Nursing Homes : Medi-Cal Rules Abet Poor Care
California’s nursing home regulations permit entrepreneurs to provide poor patient care while making big profits.
The state’s $1.1-billion Medi-Cal system, which accounts for nearly two-thirds of the revenue for nursing homes in California, actually rewards operators who skimp on patient services, according to critics.
“Every penny they can cut in cost is a penny in profit. And when you have that kind of system . . . that motivates a business person to do that, we’re just flat out asking in this state for poor care,” said Darrell Kelch, director of public policy for the California Assn. of Homes for the Aging, an organization of nonprofit nursing homes.
System Penalizes Some
Even the state’s deputy health director, John Rodriguez, acknowledged that the current system “tends to penalize facilities that spend the most on patient care.”
At the same time, the state system of enforcing health care standards through inspections and fines is so ineffective that even the worst homes rarely lose their licenses, and millions of dollars in fines go uncollected.
About $5.3 million in fines were levied against nursing home operators in 1985, according to a recent state study. But about $2.1 million of that amount was forgiven when operators corrected deficiencies. Of the remainder, only $1.1 million is expected to be collected, according to the study released last May by the Commission on California State Government Organization and Economy, commonly called the Little Hoover Commission.
Stephen Blum, who prepared the report, asserted that such fines are merely a minor nuisance to nursing home operators because they can delay or avoid payment through procedural delays and loopholes in the law.
“It’s like they’re saying, ‘Gee, there’s a lot more mosquitoes buzzing around here. I’ll have to go buy more mosquito remover,’ ” he said.
Beverly Enterprises Inc., the largest nursing home chain in the nation, illustrates how nursing home operators can flourish in California even while accumulating numerous citations for poor patient care.
The company, which received $124 million from Medi-Cal last year, has continued to make money on the vast majority of its approximately 90 nursing homes in California despite widespread and repeated deficiencies in patient care cited by state health inspectors. Even last year--a time of unprecedented nationwide losses for the chain--Beverly Enterprises reported making $10 million in before-tax profits in California.
In 1986--the same year in which Beverly Enterprises was fined a record $724,000 and put on probation in the state for allegedly substandard patient care--the company reported making more than $14 million in before-tax profits from its California operations.
As a condition of its probation, Beverly has been carefully monitored by state health inspectors who last year concluded that the chain, overall, was providing care that was about average in quality. But critics of nursing homes maintain that average care in California is woefully inadequate.
Beverly officials said that a key reason the company’s California homes are profitable is that it has been able to save money on property costs because it has owned many of its facilities for so long that the mortgages are low or paid off.
But critics of California’s nursing home industry argue that the state’s Medi-Cal reimbursement system is another important factor.
65% Paid by Medi-Cal
In California, the bills of 65% of the state’s 100,000 nursing home patients are paid by Medi-Cal.
Medi-Cal is California’s version of Medicaid, the publicly financed health-care program for the poor. Elderly nursing home patients qualify for Medicaid if they are poor or have exhausted their private savings while paying nursing home fees.
A congressional committee reported last year that 70% of elderly people living alone become impoverished by nursing home costs within 13 weeks after entering a facility.
A report released recently by the state auditor general recommended fundamental reforms in California’s Medi-Cal reimbursement system for nursing homes, and stated: “The current system of reimbursement has resulted in the state paying profits to some facilities that spend very little on nursing care for Medi-Cal patients.”
‘Archaic System’
“It’s a very arcane, archaic system,” said Barbara Manard, spokesperson for Lewin and Associates, the private consulting firm that conducted the study. “It totally abrogates the state’s ability to use its buying power to implement state goals of quality care.”
Many states reimburse nursing home operators for the actual cost of caring for patients and require them to pay back any funds not properly spent. But in California, nursing homes are given a flat payment per patient and can legally spend the money however they choose.
The only financial effect on the nursing homes of spending the money on items unrelated to patient care is that state auditors may later subtract such expenditures when calculating the next year’s rate--holding down somewhat the rate for all the homes, but not penalizing the individual home operator who misuses patient care funds.
While this system contains no financial incentive to provide quality care, its does hold down the total cost of the Medi-Cal program.
Opposes ‘Major Changes’
Dr. Kenneth Kizer, director of the state Department of Health Services, has said that he opposes “any major changes” in the manner in which nursing home rates are established, mainly because they would increase administrative costs.
A recent survey by the UC San Francisco Institute for Health and Aging estimated that the Medi-Cal daily rate is about $10 less than the average Medicaid rate nationwide.
The California rate ranges from $47 to $54 per patient, per day, depending on the size and location of a nursing home.
The nursing home industry argues that government reimbursement rates are too low to cover rising labor costs and the expense of treating increasing numbers of patients who are being released by hospitals “quicker and sicker” into nursing homes.
David R. Banks, Beverly Enterprises board president, said that the reimbursement rate in California is so low that those homes heavily dependent upon Medi-Cal financing usually “can’t function (profitably) in a metropolitan area.”
Private-Pay Patients
He said that most nursing homes are subsidized by so-called private-pay patients, who are charged as much as twice the Medi-Cal rate.
While nursing home operators, such as Beverly Enterprises, undoubtedly can realize a higher profit margin on private-pay patients, experts say that about 54% of the nursing homes in California make profits on their Medi-Cal patients. “The (Medi-Cal) system as a whole is providing a net positive margin to the industry,” according to a study completed last year for the state auditor general by the consulting firm of Lewin and Associates.
Consider the financial record of one of Beverly Enterprises’ homes in Los Angeles--Community Convalescent Hospital in Lynwood, where 70% of about 100 patients were on Medi-Cal in 1986.
The latest financial data submitted by Beverly Enterprises to the state show that the home made $241,000 in profits before taxes in 1986--including more than $87,000 from Medi-Cal patients.
During that year, the facility was cited by health inspectors for such violations as not providing “sufficient quantities of diapers, pillows, bed sheets and wash cloths to maintain patient care needs.”
Looked Like ‘Junkyard’
State inspectors reported that the home looked like a “junkyard” last summer. They compiled more than 70 pages of health-care violations, prompting a threat from federal officials to cut off public funding.
Beverly Enterprises Vice President Jack MacDonald acknowledged “significant room for improvement” at the Lynwood nursing home. As in some other Beverly Enterprises facilities, he said that the Lynwood home’s “profits need to be adjusted” so that more money is spent on patient services.
Another Beverly Enterprises home in Canoga Park made even more money--$635,000 in profits before taxes in 1986--mainly because of its high proportion of private-pay patients. Nevertheless, health inspectors have repeatedly cited the home for poor patient care during the last two years, and MacDonald acknowledged that “there’s no excuse for the conditions.”
Every year, an unknown amount of revenue spent by nursing home operators in California goes for purposes unrelated to patient care, according to the Lewin report for the auditor general’s office. The study found that nursing home operators have consistently spent money on a myriad of items ranging from public relations and travel to car telephones and parking tickets.
“You can have a facility that’s been spending money on all kinds of disallowable costs and it gets the same . . . rate as the facility spending its money on good patient care,” said Manard, the Lewin firm consultant.
Auditors Find Fault
In the case of Beverly Enterprises, state auditors reported that the company has repeatedly used patient-care revenue for such non-health-care activities as issuing new stock and buying new nursing homes.
Beverly Enterprises routinely charges each of its nursing homes a portion of what it calls “home office costs.” These costs totaled more than $24 million nationwide in 1985, according to the latest available figures. Government auditors determined that $7 million of these expenditures were unrelated to patient care.
But under California’s Medi-Cal system, there was no punitive action taken against Beverly Enterprises for home office costs not related to patient care incurred by the company’s California nursing homes. Nor can any penalty be assessed against the firm for using hundreds of thousands of dollars in patient-care revenue to further a “sale-lease-back” arrangement that state auditors said is not allowed under federal Medicaid regulations.
As part of that arrangement, Beverly Enterprises officials in 1985 sold three of its facilities in Los Angeles County to a company that Beverly itself had created earlier. Beverly Enterprises then paid out hundreds of thousands of dollars in patient care revenue to lease back the facilities.
Thus, Beverly Enterprises obtained working capital from the sale of the property, but retained control of the facilities through the lease-back.
‘Arms-Length’ Transaction
Beverly officials insisted the sale was an “arms-length” transaction with a company that is completely independent of Beverly Enterprises--although a majority of the new company’s board members either are or have been officers or directors of Beverly Enterprises.
“It’s not an arms-length transaction,” countered Frank Vanacore, state health department audit supervisor. “It’s like selling something to yourself and then establishing a new price to raise your (lease) cost.”
In auditing the 1986 financial reports of the three homes that were sold, state auditors found what they termed unjustified property expenditures arising from the lease-back arrangement totaling more than $500,000.
Nevertheless, under state Medi-Cal rules, Beverly Enterprises will not be required to pay back the lease expenses that were paid out of patient-care revenue.
Medi-Cal officials said it is not their responsibility to assure that public funds are spent in ways that achieve adequate patient care. They said it is the job of health inspectors to assure adequate care by levying fines against substandard nursing homes and seeking revocation of their licenses.
But critics say this enforcement system does not work.
The system has allowed “large numbers of facilities that (have) repeatedly failed to comply” with key standards of care to continue to operate in the state, according to a study last year by the General Accounting Office of Congress.
Enforcement of health-care standards in California nursing homes rests for the most part with the state Department of Health Services licensing and certification division.
At least once a year, state health department inspectors make unannounced visits to the more than 1,000 nursing homes throughout the state to determine whether the facilities meet standards for receiving federal funds. Inspectors from the same agency also are required to visit the homes at least once every two years to determine whether the facilities meet the more-stringent state licensing standards.
A home is required to correct all health-care violations found by inspectors or face loss of federal certification for funding and revocation of its state license.
But while dozens of California homes have been threatened with decertification from the Medi-Cal program, only three were actually decertified last year. The state revoked the licenses of four.
Process Can Take Years
The license-revocation process can take years, state officials said, and the result is the loss of scarce nursing home beds and the transfer of patients to another facility. Reluctant for these reasons to close a facility, inspectors instead rely on a system of citations and fines to try to force substandard homes to make improvements.
A perusal of dozens of state citations shows that a facility found to have been the “direct proximate cause of a patient death” might be fined $15,000 to $25,000. A bed sore that has reached the bone and requires surgery could cost a home $10,000. Rapes have triggered fines of $6,000 or $7,000, and falsification of medical records might bring a fine of $7,000.
Statewide, these fines add up to millions of dollars a year. Some of the penalties for less serious offenses must, by law, be forgiven if the violations are corrected. And the process of collecting the rest of the money can be long and cumbersome.
First, a nursing home operator can administratively appeal a fine and citation within the health department. If the state prevails and the operator still will not pay, the state attorney general’s office must take the matter to court.
The Little Hoover Commission said in its report last year that nursing home owners have nothing to lose in appealing citations and fines because “delays almost always work in their favor.” Furthermore, their attorney fees in these appeals may be charged to Medi-Cal.
‘A Major Threat’
The report concluded that while the number of citations and the amount of fines have risen in the last two years, the amount of money actually collected from citation assessments “is quite low and appears to be dropping.” This poses “a major threat to the enforcement process,” the report concluded.
Critics argue that fines alone--without additional leverage exerted through the Medi-Cal reimbursement system--cannot ensure good quality of patient care in nursing homes.
Kelch of the nonprofit nursing home association asks:
“Why doesn’t the state understand that the left hand that controls the dollars has just as much power to get at quality of care as the right hand out there doing enforcement?”
Other states do use both hands simultaneously.
For example, in Washington state, health officials put a financial squeeze on Beverly Enterprises when the chain was accused last year of operating poor-quality homes in that state.
Used to Flat Rates
“I don’t think they understood how we pay for nursing homes here,” said Mike Wills, who was head of nursing home state licensing in Washington. “They’re used to California and . . . flat rates.”
In Washington, he explained, homes that spend money on items unrelated to health care must pay back the money to the state and, in addition, the amount of such expenditures is deducted from the next year’s rate. Some critics of California’s nursing homes have proposed more-sweeping revisions than simply changing the state’s Medi-Cal reimbursement system.
Patricia McGinnis, executive director of the Bay Area Advocates for Nursing Home Reform, a San Francisco consumer group, called for strengthening the laws that allow poorly operated nursing homes to be taken away from their owners and placed in state receivership.
Ideally, McGinnis said, nursing homes should not be run by companies whose mission is to make a profit. She argued that the homes should instead be operated by community-based, nonprofit organizations.
“Overall,” she said, “quality of care and profits are incompatible. . . . I would venture to say you can’t make the kinds of profits that are going to be attractive to investors (and) still maintain . . . adequate nursing services.”
Different Approaches
Others have advocated different approaches, such as establishing a regulatory body that would control profits reaped by the nursing home industry.
Arthur S. Flemming, secretary of Health, Education and Welfare during the Eisenhower Administration, as well as a former U.S. commissioner on aging, said he would like to see an agency similar to a public utilities commission set up to regulate nursing homes.
“We have to keep moving in the direction of treating the nursing home industry as we do a public utility,” said Flemming, now a leader in national organizations that lobby for the elderly. “In other words, assuring it of a fair return on its investment, but at the same time, (the industry is) going to have to deal with a public body as far as rates are concerned and as far as quality of care is concerned.”
Flemming was nominated by a coalition of labor unions in 1982 to sit as a representative of the public on Beverly Enterprises’ board of directors, but shareholders rejected his nomination.
