New Research: The Hidden Profits of Nursing Homes
An NBER working paper (Tunneling and Hidden Profits in Health Care by Ashvin Gandhi & Andrew Olenski) on the nursing home sector reveals extensive profit tunneling, particularly in real estate and management services. This involves nursing homes purchasing services from related entities at inflated prices, effectively transferring profits and concealing the true financial state of these providers.
Why it matters: The government's significant role in health care and other sectors necessitates accurate financial reporting to design effective public policies. However, the practice of "tunneling" — where healthcare providers report inflated costs through transactions with related entities they own — complicates this effort, especially in the nursing home industry. This leads to obscured profits and distorted financial landscapes, affecting policy decisions on reimbursement rates and quality regulations.
How it works: Providers inflate reported costs by engaging in transactions with "related parties," entities that share common ownership with the provider. These inflated costs are then used to justify higher reimbursement rates from government programs and to lobby against costly quality regulations, under the guise of operating at thin margins or a loss.
By the numbers:
Real estate and management services are the primary avenues for related party transactions in the nursing home industry, accounting for significant portions of reported costs.
Studies indicate that adopting related party transactions leads to marked increases in reported costs, with real estate and management services experiencing inflations of 22% and 41.7%, respectively.
The practice is so widespread that, in 2019, an estimated 62.9% of nursing home industry profits were hidden through related party transactions, suggesting a massive underreporting of profitability.
Between the lines: Tunneling extends beyond financial reporting, affecting healthcare policy, reimbursement rates, and quality regulation feasibilities. It also acts as a liability shield, complicating claims against assets held by related entities and raising ethical and regulatory concerns about healthcare provider transparency and accountability.
What they're saying: The study calls for stricter financial reporting and oversight to combat profit tunneling. Extending liability to related parties and their owners could enhance transparency and accountability in the industry.
The bottom line: Widespread profit tunneling through related party transactions in the nursing home industry poses significant financial transparency and regulatory challenges. Addressing this issue is vital for reflecting the industry's financial realities in policies and improving care quality and provider accountability.