EP515: SNF (Skilled Nursing Facility) Fraud—Or Is It Fraud? With Michelle Cera, PhD

[00:00:00] Episode 515 SNF Skilled Nursing Facility Fraud Or Is It Fraud? Good Question! And The Answer Matters To Self-Insured Employers And Anyone Else Paying For Healthcare. Today I Am Talking About The Latest Hunter Brook Investigation With Michelle Cera.

[00:00:28] American Healthcare Entrepreneurs And Executives You Want To Know. Talking. Relentlessly Seeking Value.

[00:00:37] Hello, all you Relentless Tribe Members. Lately I have been just obsessed with what's hiding in plain sight. The root cause glitches in how American healthcare is built. Not the symptoms now, not the noise, the actual ground zero. I mean, what we call healthcare in this country is really, if you think about it, a pretty bizarre construct.

[00:01:02] It's kind of a Franken-machine stitched together from misaligned incentives and historical accidents. So if the goal is to actually fix healthcare in this country, you got to hit these underlying pressure points. And if you do, you don't just get incremental improvement. You really get a massive unlock.

[00:01:21] I feel like the relentless tribe, by the way, is inching our way. There's a number of you who are inching your way toward these kind of first principle truths. So look out for us, world. We're coming, is all I can say.

[00:01:38] But yeah, so. We talked about Ground Truth Unlock number one in episode 511 with Dr. Siva and Dr. Monica Lipson. Today, we are moving on to Ground Truth Unlock number two. This realization dawned on me during an email exchange with the YouTuber CoffeeZilla. Check it out. It's a great channel.

[00:02:03] But CoffeeZilla spends some of his time exposing fraud, not really talking about policy decisions, as he puts it. But as we were chatting, I was thinking about the one-third of healthcare dollars, these trillions, lost to waste, fraud, and abuse.

[00:02:23] And it brought up for me a question. What is the bright line between normal, legally acceptable business operations and outright fraud? Because in the healthcare industry, I'm not sure that there is one. I can, and I'm sure you can too. Think of like 15 examples off the top of your head that fall in the what might be a massive gray area where practices teeter into the

[00:02:53] fraud zone, things that are technically legal in theory, but common sense says they probably should not be. They're pretty unpalatable on their face. And this matters. These are trillions of dollars here. These are our taxpayer, employer, patient co-insurance dollars that are potentially, not always, but often enough,

[00:03:15] these are trillions of dollars going in someone's pocket while a patient is potentially getting hurt financially and or clinically simultaneously. So then I started to try to understand why this is happening and how it came to be. And I think back to when I studied economics in Sweden.

[00:03:35] In Sweden and in many other smaller countries, there is a nationwide shared understanding of what I'm going to call it the floor of human dignity looks like. Doing harm, therefore, is universally understood to mean breaching that floor of human dignity. That shared belief system is an invisible hand, actually, that is at least as powerful as the invisible hand of capitalism.

[00:04:05] You know, Adam Smith underpins the supply and demand curve, fair prices and all that. The thing is, here in the U.S., in our land of rugged individualism, there really is no counterbalancing invisible hands of ethics and integrity and dignity. Said another way, what's the whole person product? In the U.S. healthcare industry, the human being is the product, but there's really no minimum standard for what the product even is.

[00:04:34] So, yeah, here we are. And this brings us to ground truth unlock number two. Things that are so obvious once you say them out loud. Right now, we are endlessly trying to keep up with thousands of profit-extracting geniuses and creating mazes of complexity to regulate actors who have absolutely no incentive and no societal construct invisible hand to be kept under control.

[00:05:00] If we have no agreed-upon definition of what constitutes harm, then perverse incentives are just incentives. Think about this. I know I am going to be. My guest today is Michelle Serra from Hunterbrook Media. Today, we are unpacking their latest investigation. If you recall, their earlier one was about offshore GPOs taking rebates on behalf of PBMs.

[00:05:27] So this is their next investigation, and it is just as salacious and possibly even more sad than the first one. Toward the end of the show, we get into four concrete solutions to counter the disgust. Is it fraud? Is it bad behavior? Is it simply responding to an incentive? I have no idea. I'm not a lawyer. But it's kind of terrifying in whatever case. But wait, there's more.

[00:05:53] Throughout the course of this conversation about this latest Hunterbrook investigation into SNFs, skilled nursing facilities, we wind up diving into what I'm now calling the usual suspects playbook to perverse incentives. In the show notes, I will list out these playbook moves, but they are also covered in the conversation that follows. What might be the most exciting part, though, of profiteering using these usual suspects?

[00:06:20] Indeed, it is the rapid spread of the practices, of course. Once one private equity funded or publicly traded entity figures out a trick and starts making money using it, the trick becomes a best practice and discussed on earnings calls and then justifies executive incentives across the industry tied to exploiting said identified in air quotes opportunities. Right.

[00:06:48] So if you're an executive and you don't do these things now, you are at a disadvantage or you might get fired. Relentless tribe, please use this usual suspects playbook to spot the bad actors and protect your honest partners. If you have other additions to our playbook, by the way, please comment on a post on LinkedIn or contact us on the website. Or do the same if you have thoughts on the two ground truth unlocks that I've mentioned so far. You can think of others.

[00:07:15] As a tribe, I think we're really on to some big things here on both fronts. So with that, here is my interview with Michelle Sarah from Hunterbrook Media, and she's going to introduce herself and Hunterbrook Media in like T minus two minutes. So I'm going to let her do it. All links to everything Michelle and I talk about are in the show notes as usual. My name is Stacey Richter. This podcast is sponsored by Aventria Health Group. And thank you so much for being here.

[00:07:43] Michelle Serra, welcome to Relentless Health Value. Thanks for having me, Stacey. Do you want to just give the briefest of backgrounds on yourself and maybe Hunterbrook? Yeah, definitely. So my name is Michelle Sarah. I'm an investigative reporter for Hunterbrook Media. We are a investigative newsroom. We publish rigorous, in-depth, very fact-intensive articles. And we primarily focus on corporate wrongdoing.

[00:08:10] And part of the goal is working with people in a position to hold bad actors accountable. So elected officials, regulators, podcasters to create real change in the world. So if you're listening to this, you know of some shady corporate practice, please reach out to us. I think anyone listening to this podcast probably has a long list and a short list. So you may have come to the right place, unfortunately. Let's talk about your latest investigation. How did this whole thing start?

[00:08:40] Yeah. So it actually started with a call I got about six months ago from an elder abuse lawyer. She's been working on cases involving skilled nursing facilities, also called SNFs, for a while now. For a bit of context, SNFs are a specific type of nursing home actually meant for rehabilitation. And SNFs are the only type of nursing home that Medicare covers. So it was immediately clear to me she's overwhelmed.

[00:09:06] People just don't understand the horrors that go on, how many millions of people are affected, how many deaths are preventable. The scale of the nursing home crisis is just so much bigger than what law firms can keep up with. And they just don't have the resources to catch all the widespread neglect and harm. If we just back up for a sec, let's talk about what that means, because we are talking about grandmas and grandpas generally speaking here.

[00:09:34] So if I'm just looking at this at the individual level, what kind of harm are we talking about? Most Americans will require institutional care at some point in their lives. But it's not always clear how decisions on a corporation's balance sheet actually make their way down to real people. To give you an example, we sat down with the family of Cheryl Weir. It started out for Cheryl with respiratory issues that led her to a facility operated by a big skilled nursing chain where she was supposed to be rehabilitated.

[00:10:03] Instead, her family told us neglect led to her untimely death. Cheryl's family and her roommate, who we also spoke with, told us what happened. On the day Cheryl died, they were trying to wean her off her ventilator. And though she was struggling to breathe, nobody was monitoring her. Cheryl and her roommate were both dependent on ventilators, so they couldn't scream for help. They were banging on tables and banging on walls, trying to get someone to help. Help did not come in time.

[00:10:32] And Cheryl died that same day. So let me just interject. Was there no care button? Were they unable to call for help? Cheryl's daughter actually told us that when a patient pushed the call light in that nursing facility, it would take over an hour for staff to respond. So the thought was someone can be without oxygen or sufficient oxygen for an hour?

[00:10:56] I mean, there simply weren't enough people on staff to properly care for all of the patients at this skilled nursing facility. Remember the episode with Patrick Nelly about Bummel's cost disease? Basically, in healthcare, what costs the most is often labor. So one of the most common ways to cut costs is to figure out how to cut staff, hopefully by being more productive.

[00:11:25] But it turns into one of the usual suspects in our list of perverse incentive usual suspects when cutting staff turns into understaffing. In this conversation with Michelle Sarah, this understaffing perverse incentive just keeps popping up like a bad penny. Just how lucrative it is and the lengths being taken to lobby against regs with any teeth and also possibly hide what's going on. So consider all of this foreshadowing.

[00:11:54] Another example is Herbert Hauenstein, who died from a severe stage four pressure ulcer he developed at a nursing home. Six inches long, an inch deep, dead blackened flesh, penetrating to muscle. An EMT report we reviewed shows that the facility staff were aware, but nobody was treating him for it.

[00:12:14] So you've got every doctor, nurse, medical assistant completely freaking out right now who's listening, having six inches around and it's black and go on. A medical examiner who reviewed his death for a lawsuit later on concluded that the patient's demise was almost merciful due to the neglect that he suffered. So this is something that was said in court, that this patient was in so much agony, he was in so much pain, it was almost a mercy he died.

[00:12:44] Right, and pressure ulcers are the exact kind of issue that happen when patients are neglected. You can see why the elder abuse attorney gave me a call that day and was completely overwhelmed. The number of stories like this is horrifying. And if you want to learn more about this investigation or over the documents, see the photos of this, hear more from the experts that we spoke with. We definitely will link to all of this in the show notes.

[00:13:12] And you're saying that this is pervasive. What do we mean pervasive? Yeah, so we wanted to see if this was a few bad apples problem or a broken system. Perhaps unsurprisingly, we found this was happening at a massive scale. We analyzed millions of data points publicly available from Medicare and Medicaid, including things like exactly how many nursing hours each of the 14,000 or so SNFs report each day.

[00:13:41] So you're saying a lot of these issues are caused by the fact that there's just inadequate staffing. Correct. And we know from speaking to experts that the number one metric to use to actually understand the quality of a nursing home is staff hours. And this is intuitive, right? The fewer hours nurses provide, the worse off residents are, the more likely they are to experience harm. And in several cases, clearly it can be fatal.

[00:14:03] When you say understaffing, how are we connecting the dots between clinical complexity and the amount of staff that's necessary? And therefore, you can say they're understaffed. Right. So the way it works is that resident populations that have more complex needs, basically, if your patients are sicker, the government will give you more money specifically calibrated to care for those needs.

[00:14:28] So what we found is these chains will actually seek out sicker patients to maximize reimbursement. And what we wanted to understand was, did they actually take these funds and meet their resident needs? What we found was a formula developed by UCSF researchers that translated acuity, which is how sick these patients are, into an expected number of hours. So if you're X level of sick, you should have Y number of hours.

[00:14:58] We calculated that across the whole universe of skilled nursing facilities. From there, we compared that to the hours they were actually provided. And what we found was a massive gap in between the hours that they needed and the hours that were actually provided. Turns out, this actually makes them a whole bunch of money because we found millions and millions of hours that they should have been provided that they weren't.

[00:15:24] Is this something, though, that just and I'm going to say this in probably the worst possible way. But is this something that just it is what it is? I mean, this is a very difficult patient population and maybe it wouldn't matter how much staff you had. You would still have issues that were popping up. That's probably the defense the industry would give you. Difficult population margins are thin. Things happen.

[00:15:48] But the SNF itself is explicitly designed to care for patients with complex needs. I mean, it's called skilled nursing. They are a type of nursing home intended to care for people who have just left the hospital. But your audience knows about incentives and the numbers tell a bit of a different story. So, yes, you can say it's a difficult patient population, but their payment is specifically calibrated to how difficult it is to care for them. And we found they seek that out in the first place.

[00:16:17] So chains shop around for the sickest patients to maximize payment and then staff to a level below what those patients need. They keep the difference and this makes them extremely profitable. And I'm sure upcoding is in the mix here, right? Like, I mean, I feel like we're just tripping over all of the usual suspects to be perfectly frank. So we've got an entity that takes Medicare.

[00:16:41] So they have now all of the incentives that a facility that takes Medicare offers. One of them being clinical complexity of the patient population. But we are talking about the pervasiveness of this. So basically what you're saying is there was one institution, one organization that you wound up investigating as a result of this call from the elder abuse attorney.

[00:17:05] And you're digging in on issues that are prevalent within that particular organization. Let me ask you this, though. Since this is an entity that takes Medicare, there are the ratings. You can look up online and find. So is this reflective? I mean, this is a one star place. So we looked at a big chain of nursing homes.

[00:17:33] They have, you know, hundreds of skilled nursing facilities across the country. And you brought up these star ratings, which I think is really important because these star ratings that you can see on CMS's website are what consumers actually use to decide which nursing home they want to place their loved one in. And what we learned from former employees of this chain is that manipulation of these star ratings is rampant.

[00:18:01] How that happens is what informs these star ratings are assessments that the facility assesses and reports themselves. So these are self-reported. We're grading our own homework. We're grading our own homework. This is self-reported data. And it's tough because consumers don't have a whole lot of information they can use when they're deciding which nursing home to choose. So, you know, I'm a gigantic chain.

[00:18:30] Am I on the stock market? Like, this is a public company, public for-profit company here we're talking about. That's right. It's a public for-profit company. They have shareholders to answer to. And when a public company demonstrates that this model works, as in you can grow revenue by taking away care and manipulating metrics, others are going to notice. There's also quite a bit of private equity involved here, and everyone's going to follow the leader. And from a purely profit perspective, they'd be right to.

[00:18:59] The chain we looked at has a market cap of over $10 billion. There is money to be made from not providing care to sick patients. One expert actually told us that this chain is the model, as in other chains benchmark themselves against them. And so, how do you keep growing? Acquisitions spread the model to more and more facilities nationwide. The chain we researched is growing rapidly.

[00:19:22] And what we saw happening was, as an acquisition happens, it tends to be accompanied by staffing cuts that only get worse over time. Additionally, the demographics make this a lucrative market. The 65-plus population in the U.S. keeps climbing. The customer base is growing. And so are the risks to this vulnerable population. If I am reading the investment prospectus, you can see what it says, right?

[00:19:50] Like, the TAM is growing, number one, because as you just said, we have a population that over 65-plus is an exploding market. So the market cap, who knows if it's already a $10 billion company. But it sounds like this organization has really come up with a great business by cutting staffing to what sounds like unsafe levels.

[00:20:16] And then grade your own homework so no one notices? We actually saw in their 10-case that they specifically seek out distressed and struggling nursing homes and then transform them, they say, into highly rated five-star nursing homes. As we know, these metrics and star ratings are not always an accurate depiction of reality.

[00:20:42] So in other words, this organization is growing, very highly successful if you're on the market. And I'm not necessarily saying that as a stock tip. Listeners, I hope no one's thinking this. So it sounds like what this organization is doing is become a $10 billion organization by buying up by acquisition, which is a very common strategy across this market. So they buy up struggling facilities, struggling existing SNFs.

[00:21:11] They grade their own homework. So star ratings go up. Obviously, they've got some proprietary formula by which that happens. But at the same time, they're cutting staffing because that's how they're making the financials work out. So their star ratings are going up and their staffing levels are going down simultaneously. Right. And another interesting thing that we learned from former employees is that registered nurses, the highest paid, highest skilled labor, are the ones that get cut first.

[00:21:37] So a really interesting pattern we saw and we analyzed like hundreds of facilities that this was happening at. And if a facility is acquired by this chain, RN hours drop significantly. They just shoot down when the facility gets acquired by this for profit chain. All right. Let's just run through our perverse incentives playbook of usual suspects that we're collecting here.

[00:22:01] First one, perverse incentives that result in profiteering, the mother of all of them being to cut staffing because of Bumble's cost disease. Number two, playbook entry. Figure out how to grade your own homework so you can obscure the impact of aforementioned profiteering. And how do you how do you know all this? So we analyzed millions of data points from CMS. This is all publicly available data. Anyone can do it. You can go to this website and download it. We looked at nursing hours.

[00:22:31] We looked at expenses. We looked at related party transactions, which is just another fancy way for saying companies that they own or control themselves, that they pay themselves for goods and services. We spoke with former employees. We spoke with residents. We spoke with family members and experts and put that all together. You are taking sworn depositions. You're having all of these interviews. You're looking over publicly available data. You're doing the math yourself.

[00:23:01] X plus Y equals Z. Then you're comparing that to what this organization is publicly stating in their own homework that they graded themselves and popped up on the CMS websites, etc. And you're just seeing a stark difference in what is being stated publicly.

[00:23:19] And I want to come back to the incentives thing for a moment because one of the things we found in our research, and just to give you an example, there was a lawsuit over a resident death in Arizona where one facility manager revealed that his bonus was tied directly to revenue minus expenses. So by understaffing the facility, the manager was able to increase his bonus from $400,000 to over $800,000 in a single year.

[00:23:49] That was in a sworn deposition. And the lawsuit says that the resident died as a result of neglect. But the staffing cuts made the manager more money. And this can obviously be applied at a much larger scale. Take in sicker patients, increase reimbursement from the government, and cut staffing the biggest expense as much as possible. So this manager was already going to make a $400,000 bonus. Yes. And the incentive is net profit. Take the overall gross revenue, subtract the expenses.

[00:24:19] So again, you know, if you have labor being your highest cost and registered nurses, for example, being your highest cost of the highest cost or one of the highest cost of the highest costs, then it would actually, I mean, it doesn't take a financial engineering genius to be like, huh, maybe I should cut staffing hours here. So this manager decided, well, $400,000 is not enough for a bonus.

[00:24:48] I'm going to double that. And then it sounds like further diminish staffing levels. And we can actually take this up all the way to the level of executives. So this sounds pretty intuitive. You lower expenses, you make lots of money. Does that money automatically show up on a balance sheet as profit?

[00:25:18] Like, is there anything going on in the middle there that makes this story either more complicated or maybe even obfuscates the money? So what we did was we looked at five months of CMS data from July 2024 through November 2024. Because of data availability, we used that time period. We looked at payroll data. We saw how many hours that nursing homes were actually providing.

[00:25:45] We compared this to how many hours those nursing patients actually needed. And we also looked at the company's filings to see what their profits were over the course of the 2024 financial year. And what we modeled was what would happen should they have to meet the gap? Should they have to staff properly to meet their residents' needs?

[00:26:10] And we found that their profits were slashed by more than a third if they had to meet the needs of their residents. And the executive bonus pool effectively collapsed. So you said their profits were slashed by a third. You did not say they are now going out of business. So basically they now have 66% of their original profits.

[00:26:36] And it sounds like they were compensating going back to the manager in the wrongful death suit who decided he would like to make an extra $400,000 in bonus that year and kill a resident. I'm assuming or at least someone claimed that that was the case. So you've got an executive bonus pool. And again, this is the same thing you hear all the consolidated house.

[00:27:00] Like for-profit entities compensate their senior staff on growth and net and EBITDA and just, you know, all the things, right? So this is absolutely no exception. And therefore the executive bonus pool is built around that profit incentive.

[00:27:18] So when the profitability goes down by a third, then also it sounds like the executive bonus pool is cut because they're bonused on this profit margin. Right. So this is not to say they cannot afford to staff properly. They clearly can. We're seeing hundreds of millions of dollars flowing right back to themselves in the course of a year. They just might not be able to pay their executives as much as they currently are.

[00:27:47] Well, and if you're an executive, you can, I mean, this is not higher math. Let me ask you something though, relative to the staffing model. I remember, was it last year there was a reg on the books that was going to mandate that the staffing level of these SNFs was adequate? What happened? Yeah.

[00:28:10] So a couple of years ago, this was in 2024, CMS published a final rule stating that all skilled nursing facilities. So these are the facilities that are reimbursed by CMS had to have a 3.48 minimum HPRD hours per resident day. They also had to have a registered nurse RN on site 24-7 was the federal minimum.

[00:28:38] We then saw the industry lobbying group push pretty hard against this federal minimum. And they eventually sued CMS over this federal staffing minimum saying that they would have to close their doors for good and they simply couldn't afford to staff properly. There then was a lunch meeting that summer that happened. And eventually this rule was rescinded not much later.

[00:29:04] I'm adding another entry into the perverse incentives usual suspects playbook. Regulatory capture, lobby, have lunches and get any unfavorable regulation struck down. So CMS knows this, it sounds like, or some individuals over at CMS are aware of the fact that these facilities are being understaffed.

[00:29:26] There was a choice that was made and the stock market performance was deemed to be more important than minimum staffing levels for our elders. Right. And I just want to highlight that was a minimum. That was a minimum number of hours that had to be met. And so if you have more complex patient populations, you actually need to be staffing much higher than the 3.48. So that was just a minimum level that itself ended up getting rescinded.

[00:29:56] MedPAC has actually pushed really hard for this federal minimum. And we also worked closely with Charlene Harrington, a researcher who has been in this space for decades now, who also has done a lot of work to support this minimum. There's also a study done by the University of Pennsylvania, which found that this federal minimum would have saved 13,000 lives per year. It doesn't sound like this is up for dispute in a way.

[00:30:24] There is a minimum staffing level that is safe. Right. There's just there just is. It sounds like there are some who are saying, well, we simply cannot afford that minimum staffing level. Right. We just can't afford it. And I'm just taking this at face value. And maybe their definition of can't afford is we can't afford it and also pay our executives or whatever. However, they're coming to that inclusion.

[00:30:45] But they're basically saying we simply can't afford it, which is going to cause 13,000 excess deaths that would be avoidable if that minimum staffing level were met. But let me ask you this. How much of the revenue is actually coming from CMS? I mean, I'm just trying to identify if there's anything that sort of nullifies or diminishes the sort of stark point that's coming out of this conversation.

[00:31:12] So a vast majority of their revenue is taxpayer funding. We found about 70 to 90 percent of their revenue is from Medicare and Medicaid. And this applies across the board in the industry. 70 to 90 percent. Right. If we're talking about the fact that the profits and the bonus pools are in the millions of dollars. Right.

[00:31:33] So we have our tax dollars who are going to fund this executive bonus pool at the expense of, you know, if you ask me where I want my taxpayer dollars going towards, it would certainly be. I'd feel happy if it was going to the care of our grandmas and grandpas and aunts and uncles and parents. Right. Like that would make me happy. Like that would make me happy.

[00:31:57] I'm a little bit less happy to hear the amount of this, which is going to fund an executive bonus pool at the expense of that stated goal. This is the most vulnerable population in this country. The sick and the elderly. And when you think about how much is being taken away from their care and their safety and literally their survival, it's extremely disturbing.

[00:32:18] Yeah, we wind up just kind of back at this philosophical crossroads, which is, is a for profit capitalistic enterprise? Is that fundamentally compatible without a really strong girding of regulations at a minimum with human care?

[00:32:44] So there was going to be a staffing reg and it got shot down due to special interests. I'm not sure. I am not the best policy person in the world. But is there other regulations? Like, how does this happen? Well, I want to preface this with I'm not a lawyer, but a reporter. That being said, there aren't a lot of rules. As you know, the federal minimum number of hours was rescinded.

[00:33:12] Some states still have numeric minimums. The majority do not. Also, CMS does say it's illegal for related parties to charge themselves excessive rates for goods and servatives. But there's also no mechanism to recoup the excess. This is a really interesting point. CMS actually does flag when these related party transactions are excessive. No way to actually claw back that money. Well, wait, OK. So it sounds like we've just hit on another usual suspect in our list of usual suspects.

[00:33:41] So we started out with perverse incentives. I'm going to say the perverse incentive to understaff at a minimum. We've got the grading our own homework usual suspect. So you can kind of, you know, color over the impact of the perverse incentives. But it sounds like we have come upon another one, which many vertically integrated entities enjoy. The idea of paying related parties, in other words, paying sister companies, companies that you already own.

[00:34:09] You pay them more, which can diminish the balance sheet. Like this is a very common ploy. Listen to the show with Preston Alexander for vertically integrated entities, for example. But basically what you're saying, these SNFs have related parties. So they have other entities that they own. To what ends? You know what I mean? Like, am I doing that so that I can cry poor? Like, why am I doing this? Why am I overpaying somebody else that I own?

[00:34:35] Well, it's just kind of a financial engineering scheme that allows them to pass public funding through all these subsidiaries and intermediaries straight back to corporate. A medical device, rent, insurance, pharmacy, all of those kinds of things. They can charge themselves more or less whatever they want for it and then can keep the excess.

[00:35:01] And the really interesting things that CMS knows this, they're flagging it and that money is not recouped. So any given facility may be engaging in overcharging, but CMS can't get the money back? Right. So what CMS does know is they look at the fair market rate for these goods and services.

[00:35:24] They know that and they can compare that against what is showing up in the cost reports as the expenses or costs of these goods and services. But there just is no current mechanism for them to get these costs returned. So CMS has identified overpayments that are being made compared to the fair market value of whatever those goods and services should have charged. So they're like, oh, hey, I see what you're doing there. Like the end?

[00:35:52] They just say it's disallowed and leave it there. So like I get like a like a little pink ticket on. Right. And it's just kind of like, hey, stop it. You can see it on the cost reports themselves. We poured over thousands of them and you can see it says disallowed costs. But then there's no mechanism to recoup those dollars. That's right.

[00:36:12] Add one more layer into what amounts to a great playbook to make money as a SNF, own or have a deal with a private equity owned hospice center. The other day I was talking to someone who mentioned that if you are a SNF, you have like Medicare will cover a 21 day stay or something like that. But then you can refer to hospice to a sister hospice center for 180 or 120 days.

[00:36:40] And then, oh, wow, the patients didn't die. Then they're back in skilled nursing. It's a very nice flywheel. And by the way, I'm saying that in the most sarcastic way possible in case my tone was not clear. So when CMS calculates annual payment rates for SNFs, they're using in part a basket of goods and services that they then look at what the facility's margins are based on those costs. So if SNFs inflate that cost, it'll look like their margins are worse.

[00:37:10] CMS is more likely to increase their rates. But it does not appear that CMS takes into account those disallowed costs. So what CMS is trying to do there is to try to figure out are these costs in line with the acuity of the patient? And kind of while doing that math, they're digging in.

[00:37:39] And they're like, OK, well, I see what you're saying that you've purchased. And it seems like what you're purchasing is wildly more expensive or more expensive than what you should have paid. So we can also see that you're paying sister entities. So, again, if you just follow the dollar there, it's pretty clear what's going on. CMS just kind of flags it as a math problem. But then nobody is going back and actually getting the dollars for the U.S. taxpayers.

[00:38:08] Right. Overall, the rules are just thin. Oversight seems to be even worse. Experts told us again and again that enforcement is miserable. And there is a case to be made, experts told us, that what's going on is fraudulent. So federal law still mandates that SNFs have, quote, sufficient nursing staff to meet the specific needs of the residents. That's the law.

[00:38:35] Yeah. That's why we use the data on resident needs to show there's a gap between how many hours they need and what they're provided. This gap itself, experts say, is fraudulent. But again, oversight has not been great. And I can definitely see with this patient population, there is going to be a tradeoff and there's probably going to be diminishing returns. So for every additional staff I add, I prevent point four. You know what I'm saying? So like somebody's got to put a line on a chart.

[00:39:02] So it definitely sounds like we've got some usual suspects here. We talked about the perverse incentives, a big one being under staffing, the ability to sort of cover over that because we're grading our own homework. We've heard all of these stories before. We've got intercompany eliminations or whatever they're called over in this neck of the woods where there's additional monies that are being made. We have regulatory capture also added into the mix. How do you fix this?

[00:39:32] Well, the fixes are pretty simple. I mean, nothing in the health care industry is simple. But as far as the health care industry goes, fairly simple. First, codify a federal minimum number of staffing hours. This is based on research. I mean, they literally timed how long it takes to take care of residents with varying medical conditions. Also, make sure this regulation requires facilities to adjust for resident needs. There's no one size fits all standard here.

[00:39:59] There should be a minimum, but different conditions require a different level of care. Second, strengthen reporting standards and enforcement. There shouldn't be anything entirely self-reported and never audited, especially not metrics consumers use to choose nursing homes for their loved ones. CMS should be auditing everything SNF's report about their expenses and staffing hours and catching misreporting. For the related party expenses, I mean, come on.

[00:40:27] CMS flags when the payments are excessive. It's right there. Develop a mechanism to get those funds returned. It'll be billions of dollars the government gets back. And finally, reevaluate the star rating system. Consumers shouldn't be seeing metrics that are largely informed by self-reported data. At the very least, specify which star ratings come from independent sources. Suggested fixes in the show notes, but once again, here they are. Number one, codify staffing levels.

[00:40:55] Number two, strengthen reporting standards and auditing. Number three, not everything should be self-reported is maybe the minimum threshold. And number four, if an overpayment is spotted, CMS should really have a way to recoup the taxpayer dollars. And then lastly, reevaluate star ratings that consumers are using to select nursing homes for their loved ones.

[00:41:21] If I was going to argue against either any of these fixes or anything that you've said here today, what's going to be the counter argument? Well, I think primarily what the industry would tell you is that they simply don't have the funds to afford to staff properly. And what we show through our research about that money is very much there. It's just not distributed correctly. Michelle, Sarah, is there anything I neglected to ask you that you want to add here?

[00:41:47] I just want to highlight again that we're not talking about an iPhone, a handbag, a regular product that you can get in a store. We are talking about the lives of very vulnerable people. And these are not complicated fixes. They can be done and should be. If someone is interested in learning more and reading the full reporting, where would you direct them? You can read the full article at Hunterbrook.com.

[00:42:13] Just to spell it out, that's H-N-T-R-B-R-K dot com. It'll also be linked in the notes here. And Hunterbrook Media is continuing to investigate SNFs as well as the healthcare industry more broadly. So please reach out if you have stories that we should look into. You can find us at ideas at Hunterbrook.com. Michelle, Sarah, thank you so much for being on Relentless Health Value today. Thank you so much for having me. Hi, I'm Jerry DeMasso, CEO and co-founder of Payerset.

[00:42:40] Relentless Health Value is one of the best resources out there for understanding how healthcare really works. And it's actually required listening for anybody that comes on board at Payerset. Stacey gets into the real mechanics of healthcare pricing and what it takes to fix this system. If you care about making healthcare more affordable and transparent, this is the show to tune into. I highly recommend signing up for the weekly newsletter. It's a great resource because it includes all the links mentioned in the show and forward this episode to someone who should be listening.