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Skilled Nursing Facilities
Absent Effective State Oversight, Substandard Quality of Care Has Continued

Report Number: 2017-109

May 1, 2018 2017-109

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning the quality of care, financial practices, and statewide oversight of California’s skilled nursing facilities (nursing facilities).

This report concludes that the State has not adequately addressed ongoing deficiencies related to the quality of care that nursing facilities provide. From 2006 through 2015, the number of substandard care deficiencies that nursing facilities received increased by 31 percent. California assigns oversight responsibilities for nursing facilities to three state agencies: the California Department of Public Health (Public Health), the Department of Health Care Services (Health Care Services), and the Office of Statewide Health Planning and Development. We found that Public Health in particular has not fulfilled many of its oversight responsibilities, which are meant to ensure nursing facilities meet quality of care standards. Additionally, all three agencies have not adequately coordinated their oversight efforts, creating inefficiencies.

Moreover, as the sizes of the three companies we reviewed have increased significantly over the past decade, their net incomes—or revenues minus expenses—grew by tens of millions of dollars. We reviewed Brius, Plum, and Longwood, which are three of the largest private operators of nursing facilities companies in the State. The net income of all three companies grew from less than $10 million in 2006 to between $35 million and $54 million by 2015. The owners of the three companies were also able to earn additional income when their nursing facilities obtained goods or services from other businesses that they or their family members owned or controlled, called related parties. We found that related-party transactions are common in the industry and legally allowable. Medi-Cal takes several measures to limit the possibility that it might pay for profits from related-party transactions. The three companies we reviewed paid between $37.2 million and $65.7 million to related parties from 2007 through 2015. In most instances, the companies properly disclosed the related-party transactions we reviewed.

Although the State has made efforts to improve quality of care through a financial incentive program, the program is not as effective as it could be because its budget is limited and therefore only a small number of facilities receive incentive payments. To increase the impact financial incentives can have on quality of care, we believe the State should repurpose over $330 million in quality assurance fees that it annually assesses on nursing facilities to increase the amount available for such incentives. Health Care Services currently returns this money to nursing facilities without condition. However, modifying this program to require that nursing facilities demonstrate improvement to receive these funds could better ensure that nursing facilities provide the quality of care that Californians deserve.

Respectfully submitted,

State Auditor

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