This story is part of a series by MinnPost reporter Matthew Blake on Minnesota efforts to stabilize its nursing home workforce, which has long struggled with high turnover. Part one looks at the state’s plan and the pushback to it from nursing home operators. Part two looks at the exhausting work performed by nursing home employees, and part four explores the revival of workforce standards boards.
In January, the state of Minnesota will roll out an ambitious and controversial new law that will require nursing homes to pay a $19 minimum wage to all its workers, and wage floors between $23-$27 for employees with nursing certifications.
Republicans, and many nursing home operators, say that even with $36 million to comply with the new law, nursing homes are hemorrhaging money to the point that they are on the brink of closing.
“Nursing homes are already a very challenging industry to be in,” said state Rep. Dave Baker, R-Willmar during a combative House floor debate in May.
However, there is a significant gap in whether we know Minnesota nursing homes lose money, a shortcoming acknowledged by nursing homes’ state regulator, the Department of Human Services.
Moving money from left pocket to their right
Last year, Ashvin Gandhi, an assistant professor at UCLA’s Anderson School of Management, and Andrew Olenski, an assistant professor of economics at Lehigh, published a national study on nursing home finances.
What they found was rampant financial manipulation in which nursing home operators marked as an expense money they were basically paying to themselves.
“Providers essentially move money from their left pocket to their right and show their left pocket to the regulator and say, ‘Hey, look my pocket’s empty,’” Olenski said on the Lehigh School of Business’s Illuminate Podcast.
Gandhi and Olenski pored into the cost reports that nursing homes in Illinois send to the federal Centers for Medicare and Medicaid Services (CMS), which determines how much nursing homes are reimbursed for Medicare patient care. They also looked at cost reports that the same nursing homes transmitted to the Illinois Department of Human Services, which sets payment rates for patients using Medicaid.
Think of cost reports as like a publicly traded company’s quarterly earnings report, except the opposite. At Target or U.S. Bancorp, company executives are incented to put their finances in the rosiest light possible to stoke shareholder interest. But nursing homes are wont to portray themselves as struggling in order to get more government money.
In that spirit, Gandhi and Olenski found that Illinois nursing homes’ regulatory filings were rife “with related-party payments” or “tunneling” that misleadingly added expenses and hid a shocking 68% of company profits from federal and state regulators.
An example of these related-party payments: A nursing home seeks management services and so pays a contractor who provides administrative personnel.
In their cost report, they list payments to the contractor as an expense that CMS or state DHS will incorporate in determining their reimbursement rate. But what the facility does not disclose is that they partly or wholly own the contractor, meaning the money goes right back to them.
Some of these machinations were even less subtle. Gandhi found that “in some cases, related party costs include salaries paid to owners and their family members.”
Following the paper and similar studies on related-party payments, the U.S. Department of Health and Human Services’ Office of Inspector General launched an investigation that concluded with a report released in December.
In an examination of 14 nursing facilities’ cost reports, the Inspector General found that 10 either did not properly disclose an expense the generated revenue for a related party, or paid more to a related party than fair value. The audit implored CMS to expand its “desk reviews and audit processes to include reviews of the reporting and disclosure of related-party costs.”
But federal regulators responded that they would not take this step.
“In a time of limited resources, CMS does not concur with this recommendation,” wrote Biden administration CMS administrator Chiquita Brooks-LaSure.
But Minnesota is a shining example of nursing home care. Does this ‘tunneling’ really happen here?
Minnesota nursing homes likely do not deploy related-party schemes to the volume of facilities in Illinois and elsewhere. For one, the Gopher State is unusual in that the vast majority of its facilities are run by nonprofits.
Nonprofits must file a form 990 to the Internal Revenue Service, a report that includes revenues and expenses that eventually becomes publicly available.
“Nonprofits could have greater organizational difficulty establishing related parties that they could tunnel toward in part because the reporting requirements are greater,” Gandhi said, adding that, “additional benefits for tunneling are lowered because their profit margins cannot be large.”
Kelly Asche, senior researcher at the Center for Rural Policy and Development, said that related-party deals in Minnesota do not carry a heavy air of deception.
“People want to blame the facility operators, but most of them are nonprofit and nobody is making much at all,” Asche said. “Providers are just trying to diversify their portfolio.”
Also, a key culprit of related-party payments uncovered by Gandhi, Olenski and other researchers are lease buybacks.
Here, nursing home owners sell their property to a company they are invested in, pay that company rent, and then list the rent as an expense. However, “Unlike many other states, the Minnesota Medicaid program does not reimburse nursing homes based on the current or recent cost of their lease,” according to a DHS spokesperson.
But tunneling is still happening in Minnesota, and no one has a clue about its extent.
In May, DHS published a report prepared by consulting firm Myers and Stauffer that analyzed Medicaid reimbursement rates for nursing facilities. The firm discovered that “neither the quantity of related-party transactions nor the name of the related party are captured in the current version of the Minnesota Medicaid cost report database.”
“The report is saying that we know very little about related-party expenses, which is not great,” Gandhi said.
An agency spokesperson said over email that DHS is working to add a self-reporting requirement on related-party deals. Asked if the agency ever audited the extent of such deals, the spokesperson said, “DHS has not conducted this specific analysis.”
The DHS report concluded that the present reimbursement rate, which pencils out to $373 per Medicaid resident day, is sufficient. However, the report also found that, thanks in part to rate equalization, all payer revenue, which includes Medicare, Medicaid and private patients, generated $97 dollars to every $100 of expenses.
This creates a dilemma. If nursing homes are not participating in a significant number of related-party deals and generate all their revenue from patient care, then Republicans are correct: Nursing homes are losing money.
“They are mandating the wage increase without a similar rise in the reimbursement rate,” said state Rep. Natalie Zeleznikar, R-Fredenburg Township and a former nursing home administrator.
But if there are rampant tunneling deals, state and federal taxpayers are maybe forking over a higher-than-necessary Medicaid rate to financially comfortable nursing facilities.
A DHS spokesperson said in an email that its auditing of nursing homes is limited. The department does not have enough data or resources to identify which ones are profitable, to what extent they make money, or how much related-party transactions play a role.
“DHS does not know the extent to which nursing homes in Minnesota may be losing money,” the spokesperson stated.
Nursing home lobbyists point out there is a state law that says costs paid to a related party “do not exceed the price of comparable services… that could be purchased elsewhere.” In other words, a facility cannot pay an exorbitant price for pharmacy services to a pharmacist they are invested in. But, again, DHS does not regularly audit whether facilities pay fair value for services.
The most compelling evidence a wave of nursing homes will not soon close is the Minnesota Nursing Home Workforce Standards Board’s own waiver program, which enables a facility to not follow the board’s paid holiday or minimum wage rules if they demonstrate financial hardship.
With limited state information, an alternative source is form 990s, the 2024 versions of which will become publicly available later this year. The 2023 editions show nonprofits including Cassia, Benedictine and Presbyterian are in the black, while Good Samaritan is slightly in the red.
Of the 329 nursing homes in the state that accept Medicaid patients, exactly one, Lake Winona Manor, applied for this waiver. The facility presented various financial information to DHS including that they made $73 million in revenue through the first four months of April, but paid $77 million in expenses. Lake Winona Manor also said that they posted an operating loss of $12 million in 2024, and $17 million in 2023.
And, despite being owned by a nonprofit, Winona Health Services, that runs an acute care hospital and pharmacy among other enterprises, Lake Winona Manor attested that they have no related-party transactions. The board voted to grant the waiver.
