Should Nursing Homes Be for Profit?

In late 2007, the investment firm The Carlyle Group purchased one of the country's largest nursing home chains despite the concerns of regulators, lawmakers and workers' groups that the acquisition would lead to staffing cuts and cause a decline in quality of care for residents. The $6.3 billion purchase of Toledo, Ohio-based Manor Care Inc. closed after a Michigan judge lifted a restraining order that temporarily halted the sale.

"The problem is, in the nursing home industry, making money means cutting care," says Julie Eisenhardt, a spokeswoman for Service Employees International Union (SEIU), which represents employees at about 15 Manor Care homes and which spearheaded a campaign to raise awareness about the buyout.

In 2006, Manor Care, which operates more than 500 nursing, rehabilitation and assisted living facilities in 32 states, posted $167 million in profits and $3.6 billion in revenues. Manor Care shareholders were slated to get $67 for each share as part of the deal.

The Carlyle Group has holdings in several industries, including healthcare, defense and energy. Former President George H.W. Bush was one of its advisers until 2003.

Officials from both firms have denied plans to reduce staffing or slash services following the takeover, and have said Manor Care will continue to be run as it was before the buyout. "There's not going to be a cut in staff and there's no reason for quality to go down," says Rick Rump, a spokesman for Manor Care. "Carlyle is going to realize a return in investment by our company growing and becoming a better provider of healthcare."

The deal's critics also say investment companies create Byzantine ownership structures that impede regulation and shield the firms from accountability for negligent care or wrongful death accusations.

Rump says that Carlyle would not separate its assets from its operations as some private equity firms have done and that the Manor Care management team would remain the same.

Carlyle officials did not return calls by deadline, but Karen Bechtel, the company's managing director and global head of healthcare, said in a statement: "We are pleased to back a high-quality company and management team. We support [Manor Care CEO] Paul Ormond's strategic vision and support his commitment to quality patient care."

But a preliminary study of a large nursing home chain owned by a private investment firm found that staffing of registered nursing homes dropped by 8 percent and deficiencies that harmed residents doubled.

"They're not there to invest in the care for the residents, they're there to make money," says Charlene Harrington, a professor of nursing at the University of California, San Francisco, and author of the 18-month study. "The way these chains have made money is by cutting the staff to the bare bones and pocketing the profits."

Harrington, who is part of a team that has researched nursing homes for 25 years, says the privatization of chains allows companies to shirk regulatory scrutiny because they are not required to file financial documents with the Securities and Exchange Commission (SEC) or state regulatory agencies.

"These chains have had so many quality problems that they have wanted to go private in order to keep from having the litigation they have," she said.

A recent New York Times analysis of government data from 2000 to 2006 found that the quality of care declined at nursing homes that were taken over by investment firms such as Warburg Pincus and Carlyle because of cost-cutting and staff reduction.

David Adams, 40, entered one of Manor Care's homes in Pittsburgh, Pa., after he ruptured his Achilles tendon playing basketball. He says the care at the Shadyside Nursing and Rehabilitation Center was substandard before the takeover, and he's concerned it will only get worse.

"They're coming up short -- they do the minimum they can get away with and no more," says Adams, a former construction worker and cook, who testified during state hearings in Pennsylvania on the buyout. Adams says he contracted infections because his bandages weren't changed regularly, received the wrong medication and was stranded for 45 minutes after falling in his bathroom.

"One day I will leave," he says, "but there are people that are going to die here."

The Carlyle Group's buyout was announced last summer and given the green light by the SEC. Shareholders approved the deal in a December 2007 meeting. After the sale, several state health departments, including those in Illinois and Michigan, still had to approve the transfer of licenses from Manor Care to Carlyle, but Manor Care's Rump says he expected the transfers to be granted.

In November, legislators in Washington, D.C., held hearings on the issue of care at facilities owned by private investment firms, and hearings took place in several states.

In West Virginia, regulators reconsidered their initial approval of a deal just days before the completion of the sale. But after a Dec. 14 hearing, the state Health Care Authority lifted a stay on the approval, which would affect seven West Virginia nursing facilities. Manor Care had protested the stay, saying the delay was costing investors $1 million per day.

In Illinois, legislators and union leaders voiced concern about the deal.

"I think the size of the transaction, the nature of the business of the proposed buyer and the effects that could be felt by our most frail and vulnerable populations require us to give the proposal extra scrutiny," said State Rep. Greg Harris (D-Chicago) at a December hearing before the Illinois Department of Public Health, which regulates the state's nursing facilities.

In December, financial news service Bloomberg reported that the Manor Care purchase was the eighteenth sale of a nursing home operator in the United States in four years. Experts say investment firms' interest in nursing facilities is partially an effort to cash in on the aging of baby boomers into the system.

"As boomers get older, taking care of them is going to be big business," says Eisenhardt of SEIU. "The question is: Do we as a society think it's right that people are trying to make money off taking care of our most vulnerable population?"

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