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California State Auditor Logo COMMITMENT • INTEGRITY • LEADERSHIP

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

Report Number: 2017-109

SUMMARY

HIGHLIGHTS

Our audit of California's oversight of nursing facilities highlighted the following:



Tens of thousands of elderly and disabled Californians rely on skilled nursing facilities (nursing facilities) to provide them 24‑hour inpatient care. Generally operated by private companies, nursing facilities collect payments for the services they provide from Medicare, Medi-Cal, private insurance, and patients.1 The importance of nursing facilities will only increase as the State's population ages and demand rises. Of particular concern, from 2006 through 2015, the number of instances in which the California Department of Public Health (Public Health) cited California nursing facilities for deficiencies related to substandard care increased by 31 percent from a total of 445 in 2006 to 585 in 2015, while deficiencies associated with nursing facility noncompliance that caused or were likely to cause, serious injury, harm, impairment, or death to residents increased by 35 percent from 46 in 2006 to 62 in 2015.

The State has not adequately addressed ongoing deficiencies related to the quality of care that nursing facilities provide. California assigns oversight responsibilities for nursing facilities to three separate state agencies: Public Health, the Office of Statewide Health Planning and Development (Health Planning), and the Department of Health Care Services (Health Care Services). Public Health in particular has not fulfilled many of its oversight responsibilities, which are meant to ensure that nursing facilities meet quality-of-care standards. For example, through its licensing process, Public Health makes a determination whether to approve or deny a company's application to obtain a license to operate a nursing facility. Despite the importance of this process, Public Health's licensing decisions appear inconsistent because of its poorly defined review processes and failure to document adequately its rationale for approving or denying license applications. Furthermore, Public Health has not performed all of the state inspections of nursing facilities that it is required to perform and has not issued citations for facilities' noncompliance with federal and state requirements in a timely manner. It has also failed to seek legislative actions to increase the penalties associated with those citations by the cost of inflation, after we recommended in 2010 that it take this action. Together, these oversight failures increase the risk that nursing facilities may not provide adequate care to some of the State's most vulnerable residents.

In addition, 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 the program's budget is limited and only a small number of facilities receive the incentives. Therefore, we believe that the State should repurpose over $330 million in quality assurance fees that it assesses annually on nursing facilities to increase both the amount available for such incentives and the impact that financial incentives can have on quality of care. Health Care Services currently returns this money to nursing facilities without condition because the primary purpose for which the State established the quality assurance fees was to receive federal matching funds. However, by modifying this program to require that nursing facilities demonstrate improvement to receive all or a portion of their quality assurance fee payments, the Legislature could better ensure that nursing facilities provide the quality of care that Californians deserve. For example, the Legislature could require Health Care Services to reimburse a percentage of the fee—such as 10 percent—without condition and require nursing facilities to meet quality improvement targets as a condition to receive the remaining 90 percent.

Moreover, the sizes of the three private companies we reviewed have increased significantly over the past decade, and their net incomes—their operating revenue after subtracting their operating expenses—grew by tens of millions of dollars, even as the net income for the rest of the industry in the State decreased. We reviewed three of the largest private operators of nursing facilities in the State—Brius, Longwood Management Corporation, and Plum Healthcare Group. All three companies made less than $10 million in net income in 2006, but by 2015 their net incomes had increased to between $35.2 million and $53.8 million. The sources for the largest increases in the companies' revenue during this period were Medicare and managed care.2 Medi-Cal likely did not contribute significantly to the companies' net incomes because it does not fully cover nursing facilities' costs per Medi-Cal patient. In other words, Medi-Cal patients generally represent a financial loss to nursing facilities. Although the companies' expenditures also grew during this period, the increases in their revenue significantly exceeded the growth in their expenses, allowing the companies to raise their net incomes.

The owners of the three companies we reviewed were also able to earn income—separate from the revenue their nursing facilities earned from Medicare, Medi-Cal, or managed care—when their nursing facilities obtained goods and services from related parties, or other businesses that they or their family members owned or controlled. We found that related-party transactions are common in the industry and are 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. However, we found that the companies properly disclosed 76 of the 80 potential related-party transactions we reviewed. Furthermore, Health Care Services, through its Medi‑Cal audit process, ensured that Medi-Cal did not pay for profits realized from any of the transactions.

Finally, we found that Public Health, Health Planning, and Health Care Services have not coordinated their oversight efforts adequately. For example, the three agencies collect duplicative ownership, facility, and financial information from nursing facilities, creating inefficiencies for both the agencies and the nursing facilities. Additionally, Health Planning and Health Care Services each conduct audits that could be more efficient if the agencies better coordinated their efforts. Improved coordination among the three agencies would also enable them to develop new methods to share information with consumers and stakeholders. To provide a potential model of how this information sharing might work, we developed an interactive data dashboard on our website that shows nursing facility financial information and quality‑of‑care indicators. If implemented by the agencies, this dashboard or something similar would allow consumers to track the growth of companies and review their performance.

Summary of Selected Recommendations

Legislature

To ensure that the State supports nursing facilities' efforts to improve their quality of care, the Legislature should modify the State's nursing facility quality assurance fee by requiring nursing facilities to demonstrate quality-of-care improvements in order to receive reimbursements of all or some of their quality assurance fee payments. If nursing facilities do not show improvements, Health Care Services should redistribute their quality assurance fee payments to those nursing facilities that have improved.

To ensure that Public Health's oversight results in nursing facilities improving their quality of care, the Legislature should require Public Health to improve its licensing review process and require it to increase citation penalty amounts annually by—at minimum—the cost of inflation.

To ensure that the three state agencies coordinate effectively, increase efficiency, and improve transparency in their collective oversight of nursing facilities, the Legislature should require Health Planning, Public Health, and Health Care Services to collaborate to assess the information that each collects from nursing facilities and to develop a proposal to improve their collection and use of the information.

Public Health

As the Legislature considers changes to state law, Public Health should take the steps necessary to ensure that it documents adequately its licensure decisions and that it issues citations in a timely manner.

Agency Comments

Health Care Services and Health Planning agreed with our findings and indicated that they would take the steps necessary to implement our recommendations. In contrast, Public Health disagreed with some of the audit's findings—most significantly that absent effective state oversight, substandard quality of care has continued—and only partially agreed to implement two of our three recommendations. We provide our perspective on Public Health's response to our report.



Footnotes

1 Medicare is the federal public health insurance program for individuals over 65, as well as for others with certain disabilities or kidney failure. As part of the U.S. Social Security Medicaid program, Medi-Cal is funded by a joint partnership between the State and the federal government and is intended to be the payer of last resort after patients exhaust all other means of paying for their care. Go back to text

2 Managed care pays a flat rate for patients regardless of the services they use and receives funding from Medicare, Medi-Cal, and private insurance. Go back to text



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