The day before Kimberly Holdford left on a camping trip with her husband and twin girls in June of 1997, she stopped by a nursing home to visit her grandmother. It had been a month since Jewel Elizabeth Forester entered the Beverly Health and Rehabilitation Center in Jacksonville, Arkansas, to recover from a bout with the flu that had left her severely dehydrated. She hated the facility. Beverly aides seldom bathed her and often neglected to take her to the bathroom, leaving her caked in dried feces and sobbing in shame. Holdford didn't know what to do; Beverly was the only nearby nursing home with an available bed. "We're understaffed," she recalls an aide telling her. "We don't have enough people to do the job."
At 80, Forester remained feisty and sharp-witted, tackling crossword puzzles and reveling in the afternoon soaps. But on the day before the camping trip, Holdford found her groggy and disoriented. "What's wrong with my grandmother?" she asked the nursing staff. "She won't wake up." Assured that a doctor would be called, Holdford reluctantly left for the weekend.
But no one at Beverly called the doctor. The next day Forester was screaming in pain and moaning in her sleep. Aides tried to calm her down because she was disturbing other patients. On Monday a respiratory therapist found Forester nearly comatose. She was rushed to the hospital, where doctors found three times the maximum therapeutic level of a drug called digoxin in her system. The nursing home had administered an overdose of the drug, even though it had been warned that Forester had trouble tolerating the medication.
"What followed was nine days of the worst deathwatch you ever saw in your life," recalls Robert Holdford, Kimberly's husband. "She was screaming and moaning as her organs shut down from the overdose. She suffered an agonizing death because of Beverly."
Nor was Forester the only patient at the home to suffer from substandard care. With too small a staff to turn and feed them, some residents developed bone-deep wounds; one was hospitalized weighing only eighty-one pounds. Last September a 58-year-old man died after an untrained and unlicensed nurse punctured his stomach lining when she tried to reinsert a feeding tube.
Dan Springer, a vice president at Beverly, calls the facility "an aberration," but the company has acknowledged that things were seriously amiss. "We knew that we had some problems," a top executive told reporters after the home was finally shut down by the state. "It was horrible."
Such horror stories involving nursing homes have become almost commonplace. For three decades, federal and state investigations have repeatedly documented widespread understaffing, misuse of medication and restraints, even physical attacks on patients. Yet thousands of vulnerable citizens remain confined in depressing, debilitating--and often deadly--institutions like the one in Jacksonville. Last summer, a federal study found that nearly one-third of all nursing homes in California had been cited for violations that caused death or life-threatening harm to patients. Federal officials charged with policing dangerous homes "generally took a lenient stance," William Scanlon, director of health financing and systems issues for the US General Accounting Office (GAO), testified before a Senate panel in July. "Homes can repeatedly harm residents without facing sanctions."
Federal officials are promising to subject nursing homes to closer scrutiny in the coming months. President Clinton has ordered a crackdown on repeat offenders, the Justice Department is investigating charges of fraud and abuse, and Congress is poised to reshape Medicare and other programs that pay for long-term care. Yet such efforts focus more on cutting costs than improving care; they fail to recognize that standards remain lax and reforms fall short because of the very nature of nursing homes. Facilities that care for nearly 2 million elderly and disabled residents form a lucrative private industry that profits directly from pain--while taxpayers foot the bill. Nursing homes ring up $87 billion of business each year, and more than 75 cents of every dollar comes from public funds through Medicaid and Medicare. The less of that money homes spend on care, the more they pocket for themselves and their shareholders. To insure those profits, nursing homes are careful not to skimp when it comes to investing in politics: The industry gives millions in contributions to state and federal officials, insuring weak public oversight.
At a time when Republicans and Democrats alike are clamoring to let big business run everything from prisons to schools, nursing homes represent the nation's longest-running experiment in privatization--one that, after half a century, offers a graphic portrayal of what happens when private interests are permitted to monopolize public services [see sidebar ]. While the industry is currently struggling to adjust to new limits on Medicare spending, nursing homes still rely on a generous flow of public subsidies. Leading the for-profit field is Beverly Enterprises, which controls more nursing-home beds than any other firm in the nation. Founded in 1963 as privatization accelerated, the company now owns 561 homes like the one in Jacksonville, which is located just a few hours down the road from its corporate headquarters in Ft. Smith, Arkansas. Although Beverly posted a loss last year, it remains an industry giant. In 1997 the company enjoyed after-tax profits of $58.5 million on revenues of $3.2 billion.
The money did little to help elderly residents like Jewel Forester. "I trusted them not to let her come to harm," says Kimberly Holdford, looking at a photo of her grandmother. "Instead, this sweet little old woman who loved me all my life suffered a brutal death. Somebody has got to stop these big corporations from hurting our old people. They're supposed to be in the healthcare business, not the money-making business. All they care about is keeping profits up."
From colonial times, caring for the elderly poor has been a responsibility of government. At first, officials tried not only to pass the buck but to make a few as well. Until the 1820s villages and cities confronted with growing numbers of impoverished citizens routinely auctioned them off to families who provided squalid accommodations in return for grueling work. An observer at one Saturday-night auction at a village tavern noted that citizens "could speculate upon the bodily vigor and the probable capacity for hard labor of a half-witted boy, a forlorn-looking widow, or a halt and tottering old man." But as abuses--and profits--mounted, cities and counties began to operate their own poorhouses for the sick and aged. The expression "over the hill" comes from an 1871 ballad that depicts the plight of an old woman cast out by her children to live in a government-run workhouse.
As industrial mechanization eliminated jobs after World War I, the public began to protest overcrowding and illness in county poorhouses. Reformers often seemed less concerned about aiding the poor, however, than about keeping them away from the well-to-do. "Worthy people are thrown together with moral derelicts, with dope addicts, with prostitutes, bums, drunks--with whatever dregs of society happen to need the institution's shelter at the moment," the New York Commission on Old Age Security complained in a 1930 report. "People of culture and refinement," the commission noted, were forced to share services "with the crude and ignorant and feebleminded."
Spurred by scandals over conditions in public poorhouses, federal lawmakers decided to hand the elderly over to private industry. In 1935 Congress specifically framed the Social Security Act to prohibit cash payments to any "inmate of a public institution." Those over 65 received small monthly pensions, but none of the money could go to government-run homes for the aged. The massive transfer of tax dollars to private business fueled the creation of for-profit homes. Almost overnight, operators set up facilities to exploit pensioners. Sometimes little changed but the name. In Minnesota, private owners removed a large sign identifying the "Dodge County Poor Farm," replacing it with one reading "Fairview Rest Home." The federal government soon began making direct payments to private nursing homes and providing low-interest loans for construction, insuring the fledgling industry a handsome profit. "So rapidly has the nursing home developed during the past 20 years," two observers noted in 1955, "that its history seems more like an eruption than an evolutionary development."
The eruption became volcanic in 1965, when Congress created Medicaid to assist the elderly poor and Medicare to provide health insurance for the aged. The two programs provided a huge infusion of public money into private nursing homes, with few strings attached. Most states limited the number of homes, thus insuring a supply of patients to fill the beds. They also reimbursed homes for all expenses, from mortgage and depreciation on the building to the staff and supplies inside--in essence, giving owners a blank check that virtually guaranteed them a healthy profit on their investment. Before long, global corporations like ITT rushed to cash in on the industry. With backing from Wall Street, the number of homes soared from 13,000 in 1967 to more than 23,000 in 1969.
"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.
"They're short-staffing," says an aide at a Beverly home in Center Point, Alabama. "If you have twenty residents, it means you can't spend as much time with them as you should. You don't give residents the kind of care they deserve."
In nursing homes, skimping on labor costs can be lethal. In Minnesota, investigators found that at least eight residents at Beverly homes died after receiving inadequate care and supervision between 1986 and 1988. Myrtle Schneuer, 83, choked to death after a nurse's aide gave her bacon and toast, despite a doctor's order to feed her only soft food because she had difficulty swallowing. Lucy Gralish, 79, suffered for three hours after a heart attack before the home called a doctor. Joy Scales, 65, died of a skull fracture after an aide left her unattended on the toilet, contrary to her doctor's orders. "So much of this goes right back to the question of staffing and corner-cutting," James Varpness, the Minnesota ombudsman for older residents at the time, told reporters. "Why are people being left unattended on toilets so that they fall off and fracture their skull? It's because the nursing staff has too much to do and something else that needs to get done."
In many homes there are still too few aides to do the job. In 1993 two dozen employees at a Beverly home in Yreka, California, signed a letter to David Banks, warning him that staffing was dangerously low. "We are jeopardizing the safety of our residents as well as our own," the employees wrote. "It is a matter of time before a tragedy occurs that may have been preventable." They were right. In 1995 a suit was filed alleging that Reba Gregory, a 69-year-old resident, had been dropped by a nursing aide who was trying to move her from her bed without assistance, fracturing her right hip and shoulder. Last March a jury awarded Gregory a record $95.1 million--later reduced by a judge to $3 million--after evidence showed that time sheets the company originally claimed were destroyed had in fact been doctored to reflect nonexistent staffing.
Beverly has also repeatedly broken the law to prevent its 65,000 employees from joining a union to improve staffing and conditions. Last August the National Labor Relations Board issued an unusual corporationwide "cease and desist" order against the company for 240 violations of labor laws in eighteen states, including threats, coercion and surveillance of employees. A study of federal contractors by the GAO ranked Beverly among the fifteen worst violators of federal labor laws.
Beverly and others in the industry complain that Medicaid rates are simply too low to pay for decent staffing and adequate care. In Arkansas, where Beverly owns one of every six nursing-home beds, Medicaid reimburses the industry an average of $63.99 a day for each resident--only two-thirds the national average. But the low rates don't stop companies like Beverly from enjoying big profits. According to the latest available figures, Arkansas nursing homes rank second to last in the nation in median spending on direct care for patients and dead last in staffing levels. Such miserliness enables them to post the eighth-highest profit margin nationwide--nearly double the US average. Seven of the twenty most profitable homes in the state belong to Beverly.
Even when the company claims a loss, it still finds ways to make money. The home in Jacksonville, where Jewel Forester died of an overdose, reported a loss of $859,000 for fiscal 1998, which ended last June. But cost reports filed with the state show that the "loss" included nearly $309,000 in "management fees and home office costs" that the home passed along to corporate headquarters. According to proxy statements, David Banks and two other Beverly executives topped $1 million in compensation for 1997.
When it comes to compensating nurse's aides, however, Beverly and other chains plead poverty. In Arkansas, where nursing homes pay half of their 25,000 employees only $5.15 an hour, the industry didn't want to use any of its profits to raise the minimum wage as mandated by Congress. So during the closing days of the 1997 state legislative session, lobbyists snuck an amendment into the budget requiring taxpayers to reimburse nursing homes for any increase in the minimum wage. Republican Governor Mike Huckabee vetoed the bill, but lawmakers easily overrode him. The measure could end up costing taxpayers more than $17 million.
Privatized nursing homes have other, less direct ways of raiding the public treasury. Until recently, the big money for conglomerates like Beverly has been in what are considered ancillary services--drugs, diapers, ventilators, speech therapy and other supplies and care that nursing-home patients often need. Medicare billings for physical and occupational therapy, for example, rose to $7 billion in 1996--double the 1993 rate and six times the 1990 rate. Such hefty reimbursements gave Beverly and other companies an incentive to create subsidiary firms to supply ancillary services to their own nursing homes. That way, they could bill taxpayers for the retail prices they pay their subsidiaries, rather than the lower costs the companies actually incur.
"These services typically are provided by outside contractors or through wholly-owned subsidiaries of nursing home companies that focused on maximizing revenues, not pursuing cost-effective care," Beverly notes in its latest annual report. Although the company says a new Medicare plan that caps some payments has prompted it to hire its own staff therapists, it acknowledges in the report that "there has been little incentive to reduce costs or pursue operating efficiencies, even though the result is higher costs for the federal government and other payors."
"Higher costs" for taxpayers means "higher profits" for Beverly. An internal company report on rehabilitative therapy shows the company has made much larger returns on ancillary services than cost reports for individual nursing homes indicate. In the first eleven months of 1994, according to the report, Beverly made revenues of $671 million on rehabilitative therapy--yet the services cost the company only $360 million. That's an annual return of 46 percent on revenues. In 1994 Beverly cleared more than $1 million on therapy every day--and almost all of it came from taxpayers.
"It's big money, and it's hidden money," says Elma Holder, founder of the National Citizens Coalition for Nursing Home Reform. "They have a set of books that show they're losing money on one side, and yet they're making money hand over fist on the other side."
Other internal documents show similar profit rates, even in homes where Beverly claims it has been unable to make money. In Texas, for example, the chain paid $100,000 to settle claims at a home where a resident's sore foot had been ignored for forty-three days until it rotted off her leg. In another case a judge awarded $55 million to the estate of a woman who died in 1994 from an infection caused by bedsores, including a bone-deep wound the size of a grapefruit at her tailbone. In 1997, calling the regulatory environment in Texas "punitive," Beverly sold its forty-nine nursing homes in that state to a company called Complete Care Services for $143 million in cash. But what Beverly claimed was a dry well looked more like a gusher to the new owners. According to internal documents, one investor who contributed $6 million expected to make $3.5 million in cash, management fees and interest in the first year--an immediate return of nearly 58 percent.
Nursing homes can enjoy even higher returns, of course, if they simply provide no services at all in return for government subsidies. A 1996 report by the GAO on Medicare payments to nursing homes found that "fraud and abusive billing practices are frequent and widespread." The federal government, the report added, allows homes to bill Medicare without confirming that "the care or items were necessary or were delivered as claimed. As a result, the program is highly vulnerable to exploitation."
A recent government audit showed that nursing homes billed Medicare for more than $3 billion in improper claims in 1996 and 1997. Another report estimated that taxpayers may be losing 11 cents of every Medicare dollar to fraud. In one case a Georgia company was certified to bill the insurance program for therapy services even though it had no salaried therapists. A clerical employee in a storefront office simply served as a shell company that subcontracted with two uncertified providers, adding a markup of 80 percent on every bill. Another company was a "paper organization" with no staff at all, enabling its "owner" to add $170,000 in administrative costs to Medicare bills over a six-month period.
Last July Beverly announced that the Justice Department had launched an investigation into whether the company improperly billed Medicare for labor costs between 1990 and 1997. Two former Beverly employees have been called before a California grand jury, and Blue Cross of California is also reviewing its dealings with the company. Investors reacted angrily to the news. In October Beverly shareholders filed a class-action suit alleging that the company "engaged in a scheme to inflate billings to Medicare" by shifting labor costs at homes that weren't Medicare-certified to those that were.
Beverly says it is cooperating with investigators, but the company is quick to knock the government for its approach to inspections. "We believe the system that regulates nursing homes is punitive, subjective and inequitable," says vice-president Dan Springer. "Rather than the government finding problems, fining facilities and upsetting the lives of good people, why not flip the tables and work in partnership?" He adds that Beverly has devised a "report card" to evaluate its own operations. "There is no arguing that there are places where care needs to be improved. But there are instances where the process as it's implemented today doesn't recognize the positive things that go on in nursing homes."
It's no secret why companies like Beverly see "positive things" in nursing homes: With the number of elderly Americans requiring long-term care projected to reach 14 million by the year 2020, the industry is virtually guranteed a profitable future. As with other public services that have been privatized, however, the question is: What is a reasonable profit, and how can taxpayers insure they're getting their money's worth? Congress has responded to the soaring costs of nursing homes by moving Medicare and other federal programs into managed care, which caps costs at set levels. But lowering costs doesn't automatically improve the quality of care. A new reimbursement plan that took effect on January 1 gives nursing homes a fixed amount for services, then allows them to spend the money however they see fit. "The less you spend, the more you make," says Elma Holder of the Citizens Coalition.
For its part, the industry knows how to use its political and financial clout to block any meaningful reform. In 1978, on a trip to Arkansas to testify about nursing-home abuses, Holder found herself being driven to the airport by an ambitious attorney general named Bill Clinton. "I remember him saying he would never take any money from corporations that ran nursing homes," she recalls. "I was quite impressed with this man, of course, that he would say that." In 1996 Clinton raised $1.1 million from nursing-home owners, including several who attended breakfasts at the White House. The following year, at the President's recommendation, Democrats named Alan Solomont, a Massachusetts nursing-home magnate who lobbied for weaker federal enforcement, the party's new finance chairman.
Beverly has contributed more than $100,000 to federal candidates and their parties since 1995, and its board of directors enjoys high-powered contacts on both sides of the aisle. Republicans on the board include Edith Holiday, the White House Cabinet liaison during the Bush Administration, and Carolyne Davis, who served under President Reagan as administrator of the Health Care Financing Administration, the federal agency responsible for overseeing nursing homes. Democrats include Beryl Anthony, a former US representative and chair of the Democratic Congressional Campaign Committee. The industry also uses its influence to block reforms at the state level. In Beverly's home state of Arkansas an analysis of campaign contributions shows that nursing homes were the second-largest donor to state legislative candidates in 1994.
Given the political clout of companies like Beverly, it's hard to imagine lawmakers getting behind the reform proposals advocated for years by patients and their families. But with the cost of long-term care skyrocketing, some officials are starting to listen. Advocates say more money should be directed at keeping people out of nursing homes--by providing adult daycare, home health aides and other community-based programs that keep people healthy and independent. They also point to model facilities, like the nonprofit Hampton Woods in rural North Carolina or the state-run Benton Services Center in Arkansas, that invest in providing top-flight nursing care rather than maximizing profits.
The most promising reform efforts focus on the most direct and effective way to improve care: Require homes that rely on public funds to hire more nurses and aides. Advocates in sixteen states have convinced lawmakers to introduce measures that would raise minimum staffing levels, forcing homes to provide at least four hours of direct care each day. It's a seemingly simple idea, but it strikes at the heart of industry profits. Nursing homes would have to spend tax dollars directly on care rather than funneling money into lucrative sidelines. "It's the most serious issue we face," says Holder of the Citizens Coalition. "Common sense would tell you that you can't achieve good care if you don't have enough staffing, but no one wants to talk about it because of the cost involved."
Despite the cost--and opposition from nursing homes--staffing standards are gaining support from those traditionally supportive of the industry. In Arkansas, lawmakers are expected to vote in the next few weeks on a bill mandating that nursing homes hire more aides--and pay stiff penalties for understaffing. The measure's sponsor is State Senator John Brown, a conservative Republican who generally knocks government regulation in favor of "free enterprise." On a recent sunny afternoon Brown stands in a hallway of the state capitol in Little Rock, at the bottom of a marble staircase leading to the governor's office, and caucuses with patient advocates about how to pay for the increased staffing.
"We have to talk about where the money's going to come from," Brown says.
"How about profits?" suggests Virginia Vollmer, a member of Arkansas Advocates for Nursing Home Residents.
Brown surprises her by nodding in agreement. "But we've got to look behind their published numbers," he says. "Whether it's the way they report expenses or amortize interest, there are different accounting ploys that homes can use to make money. By and large they have a pretty good return. We're paying them hundreds of millions of dollars, but in too many cases they're endangering people rather than caring for them."
The advocates are encouraged, but they remain skeptical. "I don't know that any of the increased staffing will come out of the industry's pockets," says Jim Porter, whose mother died in a Beverly home in Little Rock last November. "It will probably all come out of the taxpayer's pocket. That's the shame of it." Like Senator Brown, Porter is hardly an antibusiness activist. The chairman of the Arkansas Entertainer's Hall of Fame and a Beverly investor, Porter called CEO David Banks personally after witnessing the inadequate care at his mother's nursing home. "I told him they weren't paying the salary they need to get and keep the help they need," Porter recalls. "He said he knew they were having problems and he'd get things in order. But he didn't."
Porter has a simple explanation for why care at Beverly and other nursing homes remains substandard. "Greed," he says. "They don't want to pay these nurse's aides more because it would be money out of their profits. It's as simple as that." He also has a simple idea of how to improve care: Return nursing homes to public control. Given the history of abuses at county homes and the current political climate, it's not a proposal that's likely to gain much ground. But it does suggest the depth of frustration with a privatized system that profits from pain--and the importance of remembering who ultimately pays the price.
"Perhaps nursing homes should be taken over by the state, county or city," Porter says. "Each one of them could be run for less by the government, because there wouldn't be an owner sitting there siphoning off hundreds of thousands of dollars. Imagine what kind of care we could provide with all those profits.