A federal watchdog plans to audit nursing homes’ use of related parties, and the results could ultimately lead to even more oversight for the already highly regulated sector.

The Health and Human Services Office of Inspector General will determine whether the use of related parties is being accurately reported, and if dependence on affiliates might have increased overhead costs.

The agency last week announced its plan to add the Medicare payment audit to its 2023 work plan. It is an apparent extension of the ongoing federal effort to improve transparency into nursing home ownership and the skilled nursing sector’s corporate structures. 

Nursing homes can include the cost of “services, facilities, and supplies” provided by an organization related by common ownership or control in its allowable costs, OIG noted in its announcement. But that cost cannot exceed market value or the price at which comparable services, facilities or supplies could be purchased elsewhere.

In addition to checking reporting compliance, OIG specifically said it would examine whether spending Medicare dollars with related parties might have reduced actual care due to an imbalance between overhead costs and care costs.

Attorney Lourdes Martinez, a partner with the New York office of SheppardMullin, predicted the audit would pull a sample of cost reports from for-profit providers, then compare fees paid to any related parties to those paid by other, similar nursing homes using non-related vendors.

In a blog earlier this week, she cautioned nursing home owners to ensure they understand laws and regulations regarding related parties as governmental scrutiny intensifies.

In an interview with McKnight’s Long-Term Care News Tuesday, Martinez noted that many providers have come to rely on related parties because of the efficiencies they create.

“You can get quicker turnaround service when you have control of the provider,” she said. “You get that lab test issued right away or if you need that [vendor] to come in right away, you can get that. It can make patient care quicker, more efficient, with better speed and pricing.”

Nursing homes, Martinez said, are already required to report related parties on their annual Medicaid and Medicare cost reports, but the audit will require OIG to “do more digging” to provide cost-comparison.

Insights gleaned could help the Biden administration build momentum in its campaign to limit private equity investment in the sector. It remains unclear, however, whether CMS could regulate how related parties function or whether that reform would have to come from Congress.

OIG typically makes non-binding recommendations at the conclusion of an audit. But any new regulation that springs from the findings also could chase investors from nursing homes.

“It definitely has that potential for sure, and it underscores the Biden administration and what they’ve proposed to do,” Martinez said. “But on these related parties, unless you are hiding something, the related parties are on the cost reports.”