By:
Dave Kingsley
What’s in a Number?
The major accounting firm of Clifton, Larson, & Allen (CLA) has concluded that CMS proposed nursing home staffing standards will cost the industry $6.8 billion in additional labor costs.[1] Without the proper context, a big number like $6.8 billion has a big impact on legislators, the media, and the public in general. In the proper context, this is not a big number. It is in fact a de minimus increase in overall costs to the industry – mere noise in the data.
By the time the standards are implemented, total spending on Medicaid will have reached $1 trillion. Approximately 20% or $200 billion of total Medicaid dollars will be allocated to long-term care. Medicare will expend an additional $100 billion for skilled nursing care.[2] These are conservative estimates, but even low-ball statistics reduce the impact of $6.8 billion to insignificance. Based on CLA’s estimate, nursing home operating expenses will increase by around 2% of revenue derived from taxpayers. Given waste from overpayment, widespread mismanagement, and weak government oversight in the taxpayer funded nursing home system, there will be little to no impact on providers’ bottom line because of CMS weak standards.
Furthermore, overall industry revenue from reimbursement for direct care is enhanced by a host of tax subsidies for depreciation, interest, and other write downs on taxable income. Money owed and not paid to the government is cash flow – it is money that can be used to make more money or to pass along to investors and executives.
Guns for Hire: How A Major Accounting Firm Serves as a Propaganda Arm of the Nursing Home Industry
One would expect ethical, competent accountants to provide an objective report on returns to nursing home investors. But that is not what CLA is doing for the nursing home industry. Typically, they base their claims about industry hardships on facility cost reports – specifically on net operating income. This is laughable for several reasons.
The practice of separating facility specific net income from parent corporation financial reports, i.e., income statements, cash flow statements, and balance sheets, suggests that CLA is intentionally distorting the financial picture of the industry. Expenses at the facility level include related parties and home office allocations. I suggested to a legislative committee a couple of weeks ago that they look at transfer pricing rather than the usually low or negative net operating income reported by facilities, which lease their property from another subsidiary of their parent corporation. Triple net leases are standard in the industry. Hence, facilities pay maintenance, taxes, and insurance on property they don’t own. This makes the net operating income for the property subsidiary quite robust.
As corporate finance has evolved with tax policy, net income is not a measure of “profitability” or return on investment. This is especially the case in asset intensive industries. The nursing home industry is not merely a healthcare industry. Rather it is primarily a real estate and finance business. With large amounts of write downs for, among other things, depreciation and interest, direct care revenue is greatly enhanced by tax subsidies.
Real estate alone results in huge federal and state tax expenditures. For instance, in 2014, Amazon’s net profit was -$241 million –note: that is negative $241 million. It would appear to nonfinanciers that Amazon was losing a lot of money. Harvard finance professor Mihir Desai pointed out that “Amazon’s EBIT, however, was $178 million, and the difference of $419 million represents taxes, interest, and currency adjustments.” Professor Desai asked, “What about EBITDA?” Amazon had $4.746 billion in depreciation and amortization. Consequently, their EBITDA of $4.924 billion was “a far cry from the net loss of $278 million. So Amazon generated lots of cash, as measured by EBITDA, but had losses according to profitability measures.”[3]
Of course, Amazon is not in the nursing home business. But the same principles apply. Perhaps Amazon is more asset intensive than we find in the LTC/SKN industry, but real property is a major factor in providers’ cash flow.
With the entry a couple of decades ago of limited liability corporations (LLC), real estate investment trusts (REITs) and private equity firms (PE) the ground shifted under the feet of regulators and advocates. The industry has become financialized through ancillary subsidiaries providing labor, insurance, therapy, and other goods and services, which has resulted in increasing extraction of cash without a correlative increase in quality of care. None of this enters the CLA picture of the industry. There appears to be no focus on what facilities are paying related parties for goods and services. Nor do we know how to evaluate the quality of care based on pricing. This is astounding but is nevertheless overlooked by legislatures, government agencies, and many of the largest advocacy organizations such as the AARP, NCOA, NIH, the so-called Moving Forward Coalition.
It is time that advocates step up and demand that we get a thorough, objective, financial analysis of the industry rather than a continued reliance on the AHCA/NCAL and their paid accounting firm. The nursing home lobby has no compunction about putting out ridiculous financial information because they know they can get away with it. That is a shameful, disgraceful situation. It will do us no good to argue about the minutia of reimbursement (think RUGs versus PDPM) and ignore the bigger issue of nonfeasance, misfeasance on the part of CMS, state agencies, and legislatures.
CLA Propaganda Serves as a Barrier to Quality of Care
CLA is paid to support the nursing industry’s hardship claims and to help further a very effective narrative of low net income, financially struggling owners/investors, and stifling over regulation. Legislative hearings attended by industry lobbyists, government representatives, and advocates often seem like a gathering for singing kumbaya and exuding effusive niceness. Legislators and most other speakers and attendees are willing to sit through hours of mind-numbing rate setting minutia, e.g., complex incentives paid to facilities willing to provide a minimal amount of care. Hours pass without anyone addressing highly questionable financial practices and faulty cost report data.
Furthermore, legislators don’t understand that the nursing home industry has been transformed in a mere two decades. The mom-and-pop nursing home is far gone. A few nonprofit facilities that are not part of a chain still exist, but we are uncovering serious grifting in even some of those places. In the for-profit sector, sophisticated financiers are leveraging a variety of legal and financial innovations such as the limited liability corporation (LLC) Umbrella Partnership Real Estate Investment Trust (UPREIT), private equity, and other legal, financial structures to extract optimal cash flow with minimal expenses for care.
The nursing home system is about money. It has become fully financialized. Real estate and finance override healthcare. The only way that the industry can maintain such a disgusting and pathetic system is to hide the truth from “we the people,” and create a propagandistic narrative for protecting the interests of financiers and realtors. The AHCA is very good at deception. But one of their most effective tactics is to hire a large accounting firm to do their dirty work for them.
[1] CLA (2023) “CMS Proposed Staffing Mandate: In-Depth Analysis on Minimum Nurse Staffing Standards.
[2]https://crsreports.congress.gov/product/pdf/IF/IF10343#:~:text=In%202021%2C%20Medicare%20spent%20%2492.6%20billion%20on%20SNF,payments%20attributable%20to%20SNF%20and%20home%20health%20care.
[3] Mihir A. Desai (2019) How Finance Works: The HBR Guide to Thinking Smart about the Numbers.