The Shame of our Nursing Homes
"That was when nursing homes moved away from mom-and-pop operations to large, for-profit enterprises," says Charles Phillips, director of the Myers Research Institute in Beachwood, Ohio. "They were more interested in real estate transactions than healthcare. They shuffled properties back and forth between subsidiaries, jacking up property costs to increase reimbursement. Our current long-term-care system is fundamentally a creature of government policy. Those real estate ventures became the source of corporate empires."
Today those empires represent a booming business. With the number of elderly citizens needing long-term care expected to double over the next two decades, Wall Street sees a steady stream of customers for nursing homes--with a guaranteed flow of cash consisting almost entirely of public funds. "We believe nursing homes are naturally well positioned to capitalize on this growing opportunity," the investment bank Hambrecht & Quist recently advised investors, predicting that corporate chains would boost profits by laying off staff members, cutting wages and doubling patient loads. With the help of large institutional investors like Goldman Sachs and Lazard Frères, nursing-home chains are also making shareholders happy by swallowing competitors at a record pace. Last year two of the largest chains in the country merged with two fellow giants, creating parent companies with annual revenues of about $3 billion each. Thanks to their big financial backers, seven chains now collect 20 cents of every dollar spent on nursing homes nationwide (see sidebar).
The oldest and largest chain is Beverly Enterprises. Founded by a California accountant at the outset of the federal bonanza, the company quickly earned him $10 million on his initial investment of $5,700. In the seventies, backed by the influential Arkansas brokerage house of Stephens, Inc., Beverly led the industry in a frenzied buying spree, adding nearly 1,000 nursing homes in less than a decade. "No other chain has been able to put together as successful an acquisition formula," reported a study by the Food and Allied Service Trades of the AFL-CIO.
For a time, Beverly found, bigger was better. For five years in the eighties the chain maintained an annual return on equity of 23 percent--the fifth-highest rate of any healthcare company nationwide. But unable to manage its far-flung network of nursing homes, Beverly lost $60 million in 1987 and began selling off facilities to avoid a hostile takeover. "We probably grew too fast," acknowledged David Banks, a former typewriter salesman and Stephens executive who now heads Beverly.
Led by Banks, the company also moved to Arkansas, where it enjoyed legal advice from a young attorney at the Rose Law Firm named Hillary Clinton and political support from her husband, Bill, in the governor's mansion. In one deal that demonstrated the kind of favoritism Beverly enjoyed, a state board approved $81 million in tax-free revenue bonds that would have given the company badly needed cash to pay its debts--without creating a single new job. Clinton, who appears to have originally seen the deal as a way to help woo the company to Arkansas, backed away from it only after Steve Clark, his attorney general, revealed that a lobbyist had offered him $100,000 in campaign gifts if he supported the bond handout. "The only way this proposal can be described," Clark told a meeting of startled officials unused to hearing criticism of Beverly, "is one which is the product of the arrogance of wealth and the arrogance of power." Even Clinton was forced to concede that the deal went too far. "They were trying to milk this bond system," he said.
While Beverly executives and shareholders profited from the company's rapid growth during the eighties, many patients suffered. Across the nation, health officials filed reports on Beverly nursing homes documenting filthy living conditions, infected bedsores and painful deaths. The State of Washington banned the company from opening any new homes because of its poor track record. The chain bowed out of Maine after inspectors there cited it for substandard conditions. A Missouri grand jury investigated reports of Beverly patients with gaping wounds. Texas suspended Medicaid payments to twenty-four of the company's homes because of health hazards. California fined the firm $724,000 and put it on probation after accusing Beverly of contributing to the deaths of nine patients. At one home, inspectors found that ants had swarmed over the body of a woman, entering her respiratory system through a wound in her throat. "Something is very wrong at Beverly Enterprises," a deputy attorney general in California concluded. Beverly considered it business as usual. "We pretty well mirror the industry," said CEO Banks at the time of the California investigation.
Beverly certainly mirrors the industry in the way it cashes in on Medicaid and Medicare. To improve the bottom line, homes have funneled as much money as possible into property, administrative salaries and ancillary services like drugs and physical therapy, while cutting corners on patient care and staff wages. Many facilities have only one registered nurse on duty, relying on skeleton staffs of nurse's aides to provide almost all the hands-on care for dozens of patients. Most earn little more than the minimum wage and receive only seventy-five hours of training for difficult jobs that require them to monitor and feed patients and move frail and disabled residents with little assistance. Annual turnover industrywide is nearly 100 percent.