How government incentives shaped the nursing home business — and left it vulnerable to a pandemic

Medilodge of Livingston, where Catlin lived, and four other nursing homes in the Medilodge chain — all given a below-average health inspection rating by Medicare, and three having been cited specifically for infection control deficiencies — were among the 21 facilities to sign up for the plan. Several scrambled to obtain ventilators to meet any demand.

They were responding to the incentive, as nursing homes have done for years. Covid-19 just shifted that incentive, and Medilodge moved quickly to take advantage. In the context of a system in which government money largely supports for-profit nursing home enterprises, it made sense.

Federal money, through the Medicare and Medicaid systems, has long shaped the nursing home business — and in ways that left it completely vulnerable when the viral pandemic arrived in March.

For years, extra money has gone to pay for extra services, encouraging some nursing home owners to game the system and tempting unscrupulous operators to to file false claims for reimbursement. In the recent past the gold standard was physical and occupational therapy; now it’s respiratory care.

But stringent infection control, which might have kept the coronavirus at bay, has never been a revenue producer, even now during the pandemic. Similarly, there is no monetary incentive to hire more registered nurses, although studies suggest they have been crucial in minimizing covid-19 casualties in nursing homes.

These are the things that Mary Catlin needed most if she were to survive the pandemic, but they were not, for the government or Medilodge, the chief financial priority.

The fee-for-service structure that takes care of more than a million mostly elderly Americans puts the focus on the “ancillary” treatments that bring in extra dollars, and one consequence is that employees who handle general care of residents — nursing assistants, primarily — rather than the specialty services are a low priority for operators. They are underpaid and in chronically short supply at nursing homes across the country.

“There’s a mountain of actuaries and accountants out there” advising nursing home operators on the most profitable services to provide, said Eric Carlson, directing attorney with an advocacy group called Justice in Aging. “That’s where the opportunities are financially. They’re all over this.”

Medilodge spokesman Bill Gray said: “We’re choosing not to participate in any media inquiries. We’re concentrating on taking care of our residents and employees at this time.”

The company, in any case, is not an outlier but is typical of chains in every corner of the country.

Mary Catlin was 75 and had been living at Medilodge of Livingston since a fall four years ago from which she never fully recovered, said her daughter, Janine Cooke. Divorced, Catlin had raised five children on her own and once had a job as a dietary manager in another nursing home. After retiring she had quietly tended to her garden and added to her collection of rooster figurines. But the fall that disabled her sparked a deterioration that included mild dementia.

Nobody in the family thought she was getting very attentive care at Medilodge; she had frequent skin and urinary tract infections. Cooke said her mother’s diapers were always full.

“She’d be covered with feces. Just terrible, you know,” she said. In her shared bathroom, “the toilet was filthy, just rancid.” The place, she said, reeked of urine.

But Catlin had bonded with some of the aides and felt secure there, said her granddaughter, Ashley Marie Cooke.

When the pandemic hit, Medilodge of Livingston, like nursing homes across the country, locked down. Janine Cooke said the nursing home kept assuring her and other family members that everything was fine. But one day in late March, her sister got a call: They were moving Catlin out of her room to make way for incoming coronavirus-positive patients. But not to worry, they said; she was still in good health and good spirits.

By the end of the first week of April, Cooke’s sister got another call: Catlin had a fever.

While she hadn’t been tested yet, the family assumed she had been infected by the novel coronavirus.

“How did she get it? Did she get it from another resident? Did she get it from an aide?” Ashley Marie Cooke recalled wondering.

At first they couldn’t get any answers. “They weren’t sharing information with anybody, and keeping it very hush-hush,” she said.

Janine Cooke said the staff at first wouldn’t bring Catlin a phone so she could talk to her. (Many nursing homes were hit so hard by the pandemic, dealing with illnesses and absences by staffs that were already under stress, that this sort of breakdown in communication with families on the outside was not unusual.)

“We wanted to know she was at least coherent enough to speak,” Ashley Marie Cooke said. “It was just disrespectful.”

When they finally did set up a call, Catlin was gasping for air. She couldn’t get a word out.

Finally, on Easter Sunday, April 12, she was diagnosed with covid-19 and taken to nearby St. Joseph of Livingston Hospital. She died there three days later. She was one of more than 77,000 nursing home residents who by now have been killed by the disease.

When Medilodge at Livingston was listed later that same week as a covid-19 hub facility, in line to receive the enhanced state subsidies, it crystallized a thought in Ashley Marie Cooke’s mind. “We felt like Grandma was just a paycheck to them.”

But some residents are more prized than others. Because Mary Catlin was a long-term, low-income resident whose stay was paid for by Medicaid, she was not a big source of revenue for the nursing home. The serious money involves patients who need rehabilitation services, which Medicare pays for at much higher daily rates. And that’s where nursing homes direct the most attention.

The incentives in place are “perverse,” said Marianne Udow-Phillips, head of the Center for Health and Research Transformation at the University of Michigan.

Medicaid rates vary by state, but a study last year found that on average Medicaid paid nursing homes $214 a day per resident. The average Medicare reimbursement was $523 a day.

One large publicly traded nursing home company, Diversicare, reported that in the third quarter of this year Medicaid covered 66.3 percent of its residents but accounted for 44.3 percent of its revenue.

Much of Medicare’s bump is based on “ancillary services” that the nursing home provides and bills for. Until October 2019, the biggest moneymakers were therapy and pharmacy services. In 2018, ancillary services accounted for nearly 40 percent of all revenue at Medilodge of Livingston, according to data reported to the Centers for Medicare and Medicaid Services. At another facility in the chain, Medilodge of Farmington: 50 percent.

The financial incentives have, not surprisingly, led to cases in which nursing home providers were charged with pushing patients into the most high-paying categories, even when it wasn’t warranted.

“There were incredible abuses,” said Michael Sullivan, an Atlanta lawyer who brought a false claims case against Life Care, a major national chain, for fraudulent therapy practices. “The company wouldn’t hire enough nurses to care for the patients, feed them or turn them. But there were plenty of therapists running around, even giving therapy to patients in hospice. It was ghoulish.”

Life Care agreed to pay $145 million to settle that case in 2016, without admitting fault.

Partly because of the abuse, Medicare altered its formula last year, downplaying therapy in favor of a list of 50 services including respiratory care, wound treatment, diabetes and dialysis.

Nursing homes responded by immediately cutting back on therapists’ hours, so much so that an attorney at the Center for Medicare Advocacy, Toby Edelman, worries that patients aren’t getting the therapy they need now.

A 1994 study of Midwestern nursing homes shows, in retrospect, just how much the government’s incentives have reshaped the business. A quarter-century ago, about 40 percent of nursing home expenses in that study (which did not include Michigan) went for nursing care, 5 percent for other services such as therapy, 10 percent for administration and, among other costs, about 7 percent for leases, rents or mortgages on real estate.

In 2018, the last year for which detailed figures are available, Medilodge was largely in line with the rest of the for-profit nursing home business nationally: Therapy had doubled proportionately as an expense compared to the nursing homes in the 1994 study, as had administrative costs; property had become more expensive by about half. To pay for all this, a Washington Post survey of cost data found that food services, laundry, housekeeping and building maintenance had all dropped by about half — suggesting that nursing homes have become considerably less hospitable than they were for an earlier generation.

“They were always cutting the custodial staff, the cooking, the painting staff,” said Kristen Bowen, a registered nurse who was assistant director of nursing at a Medilodge in Rochester Hills until she left in 2018, and has since visited two other Medilodge facilities, in Milford and Sterling Heights, as a traveling hospice nurse. “It was always skinny like that. The rooms were caked with grossness.”

Direct nursing care expenses have remained steady at about 40 percent of the total — but at a time when “residents are becoming more frail, more complicated and are living longer,” as Ellen Strunk, a rehabilitation consultant in Birmingham, Ala., put it, the flat line for nursing is not a good sign.

After the change in the payment structure last October, several chains, including Medilodge, began touting on their websites the respirator and ventilator therapy they have equipped themselves to offer, because those are now high-paying services.

But when the coronavirus hit last spring, Medicare revenue began to shrivel as people put off elective surgeries that required rehab or chose to recover at home. In Michigan, as in other states, that made the covid hub system, with its extra payments, an attractive alternative for financially uncertain nursing home companies.

Michigan’s hub plan for covid patients, which was similar to policies in other states, attracted stiff criticism from Republicans who accused Democratic Gov. Gretchen Whitmer of putting long-term nursing home residents at risk. Introducing such an infectious disease into selected nursing homes was bound to lead to its spread, they argued. The controversy was a factor in the angry protests against Whitmer throughout the summer.

Lynn Sutfin, a spokeswoman for the Michigan Department of Health and Human Services, said her agency worked “to ensure all facilities had adequate physical space planning, and met safety and infection control protocols to perform in this enhanced role.”

An initial study by the health policy center at the University of Michigan suggests that the hub nursing homes have dealt better with illness and death than those not in the program. The money the state pumped in, and the close monitoring it conducted made a difference, said Robyn Rontal, director of policy analytics at the Center for Health and Research Transformation at U-Mich.

But Udow-Phillips says the state should have been more stringent in its selection of nursing homes. One Medilodge participant, at Grand Blanc, had been designated by CMS as a “special focus” facility because of its continuing problems. Two others were rated “much below average.”

Medilodge of Livingston, in preparation for a rush of seriously ill covid-19 patients, had 22 ventilators in place by May 24, when the CMS began collecting such information. Ventilator care requires trained and certified staff, but it promised a significant financial bonus — as much as $1,500 a week per patient — from CMS in addition to the Michigan “hub” subsidies.

Another Medilodge nursing home, in Farmington, added more than two dozen ventilators after the beginning of the pandemic, but it wasn’t designated as a hub. Infection control there was so lacking that staff and residents alike were deemed to be in “immediate jeopardy” from March 26 to April 28, and an inspection found that the nursing home “remained out of compliance” even after the jeopardy was removed.

“I was shocked when I heard they were running vents,” Bowen said, referencing ventilators. “I was just floored. They’re woefully ill-equipped for that.”

The difference between homes in the Medilodge chain and others is “quite palpable,” she said. “The environment. The smell. Everything. Oh, God, and the food. I have yet to see more disgusting food.”

“They couldn’t clean before covid,” Janine Cooke said. “What makes me think they can do it now?”

Covid-19 appeared there in March. A 31-page inspection report, filed on June 16 after the nursing home had been designated a hub, listed continuing problems with infection control, including haphazard use of Personal Protective Equipment by staffers even as they moved between symptomatic and asymptomatic residents.

Livingston took in 19 coronavirus-positive patients. Twenty-four of its long-term residents developed covid-19, and 18 altogether died, according to CMS data. Or 10, according to the Michigan Department of Health and Human Services. The discrepancy illustrates a constant problem with government data on nursing homes and covid-19 — it is often inconsistent.

No one went on a ventilator.

It is not yet clear, said Udow-Phillips, how much transmission of the coronavirus, if any, took place between incoming patients and long-term residents.

The nursing home has since been delisted as a hub, as Michigan cases declined over the summer, but the company is still promoting ventilator and other respiratory care there. Only about 3 percent of U.S. nursing homes have ventilators on site, but the number has been growing.

There are 49 nursing homes in the Medilodge chain, all in Michigan. Like nursing homes across the country, every Medilodge received several hundred thousand dollars this year from the U.S. Department of Health and Human Services for coronavirus relief. The total for the chain came to about $25 million in extra federal funds.

As of Nov. 8, 178 residents had died from covid-19 across the chain, according to CMS data. According to the state of Michigan, 248. Since the outbreak of the pandemic, state inspectors have levied nearly $300,000 in fines against the chain’s nursing homes.

Medilodge is owned by Prestige Healthcare, based in Kentucky, which is primarily controlled by Craig Flashner and Yitzchok Perlstein through various trusts and holding companies. They also control the 16-facility Arbors chain in Ohio, which received just over $7 million in covid emergency funds. They have seven other nursing homes scattered across Tennessee, Kentucky and South Carolina, which together received another $4 million.

Working in a system that requires nursing homes to decide what extra services a resident needs, then provide those services, then bill the government, tempts some operators to game the rules and a few to commit outright fraud. Patients can be pushed into higher paying categories of need. Services can be billed that were never rendered.

The legal system’s primary tool for policing that behavior is the Civil War-era False Claims Act, which relies on a whistleblower within the company to go to court. Some nursing home companies have been hit with cases half a dozen times in the last decade. They typically agree to a settlement that can be a fraction of the alleged false claims. In one case, involving Encore Rehabilitation Services, which had contracts to provide therapy in Medilodge homes among others, the settlement was about a quarter of 1 percent of the alleged fraud.

One large chain, Consulate Healthcare, refused to settle a false claims case, went to a jury trial, was found culpable and hit with a $255 million judgment, which it has appealed.

“A nursing home is a breeding ground for people to take advantage of others,” said Joel Androphy, a Houston lawyer who brought the case against Encore. “If there’s an opportunity to game the system, it’s going to get done.”

At the beginning of this year the Justice Department announced that it planned to step up its efforts under the False Claims Act in going after cheating health care companies.

But it is not a substitute for genuine oversight. By its very nature it is random in its application. Where there’s a willing whistleblower, there’s a case. Employees are more typically coerced or even blackmailed into going along with the fraud.

“And there’s not enough government prosecutors across the country to take charge of the cases that need to be prosecuted,” Androphy said.

Given the disparity between Medicaid and Medicare rates, nursing homes mix the revenue streams. “We’re robbing those additional dollars from Medicare and giving them to those Medicaid patients,” said Mark Fritz, head of Bridgemoor Transitional Care, which runs rehab centers in Texas.

The result: Just enough is spent on Medicaid residents to keep state inspectors satisfied, while at the same time Medicare patients are not given the full value of their insurance coverage.

A factor that nursing homes have to deal with is a time limit on Medicare coverage, generally 100 days. That’s the window for obtaining as much money as possible to cover the care for each patient. Consultants advise nursing homes to be sure to diagnose and log as many co-morbidities as possible to maximize income.

“They just try to churn through Medicare and push them out when the Medicare is over,” Carlson said. “It’s wrong from a human perspective, and it’s wrong according to the law. You should get the care you need.”

David Grabowski, a Harvard University expert on the nursing home business, said, “The model just doesn’t work.”

And that’s even more the case now that the pandemic is raging and Medicare-supported rehab services have lost so many patients.

In an issue brief for the Commonwealth Fund, Grabowski argues that CMS and the states should “realign Medicare and Medicaid payments to approximate costs.” He argues further that nursing homes should have more clinicians — doctors, registered nurses and nurse practitioners — on site, that states should enforce minimum staffing requirements, and support higher pay for all staff.

Udow-Phillips, at the University of Michigan, has urged the state to provide a higher level of payments during the pandemic to nursing homes that can demonstrate rigorous infection control — a proposal involving a financial incentive that could be carried over even after the disease has dissipated.

What still angers Ashley Marie Cooke about the way her grandmother died is how administrators at Medilodge of Livingston kept assuring the public that they were doing their best to protect residents, despite continuing deficiencies cited by inspectors last year, and that they continued to say so even after Mary Catlin had to be taken to a hospital and even as they volunteered to take in coronavirus-positive patients.

And yet, Cooke said, they were largely unresponsive to her family’s increasingly desperate inquiries. “There was no common human decency in any of it for me,” she said.

In the hospital, where the nurses were willing and able to help the family connect by phone, Mary Catlin knew the end was near. “All she could say was she loved us,” Cooke said. “That was all she could really get out. But for us that was enough.”