There have been a lot of stories in the media about private equity and nursing homes, often by The New York Times, which seems to have a “thing” about the nursing home industry. All that we have seen has been negative in varying degrees, mostly dealing with cuts in staffing, declining quality of care and increased leverage.  

But a recent study by three academics from UCLA and Duke took a very detailed look at what happened to staffing, specifically nursing, when PE firms bought nursing homes. The study also tried to pinpoint what caused PE firms to change the level of staffing, as well as which staff jobs went up or down. 

The study covered 77 PE acquisitions covering 1,451 nursing home between 1993 and 2017, and it used as a control group five nursing facilities in each local market of the target facilities. The results were not earth shattering, but in some ways dispel the myths about PE investors. 

What the researchers found was that in more competitive, or concentrated, markets, PE firms actually increased their spending on staff by an average of $72,501 worth of care annually, while in less competitive markets they reduced staffing by an average of $18,604 annually.  

They also found that PE firms tend to respond to policies intended to spur competition (or at least to spur better quality). In the middle of the timeframe for the study, CMS introduced its five-star rating system. Following the introduction of the five-star rating system, PE-owned facilities increased their staffing by an average of $77,063 worth of care more than the non-PE-owned facilities. In addition, PE-owned facilities were found to shift their staffing composition towards RNs in response to the five-star rating system’s emphasis on RN staffing.  

Combining the competitive market aspect plus the five-star rating system impact, the researchers found that PE owners increased their staffing expenditures by 3.6% of the mean, or enough to raise RN staffing by 18% of the mean. But in acquisitions in less competitive markets prior to the five-star ratings, staffing expenditures were lower by 4.3% of the mean, reducing RN staffing by 21% of the mean. 

While the researchers did not conclude this (but we will take the liberty to do so), it would appear that in those markets where there was the potential to expand the higher-paying Medicare census, which usually come from hospital discharges, PE firms were willing to spend more on healthcare staffing and increase the proportion of RNs on their staffs. If a higher rating and more RNs will win more hospital business, then the acquisition will prove to be more profitable. Duh. 

The bottom-line conclusion was that PE-owned facilities are more sensitive to competitive incentives than non-PE facilities. PE firms are not stupid, and when they buy nursing facilities, they obviously want to increase the cash flow and value. If switching RNs for LPNs helps their rating and Medicare census, they will do that every day. Otherwise, why would they make the investment in the first place. Their pension fund investors are counting on their above-market returns.