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DJ Covid-Hit Nursing Homes Load Up on Debt -- Barrons.com

· 02/04/2021 15:49
By Eleanor Laise

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.

Read: As the Pandemic Struck, a Private-Equity Firm Went on a Nursing-Home Buying Spree

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.

Read: Nursing Home Commission Reveals Divisions Over Response to Covid-19 and Recommends Immediate Improvements

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."

Read: Residents Fear Nursing-Home Legal Immunity Amid Crisis

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

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February 04, 2021 15:49 ET (20:49 GMT)

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