A recent study led by researchers at the University of California Los Angeles study found reported nursing home profits may reflect only 37.1% of total profits as of 2019, suggesting a practice of profit extraction from the industry that is being "tunneled" into owners' pockets.
"Tunneling" describes the transfer of assets and profits out of firms into the pockets of the people who control them. The analysis used a stacked difference-in-differences approach to document how related party transactions were used as a form of profit extraction in the nursing home industry. Researchers found that services purchases from related parties are substantially inflated and a large share of related party spending is on real estate and management services.
Here are three main findings:
- The estimates suggest that reported nursing home profits reflect only 37.1% of profits as of 2019, and only 33.5% of facilities have no related party transactions.
- Among firms with positive "hidden" profits, the scope of such profits ranged from $81,834 to $415,379.
- The calculations suggest that firms may be substantially understating their profitability, which allows them to mislead potential plaintiffs and dissuade litigation, and ask for increased reimbursements.
"These results suggest that the scope for hidden profits in this industry is massive, and require much more detailed financial data on not only the nursing homes but their related parties as well to uncover exactly where the money flows," the study authors wrote.
Read the complete study here.