Imagine you're a young MBA at a real estate investment company in any year after the Great Recession. No part of the market seems stable: Speculation on single-family mortgages got us into this mess, Amazon is slowly backing brick-and-mortar retailers to the precipice at gunpoint, and corporate America still hasn't re-hired enough people to justify returning to office space that has lain fallow in the wake of mass layoffs.
But in your research, you stumble on an asset class you've never thought about as an asset before. It's a type of health care real estate that almost exclusively serves the rapidly growing demographic of older Americans. Sure, you may have heard of independent and assisted living communities, but unlike those settings, this asset class receives 80% or more of its revenue from the federal and state governments — checks that, unlike those of private-pay senior housing residents, always clear no matter how retirees' 401(k)s are doing. Best of all, the older people who live there have such complex medical needs that they can't receive care anywhere else, giving you a near-monopoly on a vital service for an exploding market segment.
Suddenly, the nursing home where you have half-memories of visiting your grandmother as a child doesn't look or smell as scary, cold, and weird as you recall. It looks and smells a lot like cash.
Whose nursing home is it anyway?
When I started covering nursing homes for Skilled Nursing News, one of the first signs that I was entering a strange sector was learning just how difficult it was for executives to answer what should be a very simple question: Who owns this place?
In my first year on the beat, I'd get angry calls from PR people saying that my story on some nursing home acquisition was flagrantly incorrect and I had just moments to issue a full correction. My mistake? I wrote that a company "owned" a nursing home instead of "operating" it, or that it "operated" a facility to which it actually only "provided management services."
At first I shrugged this off as overly aggressive PR nonsense, but after the second or third time I realized I was striking a nerve; multiple PR and internal comms folks across multiple companies wouldn't be so quick and so insistent if this mistake didn't have real-world implications.
This led me down the rabbit hole of related-party transactions, a hallmark of nursing home ownership with the twin goal of obscuring reimbursement flows and, probably more importantly, stonewalling aggressive personal injury lawyers looking for a big payday. I am not an expert on this subject, and for a full analysis of the ways that nursing home operators spin webs of nameless LLCs, I encourage you to read the extensive academic work of Charlene Harrington, professor emerita at the University of California, San Francisco and a longtime critic of nursing home ownership and staffing practices.
But here's the ten-cent version, with apologies to Dr. Harrington. There may be three or four companies involved in the ownership and operation of a given nursing home. One LLC owns the real estate, another owns the operations and pays rent to the real estate LLC, a third provides laundry and housekeeping services, and so on. These companies may have overlapping investors and leadership, but usually not enough to make it immediately obvious to the casual observer.
So let's say I'm curious about who owns ABC Nursing Home in my neighborhood, maybe because I have a loved one who might need that kind of care. I go to Care Compare, the federal government's public-facing database of Medicare-funded health care providers, and 99 times out of 100, I'll find that ABC Nursing Home is owned by ABC Nursing Home LLC.
Not very helpful, but hey, the federal government does require any person or entity with more than a 5% ownership stake to publicly disclose it on Care Compare, so maybe scrolling down to the more detailed ownership information will help. Probably not: 99 times out of 100, any joint corporate ownership will be through another LLC with an even more generic name (think like "City State Health Opco LLC"), and while there may be a few actual people's names listed, you can't click on them to see the other facilities in which they might have ownership stakes.
If you're a journalist or a researcher or a lawyer who advertises on the side of city buses, you might have the time and the motivation to dive further into this mess, Googling random names and EINs to find the connections and arranging them on a cork board with strings and pushpins. But if you're just some guy curious about a nursing home in your neighborhood, you probably will not bother to go any further — and this, of course, is exactly the goal.
And even if you are a dogged journalist or a lawyer looking to get the most money out of a nursing home's insurance company, you'll keep running into enough brick walls to throw you off the trail or slowly make you realize that there isn't a single entity to attack, just money expertly distributed across an endless stretch of LLCs buying and selling services to each other.
This is one of the key reasons I think the popular image of "reform," while generally morally correct, is ultimately ineffective. Since the Reagan years, lawmakers have successfully hollowed out the feds' regulatory and enforcement mechanisms to the point where they essentially outsourced these functions to civil lawsuits; in response, the nursing home industry has poured untold quantities of time and money into creating Kafkaesque legal structures that ultimately protect capital from these lawsuits.
As someone who wants to see this entire system overhauled and improved, the fines-and-lawsuits brigade just isn't the horse I want to bet on, in part because that strategy has helped us get to this point.
I can assure you that for every personal injury lawyer on the hunt for nursing home torts, there are several more industry attorneys working day and night to create even more baroque ways to cover their tracks from the Illinois Hammer and Jacoby & Meyers. Yes, the COVID-era bans on pandemic-related lawsuits helped to nip a potential wave of litigation in the bud, but even in states where they were not subsequently overturned in the face of public (and trial-lawyer) outrage, it's safe to assume the collective industry legal team is actively working on Plans B through ZZ.
In other words, if you think the industry's reaction to the threat of even more fines or even bigger lawsuits will be "oh dear, I simply must straighten up and fly right this time" — and not "get my lawyer/favorite state rep on the phone to fix this" — I happen to be offering several bridges over the East River for sale at prices in the low eight figures. Cash only.
This is what I like to call the Madonna/whore complex of nursing home reform: In critics' eyes, the industry is simultaneously composed of cold-blooded vampires who can only derive joy from abusing the elderly for money and will stop at nothing to evade accountability, and also legitimate businesspeople who will gallantly accept defeat in the face of public shame and increased fines.
To be clear, I think individuals should be able to sue nursing homes if they believe harm was done, largely because it's the only accountability mechanism available in most cases. But as the linchpin of a big-picture reform strategy, it's primarily going to benefit lawyers on both sides of the sector (and maybe a relative handful of "lucky" families who win judgments) while people continue to receive poor, dehumanizing care in buildings that keep disappearing further and further behind thick legal fog.
I never get what I really want for Christmas: real estate
That was all a long-winded way of getting to where the money and power really rests in the nursing home world: real estate.
The fact that most officials and policymakers do not understand that the "nursing home industry" primarily amounts to a real estate business, and not a health care business, is easily one of the biggest and most persistent barriers to change. You can hypothetically regulate or sue operating companies out of existence, but you can't really go after the third-party landlord, even if there is some shared ownership.
Initially, the decision to split operations from real estate ownership can seem like a win-win for both sides. A nursing home company sitting on a portfolio of valuable real estate can sell its buildings to a landlord for a substantial cash injection, which it can ostensibly put toward staffing and care; the property owner now has that stable health care asset with years of steady Medicare and Medicaid reimbursements and legions of aging baby boomers ahead. That kid with the MBA and the research skills gets a big raise and becomes a rising star in the "seniors housing and care finance" world, speaking at conferences from Miami to Dallas to Chicago about the health of nursing home real estate.
The problem, of course, is that everyone involved in these transactions are humans, and humans can get greedy. Shit, as they say, can also happen. The initial windfall from the property sale gets frittered away, perhaps not on care or workers; occupancy drops amid market-based demographic shifts and increased availability of alternative options like home health; workers (rightfully) unionize and win (even more rightfully) higher wages; or a truly horrific incident brings negative publicity, lawsuits, and federal penalties.
For the tenant that didn't account for these possibilities when penciling out years of profits, this is a looming disaster. But for the landlord, it's not an emergency yet — largely because they're simply not responsible for the care that goes on inside the building they own. In fact, under the common "triple-net lease" arrangement, they're not really responsible for much: The tenant must cover taxes, insurance, and maintenance costs on the landlord's behalf. So whether the landlord is a privately held LLC, a publicly traded real estate investment trust (REIT), or some other arrangement, their role is very simple: Pay up on the first of the month.
And even during 2020, pay up they did. All throughout that annus horribilis, as the deaths mounted and expenses for PPE and overtime skyrocketed, the public REITs consistently reported normal rent collections — thanks in large part to federal relief cash.
As a business decision for an operating company, this makes a lot of sense: If you stop paying your landlord, they can kick you out of the property, and you can kiss all that future Medicare and Medicaid money goodbye. So you make sure the REIT or private equity firm or whoever gets that rent check on the first, and then make do with what you have left over.
The loser, as always, is the older person on Medicaid who has no idea of the financial machinations happening in offices and conference hotel bars thousands of miles away from her bed. All she knows is that the staff, already overworked and underpaid, seems stretched even thinner than usual, with longer and longer times before her call button gets answered. Deferred maintenance, already a problem in a building that's likely almost as old as Medicare and Medicaid themselves, becomes consciously avoided maintenance. Care suffers. People suffer.
But here's what I want folks to understand most. People on the financial side of this equation aren't necessarily acting out of personal malice, animus, or evil. Everyone is making the correct business-school decision: the numbers say that the operator should convert that real estate equity to cash, that the landlord should take no interest in what happens inside the building, that the landlord should continue to demand rent even during times of building-level and national crisis, that the operator should continue to pay the landlord no matter how bad things are on the ground in order to avoid legal action and the potential loss of their buildings.
And this is another area in which I believe nursing home reform fails. We have a for-profit health care system, and the human mind can justify a whole lot of misery and indignity when profits are involved. But even the most fiery anti-industry critique is based on a notion that somehow, someway, we can put guardrails on the fundamental human urge to either accrue more wealth or, more commonly, just keep your job and health insurance by making the right decision for the investment firms. Let's just cap profits, put ceilings on executive salaries, tell private businesses how to (and how not to) spend their money, the advocates say — and surely they will sit quietly and behave.
Remember those bridges I said I had for sale earlier? I'm getting a lot of interest, so the price just went up, but if you act now, I'll part with them for something in the low nine figures. Cash only still.
The moment I became fully disillusioned with this line of thinking came during a 2021 House of Representatives hearing on private equity in health care. Rep. Tom Suozzi, a Long Island Democrat who used to be the executive of the county where I grew up, came out swinging against greedy private-equity owners of nursing homes. But he also made sure to bend over backwards to say that he believes in capitalism and free markets, and everyone has the right to make a buck — just not in this particularly uncouth way.
And to that, I say: What is private equity if not the logical endpoint of capitalism and free markets? What is private equity if not another legal way to make a buck? What is this for-profit nursing home system if not an indictment of for-profit health care writ large?
It's all America. And it's all more rotten than a few bad apples.