Pennsylvania Report Recommends Added Scrutiny on SNF Owners and CHOWs

In a recently released report titled “Help Wanted: Who will Care for Mom & Dad?”, the Pennsylvania Auditor General, Eugene DePasquale, lists a number of observations of and recommendations for varying facets of the Commonwealth’s nursing home programs, most of which are directed to the Pennsylvania Department of Health (DOH), the agency tasked with licensing nursing homes. The report is particularly salient for private equity investors who are or may eventually become owners of a nursing home operator or who own property leased to such an operator.

The report observes that “DOH must adopt more stringent, thorough, clearly outlined policies for vetting nursing home facilities license applicants . . .,” and recommends doing so by working with “[DOH’s] General Counsel to review how other states review new applicants, and set policy to mandate detailed, thorough vetting, including past and current litigation, vendor relationships, real estate relationships, ownership interest in other healthcare providers, and staff and client complaints.”

In addition to the above, the report also lists the following issues and remedies:

• Issue: In the past, DOH has not sufficiently vetted operators’ financial health. Where nursing home operators have financially failed and abandoned their nursing homes, the Commonwealth has been forced to install temporary management and ensure residents continue to receive safe and quality care—which comes at great cost to the Commonwealth.
• Remedy: DOH’s licensure process should change so that the Commonwealth has the authority to “demand collateral or a form of insurance from operators that would cover the costs of installing temporary management should that become necessary.”
• Issue: Where the Commonwealth has investigated certain operators, the operator owners transfer operations to a new, unrelated operator but retain ownership of the real estate. The landlord then requires the operator to buy certain amounts of goods and services from its subsidiaries.
• Remedy: DOH’s vetting process should require that applicants provide lease agreements, contracts with subsidiaries, and ownership information for the subsidiaries.
• Issue: Private equity firms are buying up nursing home chains—and these investors are career investors, not elder care specialists.
• Remedy: More ownership information should be disclosed. Private equity firms should bear the burden of proving they have “competent management” and “genuine interest” in the health and safety of clients. These entities should not be allowed to “operate in the shadows.”

If implemented, the Auditor General report could result in significant changes to the Commonwealth’s already fairly complex change of ownership (CHOW) process. At present, the Commonwealth’s CHOW process requires detailed information on operators’ “business structure,” other operations (including out-of-state operations), and compliance issues. Expect those requests to go much deeper, and potentially including disclosure of detailed ownership information for not just the operator, but also the real estate owner and subsidiaries of the operator, extensive financial disclosures (e.g., financial operating cost estimates, evidence of sufficient funds, etc.), and even track record/compliance reports from other states. For the first signs of change, interested parties should closely monitor the Commonwealth’s proposed legislation and/or regulations, as well as any directives issued by DOH.

For more information, please contact Hedy Rubinger or Alexander Foster.