Does the Profit Motive Make Nursing Homes Better or Worse?

Tuck professor Lauren Lu examines what happens when nonprofit nursing homes are purchased by for-profit businesses.

Even before the COVID-19 pandemic disproportionally ravaged the elderly, nursing homes in the U.S. were struggling.

A report published in 2019 by a health-care consulting agency found that, for the first time in 34 years of analyzing the industry, about half of the nation’s nursing homes had a negative operating margin. This was due in large part to decreased occupancy in long-term care facilities, as people began preferring to receive care at home as long as possible. The dire financial condition of many nonprofit nursing homes has led to an increase in the percentage of nursing homes purchased and owned by for-profit entities, such as conventional corporations and private equity firms. Between the years 2000 and 2017, the percentage of for-profit nursing homes in the U.S. rose from 65 to 70. This trend has drawn scrutiny from state and federal regulators and legislators, who worry that these for-profit entities will have a negative effect on the quality of care at the facilities they acquire.

In a paper forthcoming in Management Science, Tuck associate professor Lauren Lu and co-author Susan Lu of Purdue study the drivers and implications of this increase in for-profit ownership of nursing homes. Analyzing national level data from the period of 2006 to 2017, and using a sample of 631 ownership conversions during that time, they find that nursing homes with higher financial distress are more likely to be converted from nonprofit to for-profit, and that, on average, the post-conversion quality of care declined because the new for-profit owners aggressively downsized the staff of registered nurses in the facilities.

Lauren Lu

At Tuck, Lauren Lu teaches the Supply Chain Management elective. Much of her research investigates the performance of various health care systems with a focus on nursing home operations.

The pandemic has made the ownership status of nursing homes and its implications on quality of care an even more urgent concern. While nursing homes hold only one percent of the U.S. population, they account for more than 35 percent of COVID-19 deaths.

In their paper, “Does Nonprofit Ownership Matter for Firm Performance? Evidence from Ownership Conversions of Nursing Homes”, Lauren and Susan shed light on the mechanisms behind the ownership conversions and uncover patterns in how the firms attempted to wring profit out of struggling long-term care facilities. They discovered that, on average, post-conversion operating margins increased significantly—by eight percentage points. How did they achieve those gains? “There are only two possibilities,” Lauren says, “you either increase your revenue or decrease your costs. We have evidence that the net resident revenue stayed fairly flat, so these entities relied on a significant decrease in operating costs to increase their operating margin.”

Conversions from nonprofit to for-profit usually happen for survival—so the facilities don’t close. Society needs to make sure the converted facilities not only stay open, but that they continue to provide excellent care.

The for-profit nursing homes decreased their operating costs mainly by reducing wages for nurses and other staff. The staffing level (measured by hours per resident day) of Registered Nurses (the most qualified and highest paid nurses) in these facilities decreased by 7.2 percent, while the staffing level of Licensed Practical Nurses (who have less training and command lower wages) increased slightly. Many studies have shown that the quality of care in nursing homes is strongly associated with the level of RN staffing, and the pattern persists in the national data the co-authors collected: the quality of care in post-conversion nursing homes generally went down, as measured by the number of deficiency citations.

The co-authors found pre-conversion financial distress to be a strong moderator of the effect of ownership conversion from nonprofit to for-profit. “High-distress nursing homes cut their operating costs and staffing more aggressively after conversion, and their quality declined more severely,” Lauren says. “Meanwhile, low-distress nursing homes mostly kept their RN staffing unchanged and largely avoided a quality decline, but their operating margins were still able to improve, mostly by cutting non-care-related staffing cost.”

For Lauren, the implications of their study are two-fold. First, regulators need to exercise more oversight of ownership conversions from nonprofit to for-profit, especially when the nonprofit entity is in high financial distress. And second, for-profit businesses that purchase nursing homes should avoid the pitfall of cutting RNs, while instead focusing on streamlining overhead operations. “Conversions from nonprofit to for-profit usually happen for survival—so the facilities don’t close,” Lauren says. “Society needs to make sure the converted facilities not only stay open, but that they continue to provide excellent care.”