Nursing Home Owners Are Fighting New York Law That Prioritizes Patient Care

The COVID-19 pandemic forced public attention somewhere it doesn’t often go: nursing homes. Since March 2020, more than 200,000 deaths from COVID-19 have been reported among residents and staff of long-term care facilities across the country. While congregate living spaces are inherently dangerous in a pandemic — especially ones full of medically vulnerable people — COVID’s spread through these homes was intensified by preexisting problems like understaffed facilities and overworked, underpaid employees.

In some cases, this spurred action. Linking poor patient care to facilities’ spending priorities, New York State passed April 2021 legislation requiring nursing homes to spend at least 70 percent of their revenue on direct patient care (including 40 percent on patient-facing staffing), and banning them from paying out more than 5 percent in profits to owners and shareholders. Instead, the facilities must turn over to the state any surplus beyond 5 percent, which will be redistributed back to high-performing nursing homes. The law also addresses understaffing concerns by requiring facilities to provide at least 3.5 hours of direct nursing care to each resident each day.

“The goal is here to not only protect people in nursing homes but to dissuade bad actors from coming into this business,” Sen. Gustavo Rivera, New York Senate health committee chair, said in a statement.

But just before the law was set to go into effect on January 1, 2022, a collection of 239 nursing homes filed a federal lawsuit aiming to block the law, calling it unconstitutional for New York to “confiscate” their excess profits. Notably, much of the complaint outlines how the law — if it had been in effect in 2019 — would have diminished the plaintiffs’ profits by a total of $824 million.

After the lawsuit was filed, Gov. Kathy Hochul repeatedly delayed the law’s implementation, citing the pandemic and nursing homes’ ongoing staffing problems. But in April, she allowed the law to go into effect.

Now it is up to the state of New York to enforce the law — and the court to decide whether it is constitutional.

Strapped for Cash While Turning Huge Profits

It is clear that many nursing homes fail to provide the level of care patients deserve. But there is a central disagreement over the cause of the problem. Nursing homes routinely say they are barely staying afloat and unable to afford sufficient staff. In a 2020 survey, 55 percent of nursing homes claimed they are operating at a loss and 72 percent said they could not make it another year at their current rate.

In fact, one of the main goals of the powerful nursing home lobby is to increase federal Medicaid and Medicare payments, which make up the bulk of nursing home revenue. (In a recent quarter, 68 percent of nursing home revenue came from Medicaid, which pays a per diem for long-term residents. Another 10.9 percent came from Medicare, which is paid out at a higher rate for patients receiving higher-level, shorter-term care after a hospital stay.)

But advocates say nursing homes are skimping on critical services in order to make massive profits for owners and investors. And they have new ammunition in the form of the recent lawsuit.

Departing from the usual claims of barely scraping by, the 239 named plaintiffs allege in the lawsuit that a profit cap would remove hundreds of millions in profits. Advocates like the LongTerm Care Community Coalition (LTCCC) say these claims only prove these facilities have been making money all along — the funds just haven’t been reinvested into patient care.

“It was shocking,” said LTCCC Executive Director Richard Mollot. “To actually divulge how much money they’re making, above a fairly nominal requirement, was really shocking to me.”

Using the 2019 profits reported in the lawsuit, LTCCC calculated that the facilities could have used those profits to pay annual salaries and benefits for an additional 5,600 full-time registered nurses.

So are nursing homes reaping profits or struggling to provide basic care? Their financial structures lie at the heart of this discrepancy. Over the past two decades, many nursing homes throughout the country have restructured their businesses by splitting their operations and real estate into separate LLCs. This allows them to shield their valuable real estate assets from financial threats like patient lawsuits.

Many go a step further and spin off into multiple sub-companies, called “related parties,” that bill each other for services, often at high rates. Around the country, nearly three-quarters of nursing homes do business with related parties. Many nursing homes are owned by publicly traded corporations (although this is banned in New York) or private equity firms. Private equity investment in nursing homes jumped from $5 billion in 2000 to more than $100 billion in 2018; currently, 5 percent of nursing homes are owned by private equity firms. However, “Roughly 70 percent of the nation’s 15,400 nursing homes are for-profit,” as Maureen Tkacik points out in The American Prospect.

“​​Sometimes, investors would buy a nursing home from an operator only to lease back the building and charge the operator hefty management and consulting fees,” The New York Times found in a 2020 investigation of private equity-owned nursing homes. “Investors also pushed nursing homes to buy ambulance transports, drugs, ventilators and other products or services at above-market rates from other companies they owned.”

For example, a 2018 Kaiser Health News investigation found that Allenbrooke Nursing and Rehabilitation Center in Memphis, Tennessee, reported a $2 million deficit and was often short of basic supplies like diapers and sheets. Meanwhile, the facility was paying out millions to other companies owned by the two Long Island men who owned Allenbrooke and 32 other nursing homes.

And Brooklyn-based Joseph Schwartz grew Skyline Healthcare, his nursing home empire, from six facilities to more than 100 between 2015 and 2017. No oversight bodies intervened as he continued purchasing new homes, even as his facilities received complaints of neglect and mismanagement, drew fines, and some even lost Medicare and Medicaid certification. Today, he faces a host of charges and lawsuits; among them, Arkansas Attorney General Leslie Rutledge alleges Schwartz lied on Medicaid reports in order to siphon $3 million to other companies he owns.

A 2020 analysis found that nursing homes purchased by private equity firms had 10 percent higher short-term mortality, which the authors equated to 21,000 lives lost over a 10-year period. Spending at these facilities was also 19 percent higher than similar nursing homes.

An attorney specializing in nursing home finances told California Sunday that this financial structure allows nursing homes to make plenty of profits, but then “to go to the state legislature, to Senate sub-hearings, and say, ‘I have all these nursing homes, and they barely break even. We need more Medicare money. More Medicaid. We need bigger reimbursements. You guys are killing us!”

The American Prospect dug into the facilities that joined the New York lawsuit, finding that 8 of the 40 most profitable ones on the list are co-owned by members of a single family, and that 25 others are owned by their “business partners or closest associates.” Many of the most profitable facilities in the lawsuit are similarly owned by extremely wealthy, often interconnected individuals.

In fact, around the country, a relatively small network of individuals and families own massive nursing home empires. “In New York, it’s almost like, frankly, like a mafioso, with these family groups that are somehow related,” said Mollot.

Some of the facilities joining the lawsuit have been identified by the state as Special Focus Facilities, meaning they have a history of serious quality issues. And seven were among the 11 sued by the U.S. Attorney for the Southern District of New York in June 2021, for allegedly overbilling Medicare between 2010 and 2019. According to that lawsuit, the nursing homes “systematically kept patients at the facilities longer than necessary” and “systematically put patients on higher levels of rehabilitation therapy than necessary based on their actual clinical needs.”

The Pandemic Shed Light on Longstanding Problems

The New York law that recently went into effect was included as part of last year’s state budget, amid outrage over the Cuomo administration’s mishandling of COVID-19 in nursing homes.

In March 2020, as New York became the epicenter of the pandemic, the state required nursing homes to admit sick people from hospitals. Soon after, then-Gov. Andrew Cuomo bowed to industry lobbyists and inserted a special protection into the 2020 state budget, shielding nursing homes, hospitals and health care providers from COVID-related lawsuits.

What’s more, multiple audits show that Cuomo’s Department of Health undercounted the state’s total nursing home COVID death toll, by not counting 4,100 nursing home residents who died outside their facilities in hospitals.

“Instead of providing accurate and reliable information during a public health emergency, the Department conformed its presentation to the Executive’s narrative, often presenting data in a manner that misled the public,” State Comptroller Thomas DiNapoli said in a March 2022 audit.

Over the ensuing two years, the pandemic has forced a closer look at nursing homes in New York. Legislators repealed the special liability protections in March 2021, unleashing a flood of dozens of lawsuits from families seeking to hold nursing homes accountable for their loved ones’ COVID-19 deaths before the two-year statute of limitations expires. Although it was initially unclear whether the liability repeal would be retroactive, a Supreme Court judge in Buffalo recently allowed a suit to move forward on behalf of a woman who died in a nursing home in April 2020.

There has also been renewed concern over the nursing home staffing crisis. Currently, only Washington, D.C. requires nursing homes to provide 4.1 hours of direct nursing care each day, in line with minimum standards recommended in a 2001 report by the Centers of Medicare & Medicaid Services (CMS). The Biden administration recently proposed a set of nursing home reforms, including instituting a federal minimum staffing requirement (which would be set by CMS following a new research study) for all nursing homes that receive federal funding.

The nursing home industry is pushing back against Biden’s proposal, just as it pushed back against New York’s newly mandated 3.5 hours of direct nursing care a day. The industry claims staffing minimums are impossible to meet because the workforce simply does not exist. “New York does not have enough qualified workers to meet the mandate and it fails to provide enough funding to pay for the costs of the mandate,” the New York State Health Facilities Association said in a statement regarding New York’s bill.

But advocates say, if anything, New York’s law does not go far enough, and that understaffing stems from low salaries, poor working conditions, burnout and a lack of dignity on the job. National turnover rates for nursing home staff are around 100 percent, meaning that about as many people leave in a given year as are employed at a facility.

“If you’re not meeting 3.5 hours, I don’t see how you’re not neglecting your residents,” said Mollot, noting that the originally introduced version of the legislation required 4.1 direct care hours per day. “Essentially, if you’re not providing 4.1 hours of direct care time, to me, that’s fraud in one of two ways: Either you’re not providing the care that residents need, or you’re retaining residents who don’t need to be in a nursing home. Because if they need to be in a nursing home, they need 4.1 hours… It’s not a warehouse.”

Meanwhile, two other states recently joined New York as the first states attempting to improve nursing home quality by preventing owners from siphoning off profits. In Massachusetts, a new rule instituted by the governor requires nursing homes to spend 75 percent of revenue on resident care, and a recent New Jersey law requires 90 percent.

“If they’re not able to pull so much money away from care and spend it on staffing and actual services, it should make a big difference,” Charlene Harrington, an expert in nursing home reimbursement and regulation, told Fortune, referring to the three state rules capping profits. “I would expect the quality of care would improve substantially.”

“I think that people really saw what was going on, and how much of it wasn’t a standalone issue, because of the pandemic,” said Mollot, of the bills seeking to limit profits and improve care. “The residents are dying. I don’t care if you’re 90 or 100 or older. You don’t deserve to suffocate to death, in pain, because no one’s caring for you, because they were sloppy in their care.”