Chain Acquisitions of U.S. Nursing Homes and their Consequences
By Jane Banaszak-Holl, PhD, Whitney B. Berta, PhD, Dilys Bowman, MPH, Joel A.C. Baum, PhD, Will Mitchell, PhD
October 9, 2000 Abstract
This study examines the causes of acquisitions of nursing homes by corporate chains and the consequences for the operating strategies of the acquired facilities and the health outcomes of their residents.
Our data include all reports of inspections of Medicare/Medicaid certified U.S. nursing homes from January 1991 through September 1997. During this period, 3,000 corporate owners acquired nearly 5,000 of 19,000 total nursing homes.
Nursing home chains typically acquire poorly performing facilities that offer
opportunities for the new owners to improve health quality (pressure ulcer prevalence and health deficiency citations). Post-acquisition health quality of target nursing homes tends to decline initially and then improve. Target quality improves more when the acquiring chain is high quality and/or the target low quality. Nursing home acquisitions also lead to substantial changes in operating strategy, with acquired facilities experiencing declines in staffing ratios and increases in the percentage of specialty beds.
Keywords: Nursing home chains, corporate acquisition, health quality, operating strategy Text
Chain ownership of nursing homes is increasing, as it is across much of the healthcare sector, with most of the increase occurring via acquisitions of existing nursing home facilities. The prevalence of nursing home chain ownership and the growing incidence of acquisitions offer the potential to increase efficiency, but raises concerns about resident welfare. Media attention and public concern have focused on prominent quality problems in some chains (e.g., Consumer Reports 1995; McGinley 1999). Generally, many analysts are concerned that healthcare chains pursue corporate financial interests to the detriment of patient needs (Light 1986) and, by doing so, introduce bureaucracy and impersonality into an already distrustful relationship between provider and consumer (Scott et al. 1995; Starr 1982). Little large-scale empirical research, though, has sought to substantiate these concerns and discover the true impact of chain acquisition on resident welfare and nursing home cost and service strategy.
Research on nursing homes and other health care providers offers several competing explanations for increasing chain acquisition of nursing homes. First, chains may seek to increase profits by reducing costs, possibly coupled with reduction in the number and quality of services. Second, chains may target high quality homes for acquisition, which may help the chains gain market power relative to other health care service providers such as hospitals and supply companies that also are consolidating, with the risk that the chain ownership may lead to poorer quality care. Third, alternatively,
chains may seek poor quality homes and attempt to improve their quality of care. Fourth, chains may provide a vehicle for service expansion, as chains may provide needed capital and expertise to create new services in acquired homes, possibly in response to pressures from managed care firms to provide a broader set of services. While several studies have examined these issues, there is no conclusive conclusion (see Light 1986; Banaszak-Holl et al. 1996; Zinn et al. 1999; and Wells and Banaszak-Holl 2000 for reviews; xx Jane, you will have a good sense of what papers make most sense to list here).
Although chain ownership is widely held to affect the quality of nursing home care, few studies examine the causes and consequences of acquisitions underlying chain growth. We do not know whether chains tend to target poor quality or high quality homes for acquisition. And we have little evidence on subsequent changes to facility operating strategy or resident health outcomes. Moreover, prior research ignores differences among acquiring chains that may profoundly impact strategy and health outcomes.
In our study, we examine whether the health performance and operating
characteristics of nursing homes affect the likelihood that they will be acquired, and how being acquired affects a home's post-acquisition operating strategy (staff and specialty bed intensity) and resident health outcomes (state inspection deficiencies and pressure ulcer prevalence). The empirical setting for our study is the U.S. nursing home industry from January 1991 through September 1997. In total, there are over 105,000 records in the data set, covering about 19,000 unique nursing homes. We identified almost 3,000 unique corporate owners of nursing home chains. Most of the multi-home chains tend to be quite small; indeed, fewer than 7% of corporate chains owned more than 10 homes. Thus, extensive chaining of nursing homes exists, but chaining is still primarily a small-scale phenomenon. We use a longitudinal data set linking the annual files of the federal OSCAR data (On-line Survey Certification and Reporting System), which includes information from state-based inspections of all Medicare/Medicaid certified nursing homes operating in the continental U.S. from 1991 to 1997. OSCAR includes facility-level information on nursing home structure (e.g., size, staffing, services offered), resident case mix (e.g., percentage residents requiring assistance with Activities of Daily Living; percentage residents who are incontinent), system membership (e.g., multiunit organization affiliation and name), and counts of health and non-health related
deficiencies reported during state inspections. Inspections are mandated on an annual basis (the mean inspection period in our data is 374 days).
Motives for Nursing Home Acquisition.
Do nursing homes are nursing home chains tend to acquire high quality or low quality homes? The answer to this question has important policy implications: whether chains target high or poor quality homes will greatly influence the potential benefits and harms of acquisitions. The relative emphasis on acquiring high-quality or low-quality targets will have a large impact on post-acquisition operating strategy and health outcomes. Exploring this question permits us insights into the objectives and strategies being pursued by managers of chains that are acquiring nursing homes.
Previous research on business acquisitions suggests two distinct strategic
orientations that chain organizations might adopt. Pursuit of a turnaroundstrategy would lead to the acquisition of poor performing homes or of those with unsuccessful strategies. Here, acquiring chains would strive to improve on the pre-acquisition performance of targeted homes using their greater management discipline and skill to change
management, shift strategy, and infuse the target with new ideas and technology. When chains pursue a turnaround strategy, acquisitions also provide opportunities to achieve scale, lower costs, and increase competitiveness (Dutz 1989; Bowman and Singh 1993; Karim and Mitchell 2000).
A less desirable orientation is expressed in the market power strategy, where acquisitions commonly involve takeovers of high-performing nursing homes that will give the acquiring chains larger presence in their markets. According to this view, chain organizations seek primarily to increase their market power; this serves to the detriment of consumers as it reduces competition and so limits consumer choice. Successful pursuit of this strategy often results in declining post-acquisition performance (e.g., Ravenscraft and Scherer 1987), because there is little room for improvement in a high-quality home’s performance and because the chain may fail to invest sufficient resources to maintain the facility’s performance.
Our study of acquisition likelihood offers most support for the turnaround view of acquisitions. We find that homes with poorer health outcomes among their residents are significantly more likely to be acquired by a chain. We measure pre-acquisition health outcomes in two ways -- citations of health deficiencies on state inspections and percentage of residents with pressure ulcers -- to assess different aspects of a nursing home’s care quality. Nursing homes receive health deficiency citations during annual inspections for perceived problems that threaten resident health. The deficiency measure indicates major quality problems for which the facility is being publicly sanctioned, potentially damaging the reputation of the home as well as the health of the residents. We also consider the percentage of patients with pressure ulcers, which are skin ulcers that commonly develop when nursing home residents are neglected. Pressure ulcers are readily preventable and treatable and so are considered a good indicator of care quality (Aaronson et al. 1994). The percentage of residents with pressure ulcers is an indicator of a health care quality problem directly linked to a resident’s quality of life in a nursing home. Previous research (e.g., Marlin et al.1999; Mukamel 1997) has used both the prevalence of pressure ulcers and the number of health deficiencies as indictors of nursing home quality.
Table 1 summarizes key results. Our study shows that nursing homes receiving a greater number of health deficiencies during their most recent inspection and with a higher percentage of their residents experiencing pressure ulcers are significantly more likely to be acquired by a chain.
********** Table 1 about here **********
Resident case mix, facility operating strategy, and ownership-type also influence the likelihood of acquisition. Nursing homes with higher percentages of restrained residents, often associated with poor facility quality, are more likely to be acquired. For-profit homes and those with a hospital affiliation are more likely to be acquired. Homes with a greater percentage of Medicare residents, which can yield higher profit margins in the nursing home industry (Banaszak-Holl et al. 1996), are also more likely to be acquired. Chains also tend to acquire more specialized facilities, such that the likelihood of acquisition increases with the percentage of residents requiring specialty services and the percentage of specialty beds at a nursing home. Conversely, facilities with a higher percentage of incontinent residents or residents receiving anti-psychotic drugs are less
likely to be acquired, as are non-profit facilities, those that are government-owned or already chain-owned, and those that have a high proportion of private-pay residents.
In summary, the key result concerning the acquisition motives is that nursing home chains typically acquire lower quality homes that offer opportunities for the new owners to improve health performance (i.e., reduce deficiencies and pressure ulcers). These findings should allay fears that chain acquisitions commonly put high quality homes at risk of decline.
Consequences of Acquisition: Changes in Health Quality.
Much of the concern expressed about nursing home chains has arisen from cost-cutting efforts that might lead to reductions in service and facility quality, loss of capable staff, and failure to keep abreast of new technologies and services. However, little empirical evidence exists to substantiate or refute this concern. Indeed, evidence from other commercial sectors suggests that chains may enhance performance, rather than harm welfare (Baum and Ingram 1998). A common source of improvements comes through the transfer of new capabilities and knowledge (e.g., preventative measures for pressure ulcers and addressing problems that are leading to health deficiency citations) from the chain organization to the newly acquired organization. We wish to determine whether chains lead to better or poorer resident health outcomes at target facilities. Therefore, we track the change in the number of citations of health deficiencies and the percentage of residents suffering pressure ulcers year over year from 1991 to 1997, focusing on changes following acquisitions.
As Columns 1 and 2 of Table 2 show, we find that facility health quality often declines in the first year after a home is acquired, but that the decline reverses over time, with significant improvements in health outcomes from the second year onward. We attribute this pattern of initial decline and subsequent improvement to post-acquisition disruptions that are overcome as new owners gain experience with acquired facilities and operational improvements transferred to the acquired home take hold. Further, with time the benefits of scale economies and standardization possible as a chain member can be realized (Capron 1999).
********** Table 2 about here **********
We also find that a chain’s ability to improve a target’s health performance depends importantly on the performance characteristics of both the target home and its acquiring chain. Lower-quality targets and homes acquired by higher-quality chains tend to suffer greater improvements in health outcomes over time, with a corresponding greater decline in health outcomes at higher-quality targets and homes that are purchased by lower-quality chains. Thus, the effect of being acquired by a chain for facility health outcomes is strongly contingent on the quality characteristics of the acquirer and target. Acquisition by a high-quality chain or of a low-quality target can mitigate the initially disruptive effects of being acquired and generate long-term improvement; at the same time, acquisition by a low-quality chain or of a high-quality target can exacerbate initial problems and harm long-term performance.
Several chain and target characteristics influence ongoing health quality change at individual nursing homes, independent of post-acquisition change. We find that acquired homes' operating strategies tend to converge toward their chains' health quality
improvements in health quality over time, while larger homes tend to suffer declining quality.
The key conclusion concerning post-acquisition change in health quality is that quality tends to improve over time, following an initial adjustment period. Improvements are particularly strong in cases involving low quality targets or high quality acquirers.
Consequences of Acquisition: Changes in Operating Strategy.
Acquisitions also lead to changes in facilities’ operating strategy as new corporate owners reorganize acquired homes’ resources and transfer new knowledge and capabilities to the home. We measure operating strategy as staffing intensity and the proportion of specialty care beds. Staffing intensity is a key part of the operating strategy for a nursing home. Staffing intensity refers to the ratio of total staff to number of residents. We include FTEs of all employees, both nursing and ancillary, in this measure. Staffing in a nursing home is its largest operating expense, and lower staff intensity (fewer staff per resident) is considered more efficient (Zinn 1993).
Following acquisition, we observe changes in strategy that will tend to reduce costs and increase margins. Staffing efficiency initially declines, but then increases over time (Table 2, column 3). In parallel, the availability of higher margin specialty care beds increases over time (column 4). These observations are consistent with the conclusion that a profit seeking rationale drives corporate acquisitions.
Acquiring chain characteristics sometimes also influence changes in operating strategy. Homes acquired by higher efficiency chains (i.e., with lower staffing levels) experience staffing increases within the first year after acquisition, but then experience decreases in staffing during subsequent years (Table 2, column 3). The greater initial staffing increase associated with high-staff-intensity acquirers might reflect a transition to more skilled personnel capable of providing specialized care, which requires higher staffing levels. Acquirer specialty bed intensity, however, has little impact on changes in specialty beds at the targets (column 4).
Target characteristics also influence changes in operating strategy. Targets with high staffing levels tend to increase staffing levels following acquisitions (Table 2, column 3), likely because targets often offer high levels of specialty services and beds and may be able to use chain resources to add staff to increase their level of care. By contrast, targets with particularly high specialty bed intensity pre-acquisition tend to reduce their percent of specialty beds post-acquisition (column 4). This suggests that chains act to eliminate unprofitable aspects of the existing specialty services, and services with which the chain is are unfamiliar, and so lacks capabilities to operate profitably.
Several chain and target characteristics influence ongoing operating strategy change at individual nursing homes, independent of post-acquisition change. We find that acquired homes' operating strategies tend to converge toward their chains' operating strategies over time (staffing and specialty beds). Larger chains, meanwhile, tend toward lower staff and specialty bed intensity, while larger homes also tend to reduce staff but increase specialty beds. Large facilities' increasing proportion of specialty services likely reflects their ability to provide a broader array of specialty services (Tarman 1990), while using economies of scale to reduce staffing intensity.
Overall, then, the results concerning operating strategy are somewhat more mixed than the health quality outcomes. Following acquisitions, specialty beds tend to increase, other than at targets that already have high levels of specialty bed services. In addition,
staff levels tend to decline at targets, unless targets or buyers have high staffing levels, in which case staffing increases to provide skills needed for specialty care services.
Conclusions
The consolidation of nursing homes under chain ownership is of great human and social significance to a fast-aging nation. Our findings challenge the view that nursing homes acquisitions are 'bad' per se, and demonstrate that chain acquisitions can offer real benefits for resident welfare, while at the same time highlighting the conditions under which acquisitions lead to problems. Acquirers most often targeted homes with poor health quality, measured by high levels of health citations and high incidence of pressure ulcers. Health quality outcomes generally declined in the first year following an
acquisition, although these negative effects were short lived, tending to reverse quickly. Health outcomes at the target home suffered more if the acquiring chain had a history of problems or if the target home already had achieved a very high quality level. But, acquisitions by high quality chains or of poor quality homes often resulted in substantial quality improvements. Because residents of poor-quality homes are most likely to benefit from acquisition, chains' emphasis on acquisitions of poor targets is a reassuring result.
Our findings also indicate that good resident health outcomes can be compatible with an emphasis on profit-seeking through reduced staffing levels and increased high-margin services. Our results, like earlier less-detailed studies, show that chains are more likely to emphasize efficient operations. At the same time, though, chain ownership often leads to better health outcomes, despite this emphasis. The major benefits of acquisitions, and of chain ownership in general, derive from the discipline and experience of corporate managers and the availability to the newly acquired homes of new capabilities and new ways of doing business.
These findings also have straightforward policy implications. We find no evidence that the long-term quality of resident care need suffer as a consequence of a nursing home being acquired by a chain. This should temper concerns about growth of nursing home chains. At the same time, though, better policy regarding monitoring of acquisitions, particularly by poor-performing chains and of high-quality target homes, might help to avoid the systematic, negative consequences of their actions. Our results can also help guide administrators of low quality homes considering chain membership as a solution to their performance problems and corporate managers in chains considering possible acquisition targets.
Our study provides the first robust empirical conclusions concerning important causes and consequences of nursing home chaining. Chain formation in the long-term care industry has raised strong concerns about the potential negative impact on the quality of resident health care. Our results show that, while concerns are justified under some conditions, the most common impact of acquisitions on health quality is positive.
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