When AARP’s New Jersey chapter issued a report early this month criticizing nursing homes for using related party transactions to “siphon off” public dollars intended for resident care, state officials didn’t miss a beat.

Testifying on a New Jersey Senate bill to impose new penalties on nursing homes with repeat 1-star ratings three days later, Comptroller Kevin Walsh said low ratings were a hallmark of owners misusing large portions of taxpayer funds.

“The reality is poor-quality nursing homes are usually in the condition they’re in because of corruption and fraud,” he said, later adding that “there’s a lot of money going to places it shouldn’t.”

Like the industry itself, New Jersey providers have borne the brunt of plenty of bad publicity in recent years. This is where Joseph Schwartz’s Skyline Healthcare was based, after all.

But for the state’s for-profit providers — all but 15 of the nearly 350 facilities here — the rhetoric and lawmaking smacks of anti-capitalist efforts to push them out of business.

It’s not happening just in New Jersey but nationwide, as frustrated lawmakers try to legislate change that will weed out bad actors but also end up making the sector tougher for quality operators too.

What’s being targeted in New Jersey and other states including Michigan is not illegal fraud but the legal, common practice of using related parties to provide services in bulk across a chain’s footprint. 

“Yes, they’re paying a related party for the services, but they’re paying less than they would in the market,” Andy Aronson, president and CEO of the Health Care Association of New Jersey told McKnight’s Long-Term Care News. “And that’s the vast, vast majority of what related party transactions are. The law contemplates related party transactions. It’s legal. They need to be disclosed, and you need to compare the cost you paid the related party versus the cost you pay for a market transaction.”

But when groups like the AARP look at related parties, they see income earned by those related parties as overpayments — even if paying a direct cost to an outside vendor would have actually been higher, he argued.

“I’m reducing costs to my facility and to the state, who’s reimbursing me for care, and somehow, that’s being twisted in these reports as money being siphoned from patient care or overpaid, and it’s none of those,” Aronson added. “This is a for-profit versus not-for-profit argument. These advocacy groups that are attacking nursing homes over these issues are trying to make things sound hidden and nefarious and bad, and it’s not. All they’re doing is attacking for-profit healthcare.”

Nationally, nursing homes routinely fall below hospitals and inpatient rehabilitation facilities when it comes to profit margins, according to data supplied by Denise Leonard, CPA and partner at Plante Moran.

MedPAC in March reported that skilled nursing facilities’ all-payer total margin improved from –1.3% in 2022 to 0.4% in 2023. MedPAC acknowledged, however, that total margins “may be understated, given the complex arrangements many nursing homes have with third parties.” 

KFF reported that aggregate hospital margins rebounded from 2.3% in 2022 to 6.4% in 2023, and they also have related party businesses. 

Free-standing IRFs, meanwhile, reported an average all-payer margin of about 10% for 2023, per MedPAC.

Much of the problem is that nursing homes don’t have much or any of the benefits of billing commercial insurance for some patients and are left at the mercy of government payers. In New Jersey, Medicaid beneficiaries make up about 60% of patients.

“Medicaid is the payer of last resort and historically does not cover the full cost of care, so you’re likely looking at negative margins overall,” said Matt Bavolack, a principal with Baker Tilly’s healthcare practice. “I would think coupled with increased pressure on wages, you’re going to see some of those numbers stay static or decrease even with many states having adjusted Medicaid rates somewhat.”

To survive, providers need to look for business efficiencies and new investors — both of which have become go-to targets for critics in government and consumer advocacy roles.

AARP alleges that New Jersey nursing homes reported paying more than $716 million to related parties in 2023, including over $82 million in excess of allowable costs.

While not validating the finding, Aronson questioned the organizations’ concern over what he calculates as a 2% margin on $4 billion in revenue — especially in a state where most nonprofits and all but six government facilities have left the business or closed their facilities.

“If we agree that this 2% number that they threw around in that report was profit, do we have a problem with 2% profit?” he asked. “Because if they do — and the answer is they do — they just don’t want any profit. And if you don’t have any profit, what’s the alternative?”

Adding that percentage to a national average of 0.4% in profits doesn’t seem outlandish to many business-world observers. 

But in the backlash since COVID, many lawmakers began working to limit both profit-taking and partnerships that provide capital when states will not.

In New York, a 2021 law not only requires nursing homes to spend at least 70% of their revenue on direct resident care — it caps profits at 5% of total operating and non-operating expenses. More than 100 nursing homes took the law to court and lost.

“There are further restrictions being imposed on the industry that will continue to impact profit margins,” Bavolack said. “It impacts potential new operators. It also could impact quality of care. If you continue to try to make ends meet and reimbursement doesn’t cover the cost of care, you’re going to have to make cuts to meet that.”

Starting and staying profitable in the nursing home business is becoming “extremely challenging,” he said, pointing to state laws slowing private equity and REIT investment in the sector and upcoming federal requirements to report more ownership information.

“All are mechanisms to try to limit private equity and related parties and other avenues of private funding from entering,” said Bavolack, encouraging candor when describing such a situation.

The effects are becoming apparent in both nonprofit and for-profit quarters, too. In Connecticut, for instance, more than 25% of nursing homes have changed hands or closed since mid-COVID, Bavolack said.

But as demographics shift, advocates and lawmakers need to recognize how even well-intentioned laws can drive providers out of the business. After so many sales and closures, the Connecticut legislature is now forced to consider lifting a long-time moratorium on new nursing home beds.

If conditions don’t change and higher margins are viewed as a negative, experts question who will be left.

“If not this, then what?’ asks Bavolack. “There’s a definite need for a full continuum of care and it includes the for-profit and not-for-profit sectors.”