Trial Magazine

Research has shown that, on average, for-profit nursing home chains provide lower quality resident care than their nonprofit counterparts.¹ But corporate parent companies of nursing homes often claim that they are merely passive holding companies and the nursing home is a distinct entity, free to operate as it sees fit. In most cases, however, these parent companies either directly or indirectly control virtually every aspect of a nursing home’s operation.² Understanding the connections between the different links of the corporate chain and requesting certain documents will help hold parent companies accountable.

Who Is in Charge?

Establish the corporate structure from the parent company down to the facility level. The parent company typically owns, either directly or indirectly, 100 percent of its subsidiaries. And usually, all or most of the entities share common officers and directors, as well as the same corporate address.

Management companies. With few exceptions, management companies (sometimes called “administrative services companies”), which are direct or indirect subsidiaries of the parent company, provide services directly to the nursing facility. So how do you show the link between the parent company, the management company, and the facilities?

Discovery is key. Request the written contract between the facility and the management company. Determine each entity’s responsibilities and which employees meet those responsibilities. Management company employees often claim that they provide only “back office support.” Such statements are almost always inaccurate, and the written contract will directly contradict this.

For example, management company employees often testify that they are only consultants and that the nursing home maintains its decision-making independence. But the management agreement will show that the facility’s policies and procedures come from the management company and that it must seek the management company’s approval before making any changes to those policies and procedures.

Contract provisions about the payment of management fees may illustrate the degree of the management company’s control. As a starting point, figure out how the fee charged to the facility to act as its manager is calculated: Is it based on the facility’s gross revenue, or is it a flat fee? You have strong arguments for a joint venture (and therefore joint responsibility) if the management company charges a percentage of gross revenue as the management fee. If the management company charges a flat fee, it is often excessive, was agreed to with no negotiation, and has no relationship to the services provided.

Next inquire into the management agreement negotiations: You’ll probably discover that no negotiations took place. The best time to address this issue is in depositions and not in interrogatories so the defense attorney and deponent cannot prepare for your questions. Facility-level employees usually admit in depositions that they were unaware the agreement existed or allege that the facility had no say in approving it. Also examine the signatories to the agreement. In most cases, an officer or director of the management company (and parent company) signed for both parties. This makes it difficult for the officer or director to credibly argue that this was a fair and reasonable contract negotiation.

Another helpful resource is the Centers for Medicare and Medicaid Services’ (CMS) Provider Reimbursement Manual for facilities that receive Medicare payments.³ The manual recommends that a provider (the nursing home) initially determine “whether the services the provider needs can be obtained more effectively using in-house staff or through outside contractors. After evaluating all factors, a provider should choose the most prudent manner of performing the services.”⁴ The manual also states that a facility seeking reimbursement for purchased management services “must demonstrate its operational need and the cost effectiveness of its expenditures vis-à-vis available alternatives for obtaining the necessary services.”⁵ The facility also must demonstrate that it searched the marketplace for the most appropriate and best means of obtaining the services.⁶ Essentially, a facility must act as any prudent business owner would.

Most facility-level employees are unaware of this language in the Provider Reimbursement Manual. The facility administrator or the facility’s “person most knowledgeable” likely will testify that the facility failed to follow any of these recommendations before entering into the management agreement, lending support to the notion that the management agreement was forced on the facility without it having a say in the bargaining process. Lack of any meaningful negotiation is helpful to show corporate control of a facility’s operation.⁷

Corporate consultants. Corporate parents and management companies use consultants (typically employees of a subsidiary) to supervise the facilities and provide services for every aspect of the facility’s operation. There are consultants at the regional level and also up the corporate chain at the district level. Facility administrators and directors of nursing routinely refer to these consultants as their “supervisors.” Because these consultants communicate constantly about a nursing home’s operation, many documents are exchanged between the facility and the consultants. Request these in discovery.

For example, administrative and clinical consultants routinely review a facility’s staffing documents on a daily or weekly basis. Consultants also review acuity (the level of care a resident requires) and daily census information to determine whether revenue targets are being met. If targets imposed by the management company are not being met, the consultants instruct the facility on how to increase those numbers—thereby increasing revenue for the parent company.

Audits are another important source of information. Clinical and administrative consultants audit clinical care, as well as the facility’s financial operations. During discovery, look for the names of the reports that are generated, where they are stored, who has access to the audits, and other significant information. This shows the extensive control that the management company exercised and the massive amount of information it can access to keep tabs on the facility’s operations. Have a witness identify these reports by name in a deposition, then issue your written request for the specific documents.

Consultants also are involved in resident and employee complaints. Most nursing homes have a formal grievance process for residents and employees to raise concerns. These grievances often are forwarded to corporate consultants, which puts the facility and management company on notice of concerns at the facility. For example, look for written complaints of understaffing or underfunding from current or former employees and the response, if any, that was provided.

Follow the Money

Budgets, compensation, and expenditures can reveal a lot about the parent company’s involvement in the facility’s day-to-day operations.

Budgets. A facility often has little control over its budget. Before a budget is implemented, regional and district-level employees must approve it. In larger nursing home chains, the individual facility budgets are consolidated by region or district and then approved by parent company officers, directors, or managing agents—only then can the budget be implemented at the facility level.

Find out what is included in the budget. Take a person most knowledgeable deposition that lists one of the topics included in the budget, or request a template budget form in written discovery. This may avoid the expected defense objection to disclosing private financial information: If no financial information is included in what is produced, it is difficult for a defendant to argue that the document contains sensitive financial data. Does the management company routinely audit the budget throughout the year or does a facility have to get the management company’s permission before the budget can be exceeded (sometimes called a “variance request”)?

As with most corporations, for-profit nursing home chains try to keep ¬their overhead low and revenue high. To do this, they actively market to higher acuity residents, while simultaneously tending to understaff—a practice with potentially disastrous consequences. Request documents exchanged between the management company and facility detailing the facility’s overall business goals. Specifically, find out whether the facility requested additional staff to meet the needs of its residents and whether such a request was rejected.

Bonuses. What conduct is rewarded? The bonus and incentive programs at the facility level can help provide an answer. Administrators, directors of nursing, and other department heads typically receive bonuses, which offer insight into whether providing quality resident care or generating revenue for the parent company is the ultimate priority. Discover who approved the bonus structure and whether all the parent company’s facilities used that structure. If so, this is an indication that the corporate parent controls how facility-level employees are incentivized.

Purchases. Most facilities cannot purchase anything that costs more than a few thousand dollars without ¬management company approval. The higher the purchase price, the higher up the corporate chain the request must go.

Facilities often purchase supplies through electronic requisition forms in a company-wide intranet portal. The facility employee identifies the item that the facility needs to purchase and waits for approval from the management company. This shows that the management company controls the facility’s expenditures, rather than the facility being able to make an autonomous decision regarding its needs.

Credit agreements. Revolving credit agreements are a great source of evidence for proving corporate control. Nursing home chains use credit agreements to provide financing to facilities within the chain. Collateral is required before a bank will issue a revolving line of credit, and the parent company offers its assets, including revenue generated by its nursing homes, as collateral. State and federal regulations make it clear that administrators are ultimately responsible for the facility’s business operations.⁸ You would expect administrators to know that the facility and its assets are collateral for loans and credit agreements, but in reality, the parent company does this without the administrators’ knowledge. This is persuasive evidence of control.

Lockbox accounts, which are commonly required with revolving lines of credit, are structured so that reimbursement for resident care, such as a Medicare payment, is directly wired from the payor to that account. The facility cannot directly access these funds although the funds were generated through resident care at the facility; it cannot withdraw funds from the lockbox account but instead must ask for them from the management company. Request documents and policies detailing the lockbox account and what is required of the facility.

Keep in mind that larger nursing home chains may have multiple lockbox accounts so it’s crucial to trace the funds once they are wired into a lockbox account. Funds from different lockbox accounts usually end up in one or two main accounts in the parent company’s name.

Securities and Exchange Commission (SEC) filings. If a potential defendant is a publicly traded company, SEC filings are a gold mine of information: For example, Form 10-K or Form 8-K filings detail the company’s financial information and include descriptions of the parent company’s business operations.⁹ These documents confirm the parent company profits or loses money from the operation of its nursing homes. Also note how the corporate parent company defines its business operations. Parent companies claim that they are merely passive holding companies with no involvement in resident care, which contradicts what they tell investors and the SEC. If parent companies encourage investment by claiming that they are in the business of “operating health care facilities,” they should be held directly or vicariously responsible for negligent health care that harms nursing home residents.¹⁰

If the corporate parent is not publicly traded, SEC filings still can be helpful. Determine whether another publicly traded company does business with your corporate defendant. If so, the publicly traded company may post information about the business structure of and financial dealings with the corporate parent in your case. For example, in a recent case, a publicly traded real estate company posted detailed consolidated financial statements from the private entity corporate defendant. We used those financial statements to show how the corporate parent made its money and marketed itself to investors. There was no legitimate argument for confidentiality because the information was publicly available.

Federal income taxes. Parent companies file federal income taxes and treat their subsidiaries as “disregarded entities,” meaning the subsidiaries do not directly pay federal income taxes. But only single-member limited liability companies can be treated as disregarded entities.¹¹ This applies to subsidiaries because they are 100 percent owned by the entity above them—their “single member.” This allows the parent company to pay taxes once rather than having all the subsidiaries file and pay their own taxes. This can save the parent company and its subsidiaries hundreds of thousands of dollars. All assets and liabilities belong to the parent company, which pays any tax owed for a facility’s operation and receives any return.

The ultimate source of the tax owed is the operation of health care facilities, which shows a joint venture because the parent company profits or loses money from the operation of nursing homes around the country. Additionally, when deposing a corporate representative, connect the parent company’s tax burden with money it generates in your state, especially when facing lack of personal jurisdiction arguments. This is direct evidence that the parent company profits or loses money as a result of nursing home operations and is therefore doing business in your state.¹²

Who Owns the Facility?

Nursing homes generally do not own the land on which the facility sits—real estate companies that are direct or indirect subsidiaries of the parent company typically do. In this situation, look at the lease agreement to determine how rent was calculated and whether the parties engaged in any meaningful negotiation. Rent is usually the largest expense for nursing homes, aside from employee salaries and wages. From there, you can establish that the real estate company is a wholly owned direct or indirect subsidiary of the parent company, thereby increasing the parent company’s profits with each rent payment made to the real estate company.

For larger nursing home chains, a separate real estate company usually owns the land.¹³ Look at your county assessor’s website to see who owns the land, review cost reports, or request a copy of the lease agreement in written discovery. Larger chains do not own the land themselves because nursing homes are frequently bought and sold, and larger chains take over for smaller companies that did not originally own the land. However, the real estate itself is subject to a master lease agreement, which covers all the facilities, and amendments to the master lease are added as new facilities are acquired.

Facility-level employees have no knowledge of this agreement, and the facility and parent company must comply with its terms. In this situation, the parent company is a tenant and guarantees payment of the rent by its indirect subsidiaries (the nursing homes).

The collateral offered for these lease agreements is another important piece of evidence. If a facility’s property or assets are offered as collateral, then that facility cannot dispose of them without approval by the operator (typically the parent company) and property owner. Facility-level employees likely are unaware of this arrangement and the restrictions placed on them—and this is strong evidence that the parent company has overall control.

This evidence also helps establish minimum contacts if you are facing a motion to quash for lack of personal jurisdiction. Personal jurisdiction for a parent company can be established if you prove that the parent company encumbered assets and property in another state. For example, if the company offers as collateral the assets and revenues generated by nursing facilities in several states, you can use the master lease agreement to argue that the company is controlling property and money in your state, thereby subjecting itself to personal jurisdiction because it is taking advantage of conducting business in your state by generating profits in your state.

Additional Evidence

Here are a few more types of documents that often include relevant information regarding the level of control the parent company had over its facilities.

Employee handbooks and standards of conduct. All nursing home employees must comply with employee handbooks and standards of conduct—and this includes everyone from those at the top of the corporate hierarchy down to the facility-level staff. Often, these documents repeatedly reference “our employees” and “family of companies,” as well as invoke other phrases implying that everyone is part of the same company. No meaningful distinction is made between entities; all entities, from top to bottom, are referred to collectively as one.

Who welcomes the employee to the company in the handbooks? The answer is usually a CEO or other high-ranking person of the parent company. You would not expect a passive holding company to disseminate mandatory handbooks to facility-level employees. Parent companies also implement compliance committees at the facility level and use chief compliance officers to ensure its subsidiaries follow the code of conduct and report any potential violations.

Corporate integrity agreements. These are also helpful and publicly available. The U.S. Department of Justice has been investigating a growing number of nursing home chains for billing fraud.¹⁴ Following an investigation, the parent company and its subsidiaries must enter into corporate integrity agreements, which painstakingly detail what the parent company must do to ensure its subsidiaries comply with federal law. Because compliance with the agreement is achieved only through the parent company’s exercise of pervasive control over its subsidiaries, this is additional evidence of the relationship with the nursing home facilities.

In nursing home cases, you must show what happened. But it is just as crucial, if not more so, to show why it happened.

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Kim Valentine is the principal attorney at Valentine Law Group in Mission Viejo, Calif., and can be reached at kvalentine@valentinelawgroup.com. Travis Siegel is the founder of Siegel Law in Tustin, Calif., and can be reached at travis@neglectattorney.com.

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Notes

1. E.g., Vikram R. Comondore et al., Quality of Care in For-Profit and Not-for-Profit Nursing Homes: Systematic Review and Meta-Analysis­, 339 British Med. J. 381–384 (2009), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2721035/; Michael P. Hillmer et al., Nursing Home Profit Status and Quality of Care: Is There Any Evidence of an Association?, 62 Med. Care Res. & Rev. 139–166 (2005), https://doi.org/10.1177/1077558704273769.

2. See, e.g., United States v. Bestfoods, 524 U.S. 51 (1998); Forsythe v. Clark USA, Inc., 864 N.E.2d 227 (Ill. 2005); Cochrum v. Costa Victoria Healthcare, LLC, 236 Cal. Rptr. 3d 457 (Cal. App. Ct. 2018).

3. Ctrs. for Medicare & Medicaid, Regulations and Guidance, Publications 15-1 and 15-2, The Provider Reimbursement Manual, pts. 1 and 2, CMS.gov, https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Paper-Based-Manuals.html.

4. Ctrs. for Medicare & Medicaid, Regulations and Guidance, Publication 15-1, The Provider Reimbursement Manual-Part 1, Ch. 21, §2135.1, CMS.gov, https://tinyurl.com/y2xt69kf. 

5. Id. at Ch. 21, §2135.2.

6. Id. at Ch. 21, §§2101.1, 2135.1, and 2135.2. 

7. See Associated Vendors, Inc. v. Oakland Meat Co., 26 Cal. Rptr. 806 (Cal. App. Ct. 1962) (holding that one relevant consideration in piercing the corporate veil is “the failure to maintain arm’s-length transactions” between the entities).

8. See, e.g., Cal. Code Regs., tit. 22, §72513 (2019); 42 C.F.R. §483.70(d)(2)(i-iii) (2017).

9. Form 10-K is an annual financial disclosure all publicly traded companies must file with the SEC. A Form 8-K report is triggered when a major event occurs, such as a merger or bankruptcy filing. U.S. Sec. & Exch. Comm’n, Fast Answers: Form 10-K, SEC.gov, https://www.sec.gov/fast-answers/answers-form10khtm.html.

10. See Simmons v. Ware, 153 Cal. Rptr. 3d 178, 193–94 (Cal. App. Ct. 2013); see also Automotriz Del Golfo de California S.A. v. Resnick, 306 P.2d 1 (Cal. 1957).

11. 26 C.F.R. §301.7701-3 (Westlaw through Apr. 4, 2019).

12. See HealthMarkets, Inc. v. Super. Ct. L.A. Cnty., 90 Cal. Rptr. 3d 527 (Cal. App. Ct. 2009) (parent company was subject to personal jurisdiction by deliberately engaging in significant activities within the forum or deriving a benefit from its actions within the forum state).

13. A “larger” chain can be considered any entity with more than 25 facilities operating under the parent company. 

14. See, e.g., U.S. Dep’t of Justice, Office of Pub. Aff., South Florida Health Care Facility Owner Convicted for Role in Largest Health Care Fraud Scheme Ever Charged by The Department of Justice, Involving $1.3 Billion in Fraudulent Claims (Apr. 5, 2019), https://tinyurl.com/y5vtry4g.