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⭒ New Developments

Bombshell Study: Nursing Homes Have “Staggering Hidden Profits”

A new paper from Ashvin Gandhi and Andrew Olenski finds that nursing homes hide at least 63% of their profits through the use of related party transactions.  Related parties are companies that are owned by the same owner as the nursing home to which they provide goods and services.

The authors compared nursing home spending on real estate and management spending before and after using related party providers.  While reasonable folks would expect that outsourcing operations would only be done to save money, the authors find that costs increased substantially, with no increase in quality or quantity.  They call this increase “related party markup.”*  

The business arrangement of seeking out higher costs begs the question why nursing homes would act so irrationally, seemingly against their own self interest.  It turns out paying inflated payments to related parties “tunnels” (“covert profit extraction”) money to the owner at the top of the related party / nursing home chain.  Hiding profits serves three functions according to the authors:

  • encourages the state and federal governments to increase Medicare and Medicaid payments to nursing homes;
  • dissuades legislators and regulators from imposing stricter quality standards; and
  • shields assets from malpractice liability risk.

Advocates for nursing home residents have long known that owners make their facilities look poor in order to seek ever growing handouts from government budget makers.  (See claims of “chronic Medicaid underfunding.”)  This new study provides analytical proof of this fundamental nursing home deception.

* The authors almost certainly understate hidden profit. They only reviewed real estate and management company related party transactions. Nursing homes routinely use related parties for many other goods and services, including linens and other supplies, pharmacy, rehabilitation, and insurance. They also use other schemes, including unaccountable “loans” to owners, to hide profits.