Nursing homes are big business that provide valuable investing opportunities for private equity firms around the world. While not a glamorous business, nursing home chains can make money. In 2009, the U.S. nursing home industry provided more than $104 billion worth of health care to the elderly, infirm, rehabilitating and disabled. This number was up substantially by more than 20 percent just four years before. As the baby booming aging population grows larger every year, the demand for health care in nursing facilities is expected to grow substantially in the decades ahead.

A Profitable Private Equity Investment

Statistics indicate that nursing facilities owned by private equity investors pay more, albeit smaller, fines and receive more citations for a greater number of deficiencies then other for-profit facilities. In addition, these homes tend to have fewer registered nurses on the medical team, which tends to negatively impact residents. The nursing home care industry run by for-profit companies have long had tumultuous issues, especially multi-facility chains where the size of the parent company and their geographical scope nationwide facilities makes it difficult to control serious problems that each individual nursing home.

Even though the public is virtually unaware of deficiency problems, the attention by the media on private equity companies purchasing nursing homes has raised concerns about the quality of care these types of businesses can provide. In many situations, these companies have minimal accountability or no oversight at all compared to their competition other than the significant pressure placed on private equity investing entrepreneurs attempting to deliver high returns on their investment.

However, without the need of public disclosure requirements that is required by publicly traded businesses, many investors can enjoy the lucrative incentive to increase their bottom line by cutting corners, often times at the expense of the residents. Increasing profits can be accomplished by replacing highly expensive registered nurses with easily affordable licensed practical nurses (LPNs) and certified nursing assistants (CNAs). However, LPNs and CNAs often lack the necessary training to adequately meet the health and hygiene needs of every resident.

That said, many private equity facilities have fewer reported serious deficiencies compared to others in the nursing home health care industry. This might be the result of “turnaround” entrepreneurs focusing their attention on serious deficiencies that tend to generate stringent regulatory penalties including high cost fines.

Stakeholders Want Quality Care and Profits

Many private investors target financially strapped nursing facility chains as profitable investment opportunities. However, the complicated management structures of many of these larger multi-facility purchases have the propensity to obscure their true responsibility to provide quality care and hamper the efforts of residents and families seeking recourse for unresolved disputes that require litigation. Many stakeholders along with the U.S. Congress, labor unions and advocates are scrutinizing many of private equity investing deals looking for reassurances that the health and hygiene care provided to residents does not suffer.

Health care reform and new rules and protocols by CMS (Centers for Medicare and Medicaid Services) have made many nursing facilities take a different approach at their bottom line. Many private equity companies have been able to maintain profits by focusing on post-acute care for patients who are released from the hospital to recover from surgery including hip and knee replacements. This is because rehabilitation services and physical therapies attract higher profits in larger reimbursement rates paid by the federal government than taking care of individuals that are old and frail.

Our offering higher rates to ensure that their post-operative policyholders are placed in nursing facilities because it is significantly cheaper than allowing them to continue receiving care in the hospital. The increase revenues generated by caring for rehabilitation patients provides higher compensation to private equity companies that operate nursing facilities while the government pushes toward caregiving in an at-home setting.

However, there are significant risks involved in dealing with older poor individuals. As long as the profitability and nursing homes continues to be the main focus of private equity companies, poorer elderly citizens are likely to be left behind. The relationship of resident nursing care and profit-seeking private entities will likely generate more interest in the future as many more welfare recipients are likely to be replaced with higher paying customers.