As I watched Congressman Lloyd Doggett’s Ways & Means Subcommittee Hearing on June 25th, I noted Ms. Rebecca Gould, a nursing home administrator. spoke for the industry. Ms. Gould is the head executive of a small nonprofit operation with 120 beds and therefore a peculiar choice for representing the industry. She made the following statement that is typically made by industry representatives at legislative hearings: “Nursing homes run on very thin margins.”
From the perspective of corporate finance, these kinds of statements are so misleading that they can be classified as propaganda. I’m disappointed when advocates and experts fail to debunk them. Furthermore, in this case, nonprofits are not philosophically operating to make a “profit.” Rather they are 501(c)(3)’s. Ms. Gould represents about one-fourth of the industry – a sector obligated to represent the best interests of stakeholders rather than shareholders.
Private sector facilities are typically individually incorporated by parent corporations as limited liability corporations (LLCs). Often one or more other subsidiaries or shell companies are in a ownership hierarchy, which serve as a cash pipeline to investors. Furthermore, parent corporations often own subsidiaries or LLCs that provide ancillary services such as management services, pharmacies, and physical therapy. More importantly, the nursing home industry is more of a real estate and finance industry than a skilled nursing industry.
Cash Flow & Financialization: An Example
Two major financial maneuvers often occur between the facility and the return earned by investors and executives: (1) extraction of cash from Medicare, Medicaid, and private pay reimbursements – through property leases, management contracts, and ancillary services (all of which are expenses on the operators’ balance sheets, i.e. the LLC’s balance sheet), and (2) upstream financial engineering designed to generate cash unrelated to the quality of service at the facility-LLC level.
In this post, I want to simply illustrate some upstream manipulations in the flow of capital by briefly discussing recent financial reports of The Ensign Group, which owns a facility with the worst case of COVID-19 disease and deaths in the Kansas City area. I am writing this because I’m on a mission to change the way we strategize and present testimony and respond to lobbyists and other spokespersons for the industry when they propagandize.
The Ensign Group is a rapidly growing corporation that is classified as a holding company. It claims to not own or operate any skilled nursing or other senior housing business. That is a laughable legal fiction because it owns the subsidiaries that own the operations. Without doubt, earnings after expenses – as well as a lot before – flows up the capital stream to the holding company, i.e. The Ensign Group.
The holding company is not the most common model for organizing senior care real estate corporations. Many are owned by private equity firms, one of the biggest skilled nursing businesses, Life Care Centers, is owned by a single billionaire, and some are typical publicly traded corporations such as Brookdale and Genesis corporations. However, all corporations desire to enhance the “cash flow,” which is far more desired in the current “financialized” climate.
I don’t need to get too deep into the weeds on “cash flow,” but if you’ve been hearing about stock buybacks in the past couple of years, that is one type of financial technique for increasing the value of a company’s stock and often enriches shareholders and executives who exercise stock options. Furthermore, executives are often rewarded with bonuses by the board. Although the “margin” might have been “thin” at The Ensign Group’s Kansas City facility in 2019, the table below indicates that the compensation of top executives was not thin.
Although the salary of these executives hasn’t changed all that dramatically over the three-year period, total compensation increased by 250% for the chairman of the board between 2017 and the end of 2019. The other top board members had similar increases in total compensation. These five top executives also serve as members of the board. Only two outside directors are on the board. Therefore, the column labeled “Non-Equity Incentive Plan Compensation” is simply a bonus that these executives/board members awarded to themselves.
By buying back stock (a decision of the board), the stock price increased, therefore, they, the executives and board exercised their stock options. An award of stock was probably due to the creation of another subsidiary and the awarding of stock in that subsidiary to shareholders and executives. As I wrote in an earlier email, and posted on the Kansas-Missouri Gray Panther website, The Ensign Group’s 2019 10-K reported very large increases in the price of the company’s stock (https://kanmograypanthers.com/kansas-city-kansas-nursing-home-covid-19-poster-child-is-owned-by-a-profitable-multi-billion-dollar-corporation/).
|Name and Principal Position||Year||Salary ($)||Option Awards($)(1)||Stock Awards ($)(2)||Non-Equity Incentive Plan Compensation ($)(3)||All Other Compensation ($)||Total ($)|
|Christopher R. Christensen||2019||522,892||383,166||1,719,859||3,658,133||27,662||6,311,712|
|Co-Founder, Executive Chairman||2018||505,198||—||2,521,548||2,667,852||35,261||5,729,859|
|and Chairman of Board (Since May 2019)||2017||490,483||96,756||59,001||1,164,999||27,421||1,838,660|
|Barry R. Port||2019||368,962||306,533||1,634,259||3,658,133||14,634||5,982,521|
|Chief Executive Officer (since May 2019)||2018||356,477||—||1,752,454||2,112,766||14,742||4,236,439|
|Suzanne D. Snapper||2019||347,782||287,374||1,677,269||3,493,724||4,228||5,810,377|
|Chief Financial Officer||2018||336,014||—||1,914,244||2,059,056||4,100||4,313,414|
|and Executive Vice President||2017||326,227||45,153||96,041||866,151||3,828||1,337,400|
|Chad A. Keetch||2019||320,770||191,583||1,149,950||2,014,043||3,018||3,679,364|
|Chief Investment Officer||2018||309,915||—||1,486,699||1,442,086||2,788||3,241,488|
|and Executive Vice President and Secretary||2017||300,889||45,153||87,260||692,395||3,377||1,129,074|
|Spencer W. Burton, President and Chief Operating Officer, Ensign Services, Inc. (Since May 2019)||2019||292,500||287,374||932,399||1,438,590||14,270||2,965,133|
The forprofit nursing home industry would have you believe that it is hard to make money in the skilled nursing business. That is not true. Unfortunately, the industry has framed arguments and has created a narrative that keep advocates on the defensive and legislators and the public buying into “thin margin” hardship plea.
Unless advocates, activists, and scholars debunk the thin margin propaganda and go on offense, we will remain stuck playing rope a dope with the industry over cases of abuse, and neglectful practices. One suggestion I have for advocacy groups is this: find legal and financial experts that can serve on boards or at least assist with framing issues and developing a narrative that would expose the industry’s financial machinations and put them on the defensive.
In this post, I have focused on executive compensation, which is one among a large number of finance-related techniques for extracting cash from the business of caring for patients in skilled nursing facilities. In future posts, I will be exposing other corporations and other forms of financialization of the nursing home industry.