A headshot photo of Ashvin Gandhi

As much as 63% of nursing home profits in Illinois were hidden from state regulators using related party transactions in 2019, according to the results of a new study from UCLA and Lehigh University researchers.

Those results are likely indicative of a nationwide trend that has continued through the pandemic and into 2024, experts told McKnight’s Long-Term Care News Thursday.

The authors raised concerns that nursing homes participating in related-party transactions could be overstating costs and hiding revenues by funneling them through entities that share ownership with those nursing homes — a practice the study refers to as “tunneling.”

As a result, more audited financial reporting should be pursued by state and federal regulators to ensure that informed decisions can be made about reimbursement rates, staffing mandates and other issues related to long-term care funding, according to Ashvin Gandhi, PhD, assistant professor of economics at UCLA.

“This paper really underscores the need for higher quality audited data on nursing home financials and the financials of all the related parties that can help establish key facts about the industry that we need to be able to make good and informed policy, regulatory, and financial decisions,” Gandhi told McKnight’s.

Despite these results, however, the study shouldn’t be misconstrued to say that all related party transactions are made in bad-faith or that nursing home profits are secretly high enough to justify any and all expensive regulatory oversight measures, according to Gandhi.

“We are economists. We appreciate that investors in the healthcare industry need to be able to earn returns in order to have an incentive to make investments in the industry,” he said. “I don’t want someone to read our paper and say ‘XYZ can definitely be afforded by the nursing home industry.’ Rather I would say our paper suggests that profits in the industry are higher than publicly available data suggest.”

Broader trend likely

The study — coauthored by Gandhi and Andrew Olenski, PhD, assistant professor of economics at Lehigh — examined comprehensive data from Illinois nursing homes over a two-decade span during which Illinois has required facilities to report on related party transactions. The authors focused on “adopters” that switched to related party transactions during that timeframe. 

While not all nursing homes used related party transactions, the roughly three-quarters that did regularly incurred notably greater costs — especially in real estate (20%) and management (25%). 

The authors noted that some facilities have few or no “hidden” profits, and, by extension some facilities tunneled more than the 63% average.

Despite the focus on Illinois homes, Gandhi suspects that the trend may be even more pronounced nationally.

“Illinois’ data collection on related parties is some of the best that we know of in the country,” he explained. “We don’t know for sure of course, but, if anything, we would suspect that the practice may be more prevalent in other samples where it’s easier to not report the transactions.”

Consumer advocates have been calling for consolidated cost reporting of related party transactions for years, citing concerns of hidden profits and resulting higher costs for the government. Providers have argued in response that related party services can streamline services for residents and that there is a lack of evidence that related parties are charging more compared to non-related parties.

While there are legitimate reasons for related-party transactions in healthcare and long-term care specifically, the data trends revealed in the study are concerning, said David Grabowski, PhD, a healthcare policy professor at Harvard University.

“Related party transactions are common across healthcare providers and elsewhere in the economy,” Grabowski told McKnight’s Thursday. “There are a number of reasons that these transactions might be used in good faith. However, what is troubling about the use of related-party transactions in this study is that they are associated with a large decline in reported profit relative to nursing homes that did not engage in these practices. 

“The authors were not able to identify anything different about these facilities in terms of more staffing or better quality,” he added. “This suggests these transactions are being used to tunnel profits.”

Grabowski agreed the problem is not limited to Illinois facilities. He said regulators should be aware that more money exists in the long-term care system than current data collection has captured.

“This new study illustrates why policymakers need to invest in better cost-report data at the federal level,” he said. “We need to be able to monitor this issue nationally.”

More data could allow for better analysis of Medicare and Medicaid rates related to the cost of providing care, as well as the costs of staffing mandates for nursing homes — such as the federal staffing mandate currently under consideration at the Centers for Medicare & Medicaid Services. 

Gandhi noted that the authors plan to do more research to determine how prevalent tunneling is in nonprofit and for-profit facilities, respectively.