Covid-Hit Nursing Homes Load Up on Debt

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By Eleanor Laise, BARRON’s, February 4 2021

A woman looks through a window while visiting her father at his care home in California in April 2020.

Dozens of poorly run nursing homes have recently taken out cheap financing backed by a federal loan guarantee program that critics say is propping up some of the industry’s worst operators, even as Covid-19 ravages the residential care sector. 

The program, which provides mortgage insurance for long-term care facilities, guaranteed about $4.4 billion worth of loans in fiscal 2020, up more than 60% from 2015. Nursing homes that have recently taken advantage of the program include those that regulators say have caused patients serious harm and failed to protect residents from abuse. The federal program is “indiscriminately guaranteeing the loans of companies that have terrible track records,” says Mike Connors, long term care advocate at California Advocates for Nursing Home Reform. “The federal government should be screening out unfit nursing homeowners, not financing their expansion.” 

Overseen by the U.S. Department of Housing and Urban Development and known as “Section 232,” the program is designed to boost access to quality health care and protects lenders against losses in the event of a default, helping to provide low-cost, long-term financing for borrowers purchasing, refinancing, building or renovating long-term care facilities. 

More than a third of the roughly 260 skilled nursing facilities that got HUD-backed loans through the program in the fiscal year ended Sept. 30, however, have had recent regulatory issues serious enough to merit citations for putting residents in immediate jeopardy, fines of over $10,000, Medicare payment suspensions, flags for abuse, or the lowest one-star quality rating from CMS, according to a Barron’s analysis. Four are candidates for the CMS “special focus facility” program, which is reserved for facilities with the worst track record of severe regulatory violations. Behind those numbers are cases of unnecessary suffering and potentially avoidable death, state inspection reports show, including a woman who had two toes amputated because the facility failed to treat her wounds and residents who received no CPR or other emergency services when their hearts stopped, contrary to their documented wishes. 

The Section 232 program in fiscal 2020 managed an insured portfolio of nearly 3,900 loans with an unpaid principal balance of $33 billion. Screening out operators that provide poor care, industry experts say, is critical not just to protect the more than 2 million U.S. long-term care residents but also for the financial health of the HUD program, because nursing-home quality of care and financial stability often go hand in hand. “A facility with a shaky financial foundation will almost certainly compromise patient care,” cutting back on staffing, equipment and other essentials, says Jessica Moore, an attorney specializing in health care fraud at Constantine Cannon. 

HUD said in a statement that its Office of Residential Care Facilities, which administers the Section 232 program, “considers quality of care as an area of paramount importance in the underwriting of loan applications,” requires lenders to research and disclose prospective borrowers’ legal and regulatory red flags, and scrutinizes the issues raised. Special Focus facilities and candidates aren’t accepted as new participants in the program, and HUD doesn’t insure a loan unless its review confirms that “the insurance risk is appropriate,” the department said. When weighing applications from facilities with performance concerns, HUD said it can require a third-party risk assessment, an escrow tied to improved performance, or other risk-control measures. Some of the loans insured in fiscal 2020 were refinances of facilities already insured by the Federal Housing Administration, HUD said, which can reduce the default risk by trimming the interest rate and monthly payments. Low rates and the Covid-19 pandemic’s impact on other financing alternatives have helped fuel the recent growth in the program, HUD said. 

The Covid crisis has raised new questions about subpar nursing-home operators benefiting from federal programs and billions of dollars in relief funds that have flowed to the long-term care industry. More than 153,000 long-term care residents have died of Covid, accounting for more than a third of total U.S. Covid deaths, according to the Covid Tracking Project. The Covid relief package signed into law late last year included a provision that expanded benefits for participants in the Section 232 program, allowing those that were financially stable pre-pandemic to borrow additional funds to cover Covid-related expenses or losses. “Long-term care providers are facing the worst financial crisis in the history of the industry,” industry group American Health Care Association/National Center for Assisted Living, which pushed for the provision, said in a statement. 

As the industry pleads for more federal money, however, better control is needed over who runs nursing homes “and what they do with the money we give them,” says Toby Edelman, senior policy attorney at the Center for Medicare Advocacy. “If you’re providing terrible care, maybe we shouldn’t be giving you mortgage insurance.” Some researchers say it’s time to redesign the Section 232 program. Charlene Harrington, professor emerita at the University of California, San Francisco, suggests limiting it to quality nonprofit and government facilities. There’s an oversupply of nursing-home beds in many areas, she says, and “the poor operators need to be forced out of business.” 

For nursing-home operators, the benefits of the Section 232 loans are clear. The loan terms can stretch out to 40 years and offer fixed rates that are often at least 1 to 2 percentage points below conventional loans, says Joshua Rosen, a senior managing director at Walker & Dunlop, a Section 232 lender. “Once you’re done, you’re set for the next several decades,” Rosen says. Another perk: It’s a non-recourse loan, so for borrowers, “there’s nothing at stake, other than the facility, if things don’t go as planned,” he says, although there are exceptions in cases of fraud or misrepresentation. 

For nursing-home residents and taxpayers, however, there is plenty at stake. First launched in 1959, the Section 232 program has been criticized in recent years for failing to properly monitor nursing homes’ financial and physical condition. More than a dozen Illinois and Missouri facilities in the Rosewood Care Centers chain defaulted on $146 million worth of HUD-backed loans in 2018. A HUD Inspector General report that same year found that the department didn’t always have sufficient financial data to assess facilities and didn’t routinely evaluate whether the financial information submitted by facility operators and lenders was complete and accurate. HUD allowed defaulted nursing homes to remain in its portfolio for up to 6.5 years, accumulating interest and other carrying costs, according to the report. HUD said in a statement that its Office of Residential Care Facilities has continued to improve the reporting process and timely use of the data and is getting risk-mitigation recommendations from an outside contractor.

A 2012 rule change exempted most nursing homes in the program from routine HUD inspections meant to assess their physical condition, on the basis that they duplicated CMS nursing-home inspections. But CMS inspections focus primarily on a facility’s quality of care, not the plumbing leaks and exposed wiring that could be uncovered by HUD inspections. Both the HUD Inspector General and House Ways and Means Committee Chairman Richard Neal (D, MA) have called on the department to reinstitute physical inspections. “Structures falling into disrepair are often an early warning sign of financial insolvency,” Neal wrote in a 2019 letter to HUD. CMS inspections, HUD says, “include a substantial physical component appropriate to residential care facilities.” With new leadership at HUD, the Committee plans to follow up on its efforts to improve oversight of the program, according to a committee aide. 

HUD’s Inspector General shares nursing-home resident advocates’ concerns about facilities with care-quality issues participating in the program, a spokesman said. Edward Golding, who headed the FHA from 2015 to early 2017, says he struggled with the same issue. “What’s the mission? How do you know you’re doing good?” he recalls asking his team. While the hope is that low-cost mortgages mean facilities have more money to prevent infection and otherwise improve care, he says, “surely if you’re helping bad actors get bigger, that’s a really bad thing.” 

Operators with significant regulatory and legal troubles have gone on to obtain Section 232 loans for a broad swath of their facilities. In 2017, Point Loma Convalescent Hospital, a San Diego nursing home now known as the Pavilion at Ocean Point, and 10 other facilities affiliated with California nursing-home operator Brius Management Co. or its head Shlomo Rechnitz obtained HUD-backed loans totaling more than $195 million. The year before, Point Loma was one of four Brius facilities to enter deferred prosecution agreements with the U.S. attorney’s office in San Diego, after admitting that employees paid kickbacks to hospital discharge planners without the knowledge of Brius, according to the Justice Department. That same year, the California Department of Public Health denied Rechnitz’s applications to operate several facilities in the state, citing a track record of severe regulatory violations at other facilities he owned, managed or operated. And in 2014, then-California Attorney General Kamala Harris filed an emergency motion in bankruptcy court to block Rechnitz from taking over a string of facilities, saying that his “continued and repeated refusals to comply with industry laws and regulations is harming the skilled nursing industry.” 

Facilities controlled by Rechnitz “shouldn’t get a single loan” backed by HUD, says Ernest Tosh, a Dallas attorney specializing in nursing-home abuse and neglect cases. Relying on lenders to vet facilities’ regulatory track record is “asking the fox to guard the hen house,” he says, because with HUD shouldering the default risk, it isn’t in the lenders’ economic interest to turn away borrowers. 

In response to questions about Brius’ track record and the Section 232 loans, Mark Johnson of Hooper, Lundy & Bookman, Brius’ regulatory counsel, forwarded a Jan. 1 email from the Los Angeles County Department of Public Health thanking Rechnitz for opening Covid-designated facilities and “committing to take many patients in a time of great need.” Regarding the HUD-backed loans, Johnson said, “since the day the loans were approved there has not been one payment on one facility that was a single day late.” First American Capital Group of Great Neck, NY, the lender on all 11 of the 2017 loans, didn’t respond to requests for comment. 

Although lenders must review the track record of all facilities owned or operated by a prospective borrower, operators that rank among the worst in the nation on certain care-quality measures have obtained a string of recent loans. Thirty-six nursing homes operate under the Aperion Care name in Illinois and Indiana, and six of them rank among the bottom 100 nursing homes nationwide in terms of total nurse staffing hours per resident day, according to CMS data. The chain’s West Chicago facility has the lowest staffing, by this measure, out of more than 15,000 nursing homes nationwide, with 1.5 total nurse staffing hours per resident day, whereas the federal government’s recommended level is 4.1 hours. Another seven Aperion Care facilities are in the Special Focus program or on the candidate list, which bars entry into the Section 232 program, and an eighth recently shut down after 19 months in the program. Only about 3% of nursing homes nationwide have a special focus designation. But five Aperion Care facilities got HUD-backed loans in 2019 and 2020, totaling more than $37 million. 

Aperion has taken over some troubled facilities and attempts to turn them around, but “it’s not like there’s a magic wand,” says Fred Frankel, the company’s general counsel. The facilities that rank poorly in the CMS staffing data meet state requirements for nursing hours, he says, and mainly house lower-acuity patients that require less staffing. The HUD loans offer “a sense of security,” he says. “We’re not worried that every two years we’re refinancing.” 

Some long-term care facility owners and administrators have siphoned cash from the facilities while defaulting on their HUD-backed loans. Antonio Otero, former administrator of Magnolia Alzheimer’s Assisted Living in Texarkana, Tex., pleaded guilty in 2019 to skimming equity from the facility, which had defaulted on its Section 232 loan, diverting the cash to buy $1,540 worth of Dallas Cowboys tickets, $2,520 in landscaping for his personal residence, and a $3,247 watch, among other expenses, according to the Justice Department. Otero was sentenced last year to 46 months in federal prison and ordered to pay $2 million in restitution to HUD.

HUD occasionally sells off to investors Section 232 loans that have turned sour. It sold the Magnolia loan, for example, for 60% of the unpaid principal balance. But in many other cases, it gets just pennies on the dollar. HUD initially insured a $9.2 million loan for Birmingham Health Care, a nursing home in Derby, CT, in 2005, according to the department. The facility’s operator, Spectrum Health Care, declared bankruptcy in 2012, and Birmingham got a $8.95 million refinance through Section 232 in 2013. That was part of a workout effort that reduced debt service and “imposed numerous special conditions,” HUD says. But Spectrum declared bankruptcy again in 2016, and HUD ultimately sold the Birmingham loan, which had an unpaid principal balance of $8.35 million, for $125,000. Spectrum executives didn’t respond to requests for comment.