When Private Equity Takes Over
Private equity (PE) firms pool cash from individual investors to buy businesses from which they hope to extract greater profits or reorganize to sell pieces of the business at a profit. These firms often borrow heavily to fund acquisitions. And, as noted, PE firms have gotten deeply involved in the nursing home industry.
But it’s difficult to see exactly how PE takeovers of nursing homes affect their operations and finances because the new owners are, well, private. But a 2017 research paper — likely the very first in-depth academic case study of a private equity deal in this industry — sheds some light on the consequences, both positive and negative.
In 2006, the PE firm Fillmore Capital acquired Beverly Enterprises, a publicly traded operator of more than 300 nursing homes and assisted living facilities in 21 states. Along with renaming the company Golden Living, here are some of the changes the new owners made, according to coauthors Aline Bos and Charlene Harrington, a University of California, San Francisco, professor emerita who has studied nursing homes for decades:
- Split the company into an operating company, Golden Horizons, and a real estate firm, Geary Property Holdings.
- Further split Golden Horizons into Golden Living, owner of the nursing home chain, and Golden Ventures, a provider of administrative services.
- Divided the nursing home chain into individual limited liability companies for each of the properties.
- Launched a pharmacy services company, AlixaRx, with Golden Living as its initial customer. “AlixaRx will be wildly profitable,” said Ronald Silva, then and now the CEO of San Francisco-based Fillmore Capital Partners and chairman of Golden Living’s parent company.
- Significantly reduced per-resident staffing hours to lower-than-industry levels in its California nursing homes, cutting hours for licensed practical nurses and nursing assistants. Subsequent staff increases didn’t keep pace with national trends.
- Increased the amount of local managers’ compensation based on “financial performance and clinical excellence” rather than base pay. “They can almost double their salary,” said Neil Kurtz, M.D., Golden Living’s CEO at the time.
To its credit, the researchers found, Golden Living increased staffing hours for registered nurses, boosted employee training and benefits, and accelerated investments in information and communication technology. But, the researchers wrote, “the private equity-owned company did not improve quality of care.”
After the takeover, Golden Living faced numerous legal and regulatory actions in different states alleging problems with its facilities. In a 2015 lawsuit, for instance, the Pennsylvania attorney general alleged understaffing and failure to provide basic services to residents, and said state inspectors were deceived at 25 of the company’s 36 Pennsylvania facilities.
“We’re a mission-driven, social investing firm and we tried to change post-acute care by purchasing Beverly,” said CEO Silva in an interview this fall. “But I failed to do what I set out to do in many respects. The Golden Living board made a decision — because of various pressures on the nursing home sector and reputational issues — that other providers could do a better job providing care than we could.”
So 10 years after its acquisition, the company in 2016 started getting out of directly operating the homes, Silva said, leasing them to local and regional “tenant operators.” Golden Living now leases its nearly 200 remaining nursing home properties to 22 different operators in 12 states, while continuing to provide pharmacy and therapy services to some of the facilities through its subsidiary companies. It also provides clinical consulting services.
But Golden Living’s facilities continued to face financial and quality problems after shifting their management to others. Skyline Healthcare, a New Jersey-based operator to which Golden Living leased 60 of its facilities, was forced by regulators in four different states to give up management because of failure to pay staff and vendors, among other problems. At one Kansas facility, a vendor that hadn’t been paid reportedly stopped delivering food, so staff had to buy bread for the nursing home residents out of petty cash. Golden Living has since sold most of the former Skyline facilities and retains only 20 of them, with different operators in place, Silva said.
“I put total blame on Golden Living for not doing due diligence on whom they were leasing dozens of nursing homes to,” said Stephen Monroe, managing editor of “SeniorCare Investor” and a partner at Irving Levin Associates, which tracks private equity deals. “That was one of the more stupid transactions I’ve seen in the nursing home industry. Ron Silva was desperate to get out of the operating business and pushed hard to get out, but they bet on the wrong horse.”
Asked recently to update her assessment of Golden Living and other private equity owners, Harrington, the coauthor of the study about the nursing home purchase, responded, “I wouldn’t say Golden Living is worse; they’re all bad.” She added: “They’re investing to make money and aren’t producing adequate quality. That’s the bottom line.”
Editor’s note: An earlier version of this article incorrectly stated that Neil Kurtz was still CEO of Golden Living.