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For-Profit Enterprise in Health Care. 1986. Nabonal Academy Press, Washington, D.C. The Changing Structure of the Nursing Home Industry and the Impact of Ownership on Quality, Cost, and Access Catherine Hawes and Charles De Phillips INTRODUCTION Many observers view the increasing "cor- poratization" of American health care as the most significant development since the pas- sage of Medicare and Medicaid. While there is general consensus about the trend toward corporatization, there is little agreement about the impact of this development on the cost, quality, and accessibility of American health care. Recently, the for-profit segment in the modern hospital sector has become prominent with the rapid growth of proprietary corporate chains. The nursing home sector has, how- ever, been dominated by proprietary provid- ers for decades, and publicly held corporations owning and operating nursing homes have been prevalent since the late 1960s. Until fairly recently, nursing homes have not attracted substantial attention from re- searchers, except for studies on costs. Rela- tively few studies have focused on quality, and even fewer have investigated accessibility. Virtually none have focused on nursing home "chains," that is, corporations owning and op- erating nursing homes in a number of states. There are, however, a few empirical studies that address the impact of the type of own- ership on nursing homes. They provide suggestive information about the incentive structure of these ownership forms and about what policymakers can expect if current trends continue. This paper will explore what is known about the impact of ownership and the corporatiza- tion of health care in the nursing home in Dr. Hawes is with the Research Tnangle Institute, and Dr. Phillips is a member of the faculty of political science at the University of North Carolina at Chapel Hill. 492 dustry. It will discuss the history of nursing homes, identify the current structure of the industry and the public policies that have con- tributed to this structure, and indicate poten- tial results if current ownership trends persist. Finally, it will attempt to apply what is known about developments in nursing homes to the hospital sector. Nursing home care is the third largest seg- ment of the health care industry. It will con- tinue to grow in prominence with increasing longevity, shifts in morbidity, and changing demographic, social, and economic patterns in the family. Given present demographic trends, (in particular, the dramatic growth of the 85 years of age and older segment of the popu- lation), the United States will need to increase its nursing home bed supply by an estimated 57 percent between 1980 and the year 1995 to keep pace with the current level of utili- zation (Harrington and Grant, 1985; Doty et al., 1985; Lane, 19841. Some experts predicted the need for an additional 1 million to 1.5 mil- lion beds by the year 2000, based on current utilization, prior rates of increase in utiliza- tion, and estimated rates of dependency among the elderly (Rice, 1984; Scanlon and Feder, 1984; U. S. DHHS, 1981b; Weissert, 1985~. By 2040, 4.3 million elderly are expected to be institutionalized (Doty et al., 1985~. This apparent need for additional long-term care beds presents policymakers with an im- portant opportunity to affect the future shape of the long-term care system. The debate about whether proprietary interests should be per- mitted to remain in the nursing home busi- ness, however, "is essentially moot" (Vladeck, 1980~. For-profit interests own more than 7S percent of the nursing homes nationwide and are rapidly expanding in the home health and life care markets. Yet, today's public policy decisions on reimbursement, health planning,

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THE NURSING HOME INDUSTRY licensure, and the use of low-interest bonds for new construction can affect the structure of tomorrow's industry. Thus, the possibility exists for public policies to significantly affect the structure of the health care sector. Public policymakers have a clear stake in the emerging shape of the nursing home in- dustry. First, government has a fundamental regulatory role as the primary purchaser of formal long-term care services. It dispenses more than half of the dollars spent for nursing home care and assists in paying for nearly 70 percent of all the patients in nursing homes. As such, government has a responsibility to ensure that its funds are well spent. Second, the regulatory system bears a sig- nificant responsibility for the quality of nursing home care because of the frailty of most con- sumers. Consumers needing long-term care generally super from a bewildering array of chronic physical, functional, or mental disa- bilities. In fact, studies indicate that the nurs- ing home population is becoming even more aged and disabled, and this trend is likely to continue (GAO, 1982, 1983b; Manton, 1984~. These consumers have only a limited ability to choose rationally among providers of long- term care. They have poor access to accurate information, limited ability to evaluate the in- formation, and multiple disabilities that re- strict their mobility and ability to switch easily from one provider to another. Thus, consum- ers have little to influence facilities' decisions and behavior. Third, most nursing home patients lack ad- vocates to represent their interests. An esti- mated 30 percent of the patients have no living immediate family members, and as many as half have no relatives nearby (Broody, 1977; U. S. Senate Special Committee on Aging, 1974~. While physicians may recommend nursing home placement, they seldom choose the facility. Placement decisions for many in- rlividuals entering nursing homes are made by case workers and hospital discharge planners. These individuals may have the best interest of the patient at heart, but they labor under a set of incentives in which locating an empty bed-in any facility that will accept the pa- t~ent is a strong priority. Even when family members are present, they too labor under the burden of needing to locate an available 493 bed while lacking useful information on the comparative merits of different providers. As a result, government's role in quality as- surance is essential. Moreover, it is crucial. Despite considerable improvement in nursing homes since the inception of Medicare and Medicaid, substandard quality of patient care and quality of life remain serious problems nationwide. Inadequate nutrition, dehydra- tion, overdrugging, excessive use of physical restraints, failure to provide prescribed ther- apies, inattention to the psychosocial needs of nursing home residents, and ineffective gov- ernment regulatory activity are but a few of the problems commonly cited (Mech, 1980; Kane, 1983; Kane et al., 1979; Himmelstein et al., 1983; Zimmer, 1979; Ohio Nursing Home Commission, 1979; Virginia Joint Legislative Audit and Review Commission, 1978; Men- delson, 1974; Texas Nursing Home Task Force, 1978; AFL-CIO, 1977, 1983b; U.S. Senate Special Committee on Aging, 1974, 1975a,b; U.S. DHEW, 1975a; Ray et al., 1980; Ous- lander et al., 1982; California Health Facilities Commission, 1982; California Commission on State Government Organization and Econ- omy, 1983; Illinois Legislative Investigating Commission, 1983; Missoun State Senate, 1978; New Jersey State Nursing Home Commission, 1978~. Furthermore, nursing home costs have es- calated at an even more dramatic rate than costs for hospital care. Discrimination against recipients of Medicaid and those individuals with heavy-care needs is widely acknowledged (Harrington and Grant, 1985; GAO, 1979, 1983a,b; Feder and Scanlon, 1981; Scanlon, 1980a,b; Vogel and Palmer, 1983~. Given these problems in quality, cost, and accessibility of nursing home care, information about the im- pact of ownership is essential to rational pol- icymalcing in long-term care, particularly given the ability of public policies to restructure the industry. PUBLIC POLICY AND THE GROWTH OF NURSING HOMES The nursing home industry is generally seen as an outgrowth of Medicare and Medicaid, but its roots are older and more complex. The industry is heir to both the almshouse and the

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494 hospital. Indeed, nursing home policy com- bines elements of health, welfare, and housing policy in a schizophrenic and nearly uncon- trollable amalgam of increasing cost, substan- dard care, and discrimination against both those most in need of care and those least able to pay for such care. It has also produced a large new industry that grew and became profitable largely by providing services to the infirm and disabled poor. Our current long-term care system is fi~n- damentally a creature of government policy. Yet, nursing homes and now home health, re- tirement, and life care communities have rarely been directly addressed as policy issues of some consequence. As Vladeck (1980) observes, By and large, nursing home policy has been made not only with limited foresight, but largely by peo- ple who, at Me time, were pumanly concerned with doing something different. It has, been an aPcer- thought, a side eject of decisions directed at over problems. The nursing home industry has grown as a Poor Laws and Poor Houses2 From colonial times to the Great Depres- sion, public policy in the United States fol- lowed the tradition of the English poor laws, leaving care of the destitute to local govern- ments and relying almost totally on "indoor relief' rather than direct income assistance. For the aged and infirm poor in America, this FOR-PROFIT ENTE~SE IN HEALTH CAM meant that the only form of public support was institutional, largely in almshouses and poor farms Bedeck, 1980; Dunlop, 1979~. There was, however, private support for the aged and infirm during this period. Approximately the same number of individuals resided in chari- table private homes for the aged, sponsored largely by immigrant and religious groups, as lived in the poor homes.3 Taken together, the almshouses, poor farms, and charitable homes for the aged housed ap- proximately 100,000 elderly Americans. Nearly as many aged individuals, an estimated 70,000, were inmates of mentalhospitals (Vladeck, 1980; Dunlop, 1979; Markus, 1972; Waldman, 1983~. Conditions in the mental institutions were un- doubtedly wretched; however, it was the abominable conditions in almshouses and the destitution of 7 million aged Americans that commanded policymakers' attention during the 1920s and early 1930s. These concerns shaped the Social Security Act and helped frame the growth of what became the nursing home in result of a multiplicity of factors. It has thrived Y on the infusion of public dollars (through a variety of programs, a growth in need due to changes in demographics and shifts in mor bidity patterns toward chronic diseases, and the interplay of policies aimed at other insti tutions (e g., admshouses, mental institutions, and acute care hospitals). In the process of growing, the industry has also fundamentally changed. Some of the most profound changes include an increasingly medically oriented set ting, a shift from smaller to larger facilities, a move away from government-owned and vol untary homes to proprietary ones. Most re cently, the industry has witnessed a growing concentration of ownership in mult~facility chains that are diversifying vertically as well as horizontally. Social Security and Old Age Assistance The original entry of proprietary providers into the business of owning and operating nursing homes was an unforeseen and prob- ably unintended consequence ofthe Social Se- cunty Act of 1935, which also established a federal grants-in-aid program to the states for old age assistance (OAA). OAA was a need- based (means-tested) cash grant program de- signed to provide income support to the el- derly poor who would not yet draw sufficient benefits from the old age insurance (OAI) sec- tion of the act. Because of the scandals about almshouses and poor farms, however, the act prohibited payment of the cash grant to any "inmate of a public institution." In effect, the framers of Social Security de- termined that OAA would not be used for the maintenance of almshouses. These restrictions enabled new OAA beneficiaries to turn else- where for care and assistance when they be- came incapable of caring for themselves (or being cared for) at home. Meager as most of the states' OAA payments were, they still pro- vided the elderly with sufficient purchasing power to obtain institutional care without be

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THE NURSING HOME INDUSTRY coming wards of the cities or counties. The existing nonprofit institutions were accus- tomed to relying on payments from residents, supplemented by charitable contributions. As the Great Depression deepened, fewer resi- dents and their families were capable of paying their share, and charitable contributions also began to dwindle. Nevertheless, voluntary or- ganizations were slow to appreciate the op- portunity that OAA provided. By the end of the 1930s, the total number of individuals these facilities served was nearly the same as before the onset of the depression (Vladeck, 1980; McClure, 1968; Thomas, 1969~. Private board and care homes for pensioners had existed for some years, but the Social Se- curity Act's transfer of cash into the hands of the aged helped begin the transformation of this sector into a predominantly proprietary nursing home industry. The new flow of in- come to older people allowed private homes to provide some health services or supervision for those in need rather than just board and care. In addition, the economic problems en- gendered by the depression encouraged many individuals-whose only resources were their labor and the possession of a house to enter the business of providing "nursing" care in their homes. While the business was tiny by comparison to today's industry, the combination of OAA payments with the growing proportion of the aged in the population spurred growth of the industry, particularly the proprietary "mom and pop" sector (U.S. Senate Committee on Labor and Public Welfare, 1960; McClure, 1968; Thomas, 1969~.4 As Table 1 indicates, the period between 1939 and 1950 was one of significant growth, a certain sign of the impact of increased purchasing power among the el- derly as a result of Social Security and OAA. Post-World War II and the Eisenhower Era After World War II, developments in the hospital sector affected nursing homes. Chronic disease hospitals began to upgrade their ser- vices to provide rehabilitative care. In addi- tion, some acute care hospitals added beds to provide lower-cost care for patients needing subacute or extended recuperative care (Har 495 rington and Grant, 1985~. Although hospital- affiliated facilities did not capture a significant share of the market, they opened the way for the entrance of the medical profession into long-term care and for the eventual develop- ment of professional standards in what had pri- marily been a board and care industry (Lane, 1981, 1984; Dunlop, 19791. This transformation of the nursing home in- dustry was furthered by the extension of Hill- Burton grants to public and nonprofit orga- nizations for the construction of nursing homes. Apart from minimal state licensing laws, there were no regulatory standards for what kind of care these nursing homes should provide. In administering Hill-Burton, the Public Health Service (PHS), formulated the first standards on physical plant design and construction as well as staking patterns in nursing homes, fur- ther transforming these institutions into more medically oriented settings. They now be- longed to health as well as welfare policy (Vla- deck, 1980; Lane, 1984~. Two developments during the 1950s had a major impact on the growth and structure of the industry and attracted the first speculators to investment in nursing homes. The first was a vendor payment system, authorized under the 1950 amendments to the Social Security Act and expanded in 1956. This provided for federal matching funds to the states for direct payments to nursing homes (the "vendors") for care provided to OAA recipients. The second was increased availability of government-backed loans, through the Small Business Adminis- tration (SBA) and the Federal Housing Act (FHA), for nursing home construction and conversion (Markus, 1972~. The vendor payment system and increased government dollars available for nursing home care helped regularize payments, an attractive feature for businessmen. Perhaps most im- portant for the long-run shape of the industry, it gave nursing home providers an identifiable political entity to be lobbied for rate increases and favorable regulations. The vendor pay- ment program thus shaped a system in which the cost, quality, and level of services are de- cided in a transaction between vendors (pro- viders) and the state, creating the politics of long-term care. The availability of loans for nursing home

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496 TABLE 1 Nursing Home Statistics by Yeara FOR-PROFIT ENTE~SE IN HEALTH CAM Percentage Change Annual from PAor Compounded Persons in Number of Number Reported Rate of Number Nursing Average Facility Year Facilitiesb of Bedsb Year Changer of Beds ~Homee Occupancy Ratesb 1939 1,200 25,000 - 35% 1950 9,OOOf 250, 0CCi 900 296,783 1961 9,900 510,180 104 14.7~ 469,717 80 1963 12,800 568,560 11 5.6 90 1969 14,998 879,091 55 7.5 972,514h 91 1973 15,737 1,175,865 34 7.5 92 1976 16,426 1,317,909 12 3.9 93 1980 17,737 1,479,000a 12 2.9 1,372,019a 1,426,371 95 1982 1,515,000 2.4 1.2 1,428,960a 95 ~ 1983 1,450,413a 95 + aThe discrepancies in the estimates are a result of several factors. For example, in many instances one nursing home that is certified to provide both skilled nursing care and intermediate care may be "double-counted." Also, some nursing homes also operate residential care beds, and these may sometimes be erroneously counted as nursing home beds. Thus, accurate estimates are difficult to achieve. Ibe Aging Health Policy Center (AHPC) data were colllected directly from the state licensing agencies and may be the most accurate. b Date from the National Center for Health Statistics (NCHS). CRate computed by Montgomery Securities (1983~. Data compiled by the AHPC, University of California at San Francisco (Harrington and Grant, 1985~. eData from U. S. Bureau of the Census, compiled by and reported in Scanlon and Feder (1984~. fData from Dunlop (1979~. "Rate of increase Tom 1939 to 1961. hData Tom 1970. construction and conversion through the SBA and FHA also had a major impact on the struc- ture of the industry. Hill-Burton construction grants were only available for nonprofit pro- viders, but SBA and FHA loans could be made to for-profit entities. Certainly these funds had an impact on the expansion of the proprietary sector, helping not only to increase bed supply but also to shift the facilities from converted homes with relatively few beds to the larger, more modern, single-purpose building that is the norm today. Additionally, it made builders and real estate speculators aware of a new and potentially very profitable market for invest- ment nursing homes. As Lane (1984) ob- serves, "This capitalization of the profession by prudent real estate businessmen seeking a secured return on their investment helps to explain the ~ronrietan~ n~hlr~ of the inAllc_ try. ,7 ~ _, _ _~ _ - ,._ ~,~ ~ Direct payment to vendors and construction loans attracted the first significant group of proprietary operators, many of whose names eventually became synonymous with nursing home scandals the Bergmans, Hollanders, Kosows, and the first rumored involvement of He Mafia in the industry (Mendelson, 1974~. These public policies also resulted in signifi- cant increases in government spending and growth in the number of nursing home beds. In 1950, there were fewer than 9,000 nursing homes with approximately 250,000 beds (Dun- lop, 1979~. Total spending for nursing home care was just $187 million, or 1.5 percent of national health expenditures, and government paid only 10 percent of the nursing home ex- penditures (Gibson, 1979~. By 1960, there had been a 181 percent increase in total national spending on nursing home care, and govern- ment was paying approximately 22 percent of that total. Even with this expansion, the grown in beds was not sufficient to keep pace with the in- creasing numbers of elderly who needed long- term care. The U. S. General Accounting Of- fice (GAO) estimated that by the early 1960s,

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THE NURSING HOME INDUSTRY the shortage of adequate nursing home beds was between 25O,OOO and 500,000 (Elliott, 1969; Spitz, 1976~.5 Thus, one of the major concerns in Congress with the passage of Medicare and Medicaid was the availability offunds for long- term care. The Development of Medicare and Medicaid During the decade following the 1965 pas- sage of Medicare and Medicaid, there was a dramatic expansion in the supply of nursing home beds and an even more dramatic esca- lation in costs. New facilities were built, and a more sophisticated set of owners emerged, including the multistate, multifacility systems or chains. These developments were largely a product of four factors: (1) the availability of funding; (2) the method of reimbursing facil- ities; (3) increasing demand; and (4) federal health and safety regulation. The Expansion of Coverage The original framers of Medicare were well aware that the inclusion of nursing home ser- vices could destroy the fiscal viability of the system, particularly if it covered the kind of long-term custodial care most nursing homes were then providing. Despite this, substantial inflation in hospital rates during the 1950s and early 1960s made it desirable to have less costly alternatives than hospitals for patient convales- cence (interview with Wilbur Cohen, personal communication, 1980; U.S. Senate Commit- tee on Finance, 1970; Vladeck, 19801. Thus, as originally conceived, Medicare covered only hospital care, but was amended to add cov- erage for convalescing patients in "extended care facilities" (ECFs). With anticipated daily costs about half those of convalescent care in a hospital, ECFs were seen as a cost-efficient form of institutional care. Although the extended care provision of Medicare was soon to haunt its framers, its impact pales beside that of another amend- ment to the Social Security Act, Title 19 or Medicaid. Medicaid attracted little attention from policymakers, and coverage of skilled nursing home care was included almost by de- fault again through vendor payments and 497 without much definition or a budgetary limit. This coverage (and the eventual extension to intermediate care as well) provided the finan- cial fuel for the further growth of the nursing home industry. With the passage of Medicare and Medi- caid, sufficient funds were available to many of the elderly for much pent-up need to be translated into demand for and utilization of nursing home care. It was not, however, only the infirm aged residing in the community who came to demand nursing home care. Nursing home care also emerged as a substitute for housing (and some care or supervision) pre- viously provided to many of the elderly in other settings, particularly mental institutions (Dun- lop, 1979; Manard et al., 1975; V-ladeck, 1980; Scanlon and Feder, 1984; Barrington and Grant, 1985~. One observer estimated that 25 percent of the increase in nursing home uti- lization between 1960 and 1970 can be attrib- uted to the deinstitutionalization or diversion of individuals from mental institutions into nursing homes (Morton Research Company, 1982). Consumers of care and their families had a multitude of reasons for choosing nursing homes over other forms of institutional care. But it was also in the interest of the states and lo- calities. In these other settings, most of the costs were borne by state and local govern- ments, while transfer to a nursing home usu- ally meant the state could collect the federal matching hinds for the care of these individ- uals in nursing homes under the Medicaid pro- gram. As a result of these diverse factors, including reductions in hospital lengths of stay, the percentage of elderly persons in nursing homes rose 58 percent in the decade between 1950 and 1960 and 107 percent between 1960 and 1970. A combination of factors, therefore, fueled the demand for and utilization of nursing home beds. Increased but unevenly distributed ex- penditures under Kerr-Mills led to significant grown, but it was the passage of Medicare and Medicaid in the mid-1970s, in conjunction with demographic trends, that led to substan- tially extended demand by the elderly for nursing home care. From the viewpoint of po- tential providers, expansion was a result not only of increased demand, but also the in

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498 creased availability of public reimbursement and the attractiveness of the rates set up under these new programs, a result of the policy- makers' desire to assure substantial provider participation. While they expanded eligibility, Medicare and Medicaid could accomplish little if too few individuals and organizations were willing to provide services to program bene- ficiaries. To attract providers to the program- and increase the supply of nursing home beds- the federal government pursued two basic pol- icies, one related to reimbursement and an- other to regulation. Increased Reimbursement Rates. First, Medicare adopted a cost-based reimburse- ment policy very similar to that it employed for hospitals. Providers were basically reim- bursed for their reported costs. The formula placed no ceiling on reimbursement rates, and variations in reported costs between providers were ignored. In addition, the program pro- vided proprietary nursing homes a "profit" based on their net invested equity in the fa- cility. Finally, the American Hospital Associ- ation (AMA) lobbyed effectively for Medicare to reimburse hospitals for mortgage interest as well as depreciation of capital equipment, including the facility. This was extended to nursing home reimbursement. As a result, investors were virtually assured of covering their mortgage payments-and having a pos- itive cash flow (from depreciation) as well in the first years of the mortgage through the Medicare program. They were also virtually assured of having their costs covered as well as receiving in effect a guaranteed profit (Shul- man and Galanter, 1976; Vladeck, 1980; Ohio Nursing Home Commission, 1979; Washing- ton Senate, 1978~. Lenient Regulatory Posture. Medicare also adopted a policy of easing nursing homes' en- trance into the program. Although enacting mandatory minimum health and safety regu- lations for facilities participating in Medicare, the federal government estimated that few fa- cilities could actually meet even the minimum standards. Consequently, granted nursing homes were given participatory status in Med- icare and Medicaid if they were in "substan- tial" (rather than full) compliance with the new FOR-PROFIT ENTERPRISE IN HEALTH CARE federal minimum health and safety standards. The homes simply had to present to the survey and certification agency a plan for correcting their violations in order to be certified and receive payments. This lenient regulatory posture, combined with open-ended, full-cost reimbursement, a guaranteed profit factor, and interest plus de- preciation for capital reimbursement in a pro- gram financially supported by the federal government, made investment in nursing homes very attractive. In addition, govern- ment fielding and the aging of the population ensured the industry of a ready supply of cus- tomers. Thus, government policies eliminated much ofthe risk generally associated with most investments and nearly all new ventures while promising substantial profits to those with the knowledge and ability to manipulate the sys- tem. As a result, in less than a decade the industry expanded its total supply of beds from approximately 460,000 (in 1965) to more than 1.1 million beds (by 1973) an increase of 139 percent in less than a decade.6 Expenditures grew even more rapidly. In 1950, total expenditures for nursing home care were less than $190 million, with government paying only 10 percent of that total. By 1960, government paid 22 percent of a total of $526 million. By 1965, just before the onset of Med- icare and Medicaid, expenditures totaled $1.328 billion, an increase in just 5 years of 153 per- cent. Between 1960 and 1974, expenditures on nursing home care grew approximately 1400 percent (U.S. Senate Special Committee on Aging, 1974~. By 1978, the nation spent $15.8 billion on nursing homes, with government paying 53 percent of the total (Gibson, 1979~. And by 1982, expenditures for nursing home care exceeded $27 billion annually with gov- ernment paying nearly 55 percent of the total (GAO, 1983b). In 1984, expenditures on nurs- ing home care exceeded $32 billion with gov- ernment paying 49 percent (Levis et al., 1985~. The Emergence of Nursing Home Chains At the same time that the industry was grow- ing and expenditures were skyrocketing, the pattern of ownership and control in the in- dustry was undergoing a significant change. Unlike the hospital sector, the proprietary

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THE NURSING HOME INDUSTRY nursing home firms industry has been preva- lent and growing since the 1930s. The trend away from government and nonprofit facilities accelerated. In 1969, 64.5 percent of all nurs- ing home beds were in proprietary facilities. By 1980, 81 percent of all the facilities and 69 percent of the beds were proprietary. During the same period, the proportion of beds in nonprofit facilities decreased from 25.8 per- cent to 22. 7 percent, with government owning only 8 percent (U. S. National Center for Health Statistics, 1984~. But the most significant de- velopment in the immediate post-Medicare period was the development of proprietary corporate nursing home chains. In 1966, only a handful of firms owning nursing homes were registered with the Securities and Exchange Commission (SEC). By 1969, that number had expanded to 58 and by 1970 had reached nearly 90 (Spitz, 1976~.7 The post-Medicare need for capital was enormous because of the demand for new beds. New nursing home construction was needed to cope with existing bed shortages as well as to replace obsolete facilities that were often converted mansions, farmhouses, hotels, and motels. One way to secure capital for nursing home expansion was borrowing. Some owners calculated that once they had enough for a down payment on their first home (with in- terest and depreciation as part of the govern- ment reimbursement rate), government revenues could be expected to cover the cost of a first mortgage. The same was true for sec- ond-, third-, and even fourth-position mort- gages. With few fiscal controls, the program provided virtually open-ended reimburse- ment for Medicare patients. Moreover, the owners could use the capital generated by these additional mortgages for whatever purposes they chose. Many used them to pyramid their nursing home holdings. With Medicaid, sim- ilar opportunities existed in the states through both reimbursement systems modeled on Medicare and through "flat-rate" systems. Un- der the latter methods, nursing home owners received a set fee for each Medicaid patient day regardless of what they actually spent on patient care. Many owners used part of these fiends to purchase new facilities, pyra- miding their acquisitions on current holdings. Publicly held nursing home chains had even 499 more options for financing new growth. Going public with the sale of stock was an alternative to borrowing. In addition, a public market for a company's stock enhances its ability to attract borrowed funds, since the stock can be offered as collateral to secure loans. As it turned out, the stock market proved to be a very successful new source of capital for the nursing home industry. In 1969 alone, 40 nursing home cor- porations sold stock worth $340 million. During the late 1960s, the "Fevered Fifty," corporations owning or planning to own nurs- ing homes, emerged as the "hottest" stocks on the market. In a 1969 article in Barron's, I. Richard Elliott, Jr. (1969) explained the phe- nomenon: Of late . . . fal kind of frenzy seems to grip the stock market at the merest mention of those magic words: "convalescent care," "extended care," "continued care." All euphemisms for the services provided by nursing homes, they stand for the hottest invest- ment around today. Companies never before near a hospital zone from builders like IlTs Sheraton Corporation, National Environment, and Ramada Inns, to Sayre and Fisher . . . have been hanging on the industry's door. "Nobody, a new-issue un- derwriter said the other day, "can lose money in this business. There's just no way." Even while the industry was telling state legislatures that it faced bankruptcy if Medi- caid rates were not dramatically increased, some nursing home owners were promoting them- selves on Wall Street as the most profitable investment around. According to stock pro- spectuses issued by some publicly held chains, the guaranteed government revenue and the growing number of elderly combined to pro- duce an expected return on investment of at least 20 to 25 percent per year. These potential profits for the parent corporations were to be further augmented by the development of sub- sidiaries that would sell ancillary goods and services to the nursing homes such as phar- maceuticals, food service, laundry, manage- ment, real estate development, and construction. The reported puce/ean~ings ra- tios of the new nursing home chains were as much as 40 times that of blue chip stocks. For instance, in 1969 the pricelearnings multiple for Bernard Bergman's Medic-Home chain was 179; for Unicare, another major nursing home chain, the multiple was 700 (Elliott, 1969~.

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500 The boom in nursing home stocks, however, was relatively brief, and the bust was spectac- ular. By 1971-1972, the stock prices had fallen far below their high marks of 1969. ^Medicen- ters of America, whose price per share had reached almost $60 during the late 1960s, was selling at less than $4 by the mid-1970s. And the same decline was true for all the chains. Four Seasons Nursing Centers, certainly the most publicized of the chains and the first to list its shares on a major exchange, started out as a housing construction company. Its stock ran up to nearly $100 per share in 1969. By 1970, when the SEC suspended trading, it was selling for 6 per share. The bankruptcy of Four Seasons was a result of massive fraud, with the president, partners of the corporation's accounting firm, ancl two officers of a brokerage firm indicted for secu- rities violations. This stock fraud was one factor in cooling off the market for nursing home stocks. Continuing scandals about poor care and patient abuse also dampened investors' enthusiasm. But perhaps the most important factor involved a serious miscalculation about the role of Medicare in paying for nursing home care. A surprising number ofthe new nursing home entrepreneurs, like many of their investors and an unhappy number of Social Security recip- ients, initially assumed that Medicare and its unlimited, cost-plus reimbursement system would finance most of Me nursing home care of the nation's elderly. In fact, given the orig- inal Medicare limitations and further restric- tions on eligibility and coverage introduced during the Nixon administration, Medicare paid for relatively little of the nation's expenditures on nursing home care. Table 2 illustrates the actual funding pattern that has emerged. The predominantly extended-care (or sub- acute care) market funded by Medicare, which was anticipated by the nursing home entre- preneurs, never materialized. The mainstay of the nursing home market proved to be the long-stay resident-an individual suffering from chronic rather than acute diseases and disa- bilities, unable to pay for her or his own care, and unable to qualify for Medicare coverage. And Medicaid was not as uniformly generous a payer as Medicare.8 Despite this, it was the Medicaid program FOR-PROFIT ENTERPRISE IN HEALTH CARE TABLE 2 Nursing Home Expenditures by Payer (percentage) Payer 1981 1982 1983 1984 Medicare Medicaid Other government Private insurance Out-of-pocket 1.7 1.9 49.8 45.8 4.6 4.5 0.8 1.0 43.2 46.0 1.7 1.9 44.2 43.4 4.1 4.0 0.7 0.9 48.3 49.4 SOURCE: Waldo and Gibson, 1982; Levit et al., 1985. that removed the lid from expenditures on vendor payments to nursing homes. The initial legislation basically left the decision on how to reimburse nursing homes almost entirely to the states. Some provided generous rates un- ~ler cost-based systems similar to the Medicare payment program; others provided a fixed (or "flat") rate for all facilities. Such fixed rates were independent of actual nursing homes' costs, differences in the severity of patient case mix, and quality of care. In general, however, Medicaid rates, tied to state welfare programs, were lower than Medicare rates. Yet Medicaid was an open-ended program, paying for the care of all eligible program beneficiaries, and its eligibility. The limitations on Medicare coverage, ret- roactive claim denials, and payment and eli- gibility limitations imposed by most Medicaid programs made the nursing home industry less attractive financially. In addition, after the rapid expansion in bed supply during the initial in- vestment euphoria, many nursing home beds were empty by the early 1970s, further con- tributing to some homes' financial difficulties. During this period, many nursing homes sur- vived and prospered by either lowering ex- penditures (often by cutting back on food and staffing) or by engaging in real estate manip- ulations (see Ohio Nursing Home Commis- sion, 1979; New York State Moreland Act Commission, 1975; and Shulman and Galan- ter, 1976~. The effects of this situation were varied. First, conditions in nursing homes continued to be a cause of concern for consumers and policy

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THE NURSING HOME INDUSTRY makers. Many attributed seriously substan- dard care not only to the failure of the regulatory system but also to the incentives inherent in many Medicaid reimbursement policies, par- ticularly "flat-rate" systems (U. S. Senate Com- mittee on Finance, 1912~. Second, the trafficking in nursing home real estate that is, the sale and resale of nursing homes as well as inflated lease and rental charges arti- ficially increased the cost of providing care. Nursing home chains slowed their rate of growth. From 1969 through the mid-1970s, the market share of the major multistate nurs- ing home chains remained relatively stable. Policy changes in the 1970s, however, would significantly alter the structure of the industry. In summary, four factors led to the creation of a nursing home sector and its expansion between 1930 and 1970: (1) increased demand resulting from shifts in mortality and morbid- ity, as well as the substitution of care in nurs- ing homes for housing that had been provided to the elderly in other institutional settings, such as almshouses, poor farms, and mental hospitals); (2) increased funds available to pay for such care through government programs such as OAA and Social Security payments, Kerr-Mills, and finally :\Iedicare and Medi- caid; (3) favorable reimbursement rates and payments made directly to the vendors of nursing home services; and (4) a lenient reg- ulatory posture toward nursing homes. PUBLIC POLICY CHANGES AND THE GROWTH OF NURSING HOME CHAINS: THE 1970s AND 1980s The dominant trend in the nursing home industry during the 1970s and 1980s has been increasing concentration and corporatization of ownership. This transformation has been stimulated by changes in reimbursement and regulatory policy, health planning restrictions on bed supply, easier access for "chains" to expansion capital, and tax policies. Between 1982 and 1983, the 25-30 largest chains in- creased their control of total beds by another 15 percent. Although the holdings of chains remained relatively stable during the early 1970s, the late 1970s brought about a spate of merger and acquisition activities. Between 1972 and 1980, with most of the activity occurring 501 after 1976, the three leading chains dramati- cally increased their control of nursing home beds and facilities. Beverly Enterprises in- creased its facilities by 600 percent, ARA its holdings by approximately 250 percent, and Hillhaven by 200 percent. This growth pattern far outdistanced the growth rate in the total number of nursing home beds and facilities, which was only 18 percent during the same period. The Modern Healthcare annual sur- veys of multifacility systems show that be- tween 1979 and 1982, the major investor-owned chains increased the proportion of all nursing home beds they controlled by 50 percent. Some observers, including leaders of some of the major chains, predict that within the next 5 years, half of all nursing homes will be operated by proprietary chains, with the ma- jority controlled by Me 5 to 10 largest chains (LaVioleKe, 1983~. Certainly, the growth rate of the largest chains has been spectacular (Ta- bles 3 and 4~. In 1973, the three largest chains owned only 2.2 percent of the beds. By 1980, the three largest chains controlled 6.4 percent of the beds nationwide, and by 1982, Beverly, ARA, ancl Hillhaven owned, leased, or man- aged 9.6 percent of all nursing home beds, a 2-year increase of 54 percent. This picture of increased concentration, however, is somewhat misleading. The three largest chains have substantially increased their holdings largely through acquisition of small- to-medium chains, rather than through the purchase of individual facilities. Thus, this in- creased concentration does not represent a substantial increase in the control of total beds by the chains. It simply reflects the very larg- est chains' purchase of or merger with other large-to-medium multifacility systems. De- spite the major increases in holdings by firms such as Beverly, the industry remains fairly fragmented, largely controlled by individual owners and small (5- to 20-facility) local and regional chains. Further, the rate of growth of the largest chains could be somewhat slowed as the number of medium-sized chains that can be efficiently acquired diminishes.9 Despite misperceptions about current lev- els of concentration, policymakers should fo- cus attention on the industry's changing structure. Although the chains do not control an enormous proportion of nursing homes na

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502 FOR-PROFIT ENTERPRISE IN HEALTH CARE TABLE 3 Nursing Home System Ownership, 1972 Name of Chain Number of Number of Facilities Beds 79 77 70 60 56 47 44 44 43 41 41 38 36 30 29 28 27 26 23 20 20 20 National Health Enterprises Unicare First Healthcare Corporationa Hillhavena Leisure Lodgesb Beverly Enterpnsesb CENCO American Medical International National Living CentersC Extendicare~ GeriatricsC Americanae Monterey Life Systems Continental Care Centers Medicentersa Care Management Anta/Four Seasons Medic-Homes f National Health Services American Medical AlEliates Aid, Inc. Care Corp. 10,551 6,481 8,425 5,861 5,264 5,670 4,409 3,582 4,400 5,045 4,394 3,440 3,598 3,286 5,101 1,690 4,200 3,105 2,590 1,979 2,494 2,494 aFirst Healthcare facilities were acquired by CNA and later sold to Hillhaven; Hillhaven also acquired Medicenters (1977). bIn 1976, Stephens Inc. became the sole owner of Leisure Lodges, and in 1977, through a complex series of exchanges, Stephens Inc. and Beverly facilities were merged. CARA owns both National Living Centers (1973) and Geriatrics (1974). ~Extendicare changed its name to Humana and sold its nursing homes to National Health Enterprises (1973). Americana was acquired by CENCO (1972-1973). fMedic-Home was involved in violations of Securities and Exchange Commis- sion regulations and was eventually split. Two of the main components of this chain were PMG and Liberty [Nursing Homes. tionwicle, chains have achieved very signifi- cant market penetration in some areas of the country. In some regions of the country, the four largest nursing home operators already control between 60 and 100 percent of bed capacity. In Texas, for example, Beverly and ADA alone control nearly 25 percent of the beds, dominating many geographic areas of the state. The U. S. Department of Justice has been concerned about some ofthe merger and acquisition activity of the major chains. In Jan- uary 1984, for example, it filed suit to block Beverly's plan to acquire Southern Medical Services, arguing that this acquisition would "substantially lessen" competition in four ma- jor markets in which Beverly would control between 29 and 48 percent ofthe total licensed nursing home bed capacity. Further, the ma- jor chains' predictions about their growth and increased concentration may well be accurate. The concerns many observers feel about such concentration is not only that it lessens com- petition but that it also substantially reduces the ability of the regulatory agencies to control the behavior of We highly concentrated pro- viders. Several factors have contributed to the con- centration of nursing home ownership. First,

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532 homes to develop and implement quality mon- itoring and assurance programs. Third, there are significant structural dif- ferences between hospitals and nursing homes. Hospitals are still largely not-for-profit insti- tutions and are presumed to operate under a set of professional and ethical norms that con- strain their behavior to the benefit of patients. Nursing homes, however, are largely proprie- tary. As businesses, they must calculate the scope and quality of the services they provide with an eye constantly turned toward profit- ability goals. Fourth, state and federal policies designed to contain long-term care costs may contain powerful incentives inimical to the provision of high quality care. These are primarily cost containment measures adopted in the last few years, such as prospective payment systems, reimbursement ceilings, and moratoria on new nursing home bed construction. For nursing homes with sizable populations of patients supported by Medicaid, such reimbursement policies contain incentives that tend to inhibit admission of those most in need of care and that may encourage reductions in staffing and food. Under prospective reimbursement sys- tems that have been instituted in a number of states, payment rates are set in advance and homes are allowed to retain the difference be- tween the rate and what they actually spend. Operating at the same level of quality but more efficiently is clearly the most socially desirable way of achieving profits in such a system; how- ever, shifting to a less-costly-to-care-for pa- tient mix is another way for facilities to achieve profits under such a system.43 Reducing the scope and quality of services is a third way for homes to achieve profits. Reducing variable expenditures such as staffing, activities, and food is the simplest way for homes to hold their expenditures below prospective rates. Thus, discrimination and reductions in the level and quality of services are two ways in which homes may respond to these cost containment initiatives. The evidence on discrimination is clear, and there is some evidence that many nursing homes, the proprietaries in particular, may be reducing quality in response to severe reimbursement constraints (Schlenker, 1984; Birnbaum et al., 1979, 1981; Caswell and Cleverley, 1978; Holahan, 1984~. FOR-PROFIT ENTERPRISE IN HEALTH CARE Finally, restrictive health planning and more stringent reimbursement policies have re- sulted in slowed construction of new nursing homes. In addition, there are few community- based services that can substitute for nursing home care. Because demand for longterm care exceeds supply, homes have little incentive to compete for Medicaid patients by offering higher quality. The only competition along quality lines occurs among homes that seek to maintain a high percentage of the more prof- itable private-paying patients. Thus, compe- tition among providers is an unreliable mechanism for assuring quality in nursing homes. Given changes in the structure of hospital ownership and in payment mechanisms, some of the apparent differences between the hos- pital and nursing home sectors may diminish. The emergence of a strong proprietary sector and of hospital chains that are growing verti- cally and horizontally represents a striking similarity to developments in the nursing home industry. Further, increasing concern with es- calating hospital costs and the development of Medicare's prospective payment system are very similar to prior developments in the long- term care sector. This convergence of an emerging proprietary sector and tightened reimbursement policies could produce some of the negative consequences associated with the long-term care sector. To a large extent, three factors are likely to determine the ultimate outcome of such de- velopments: (1) the response of health profes- sionals to a changing environment; (2) the response of patients and their willingness and ability to become more effective consumers; and (3) the ability of regulatory and peer re- view agencies to exert a strong influence for quality assurance. At the least, such devel- opments suggest the need for more sophisti- cated and substantial quality assurance activities by public and private agencies to monitor ac- curately the effects on quality and access and to ensure that unacceptable reductions in quality and access do not occur. - NOTES I Both Medicare- and Medicaid-eligible patients pay for part of their nursing home care; these individuals

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THE NURSING HOME INDUSTRY must make copayments (Medicare) or devote nearly all of their income for care before Medicaid pays for the additional nursing home charges. In addition, private- pay patients tend to pay somewhat higher rates than Medicare and Medicaid patients. These two factors ex- plain why half the dollars but a larger proportion of the patients are accounted for under government plans. 2This phrase is so apt that I've stolen it directly from Vladeck (1980~. 3Indeed, these homes for the aged, dominated by immigrant and religious groups, are the forebears of the large, voluntary homes of today. 4Even in the 1930s, there was widespread concern and dissatisfaction with conditions in many proprietary nursing homes. The facilities were often aged and di- lapidated houses, farms, or small motels that had been converted to use as a nursing home. Nursing and med- ical care were minimal at best, and reports of patient abuse were widespread. These prompted calls for re- form-for state licensing and inspection. But the di- lemma that still plagues the regulatory system arose then with a shortage of facilities, the imposition of stricter standards would mean closing some, perhaps many, facilities, aggravating the bed shortage. Like modern regulatory officials, most states chose educa- tion and exhortation in an attempt to improve the fa- cilities rather than development and enforcement of stricter standards of care (Vladeck, 1980; McClure, 1968; Thomas, 1969~. sOne of the major forces contributing to the grown of nursing homes is the dramatic increase in the num- ber and proportion of the population that is aged. The proportion of the U. S. population 65 years of age and older has increased from 4.4 percent in 1900 to 11.7 percent in 1983. Moreover, the projections are that by the end of the century, between 35 million and 37 million people, at least 13.1 percent of the population, will be aged. Moreover, the fastest growing cohort of the population is the very old- those most at risk in terms of needing long-term care services (Manton, 1984; Torrey, 1984; U.S. Bureau of the Census, 1983~. Only with the availability of financial assistance, however, is this need translated into demand for nursing home care, since the majority of the aged who actually need long-term care cannot afford to pay for the care they require. regrowth in bed supply has leveled off for a variety of reasons since the mid-1970s. 7For 1984, only 49 publicly held nursing home chains are listed with the SEC. An additional number of mul- tifacility nursing home chains are owned and operated as subsidiaries of hospital chains. BThere are basically two types of nursing home res- idents-the "short-stay" patients whose average length of stay is less than 3 months, and the "long-stay" res- idents whose average LOS is more than 2.5 years (Liu and Mossey, 1980). While the short-stay residents con 533 stitute a sizeable proportion of admissions, on any given day the "long-stayers" are the majority of nursing home patients. fin addition, ongoing debate and ships in policy about whether public programs will reimburse higher capital or property costs that result from sales/purchases of nursing homes is also likely to affect the rate of chain growth. inactive imposition of the LSC was delayed for sev- eral years in order to give facilities ample opportunity to come into compliance with what is fundamentally a federal fire safety code. CHEW was renamed the U. S. Department of Health and Human Services (HHS) in 1981. Enduring the early years of a mortgage, most of the payment is for interest on the loan; relatively little is applied to the principal. Depreciation payments by the state, however, are usually calculated on a 20- to 30- year life expectancy for a new nursing home and made on a straight-line basis. Thus, under most of the 1970s' cost-related systems, in the early years of a mortgage, the depreciation payment from the state to the facility exceeds the amount the facility actually has to pay the mortgage holder as the principal payment. (Interest is a direct pass-through.) The result is a positive cash flow to the facility during those years and an incentive to sell the facility as a depreciation payment from the state approaches the amount of the mortgage that is payment toward the principal (see Baldwin, 1980~. Many states found nursing homes responding to this incentive, with proprietary facilities being sold as often as every three to four years, providing indirect profits to the facilities and increased costs (but not services) to the states (Ohio Nursing Home Commission, 1979; Washington Sen- ate, 1978~. This made many individual owners willing, even eager, to sell. Often owners would sell the facility to a chain and then lease it back to operate (see also Shulman and Galanter, 19769. For instance, in 1983, Beverly, the largest chain, leased more than half its facilities, and this is fairly common (Beverly Enter- prises, lOK report filed with the SEC, 1983~. Cone of the prevailing myths about long-terTn care is that the elderly are in nursing homes because their families have abandoned them. This is simply untrue- unless dying is viewed as abandonment. Long-term care is predominantly an issue involving widowed or single elderly women. Half of all nursing home resi- dents have no immediate relatives living in close prox- imity. Those patients who do have relatives tend to be very functionally dependent (in terms of needing as- sistance in the activities of daily living, such as dressing, eating, walking, and toileting) and also mentally im- paired (Barney, 1974; Liu and Mossey, 1980~. 24 For example, Beverly Enterprises' operation of 13 percent ofthe facilities in Texas (a low-rate, prospective reimbursement state) has average net revenues per patient day that are 2 percent lower than the average

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534 for all Texas facilities but net income that is 22 percent higher. 75Some observers, such as Scanlon and Feder (1980) cite "inadequacy" of return as a potentially more im- portant cause of declining growth. Data on the prof- itability of nursing homes, particularly the "chains" call this into question (U.S. Senate Special Committee on Aging, 1984~. 26Many reimbursement systems exclude nonprofit owners from return on equity a "profit" factor. Thus, nonprofit providers may receive less from Medicaid (and Medicare) programs than for-profit entities with comparable costs. 27The Tax Equity and Financial Responsibility Act of 1982 (TEFRA) eliminated some of the future benefits of ERTA. 28 For instance, CENCO, one of the larger chains in 1979-1980, was the target of a major Wall Street battle and was eventually acquired by Manor Care. National Health Enterprises, the sixth largest nursing home chain in 1981 and Flagg Industries (number 20) were ac- quired by Hillhaven/National Medical Enterprises. Mediplex (number 8), Commercial Management (num- ber 11), and Beacon Hill (number 21) have been ac- quired by or merged with Beverly Enterprises, which also acquired other small-to-medium size chains (e.g., P&H Enterprises, Inc.; Consolidated Liberty; PMG, Inc.~. 29Demand is a function of need and ability and will- ingness to pay. 20Two-thirds of all middle-income patients in nursing homes spend their life savings within 2 years of ad- mission and become Medicaid patients (U.S. Senate Special Committee on Aging, 1984~. 22 It is well to note, as Vladeck (1980) does, that these institutions do labor under some incentives that are similar to those of the for-profits. 'tithe voluntaries may not be profit-maximizers, but they invariably operate under the constraint of trying at least to break even" (Vladeck, 19801. They may, however, select different methods than the for-profits to break even. 22 Two such chains report (in their filings with the SEC) that the decision to expend funds upgrading newly purchased facilities is part of a corporate strategy aimed at attracting more private-pay and Medicare patients- who are more lucrative for the nursing home. 23Again, this may vary by chain. In addition, the record of Beverly Enterprises in Texas indicates that it has a disproportionate number of significant viola- tions. Indeed, there is some evidence that Beverly does not promptly correct deficiencies when cited, since it has received a disproportionate share of punitive ac- tions for failure to correct violations. 24Schlenker (1984), in reviewing studies on the re- lationship between costs, reimbursement policies and quality of care, argues that RN hours and dietary costs may be good indicators of quality. "A more intense FOR-PROFIT ENTERPRISE IN HEALTH CARE case mix and/or higher quality care should require some combination of more nursing hours per patient day, a greater ratio . . . RN or . . . LPN hours to aide hours, and possibly higher wage rates to reflect higher skill levels.... (Higher dietary costs may also be related) since nutritional adequacy is important to patients' overall health." Awhile the high-quality homes outspent the low- quality homes on these items, the low-quality facilities had higher expenditures on administrator salaries, legal and accounting fees, and motor vehicles; they also seem to substitute LPNs for RNs. 26Nonprofits tended to have more beds, more build- ings, and more floors in the building; they also tended to have more single rooms, more ward rooms (with five or more patients per room), and more bathrooms. 27An alternative explanation is that these facilities offer such low quality oicare that they can attract only those individuals with no other choices, such as the elderly poor and disabled without family or other social supports (see Greene and Monahan, 1981; Ohio Nurs- ing Home Commission, 1979~. 28The FotUer et al. (1981) study used multiple regression analysis to study the relationship between profits per patient day (ppd) and four measures of qual- ity: (1) skilled nursing hours ppd.; (2) nonnursing hours ppd.; (3) total nursing and nonnursing hours ppd. and (4) staffing ratios. They argue that these are usefill sur- rogates for the quality of patient care and found that "profitability increases as the service intensity (quantity and quality of labor inputs) decreases." The study fo- cused on 43 nursing homes in California. 29The commission also reported a strong correlation between the level of profitability and lower expendi- tures on food, dietary salaries, medical supplies, nurse's aides, medical and rehabilitative care, electricity, and housekeeping. 30Elwell notes that although some of the spending differences do not appear large, the figures represent per patient per day expenditures. He observes that reductions in such spending, even relatively small ones, can result in substantial savings for the facility. For instance, "by spending 35 less ppd for nursing, the average SNF (which in New York had 44,867 inpatient days in 1976) could save over $15,700 per year" (Elwell, 1984~. 3~Of those 45 facilities, 37 were earning profits on the Medicaid rate alone. 32Koetting also concluded that proprietary homes were more efficient that is, they were able to attain a given level of quality at a lower cost than the nonprofit fa- cilides. In addition, he found that cost and quality of care were only wealdy related (Koetting, 1980~. 33The performance of Beverly Enterprises, one of the major chains operating facilities in California, was particularly poor. According to an analysis of the Cal- ifornia Health Facilities Commission data by the AFL

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THE NURSING HOME INDUSTRY CIO (1983a), "Beverly's . . . performance was abysmal. For 35 homes listed as belonging to Beverly, the av- erage number of citations (per facility) came to 2.31, with 9 of the 35 exceeding the California standards . to rank among the worst homes in the state." 34The department does not maintain a listing by type of owner; therefore, the listing of facilities receiving some form of punitive action has to be matched against a separate ownership file. The control (ownership) type of four facilities terminated from the program could not be determined from these files. 35The study, however, did not find a relationship between staff ratios (resource inputs) and other quality of care measures. "The correlations are found all uni- formly insignificant" (Lee, 1984~. 36In Ohio, the multistate chains were Manor Care, Hillhaven, HCF (now Health Care and Retirement Fund, Inc.), Medicenters, and Americare. The data are derived from cost reports submitted to the Ohio Department of Public Welfare by 579 (77 percent) of the nursing homes participating in the Ohio Medicaid program in 1977. Eighty-five percent were for-profit facilities. Of these, 78 percent were operated by in- dividual owners; 16 percent were owned by small, in- trastate chains; and 8.5 percent (32 facilities) were part of large multistate nursing home chains. 37This seems to be borne out by anecdotal testimony and evidence presented to and gathered by the Ohio Nursing Home Commission. The major stockholder of the largest intrastate chain was indicted for Medicaid fraud and was the subject of several health department compliance actions. Two other intrastate chains had an unchallenged reputation for providing truly vile care. 38Management fees are significantly positively cor- related with increased spending on other administra- tive salaries; office supplies and printing; communication; travel and other motor vehicle; advertising and public relations; legal and accounting fees; and other admin- istrative . . . services" (Ohio Nursing Home Commis- sion, 1979~. 39 Such studies should also take into account the va- riety of services that are provided under the daily rate and are incorporated in costs, as well as noting those services for which additional charges are billed to pa- tients. 40 Since Medicare pays for only about 2 percent of all expenditures on nursing home care, problems Med- icare beneficiaries experience have not been as well- documented; moreover, they may be a result of the unwillingness of many homes to meet the higher cer- tification and audit standards associated with Medicare rather than a result of the payment rate or disability of patients. 4~". . . two-thirds of all middle income patients in nursing homes spend their life savings within 2 years of admission and become Medicaid patients" (U. S. Sen- ate Special Committee on Aging, 1984~. 535 42The data are far from precise, but the average Med- icaid utilization nationwide appears to be between 64 and 70 percent. In some states, of course, it is much higher, as in North Carolina where 89 percent of the patients receive assistance from Medicaid. 43One of the most common myths is that quality is low because profits are low or nonexistent. Research does not support this myth (Ohio Nursing Home Com- mission, 1979~. Most for-profit homes earn healthy re- turns. It is the incentives inherent in reimbursment systems that seem to affect quality, not merely the rate, although clearly reimbursement rates must be suffi- cient to cover genuine, reasonable costs if quality of care is to be achieved (Schlenker, 1984~. REFERENCES AND BIBLIOGRAPHY AFL-CIO, Executive Council (1977) Nursing Homes and the Nation's Elderly: AnKrica's Nursing Homes Prof t in Human Misery. Bad Harbour, Fla.: Statement and report adopted by the AFL-C10. AFL-CIO, Service Employees International Union (1983a) Beverly Enterprises in Michigan: A Case Study of Corporate Takeover of Health Care Resources. Washington, D.C.: The Food and Beverage Trades Department. AFL-CIO, Service Employees International Union (1983b). Beverly Enterprises Patient Care Record; Washington, D.C.: The Food and Beverage Trades Department, OFFICIO, January 27. Aging Health Policy Center (1983) Unpublished Telephone Survey of States, Nursing Home Supply Data. San Francisco: lhe University of California. American Association of Homes for the Aging (1981) Factors Influencing the Provision of Non-institutional Long-Term Care by Homes for the Aging. (Contract 18-p-976-24/3-01) Washington, D.C.: Health Care Fi- nancing Administration. Arrow, K. I. (1979) The limitations of the profit mo- tive. Challenge ~(Sept./Oct.):23-37. Baldwin, C. Y. (1980) Nursing home finance: Capital incentives under Medicaid. 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