for Funding State Oversight of Health Care Facilities. GAO-09-64. Washington, D.C.: February 13, 2009. Nursing Homes: Federal Monitoring Surveys Demonstrate Continued Understatement of Serious Care Problems and CMS Oversight Weaknesses. GAO-08-517. Washington, D.C.: May 9, 2008. Nursing Home Reform: Continued Attention Is Needed to Improve Quality of Care in Small but Significant Share of Homes. GAO-07-794T. Washington, D.C.: May 2, 2007. Nursing Homes: Efforts to Strengthen Federal Enforcement Have Not Deterred Some Homes from Repeatedly Harming Residents. GAO-07-241. Washington, D.C.: March 26, 2007. Nursing Homes: Despite Increased Oversight, Challenges Remain in Ensuring High-Quality Care and Resident Safety. GAO-06-117. Washington, D.C.: December 28, 2005. Nursing Home Quality: Prevalence of Serious Problems, While Declining, Reinforces Importance of Enhanced Oversight. GAO-03-561. Washington, D.C.: July 15, 2003. Nursing Homes: Public Reporting of Quality Indicators Has Merit, but National Implementation Is Premature. GAO-03-187. Washington, D.C.: October 31, 2002. Nursing Homes: Federal Efforts to Monitor Resident Assessment Data Should Complement State Activities. GAO-02-279. Washington, D.C.: February 15, 2002. Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the Quality Initiatives. GAO/HEHS-00-197. Washington, D.C.: September 28, 2000. Nursing Home Care: Enhanced HCFA Oversight of State Programs Would Better Ensure Quality. GAO/HEHS-00-6. Washington, D.C.: November 4, 1999. Nursing Home Oversight: Industry Examples Do Not Demonstrate That Regulatory Actions Were Unreasonable. GAO/HEHS-99-154R. Washington, D.C.: August 13, 1999. Nursing Homes: Proposal to Enhance Oversight of Poorly Performing Homes Has Merit. GAO/HEHS-99-157. Washington, D.C.: June 30, 1999. Nursing Homes: Complaint Investigation Processes Often Inadequate to Protect Residents. GAO/HEHS-99-80. Washington, D.C.: March 22, 1999. Nursing Homes: Additional Steps Needed to Strengthen Enforcement of Federal Quality Standards. GAO/HEHS-99-46. Washington, D.C.: March 18, 1999. California Nursing Homes: Care Problems Persist Despite Federal and State Oversight. GAO/HEHS-98-202. Washington, D.C.: July 27, 1998.

Summary: Since 2007, attention has been focused on nursing home ownership by private investment (PI) firms. Nursing home providers are required to disclose parties with an ownership or control interest in order to participate in Medicare or Medicaid. CMS, the HHS agency responsible for managing these two programs, maintains ownership and chain data in its Provider Enrollment, Chain, and Ownership System (PECOS). GAO examined (1) the extent of PI nursing home ownership and firms' involvement in homes' operations, (2) whether PECOS reflects PI ownership, and (3) how HHS and states use ownership data for oversight. GAO identified PI ownership using a proprietary database and analyzed data from six PI firms about their interest and involvement in nursing homes. GAO examined PECOS data for selected PI-owned nursing home chains and discussed ownership data with officials from HHS, CMS, and six states that also collect data. GAO found that 1,876 unique nursing homes were acquired by PI firms from 1998 through 2008. While some of the acquisitions involved entire nursing home chains, which included both the operations and any owned real estate, other acquisitions involved only the real estate. Sometimes the same nursing homes were acquired more than once. Ten PI firms accounted for 89 percent of the 1,876 unique nursing homes acquired by PI firms during this period. Of the six PI firms from which GAO collected information, those that acquired a chain reported being more involved in nursing home operations than those that only acquired the real estate. These firms had representatives on the nursing home chain's board of directors, but they generally characterized their involvement as related to the chain's strategic direction rather than day-to-day operations. PI firms that acquired real estate only had no representation on the boards of the operating companies, but officials at one PI firm observed that some leasing arrangements have the potential to affect operations. PECOS provided a confusing picture of the complex ownership structures and chain affiliations of the six PI-owned nursing home chains GAO reviewed. The database did not provide any indication of the hierarchy or relationships among the numerous organizational owners listed for PI-owned nursing homes. Further, PI ownership was often not readily apparent in the data, which could be the result of (1) PI firms not being required to be reported because of how they structured their acquisitions, (2) provider confusion about the reporting requirements, or (3) related entities that were reported but were not easily identifiable with the PI firms. Finally, PECOS chain information was not straightforward and was sometimes incomplete, making it difficult to link all the homes in a chain. Compounding these shortcomings, CMS's ability to determine the accuracy and completeness of the reported ownership data is limited. HHS has made limited use of PECOS ownership data. The only CMS division with routine access to PECOS data has been largely focused on populating the database and has not developed any standardized reports on nursing home ownership that it could share with interested parties. Some states collect their own ownership information but it can be limited to owners that operate in their state. As a result, tracking compliance problems among commonly owned homes or multistate chains can be ad hoc. State officials and others expressed interest in nationwide ownership data, such as PECOS, to improve nursing home oversight. Recognizing the growing interest in PECOS data, CMS has established a workgroup to consider how to accommodate the PECOS interests of other groups within the agency and is considering whether and how to provide access to external parties such as states. The implementation of the Patient Protection and Affordable Care Act provides CMS with an opportunity to address shortcomings in the current PECOS database and to make ownership information available to states and consumers in a more intelligible way. GAO recommends that the Secretary of HHS and CMS Administrator consider requiring the reporting of certain information to make nursing home ownership structures more understandable and take other actions to improve the accuracy and dissemination of these data as HHS implements new ownership reporting requirements in the 2010 Patient Protection and Affordable Care Act. HHS concurred with all of GAO's recommendations.