PRINT THIS PAGE Will private equity investment in healthcare remain private?16/01/2008. Source: Dechert. Susan M Hendrickson and Beth L Rubin
Have private equity investments in nursing homes compromised the quality of care provided to residents in these facilities? That is what the US Congress and several state legislatures want to know in the aftermath of a New York Times article claiming cost-cutting measures have been carried out in facilities that have been taken over by private equity sponsors, say partner Susan M Hendrickson and counsel Beth L Rubin of law firm Dechert. Regardless of the validity of the claims, private equity investments in this sector are being scrutinized, and sponsors must be far more knowledgeable about the administrative and regulatory aspects of these portfolio investments.
In addition, the reporter also observed, "Byzantine structures established at homes owned by private investment firms also make it harder for regulators to know if one company is responsible for multiple centers." A private equity firm representative explained that the structures were created because of ballooning litigation costs, with the complex organizational structures designed to insulate the private equity firms from costly lawsuits. Finally, Mr. Duhigg mentioned that the complex structures help managers bypass rules that require them to report when they, in effect, pay themselves from programs like Medicare and Medicaid.Congress's Response
In reaction to this article, Senator Chuck Grassley (R-IA), ranking member of the Senate Finance Committee, requested that the Government Accountability Office ("GAO"), Congress's investigative arm, examine how private equity ownership affects the quality of care in nursing homes. On October 16, Senator Grassley and Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, asked the Centers for Medicare and Medicaid Services ("CMS") for a briefing on what information CMS has regarding these nursing home purchases and their effects on nursing home care. The Senators also asked CMS what actions it plans to take to address the quality and safety concerns at investor-owned nursing homes, and to ensure that the investment firm owners are identifiable and held accountable for their actions.
The two Senators also asked five private equity firms engaged in health care investments for the following detailed information by November 9:- any and all properties and entities used as nursing home facilities that are owned, in whole or in part, or
- are operated by the firms, their subsidiaries, or related entities;
- all identifying and contact information for each listed property and entity; and
- copies of any and all contracts or agreements related to the operation of the listed nursing homes.
As indicated below, the House will conduct its own investigations as well.
States' Response
In addition, the New York Times article has since influenced state regulatory agencies reviewing proposed health care transactions where regulatory approvals are required. Regulators are now reviewing more layers of ownership during their reviews and are becoming more savvy when analyzing organizational charts filed with regulatory approval applications. This additional scrutiny already has increased the time it takes to complete a transaction and has added to transaction costs.
Labor's Response
The large health care workers union, SEIU Healthcare, also has joined the fray. Union officials have expressed serious concerns about the takeover of the nursing home chain, Manor Care Inc., by The Carlyle Group, a private equity firm. In late October, SEIU organized a demonstration outside of the headquarters of The Carlyle Group and visited Capitol Hill to lobby Congress to hold hearings on private equity ownership of nursing homes. Union officials expressed their concerns about the fate of nursing home workers and that care may deteriorate after the acquisition is completed.
After meeting with SEIU members, Rep. Barney Frank (D-MA), Chairman of the House of Representatives Committee on Financial Services, and Rep. John Dingell (D-MI), Chairman of the House Committee on Energy and Commerce, announced that they will investigate the "suitability" of private equity firms buying nursing home chains. Mr. Frank noted that the committees will work together to investigate whether these firms are the "appropriate business form" for this industry, and whether such homes are providing proper treatment for patients.
These Committees plan to gather facts and hold hearings. In mid November, The House Ways and Means Health subcommittee, held a hearing on Trends in Nursing Home Ownership and Quality.
The Future of Health Care Private EquityThis seismic shift in scrutiny at the federal and state levels will affect private equity investments in health care providers. Investors will need to understand that their actions will be scrutinized, including any cuts in nursing and other staff, supplies, and activities. Investors will need to become well informed about the Medicare/Medicaid participation process, including the alphabet soup of healthcare regulatory compliance rankings used to evaluate health care facilities. In order to counter allegations that deficiencies have increased due to private equity ownership, investors with interests in health care facilities will need to focus on compliance issues and develop internal systems that can provide quick access to details of any claims of non-compliance and verification of timely corrective action plans.
Investors also will need to understand the cost reporting process, as well as the complex set of arrangements for services provided by different but related entities within the ownership structure. This includes agreements for both administrative and clinical services. They will need to understand, among other things, how charges are determined and booked between facilities and related ancillary service providers such as therapy companies and hospice providers. Under some circumstances, facilities must bill for these services (the therapy provider cannot), but reimbursement caps may apply, regardless of what the related therapy provider charges for the services.
In any event, investors need to understand that this heightened scrutiny will involve examination of all levels in the ownership structure, including all investors, officers, and agreements for services among related parties. In other words, they need to understand that their investments may no longer be as "private" as they once were, and they may be asked to disclose, among other things, the social security or EIN numbers and percentages of ownership of all investors.
At this time, investors should consider such actions as:- tracking and centrally reporting deficiencies and corrective action;
- maintaining accurate and easily accessible staffing level statistics;
- working with public relations staff to make sure that those scrutinizing their investments have accurate staffing level information;
- understanding how government payment program cuts and litigation costs can affect the quality of care;and
- consulting with counsel when responding to requests for information from Congress, the GAO, the CMS, the Office of Inspector General, and when responding to any subpoenas.
It is not clear yet whether any regulatory changes will result from this increased scrutiny. What is clear is that the ground has shifted, and the complex organizational charts and inter-relationships among entities represented in these charts will be analyzed more closely than ever before. Investors need to develop compliance plans to ensure that these structures withstand such scrutiny.
Dechert is an international law firm with over 700 attorneys. It provides practical business solutions to a diverse client base. For more information please visit www.dechert.com.
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