Michael Loucks

[Editor’s Note: The first footnote offers the bio of author Michael K. Loucks1.]

For many of us, some form of organized living arrangement—a nursing home or an assisted living facility (ALF)—is in our future. While few of us will want to spend anytime in a nursing home, many of us may choose to live in an assisted living facility. Both sectors will be under substantial demographic, regulatory and enforcement pressure over the next decade. As the baby boomers age, each sector will experience dramatic growth.

Complying with new requirements imposed by the Patient Protection and Affordable Care Act will substantially raise the cost structure for all nursing homes. Such  escalation cannot be far behind for ALFs. With the new growth and rules will come new “legal enforcement.”  Some will involve federal and state regulators and prosecutors poking through the operations of these facilities; and some enforcement will include increasingly aggressive plaintiffs’ and whistleblower bars. 

How will these sectors change? The slide to extinction for small independently run nursing homes will quicken; the disappearance of the small assisted living facility provider won’t be far behind.  To achieve compliance program economies of scale, small operators will be forced to merge with bigger, better capitalized entities. By the same token, bigger deep-pocketed entities will be on the prowl for takeover targets. The end result will be more highly concentrated sectors. If you are an executive running a small nursing home or ALF,  brace yourself for rising compliance costs and litigation, and ultimately buyouts or mergers. If you an executive running a business with the capacity to acquire, if you aren’t already looking around, you should be, but cautiously. And, whatever size facility you run, brace yourself for the incursion of a pharmaceutical industry-like enforcement and whistleblower wave.     

The sectors

Nursing homes: In 2008, our nation spent $138 billion on nursing home care2,   $25.7 billion by Medicare, $56.3 billion by the Medicaid programs, and $36.9 billion by patients.3 This money was spent in 15,962 nursing homes. Those nursing homes had 1,648,608 beds and 1,492,200 residents.4  In the prior five years, the country lost 525 nursing homes.  Most were small (fewer than 100 beds), and the vast majority—471—were either not-for-profit or government run.5 In 2002, there were 16,568 nursing homes, a drop of nearly 4%.  

Assisted living facilities: There were 20,729 “community care facilities for the elderly” in 2007 with total revenues of about $41.5 billion.6 According to the National Center for Assisted Living, these facilities had 974,871 licensed residential beds.7  Given the population over age 65, there were then 25.7 assisted living beds available for every 1,000 individuals.8  Unlike with nursing homes, this sector saw an increase in establishments, from 17,988 in 2002.

The demographics

As the baby boomers age, the demand for nursing homes and assisted living facilities will jump. The following table reflects today’s population and projections for 2030.


In 2008, 0.5% of the population resided in a nursing home. If 0.5% of Americans will in 2030 require nursing home stays, there will be 1,867,520 Americans in nursing homes. 

In 2008, 45% of the 1,492,200 nursing home residents—674,500 residents—were 85 and older. They stayed on average 546 days, whereas the American between 64 and 85 stayed for 390 days. Assuming no change in these rates, in 20 years there will be 1,048,799 Americans over the age of 85 in nursing homes for eighteen months, and 1,583,675 Americans between the ages of 65 and 85 in nursing homes for on average about 390 days.9 

All other things remaining constant, we will in 2030 need more than 2,908,402 nursing home beds.  That’s a 76% growth rate over the next twenty years.  The demand for assisted living facilities will similarly be huge.  If the demand for ALF beds remains constant—25.1 beds per 1,000 Americans older than 64—in 2030, the United States will need 1,852,764 ALF beds, an increase of 877,893 beds, nearly doubling today’s total.

Of course, it is likely that the demand for both nursing homes and ALFs will actually be considerably higher in twenty years. The Medicare program is predicting a 33% increase in the next 10 years in the number of Americans who will need long term care.10  It is a fair conclusion that the predictions set forth here are very conservative.  

The past enforcement environment

There has over the past 20 years been very little federal enforcement in the nursing home sector and almost none among ALFs. Of $24 billion recovered in federal healthcare enforcement actions since 1991, just $528 million—or less than 2.2%—was recovered from nursing homes and none from ALFs.  When comparing expenditures and recoveries with other sectors between 1997 and 2008, the comparison is startling:


If you ran a nursing home over the past decade, your chances of being investigated and forced to pay money to the federal government were barely higher than your chances of being struck by lightning.17 If you ran an ALF, your odds were zero. While there have been some state agency actions involving both ALFs and nursing homes, those actions have not materially impacted the compliance risk profile for both institutions.  The average person spends nothing to keep from being struck by lightning; there can be little doubt that given the relative absence of law enforcement action, monies spent on compliance efforts by nursing homes and ALFs have been low.               

The new federal regulatory future

Various sections of the Patient Protection and Affordable Care Act18 (PPACA) will significantly increase the cost of running a nursing home. While many of these requirements are not directly applicable to ALFs, the risks, and, therefore, the potential costs associated with most are. 

First, the secretary must by March 25, 2013, “promulgate regulations for an effective compliance and ethics program” for nursing facilities and skilled nursing facilities. The nature of the program may vary according to the size of the facility.

Second, beginning in 2012, skilled nursing facilities must “separately report expenditures for wages and benefits for direct care staff,”19 including for “registered nurses, licensed professional nurses, certified nurse assistants, and other medical and therapy staff.”20 The Secretary must make this information “readily available to interested parties.”21 

Third, beginning in 2012, the secretary shall “require a facility to electronically submit … direct care staffing information” that specifies: (1) the “category of  work a certified employee performs”; (2) resident census data and resident case mix; (3) a regular reporting schedule; and (4) “information on employee turnover and tenure.”22  HHS must thereafter post this and other information regarding nursing homes on the Nursing Home Compare Medicare website.

Fourth, every nursing home and ALF23 will soon have to conduct criminal records and fingerprint checks and a search “of State-based abuse and neglect registries and databases” and “the records of any proceedings in the State that may contain disqualifying information” on all prospective employees who have patient access.24  

Fifth, PPACA extends the disclosure of ownership interests for owners of nursing homes and ALFs to the 5% owners of the 5% owners.25 Moreover, each facility must maintain and keep, with the expectation that the information will be made public, the following: 

(1) the ownership information26;

(2) the identity and information of “each member of the governing body of the facility,” each “officer, director, member, partner, trustee, or managing employee of the facility” and “each person or entity who is an additional disclosable party”27;  and

 (3) the “organizational structure of each additional disclosable party.”28

Sixth, beginning in 2011, nursing homes must “have reports with respect to any surveys, certifications and complaint investigations” made within the past three years “available for any individual to review upon request”; they must also “post notice of the availability of such reports” in “prominent and accessible to the public” locations.29

Seventh, the “owner, operator, employee, manager, agent or contractor of a long term care facility” that received at least $10,000 in federal funding, must report to the Secretary and to “1 or more law enforcement entities” in the facility’s “political subdivision” “any reasonable suspicion of a crime” under applicable state law “against any individual who is a resident of, or is receiving care from, the facility.”30   

Finally, PPACA requires the secretary to implement two demonstration projects. Section 6112 requires, starting in 2011, a “demonstration project to develop, test, and implement an independent monitor program to oversee interstate and large intrastate chains of skilled nursing facilities and nursing facilities.” The monitor must conduct a thorough compliance review of all of the operations of the nursing home, including “analyz[ing] the management structure, distribution of expenditures, and nurse staffing levels of facilities of the chain in relation to resident census, staff turnover rates, and tenure.” In the second project, the secretary must within 18 months of March 25, 2010, “award grants … to conduct demonstration projects for purposes of developing core training competencies and certification programs for personal or home care aides” including those employed by nursing homes and ALFs.31 The training must cover, inter alia, “the role of the personal or home care aide”, “consumer rights, ethics and confidentiality”, “cultural and linguistic competence and sensitivity”, “health care support”, “nutritional support” and “training specific to an individual consumer’s needs.”32

Compliance with these new rules will increase the nursing homes’ or ALFs’ costs. The information that must be disclosed will create extensive  databases for investigators, prosecutors, an d whistleblower attorneys evaluating, inter alia, allegations that a nursing home has not had sufficient staff to care for residents, or that a nursing home has paid a kickback to a referral sources or suppliers.  Finally, the disclosure of additional owners will increase costs by increasing the pool of likely targets for civil suits.

The cost of compliance

There are few statistics that track the growth in compliance costs; undoubtedly, the health care industry as a whole spends much more today on compliance than was being spent just ten years ago. Thirty-nine percent of the respondents to a survey of compliance officers in 2008 by the Health Care Compliance Association reported growing budgets, compared with only 3% reporting reductions.33 

According to that survey, the average chief compliance officer was paid $147,843.34 The median company with $300,000,000 in revenues reported having 4.05 full time compliance employees, with a mean salary cost of $437,000.35  Factoring in all other related expenses, the total cost exceeded $1,000,000. 36 These costs did not include expenses incurred in compliance training for other company employees.37 Accordingly, the true cost was much higher. 

How much compliance can a small nursing home or ALF afford? Irving Levin Associates reports that in 2009, the average net operating income per nursing home bed was $5,700 and per unit in an ALF was $9,700.38 Neither a 100-bed nursing home nor a 100-unit ALF can afford the cost of a large compliance function.  

The cost of non-compliance

Nursing homes and ALFs provide 24-hour, seven-days-a-week nursing home care or assisted living to a specific number of individuals in an existing facility. Most payers pay a fixed monthly fee. Cheating in such institutions, if it occurs, will most likely involve reducing expenses by cutting corners on required staffing levels.  Indeed, the regulatory structure is geared to watchdog such scrimping. Virtually all states specify minimum hourly staffing and care requirements for nursing homes; while the rules are looser for ALFs, most states impose a sufficiency requirement and some specify minimum required hourly levels of care per resident. These benchmarks permit easy auditing and are a focus of state inspections.

The potential “costs” of non-compliance include:

* federal criminal prosecution, with potentially sizeable fines; 

* federal false claims act suits, with potential financial penalties set at a multiple of the benefit obtained by the corner cutting;

* state criminal and civil false claims act actions, with similar potential consequences;

* plaintiffs’ suits brought under state consumer protection laws, tort actions and civil fraud claims;

* facility license suspension and, potentially, revocation; and

* exclusion from participation in federal health care programs.39

The coming storm

The enhanced disclosure rules in this environment of significant and measurable benchmarks will cause watershed changes. Significant jury awards could become common as plaintiffs’ counsel race to look for staffing deficiencies cited in state inspection reports.40  Counsel can expect that  juries will respond to cases that rely on the failure to meet state staffing requirements as proof of  the denial of care to the infirm elderly residing in nursing homes or ALFs.

Federal prosecutors, largely absent from this sector over the past twenty years, will “follow the money” and commence investigations predicted on repeated inspections reporting staffing deficiencies, in a hunt for evidence demonstrating that that pattern was willful.  In those instances where federal prosecutors find such evidence, the stakes will involve, not “merely”  the potential for sizeable civil fines and facility license suspension for the organization, but also the prospect of indictment, criminal conviction and a prison sentence for the accused executive.           

In this maelstrom, small providers struggling to meet the new and enhanced compliance obligations and expenses, but not otherwise deliberately cutting corners, will seek out merger partners, or offer themselves as acquisition targets.  There will be others, self-aware of lurking, maybe even systemic and longstanding, staffing deficiencies, who will look to sell themselves while hiding behind a mirage of profitability. Careful due diligence will be exceedingly important for entities looking to expand through acquisition, to assure that the price being paid has not been inflated by hidden corner cutting.  The costs of compliance will add to the already significant barriers to entry in these industries.  Ten years from now, there will be fewer providers in both sectors managing many more beds than now exist.  How, if at all, this will impact the quality of care provided is anyone’s guess.         

1 Loucks is a Partner with Skadden, Arps, Slate, Meagher & Flom LLP.  Before joining Skadden’s Boston office, he served as Acting United States Attorney in Massachusetts in 2009, as First Assistant U.S. Attorney from 2005-2009, and as Chief of the Health Care Fraud Unit in that office for many years.  He can be reached by telephone at( 617) 573-4840 or by e-mail at [email protected].

2 Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group (cited hereafter as NHSG and by Table number), Table 4 (National Health Expenditures, by Source of Funds and Type of Expenditure: Calendar Years 2003-2008).

3 Private insurance and other private funds covered only $15.4 billion of the $138 billion spent on nursing home care. NHSG, Table 9.

4 Kaiser State Health Facts, Number of Nursing Facility Beds, http://www.statehealthfacts.org/comparetable.jsp?ind=413&cat=8.  But see Mollica, State Medicaid Reimbursement Policies and Practices in Assisted Living (National Center for Assisted Living, American Health Care Association), September 2009, at 152, listing 1,671,238 nursing home beds.

5 Thus, between 2003 and 2009, the number of nursing homes with between 100 and 200 beds grew by 1% while the number of nursing homes with fewer than 50 beds shrunk by 12.4%. The percent of not-for-profit homes shrunk from 28.2 % to 26.8 %.  CMS, Nursing Home Data Compendium, 2009 Edition, at 6-24.

6 2007 Economic Census, Sector 62, NAICS Code 6233. See http://smpbff1.dsd.census.gov/TheDataWeb_HotReport/servlet/[email protected]&filename=rcp1.hrml&20071127090603.Var.NAICS2002=6233.

7 Mollica, State Medicaid Reimbursement Policies and Practices in Assisted Living (National Center for Assisted Living, American Health Care Association), September 2009, at 152. The data is from 2007.

8 Id. Mollica reports 37,887,858 Americans 65 and older in 2007.

9 This assumes that the average period of stay in a nursing home does not change. 

10 Medicate, Long Term Care, http://www.medicare.gov/longtermcare/static/home.asp. Long-term care is not the same as nursing home services.  However, as more Americans need long term care and cannot live independently, the aggregate demand for both ALFs and nursing homes will increase.

11 CMS, Office of the Actuary, National Health Statistics Group, Table 2.

12 Loucks and Lam, Prosecuting and Defending Health Care Fraud Cases, Appendix 11A-3 (BNABooks, 2010, Second Edition).

13 Id.

14 United States Census Bureau, 2007 Non Employer Statistics, http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=NS0700A2&-NAICS2007=32541.

15 United States Department of Health and Human Services, Data Compendium 2009 Edition, http://www.cms.gov/DataCompendium/15_2009_Data_Compendium.asp#TopOfPage, Table VI.1. 

16 CMS, Nursing Home Data Compendium, 2009 Edition, Figure 1.1.

17 National Weather Service, Lightning Safety, http://www.lightningsafety.noaa.gov/medical.htm. The odds of being struck by lightning throughout one’s life are one in 6,250, for a percentage chance of 0.016. 

18 P. L. No. 111-148.

19 42 U.S.C. §1395yy(f)(1).

20 Id.

21 42 U.S.C. §1395yy(f)(3).  The term “interested parties”, while used throughout PPACA, is not defined.  Providers can expect that putative whistleblowers and plaintiff’s counsel, among others, will seek such information as interested parties.

22 Social Security Act §1128I(g).

23 42 U.S.C. §1320a-3.  §1320a-3(a)(6)(E) defines  “long term care facility” to include skilled nursing facilities (i), providers of adult day care (vii) and “assisted living facilities that provide[] a level of care established by the Secretary.”

24 Public Law No. 111-148, §6201(a)(3)(A).

25 Disclosure had been limited to the 5% owners.  “Disclosing identity” is defined as those entities defined in 42 U.S.C. §1395x(u) (“a hospital, critical access hospital, skilled nursing facility, comprehensive outpatient rehabilitation facility, home health agency, hospice program”) and carriers acting as fiscal intermediaries to a provider.

26 42 U.S.C. §1320a-3(c)(2)(A)(i).  This disclosure obligation is subject to a “special rule” that ownership or control interests includes “direct or indirect interests, including such interests in intermediate entities.”  42 U.S.C. §1320a-3(c)(2)(C)(i).

27 42 U.S.C. §1320a-3(a)(3)(A)(ii)(I)-(III).  This disclosure obligations includes “the owner of a whole or part interest in any mortgage, deed of trust, note, or other obligation secured … by the entity or any of the property or assets thereof” provided that the interest exceed 5% of the total assets of the entity.  42 U.S.C. § 1320a-3(c)(2)(C)(ii).

28 42 U.S.C. §1320a-3(c)(2)(A)(III).  An “additional disclosable party” includes any person or entity that “exercises operational, financial or managerial control of” or provides “policies or procedures for any of the operations of” or “financial or cash management services to” the facility.  42 U.S.C. §1320a-3(c)(2)(A).

29 42 U.S.C. §1395i-3(d)(1)(C)(i)-(ii) (SNF); 42 U.S.C. §1396r(d)(1)(V)(i)-(ii) (NF).

30 42 U.S.C. §1320b-25(a)(1)-(3), (b).

31 § 2008(b)(6)(C).

32 42 U.S.C. § 2008(b)(3)(A).

33 Health Care Compliance Association, 10th Annual Survey, 2008 Profile of Health Care Compliance Officers, at 6.

34 Health Care Compliance Association, 10th Annual Survey, 2008 Profile of Health Care Compliance Officers, at 3. This average reflects the total of mean salary costs for a department of four people.

35 Id., at 4.  Three percent of those responding to the survey, or 20 individuals of 697, indicated they worked for either an ALF, a SNF or a nursing home.

36 Joe Hadzima, How Much Does An Employee Cost?, Massachusetts Institute of Technology. http://web.mit.edu/e-club/hadzima/how-much-does-an-employee-cost.html. One yardstick for evaluating the total cost of an employee to a corporation involves multiplying the employee’s salary by 2.7: by 1.25 to account for taxes and benefits; then by 1.75 to account for space and equipment; and then by 1.25 to cover management expenses.  Using this yardstick, the $437,000 compliance department actually costs the corporation $1,194,900.

37  Health Care Compliance Association, 10th Annual Survey, 2008 Profile of Health Care Compliance Officers, 9 (66% of those responding indicated that the compliance budget did not include the direct costs of training).

38 The Senior Care Acquisition Report, Fifteenth Edition, 2010, Irving Levin Associates, Inc. (2010), at 31 and 66.

39 While Medicare does not pay for ALF coverage, many ALFs provide some health care services, and offer for residents the ability to consult with and obtain care from physicians directly on the premises of the ALF.  Exclusion, while perhaps not affecting the monthly payment from the ALF resident, would likely prohibit the ALF from offering such services.

40 In early July, 2010, a California jury awarded a plaintiff class $677 million dollars from a nursing home chain, Skilled Healthcare Group, Inc.  The suit was brought under several California consumer protection statutes to “redress the pervasive and intentional failure to provide sufficient direct nursing care staffing for elderly residents at skilled nursing facilities owned, licensed, operated, administered, managed, directed and/or controlled” by Skilled Healthcare Group and 23 subsidiaries.  Lavender, et al. v. Skilled Healthcare Group, Inc., Case No. DR060264, Complaint ¶ 1 (April 16, 2008).  The core allegation concerned a California statute that requires a nursing home to provide 3.2 hours of direct patient pare per day per resident.40 CA H & S Code § 1276.5. Inter alia, the plaintiffs alleged that the defendants did not provide this level of care, while routinely advertising that they did. Complaint, ¶ 47, ¶52. Specifically cited in the complaint was evidence collected from inspection records of the California regulatory agency, California Department of Health Services. Complaint ¶¶4, 52-54.  The defendant chain has moved for a new trial. See Matt Drange, Defense Attorneys in Skilled Healthcare Lawsuit File For Retrial; Motion Based On Alleged Juror Misconduct, Times-Standard (Aug. 7, 2010), http://www.times-standard.com/localnews/ci_15703459.  On September 8, 2010, according to news reports, the parties settled the litigation for payment of $50,000,000 and imposition of an injunction requiring, inter alia, that Skilled Healthcare Group comply with statutory and regulatory staffing requirements. http://ir.skilledhealthcaregroup.com/phoenix.zhtml?c=204000&p=irol-newsArticle&ID=1468098&highlight=.