 |
| The HCR ManorCare nursing-home chain struggled
financially until it filed for bankruptcy in March. The number of
health-code violations found at the chain each year rose 26 percent
between 2013 and 2017, according to a Washington Post review. (Michael
S. Williamson/The Washington Post) |
POTTSVILLE, Pa. —
To the state inspectors visiting the HCR ManorCare nursing home here
last year, the signs of neglect were conspicuous. A disabled man who had
long, dirty fingernails told them he was tended to “once in a blue
moon.” The bedside “call buttons” were so poorly staffed that some
residents regularly soiled themselves while waiting for help to the
bathroom. A woman dying of uterine cancer was left on a bedpan for so
long that she bruised.
The lack of care had
devastating consequences. One man had been dosed with so many opioids
that he had to be rushed to a hospital, according to the inspection
reports. During an undersupervised bus trip to church — one staff member
was escorting six patients who could not walk without help — a resident
flipped backward on a wheelchair ramp and suffered a brain hemorrhage.
When
a nurse’s aide who should have had a helper was trying to lift a
paraplegic woman, the woman fell and fractured her hip, her head landing
on the floor beneath her roommate’s bed.
“It was horrible — my mom would call us every day
crying when she was in there,” said Debbie Bojo, whose mother was
treated at ManorCare’s Pottsville facility in September 2016. “It was
dirty — like a run-down motel. Roaches and ants all over the place.”
Under
the ownership of the Carlyle Group, one of the richest private-equity
firms in the world, the ManorCare nursing-home chain struggled
financially until it filed for bankruptcy in March. During the five
years preceding the bankruptcy, the second-largest nursing-home chain in
the United States exposed its roughly 25,000 patients to increasing
health risks, according to inspection records analyzed by The Washington
Post.
The number of health-code violations
found at the chain each year rose 26 percent between 2013 and 2017,
according to a Post review of 230 of the chain’s retirement homes. Over
that period, the yearly number of health-code violations at company
nursing homes rose from 1,584 to almost 2,000. The number of citations
increased for, among other things, neither preventing nor treating bed
sores; medication errors; not providing proper care for people who need
special services such as injections, colostomies and prostheses; and not
assisting patients with eating and personal hygiene.
Counting only the more serious violations, those
categorized as “potential for more than minimal harm,” “immediate
jeopardy” and “actual harm,” The Post found the number of HCR ManorCare
violations rose 29 percent in the years before the bankruptcy filing.
The
rise in health-code violations at the chain began after Carlyle and
investors completed a 2011 financial deal that extracted $1.3 billion
from the company for investors but also saddled the chain with what
proved to be untenable financial obligations, according to interviews
and financial documents. Under the terms of the deal, HCR ManorCare sold
nearly all of the real estate in its nursing-home empire and then
agreed to pay rent to the new owners.
Taking the
money out of ManorCare constrained company finances. Shortly after the
maneuver, the company announced hundreds of layoffs. In a little over a
year, some nursing homes were not making enough to pay rent. Over the
next several years, cost-cutting programs followed, according to
financial statements obtained by The Post.
“You wonder how these people could have run a place
that treated people so poorly,” said Bojo, who, like others
interviewed, attributed the problems to lack of staff. “We would ask the
director of the place, ‘Would you treat your mother this way?’ That
stopped him for a minute, but we didn’t get an answer.”
“One
time we came in to visit him and he was sitting there in a wheelchair
naked, with just a blanket on him — no pants, no underpants,” said
Michelle Maldonado, whose father, a former factory worker, was at the
Pottsville home for several months in 2017. “He got bedsores,
infections, and he had a couple of falls. It was like they would never
check on him.”
“Carlyle was a very interesting
group to deal with,” said Andrew Porch, a consultant on quality
statistics to whom HCR ManorCare referred questions about health-code
violations. “They’re all bankers and investment people. We had some very
tough conversations where they did not know a thing about this business
at all.”
In response to The Post’s reporting, Carlyle and
HCR ManorCare representatives said care at the nursing homes was never
compromised by financial considerations. The cost-cutting trimmed
administrative expenses, not nursing costs, they said. The number of
nursing hours provided per patient stayed fairly constant in the years
leading up to the bankruptcy, according to the figures that the company
reported to the government.
HCR ManorCare
officials also disputed the idea that quality at the homes had suffered
in recent years. They said their nursing homes offered excellent service
based on the ratings issued by Medicare, the federal government’s
insurance program for older Americans. ManorCare homes averaged 3.2
stars in the years before bankruptcy, which was slightly below the U.S.
average. Some watchdog groups, such as the Center for Medicare Advocacy,
are critical of the five-star rating system, however, because it relies
on unaudited data reported by nursing homes.
As
for the rise in health-code violations, HCR ManorCare officials noted
the number of violations increased at other nursing homes as inspection
methods changed. But the number of violations at HCR ManorCare homes
rose about three times faster than at other U.S. nursing homes,
according to The Post’s analysis. This rise is evident whether comparing
total violations or the average number of violations per home.
At the suggestion of an HCR ManorCare expert, The
Post looked at the five states where the chain has the most nursing
homes. In four of those five states, violations at ManorCare homes rose
steadily and outpaced increases at other nursing homes. For example, in
Pennsylvania, the number of violations rose 12 percent faster than
violations at others in the state; in Ohio, the number of violations
rose more than two times faster. In Florida, the number of violations
rose for two years and then fell for two years, leaving no clear trend.
Carlyle
officials attributed the company’s financial trouble primarily to the
U.S. government, and specifically the Medicare program, which in October
2011 reduced how much it paid for nursing-home services. In Carlyle’s
view, the trouble was not primarily caused by the real estate deal, but
the ensuing shortfall in Medicare revenue.
“In
the first four years [after the acquisition] we felt very good about the
progress” at HCR ManorCare, said Chris Ullman, a Carlyle spokesman.
“They had improved some of the quality metrics. We were looking to
expand, then things changed drastically due to the massive Medicare rate
cut.”
But others in the industry said the company simply
had too many financial obligations to weather unexpected challenges.
Companies less burdened by financial obligations, they noted, did not
wind up in bankruptcy court.
“Our first
priority was to deliver quality care and serve the company’s patients
well,” Ullman said. “We are disappointed this investment did not meet
our financial expectations.”
After the bankruptcy, the nursing home chain was bought by Promedica Health, a nonprofit group.
“We
look forward to being a not-for-profit mission-focused organization,”
HCR ManorCare said in a statement, noting that “not a single creditor
lost a single penny as a result of the bankruptcy filing.”
Pottsviile is the home one of HCR ManorCare’s facility. (Michael S. Williamson/The Washington Post)
In recent years, private-equity firms have moved into businesses serving some of the nation’s poorest or most vulnerable people.
The
firms profit by pooling money from investors, borrowing even more, and
then using that money to buy, revamp and sell off companies. Their
methods are geared toward generating returns for investors within a
matter of years, and this has led to criticism that they merely plunder
company assets while neglecting employees and customers.
During and after the recession, as returns became
scarce, private-equity investors began to explore industries they had
once overlooked, and some invested in businesses that largely cater to
the poor: payday lenders, nursing homes, bail bond providers, low-income
homes for rental and prison phone services.
Ludovic Phalippou, a professor at Oxford who wrote the textbook “
Private Equity Laid Bare,” says it is a question of whether private-equity methods are appropriate in all fields.
He
has praised the ability of private equity to streamline companies but
he has also described the firms’ approach as “capitalism on steroids.”
He
said, for example, that while private-equity ownership of nursing homes
is accepted in the United States, people in some other countries would
be “aghast” at the idea.
“People will wonder
whether this pure capitalism is appropriate in nursing homes,” Phalippou
said. “The health and welfare of the old people who live there depend
on them.”
One of the founders of Carlyle, David Rubenstein,
explained to Freakonomics Radio last year the role of private equity:
“You spend three to five years improving the company, incenting the
managers to work harder, do more efficient things, and ultimately, after
three or five years, you sell or otherwise liquefy the investment.”
He sees private-equity firms as a force for good.
“Private-equity
people think that, while we’re not perhaps guardian angels, we are
providing a social service, and that social service is making companies
more efficient,” he said.
The origins of the
HCR ManorCare deal go back to 2007, when Carlyle solicited investors for
money for a new investment fund. More than 300 investors, mostly
pension funds, investment companies and big corporations put up money.
Carlyle raised $13.7 billion, with Carlyle agreeing to put up
$700 million, or about 5 percent of the pool, according to the agreement
between Carlyle and investors.
The fund,
called Carlyle Partners V, then purchased an array of companies — a
Canadian distributor of construction products, a Chinese shipping
company and a U.S. aerospace company were among them. In December 2007,
it bought HCR ManorCare for $6.1 billion plus fees and expenses. Most of
the purchase price was borrowed money — about $4.8 billion — and
Carlyle put up $1.3 billion.
The deal
immediately faced protests from critics who said the aggressive
financial tactics of private-equity firms are ill-suited for companies
caring for some of society’s most vulnerable. In response, company
officials promised patients’ care would not be compromised. They also
hired a committee of three industry experts to monitor quality.
“Meeting
the care needs of ManorCare’s patients and residents is our top
priority,” Carlyle Managing Director Karen H. Bechtel said in a news
release issued in October 2007. “ManorCare is poised to become an even
stronger health care provider under Carlyle’s ownership.”
At first, the ManorCare deal seemed to work for Carlyle. Executives considered expansion plans.
But in 2011, the deal turned sour.
Analyzing
private-equity deals is difficult because the rules that compel public
companies to publish their financial statements generally do not apply
to companies held by private-equity funds. In addition, even when public
pension funds are investors in private-equity funds, private-equity
firms such as Carlyle request that those pension funds exempt
private-equity records from disclosure rules.
To
put together a financial picture of HCR ManorCare, The Post obtained
financial statements for the company for 2009 through 2016, as well as
the agreement between Carlyle and its co-investors. Other data came from
ManorCare’s bankruptcy filings and public-records requests to
authorities in Florida, Wisconsin and California. Information about
Carlyle’s other companies came from a database maintained by Phalippou
and his colleagues.
From the start, Carlyle’s
acquisition of HCR ManorCare made the company’s finances more risky
because the purchase burdened it with billions in long-term debt.
But
in April 2011, Carlyle made another critical move at HCR ManorCare, one
that would enrich investors and imperil the financial footing of the
chain.
Carlyle took HCR ManorCare’s vast real
estate empire — the hundreds of nursing homes and assisted living
facilities as well as the land underneath — and sold it to HCP, a real
estate investment company. HCR ManorCare then had to pay rent to HCP for
the use of the nursing homes.
This kind of
deal, known as a sale-leaseback, is a common tactic of private-equity
firms, and it generated financial benefits for Carlyle and its
investors.
Carlyle got $6.1 billion from the
sale, an amount that roughly matched the price that the private-equity
firm had paid to buy the company just four years prior.
With
that money, Carlyle paid off billions in debt that it racked up buying
HCR ManorCare, according to company financial statements obtained by The
Post. Crucially for Carlyle and its investors, the deal allowed them to
recover the $1.3 billion in equity they put into the deal.
Carlyle
made money from its investment in other ways, too. It took at least
$80 million from the HCR ManorCare venture in the form of various fees,
according to interviews and financial documents.
Most
of that was a “transaction fee,” which is money Carlyle receives when
it buys a company, typically 1 percent of the purchase. The $6.1 billion
ManorCare purchase yielded Carlyle $61 million, Carlyle officials
confirmed. That money was distributed to Carlyle and its investors.
In
addition, Carlyle receives annual “advisory fees” from the companies
that it purchases — essentially, Carlyle pays itself to manage the
companies it owns. At ManorCare, those fees averaged about $3 million a
year from 2007 to 2015, or about $27 million, according to documents and
interviews. That money was also distributed to Carlyle and its
investors.
Finally, there was one other person
who made a lot of money despite the company’s financial woes. After the
bankruptcy, longtime chief executive Paul Ormond was awarded
$117 million under a deferred compensation agreement.
While the HCR ManorCare sale-leaseback benefited Carlyle and its investors, the chain could no longer pay its bills.
During
the buyout by Carlyle, HCR ManorCare’s long-term financial obligations
had risen from less than $1 billion to over $5 billion, according to
financial statements. The real estate deal yielded enough money to help
the company pay down some of that debt. But the deal also meant that HCR
ManorCare had to make massive rent payments to its new landlord, and
these, according to the company’s accounting, raised the company’s
long-term financial obligations to $6 billion.
The
rent HCR ManorCare was obliged to pay — to occupy the nursing homes it
had once owned — amounted to $472 million annually, according to legal
filings. The rent was set to escalate at 3.5 percent a year, and
according to the lease, HCR ManorCare also had to pay for property
taxes, insurance and upkeep at the homes.
Required to explain the bankruptcy in court filings, HCR ManorCare began its narrative with the sale-leaseback deal.
The
rental price had been negotiated when the business environment for
nursing homes was “favorable,” the company disclosed in the court
filing. But then the environment became “significantly more
challenging.”
The company cited a handful of
reasons for the changing climate: increased competition from alternative
health-care services; the decisions of many Americans to choose
Medicare Advantage plans, which pay nursing homes less than traditional
Medicare; and reductions in reimbursement rates from Medicare and
Medicaid.
“This challenging business
environment has resulted in decreasing revenue . . . and impeded [the
company’s] ability to pay minimum rent” under the sale-leaseback
agreement, the company said.
In interviews,
Carlyle officials emphasized just one reason for the bankruptcy,
however: Medicare’s decision in October 2011 to cut what it pays nursing
homes by 11 percent. Roughly a third of the revenue for the chain comes
from Medicare.
The Medicare cut “was a
devastating blow for the industry,” Ullman, the Carlyle spokesman, said.
“The whole industry went into a tailspin.”
Most
of the industry, however, avoided bankruptcy court. Moreover, the
Medicare cut in 2011 had merely erased an increase of about 16 percent
from the previous year, according to government figures.
Over
the next five years, earnings in the nursing-home industry remained
above 10 percent of total revenue before interest and taxes, according
to a report by CLA, a national public accounting firm.
Experts
familiar with HCR ManorCare said it was massive financial obligations
that led the company to bankruptcy. The company had been “over-levered”
with debt.
“There were multiple reasons” for
the bankruptcy, said Chad Vanacore, vice president and research analyst
of health-care providers at Stifel, the investment bank. “I think it’s
fair to say they were over-levered.”
HCR
ManorCare “was doomed,” Tom DeRosa, chief executive of Welltower, a
company that acquired HCR ManorCare’s real estate after the bankruptcy,
said in an interview
at a real estate conference last summer. “It was over-levered, and it
couldn’t work under the capital structure that had been crafted.”
The financial obligations made it difficult for the chain to invest and adapt to market shifts, they said.
As a result of company finances, DeRosa said, HCR ManorCare’s management team had “one hand tied behind its back.”
After the sale-leaseback, the onset of financial troubles was sudden.
The chain never again recorded an annual profit, according to financial statements.
By
the next year, the nursing homes could not afford their lease. An HCR
ManorCare expert reported in a recent court filing that by 2012 the net
cash flows at the nursing homes in some months were “insufficient . . .
to make the required rent payments.”
Executives began to cut costs.
By 2012, HCR ManorCare had instituted a “cost reduction program” according to a financial statement of HCP, its new landlord.
Between
2010 and 2014, the amount that HCR ManorCare spent to keep the
company’s facilities going — operations — fell by 6 percent, after
accounting for inflation, according to company financial statements that
include its nursing homes, assisted living facilities and other
businesses. Operating expenses continued to fall after that, too, but
that was partly because the company was reducing the number of nursing
homes it operated.
Then, during “significant”
losses from 2014 through 2016, HCR ManorCare management “instituted
measures to control expenses and conserve cash,” according to an HCR
ManorCare financial statement.
During this period, the number of health-code violations reported at HCR ManorCare properties each year began to rise.
Inspectors
reported bedsores, falls and infections — the kinds of trouble that
some experts say signals a lack of nurses who are qualified enough.
Bedsores
occur at nursing homes because there are not enough people to move
residents who are confined to their beds, according to experts; the
falls happen because there is a lack of staff to answer bells to help
people get to the bathroom; and infections spread when aides forget to
wash hands.
“Almost all of these issues relate
to staffing — either not enough people or not enough training,” said
Charlene Harrington, a nurse and professor at the University of
California at San Francisco, who has studied nursing homes for years.
“That’s why this is so frustrating. It’s just basic hands-on care.”
One
of the biggest operating expenses for any nursing home is personnel.
According to the figures that HCR ManorCare reported to the government,
the nursing homes had been operated for years with fewer nurses compared
to other homes.
In terms of nurse staffing
hours per patient, HCR ManorCare scored 10 percent or more below the
national average. The staffing scores, which include registered nurses,
licensed practical nurses and nurse aides, are adjusted by Medicare to
reflect the varying needs of patients at each home. At HCR ManorCare,
the staffing score changed little during the years leading up to the
bankruptcy.
Vincent Mor, a Brown University
health policy professor who has studied nursing homes and whom HCR
ManorCare hired as part of an expert committee on quality, said, in
periodic visits to nursing homes, he saw no signs that cost-cutting
affected staffing.
“We never heard that any cost-cutting prevented an administrator from hiring a new person,” he said.
Mor
said the statistics he reviewed for the most serious health-code
violations — those that are characterized as signs of “substandard” care
— showed no clear trend in the years leading up to the bankruptcy. In
2017, according to The Post’s tally, these violations were found at
8 percent of HCR ManorCare homes, and 14 percent of homes elsewhere, an
advantage that company advocates stressed.
Mor did not review the data for overall violations, however, and these showed a steady rise.
Told
of The Post’s finding of increased violations, Mor said, “It certainly
shows that there may have been something going on there.”
HCR
ManorCare officials also suggested The Post discuss the violations data
with Andrew Porch, the CEO of a consulting group that works for
ManorCare analyzing quality statistics. He used a slightly different
Medicare data set, but his figures show a similar trend. Over the period
from 2013 to 2017, violations at HCR ManorCare properties rose
26 percent, while the national figure rose 10 percent, according to
Porch’s figures.
Porch also presented figures
comparing HCR ManorCare to other nursing homes that are operated for
profit. The average number of violations at HCR ManorCare and other
for-profit homes rose about the same amount over the 2013 to 2017
period, according to his figures. However, HCR ManorCare nursing homes
averaged more violations throughout the period. For example, the
company’s homes had 9.7 violations per home in 2017, while other
for-profit nursing homes had 8 percent fewer, or 8.9, violations per
home.
In a statement, HCR ManorCare said The Post was misusing the Medicare data, but did not specify how.
“The
Post’s internally created system is not a valid approach to evaluate
and compare nursing home quality,” it said. “It is inconceivable to us
that you are not using the [Medicare] data as it is designed to be
used.”
The Post used a public database issued
by Medicare to count health-code violations at 230 HCR ManorCare homes
that remained in the chain during the years the Carlyle fund owned the
company. Most nursing homes are inspected every year. The review was
limited to the period from 2013 to 2017 because the Medicare data before
that period was recorded inconsistently. Such counts, in addition to
other tactics, are used by Medicare and academics to evaluate
nursing-home quality. The Post did not create a system to evaluate
nursing homes.
Several nurses who worked at the
ManorCare facility and at others nearby said they thought there was
often too few people working. Some said they noticed the problems got
worse about 2012.
“They always worked
short-staffed,” said Diane Bridges, a nursing assistant who worked there
in 2015. “There were two CNAs [certified nursing assistants] for over
30 people. The workload was very heavy. There were not enough girls to
get the residents up, get them out of bed in the morning.”
“It
was a very good place to work — and then it wasn’t,” said a nurse’s
aide who left in 2013 after more than a decade there. “They just didn’t
seem to have the money. The Hoyer lifts [equipment for moving patients]
started breaking down and it was hard to get them fixed. They switched
to cheaper supplies. Residents started complaining.”
“I
felt bad because we were supposed to get to these room bells in a
certain amount of time, but we couldn’t — there weren’t enough people,”
said Kiesha Miller, a nursing assistant who worked at the ManorCare in
Allentown, Pa., from 2009 to 2012. “All I could do was say, ‘I’m sorry
we’re doing the best we can,’ because management would tell us not to
say we’re short-staffed. And when we complained, management would say we
can’t afford to have that many people on staff. And I thought, ‘This is
just wrong.’ ”
At Pottsville, the number of lawsuits against ManorCare rose.
In
the three years before Carlyle purchased ManorCare, the Pottsville
facility had been sued just once, according to Schuylkill County court
records.
In the three years before it filed for bankruptcy, 10 families sued or filed preliminary papers indicating they may file suit.
All
of the plaintiffs in these cases, however, either declined to be
interviewed or could not be reached. ManorCare and plaintiffs typically
settle such cases before trial, and ManorCare often requires plaintiffs
to sign agreements forbidding publicity.
Asked
about the rise in legal complaints at Pottsville, the nursing-home
company said Pennsylvania has been “increasingly targeted by out of
state trial attorneys.” The lawsuits, however, describe an array of
neglect similar to those of the state inspection reports. One woman had
suffered three falls, multiple infections, dehydration and bedsores,
according to the lawsuit that her family filed; another also had
multiple falls, one that caused a broken hip; a liver cancer patient had
fallen six times during four months, and at least one of those times it
was while reaching for his urine bag; and another broke his hip when
aides were moving him to be weighed, but had to wait two hours before he
was taken to a hospital.
“The short-staffing
was to the extent that it was very dangerous for the residents,” said
Lisa Kay Wasnowic, who worked off and on at the Allentown ManorCare from
2004 to 2014. “At times, it was just one aide for 60 patients. And it
just kept on getting worse.”
Full Article & Source:
Overdoses, bedsores, broken bones: What happened when a private-equity firm sought to care for society’s most vulnerable
