More Profit and Less Nursing at Many
By CHARLES DUHIGG
Published: September 23, 2007
Habana Health Care Center, a 150-bed nursing home in
Tampa, Fla., was struggling when a group of large
private investment firms purchased it and 48 other
nursing homes in 2002.
The facility’s managers quickly cut costs. Within
months, the number of clinical registered nurses at
the home was half what it had been a year earlier,
records collected by the Centers for Medicare and
Medicaid Services indicate. Budgets for nursing
supplies, resident activities and other services
also fell, according to Florida’s Agency for Health
The investors and operators were soon earning
millions of dollars a year from their 49 homes.
Residents fared less well. Over three years, 15 at
Habana died from what their families contend was
negligent care in lawsuits filed in state court.
Regulators repeatedly warned the home that staff
levels were below mandatory minimums. When
regulators visited, they found malfunctioning fire
doors, unhygienic kitchens and a resident using a
leg brace that was broken.
“They’ve created a hellhole,” said Vivian Hewitt,
who sued Habana in 2004 when her mother died after a
large bedsore became infected by feces.
Habana is one of thousands of nursing homes across
the nation that large Wall Street investment
companies have bought or agreed to acquire in recent
Those investors include prominent private equity
firms like Warburg Pincus and the Carlyle Group,
better known for buying companies like Dunkin’
As such investors have acquired nursing homes, they
have often reduced costs, increased profits and
quickly resold facilities for significant gains.
But by many regulatory benchmarks, residents at
those nursing homes are worse off, on average, than
they were under previous owners, according to an
analysis by The New York Times of data collected by
government agencies from 2000 to 2006.
The Times analysis shows that, as at Habana,
managers at many other nursing homes acquired by
large private investors have cut expenses and staff,
sometimes below minimum legal requirements.
Regulators say residents at these homes have
suffered. At facilities owned by private investment
firms, residents on average have fared more poorly
than occupants of other homes in common problems
like depression, loss of mobility and loss of
ability to dress and bathe themselves, according to
data collected by the Centers for Medicare and
The typical nursing home acquired by a large
investment company before 2006 scored worse than
national rates in 12 of 14 indicators that
regulators use to track ailments of long-term
residents. Those ailments include bedsores and
easily preventable infections, as well as the need
to be restrained. Before they were acquired by
private investors, many of those homes scored at or
above national averages in similar measurements.
In the past, residents’ families often responded to
such declines in care by suing, and regulators
levied heavy fines against nursing home chains where
understaffing led to lapses in care.
But private investment companies have made it very
difficult for plaintiffs to succeed in court and for
regulators to levy
chainwide fines by creating complex corporate
structures that obscure who controls their nursing
By contrast, publicly owned nursing home chains are
essentially required to disclose who controls their
facilities in securities filings and other
The Byzantine structures established at homes owned
by private investment firms also make it harder for
regulators to know if one company is responsible for
multiple centers. And the structures help managers
bypass rules that require them to report when they,
in effect, pay themselves from programs like
Medicare and Medicaid.
Investors in these homes say such structures are
common in other businesses and have helped them
revive an industry that was on the brink of
“Lawyers were convincing nursing home residents to
sue over almost anything,” said Arnold M. Whitman, a
principal with the fund that bought Habana in 2002,
Formation Properties I.
Homes were closing because of ballooning litigation
costs, he said. So investors like Mr. Whitman
created corporate structures that insulated them
from costly lawsuits, according to his company.
“We should be recognized for supporting this
industry when almost everyone else was running
away,” Mr. Whitman said in an interview.
Some families of residents say those structures
unjustly protect investors who profit while care
When Mrs. Hewitt sued Habana over her mother’s
death, for example, she found that its owners and
managers had spread control of Habana among 15
companies and five layers of firms.
As a result, Mrs. Hewitt’s lawyer, like many others
confronting privately owned homes, has been unable
to establish definitively who was responsible for
her mother’s care.
Current staff members at Habana declined to comment.
Formation Properties I said it owned only Habana’s
real estate and leased it to an independent company,
and thus bore no responsibility for resident care.
That independent company — Florida Health Care
Properties, which eventually became Epsilon Health
Care Properties and subleased the home’s operation
to Tampa Health Care Associates — is affiliated with
Warburg Pincus, one of the world’s largest private
equity firms. Warburg Pincus, Florida Health Care,
Epsilon and Tampa Health Care all declined to
Demand for Nursing Homes
The graying of America has presented financial
opportunities for all kinds of businesses. Nursing
homes, which received more than $75 billion last
year from taxpayer programs like Medicare and
Medicaid, offer some of the biggest rewards.
“There’s essentially unlimited consumer demand as
the baby boomers age,” said Ronald E. Silva,
president and chief executive of Fillmore Capital
Partners, which paid $1.8 billion last year to buy
one of the nation’s largest nursing home chains.
“I’ve never seen a surer bet.”
For years, investors shunned nursing home companies
as the industry was battered by bankruptcies,
expensive lawsuits and regulatory investigations.
But in recent years, large private investment groups
have agreed to buy 6 of the nation’s 10 largest
nursing home chains, containing over 141,000 beds,
or 9 percent of the nation’s total. Private
investment groups own at least another 60,000 beds
at smaller chains and are expected to acquire many
more companies as firms come under shareholder
pressure to sell.
The typical large chain owned by an investment
company in 2005 earned $1,700 a resident, according
to reports filed by the facilities. Those homes, on
average, were 41 percent more profitable than the
But, as in the case of Habana, cutting costs has
become an issue at homes owned by large investment
“The first thing owners do is lay off nurses and
other staff that are essential to keeping patients
safe,” said Charlene Harrington, a professor at the
University of California in San Francisco who
studies nursing homes. In her opinion, she added,
“chains have made a lot of money by cutting nurses,
but it’s at the cost of human lives.”
The Times’s analysis of records collected by the
Centers for Medicare and Medicaid Services reveals
that at 60 percent of homes bought by large private
equity groups from 2000 to 2006, managers have cut
the number of clinical registered nurses, sometimes
far below levels required by law. (At 19 percent of
those homes, staffing has remained relatively
constant, though often below national averages. At
21 percent, staffing rose significantly, though even
those homes were typically below national averages.)
During that period, staffing at many of the nation’s
other homes has fallen much less or grown.
Nurses are often residents’ primary medical
providers. In 2002, the Department of Health and
Human Services said most nursing home residents
needed at least 1.3 hours of care a day from a
registered or licensed practical nurse. The average
home was close to meeting that standard last year,
according to data.
But homes owned by large investment companies
typically provided only one hour of care a day,
according to The Times’s analysis of records
collected by the Centers for Medicare and Medicaid
For the most highly trained nurses, staffing was
particularly low: Homes owned by large private
investment firms provided one clinical registered
nurse for every 20 residents, 35 percent below the
national average, the analysis showed.
Regulators with state and federal health care
agencies have cited those staffing deficiencies
alongside some cases where residents died from
accidental suffocations, injuries or other medical
Federal and state regulators also said in interviews
that such cuts help explain why serious
quality-of-care deficiencies — like moldy food and
the restraining of residents for long periods or the
administration of wrong medications — rose at every
large nursing home chain after it was acquired by a
private investment group from 2000 to 2006, even as
citations declined at many other homes and chains.
The typical number of serious health deficiencies
cited by regulators last year was almost 19 percent
higher at homes owned by large investment companies
than the national average, according to analysis of
Centers for Medicare and Medicaid Services records.
(The Times’s analysis of trends did not include
Genesis HealthCare, which was acquired earlier this
year, or HCR Manor
Care, which the Carlyle Group is buying, because
sufficient data were not available.)
Representatives of all the investment groups that
bought nursing home chains since 2000 — Warburg
Pincus, Formation, National Senior Care, Fillmore
Capital Partners and the Carlyle Group — were
offered the data and findings from the Times
analysis. All but one declined to comment.
An executive with a company owned by Fillmore
Capital, which acquired 342 homes last year, said
that because some data regarding the company were
missing or collected before its acquisition, The
Times’s analysis was not a complete portrayal of
current conditions. That executive, Jack MacDonald,
also said that it was too early to evaluate the new
management, that the staff numbers at homes over all
was rising and that quality had improved
by some measures.
“We are focused on becoming a better organization
today than we were 18 months ago,” he said. “We are
confident that we will be an even better
organization in the future.”
A Web of Responsibility
Vivian Hewitt’s mother, Alice Garcia, was 81 and
suffering from Alzheimer’s disease when, in late
2002, she moved into Habana.
“I couldn’t take care of her properly anymore, and
Habana seemed like a really nice place,” Mrs. Hewitt
Earlier that year, Formation bought Habana, 48 other
nursing homes and four assisted living centers from
Beverly Enterprises, one of the nation’s largest
chains, for $165 million.
Formation immediately leased many of the homes,
including Habana, to an affiliate of Warburg Pincus.
That firm spread management of the homes among
dozens of other corporations, according to documents
filed with Florida agencies and depositions from
Each home was operated by a separate company. Other
companies helped choose staff, keep the books and
negotiate for equipment and supplies. Some companies
had no employees or offices, which let executives
file regulatory documents without revealing their
other corporate affiliations.
Habana’s managers increased occupancy, and cut
expenses by laying off about 10 of 30 clinical
administrators and nurses, Medicare filings reveal.
(After regulators complained, some positions were
refilled and other spending increased.) Soon,
Medicare regulators cited Habana for malfunctioning
fire doors and moldy air vents.
Throughout that period, Formation and the Warburg
Pincus affiliate received rent and fees that were
directly tied to Habana’s revenues, interviews and
regulatory filings show. As the home’s fiscal health
improved, those payments grew. In total, they
exceeded $3.5 million by last year. The companies
also profited from the other 48 homes.
Though spending cuts improved the home’s bottom
line, they raised concerns among regulators and
“Those owners wouldn’t let us hire people,” said
Annie Thornton, who became interim director of
nursing around the time Habana was acquired, and who
left about a year later. “We told the higher-ups we
needed more staffing, but they said we should make
Regulators typically visit nursing homes about once
a year. But in the 12 months after Formation’s
acquisition of Habana, they visited an average of
once a month, often in response to residents’
complaints. The home was cited for failing to follow
doctors’ orders, cutting staff below legal minimums,
blocking emergency exits, storing food in unhygienic
areas and other health violations.
Soon after, nursing home inspectors wrote in Centers
for Medicare and Medicaid Services documents that
Habana was at fault when a resident suffocated
because his tracheotomy tube became clogged.
Although he had complained of shortness of breath,
there were no records showing that staff had checked
on him for almost two days.
Those citations never mentioned Formation, Warburg
Pincus or its affiliates. Warburg Pincus and its
affiliates declined to discuss the citations.
Formation said it was merely a landlord.
“Formation Properties owns real estate and leases it
to an unaffiliated third party that obtains a
license to operate it as a
health care facility,” Formation said. “No citation
would mention Formation Properties since it has no
involvement or control over the operations at the
facility or any entity that is involved in such
For Mrs. Hewitt’s mother, problems began within
months of moving in as she suffered repeated falls.
“I would call and call and call them to come to her
room to change her diaper or help me move her, but
they would never come,” Mrs. Hewitt recalled.
Five months later, Mrs. Hewitt discovered that her
mother had a large bedsore on her back that was
oozing pus. Mrs. Garcia was rushed to the hospital.
A physician later said the wound should have been
detected much earlier, according to medical records
submitted as part of a lawsuit Mrs. Hewitt filed in
a Florida Circuit Court.
Three weeks later, Mrs. Garcia died.
“I feel so guilty,” Mrs. Hewitt said. “But there was
no way for me to find out how bad that place really
Death and a Lawsuit
Within a few months, Mrs. Hewitt decided to sue the
“The only way I can send a message is to hit them in
their pocketbook, to make it too expensive to let
people like my mother suffer,” she said.
But when Mrs. Hewitt’s lawyer, Sumeet Kaul, began
investigating Habana’s corporate structure, he
discovered that its complexity meant that even if
she prevailed in court, the investors’ wallets would
likely be out of reach.
Others had tried and failed. In response to dozens
of lawsuits, Formation and affiliates of Warburg
Pincus had successfully argued in court that they
were not nursing home operators, and thus not liable
for deficiencies in care.
Formation said in a statement that it was not
reasonable to hold the company responsible for
residents, “any more, say, than it would be
reasonable for a landlord who owns a building, one
of whose tenants is Starbucks, to be held liable if
a Starbucks customer is scalded by a cup of hot
Formation, Warburg Pincus and its affiliates all
declined to answer questions regarding Mrs. Hewitt’s
Advocates for nursing home reforms say anyone who
profits from a facility should be held accountable
for its care.
“Private equity is buying up this industry and then
hiding the assets,” said Toby S. Edelman, a nursing
home expert with the Center for Medicare Advocacy, a
nonprofit group that counsels people on Medicare.
“And now residents are dying, and there is little
the courts or regulators can do.”
Mrs. Hewitt’s lawyer has spent three years and
$30,000 trying to prove that an affiliate of Warburg
Pincus might be responsible for Mrs. Garcia’s care.
He has not named Formation or Warburg Pincus as
defendants. A judge is expected to rule on some of
his arguments this year.
Complex corporate structures have dissuaded scores
of other lawyers from suing nursing homes.
About 70 percent of lawyers who once sued homes have
stopped because the cases became too expensive or
difficult, estimates Nathan P. Carter, a plaintiffs’
lawyer in Florida.
“In one case, I had to sue 22 different companies,”
he said. “In another, I got a $400,000 verdict and
ended up collecting only $25,000.”
Regulators have also been stymied.
For instance, Florida’s Agency for Health Care
Administration has named Habana and 34 other homes
owned by Formation and operated by affiliates of
Warburg Pincus as among the state’s worst in
categories like “nutrition and hydration,”
“restraints and abuse” and “quality of care.” Those
homes have been individually cited
for violations of safety codes, but there have been
no chainwide investigations or fines, because
regulators were unaware that all the facilities were
owned and operated by a common group, said Molly
McKinstry, bureau chief for long-term-care services
at Florida’s Agency for Health Care Administration.
And even when regulators do issue fines to
investor-owned homes, they have found penalties
difficult to collect.
“These companies leave the nursing home licensee
with no assets, and so there is nothing to take,”
said Scott Johnson, special assistant attorney
general of Mississippi.
Government authorities are also frequently unaware
when nursing homes pay large fees to affiliates.
For example, Habana, operated by a Warburg Pincus
affiliate, paid other Warburg Pincus affiliates an
estimated $558,000 for management advice and other
services last year, according to reports the home
Government programs require nursing homes to reveal
when they pay affiliates so that such disbursements
can be scrutinized to make sure they are not
However, complex corporate structures make such
scrutiny difficult. Regulators did not know that so
many of Habana’s
payments went to companies affiliated with Warburg
“The government tries to make sure homes are paying
a fair market value for things like rent and
consulting and supplies,” said John Villegas-Grubbs,
a Medicaid expert who has developed payment systems
for several states. “But when home owners pay
themselves without revealing it, they can pad their
bills. It’s not feasible to expect regulators to
catch that unless they have transparency on
Formation and Warburg Pincus both declined to
Groups lobbying to increase transparency at nursing
homes say complicated corporate structures should be
outlawed. One idea popular among organizations like
the National Citizens’ Coalition for Nursing Home
Reform is requiring the company that owns a home’s
most valuable assets, its land and building, to
manage it. That would put owners at risk if care
But owners say that tying a home’s property to its
operation would make it impossible to operate in
leased facilities, and exacerbate a growing
nationwide nursing home shortage.
Moreover, investors say, they deserve credit for
rebuilding an industry on the edge of widespread
“Legal and regulatory costs were killing this
industry,” said Mr. Whitman, the Formation
For instance, Beverly Enterprises, which also had a
history of regulatory problems, sold Habana and the
rest of its Florida centers to Formation because, it
said at the time, of rising litigation costs. AON
Risk Consultants, a research company, says the
average cost of nursing home litigation in Florida
during that period had increased 270 percent in five
“Lawyers were suing nursing homes because they knew
the companies were worth billions of dollars, so we
made the companies smaller and poorer, and the
lawsuits have diminished,” Mr. Whitman said. This
year, another fund affiliated with Mr. Whitman and
other investors acquired the nation’s third-largest
nursing home chain, Genesis HealthCare, for $1.5
If investors are barred from setting up complex
structures, “this industry makes no economic sense,”
Mr. Whitman said. “If nursing home owners are forced
to operate at a loss, the entire industry will
However, advocates for nursing home reforms say
investors exaggerate the industry’s precariousness.
Last year, Formation sold Habana and 185 other
facilities to General Electric for $1.4 billion. A
prominent nursing home industry analyst, Steve
Monroe, estimates that Formation’s and its
co-investors’ gains from that sale were more than
$500 million in just four years. Formation declined
to comment on that figure.