By:

Dave Kingsley

A PUZZLING REPORT COMING FROM AN ADVOCACY ORGANIZATION

The AARP commissioned Harris Meyer, a business journalist, to write a report regarding the nursing home industry’s response to COVID.  The report, “Nursing Homes’ Flawed Business Model Worsens COVID Crisis” was posted on the AARP website (https://www.aarp.org/caregiving/health/info-2020/covid-19-nursing-homes-failing-business-model.html).

The advocacy work of the AARP during the COVID pandemic has been less than stellar. It will take more than one blog post to call out the AARP for a report that minimizes industry negligence and the size and scope of the COVID tragedy in U.S. home nursing homes. This is the first one.

 

The title of Meyer’s report might lead one to believe that the AARP is criticizing the industry and advocating for patients because of a “flawed business model,” which might be interpreted by ordinary taxpayers and stakeholders as “greed.”  Nothing could be further from the constructed reality presented in the report.  It is a delicate attempt to “carry water” for an industry that failed to protect patients entrusted to its care.

 

 By reducing the COVID tragedy in nursing homes to his perception of a “flawed business model,” and inadequate Medicaid reimbursement, Meyer gives more legs to a false narrative: nursing home corporations aren’t paid enough for providing the care elderly patients need and deserve. The flawed business model as he sees it has been imposed on corporations. That is untrue and unrelated to reality.

 

The report is full of misinformation and fails to address the dominance of finance and real estate driving the legal and financial structure and functioning of the nursing home system while Medical care is incidental.  Meyer even absurdly compares the daily Medicaid reimbursement rate to daily hotel rates of $200.  I know of no person, having checked into a hotel, was told they would be sharing a room with a stranger paying the same rate.

 

AARP – OSTENSIBLY AN ADVOCACY GROUP – IS TAKING ON A DEFENSE OF A NEGLIGENT INDUSTRY, WHICH NEEDS TO BE HELD ACCOUNTABLE

Meyer begins his article by taking the grossly negligent industry off the hook:

“It’s tempting to heap blame on the owners of America’s nursing homes—to argue that the pursuit of profits led to poor care and so many coronavirus-related deaths.” He claims that “The reality, however, is more complex.” He then makes a contradictory and untrue assertion: “Clearly most operators reacted to the pandemic as best they could. But what I found was that the industry’s complex and murky financial structure fails to safeguard the health of residents and staff.”

WHO IS RESPONSIBLE FOR THE “MURKY FINANCIAL STRUCTURE?”

Special interests representing real estate and finance are responsible for legislation that rewards high net worth individuals and institutional investors seeking shelter from the IRS and return on investment in medical care funded by federal and state governments.  Tax expenditures such as accelerated depreciation allowances, carried interest, pass through entities, interest deductions, and so on infuse cash into nursing home corporations that are above and beyond Medicaid/Medicare/Private Pay reimbursements.  There is no other industry rewarded as well by the tax codes as is the real estate industry.

GENESIS CORPORATION IS HARDLY AN EXEMPLAR FOR NURSING HOME CORPORATIONS

To determine how well corporations – paid to care for medically fragile and vulnerable patients – fulfilled their responsibilities, it is important to objectively examine evidence available from publicly listed corporations, but it is even more important to penetrate the opaque financial information behind the nursing home system’s veil of secrecy.  I have reported some of my examination in a recent post (e.g., on December 17, 2020 regarding The Ensign Group – a publicly traded company).  The ENSG has had rather robust earnings during the past three quarters compared to the same three quarters of 2019.

What Meyer doesn’t do is explain much about the financial structure he blames for (and what he minimizes as) the “COVID crisis” – one of the greatest medical tragedies in U.S. history. He uses the failing Genesis Healthcare Corporation as an exemplar of the industry.  Genesis, founded in the 1980s, grew into the largest chain of long-term care facilities in the U.S.  It was taken over – raided – by Formation Capital in 2007 and basically looted.  Formation sold off the property to Welltower – a player in the nursing home industry and publicly traded real estate investment trust (REIT) with over $4 billion in revenues.

The facilities were leased back to Genesis.  Triple net leases (tenant pays for maintenance, taxes, and insurance) are standard in the long-term care industry.  Meyer doesn’t understand that the variety of business models in the industry are conscious decisions of investors – they are not something over which corporate executives and investors have no control.  They choose how to structure their corporations, which is mostly for maximum extraction at the expense of care.

Genesis is basically a zombie company; its stock is practically worthless.  Here is what Welltower stated in their third quarter report:

“Genesis Healthcare Update As a result of Genesis Healthcare noting substantial doubt as to their ability to continue as a going concern we have written off all existing straight-line rent receivable balances and revised our method of revenue recognition to a cash-basis accounting method from a straight-line accounting method, effective July 1, 2020. Genesis Healthcare is current on all obligations to Welltower through October.”

MEDIAN NET OPERATOR EARNINGS ARE MISLEADING

Meyer cites a MedPAC report indicating a “operating profit margin of negative 3 percent on patients paid for by Medicaid and other non-Medicare sources.” This is a nonsensical statement.    Operators are at the bottom of the food chain in the nursing home system.  Much of what they are expensing is revenue that flows up the chain.  In the next post, I will discuss “net earnings” versus “earnings before interest, taxes, depreciation, and amortization” or “EBITDA.”  A financial metric that provides a much better picture of financial performance.

Also, I will be discussing a report paid for by the industry and produced by the major accounting firm Clifton, Larson, Allen (CLA).  This report also misleads the public and is used by the industry in its hardship pleas, which should be taken with a big grain of salt. Nevertheless, it contradicts and undermines Meyer’s report.