by A.C. Thompson, ProPublica
Published December 31, 2013
The one-story beige building on Southwest Hill Road in McMinnville, Oregon — an old mill town between Portland and Salem — has seen plenty of trouble over the years of its operation as an assisted living facility.
Two men have been jailed for committing sex crimes inside its walls. Residents of the facility have repeatedly assaulted one another. There has been at least one case of severe, near-fatal neglect. To be sure, then, the building has been something less than the refuge it has held itself out to be for local seniors, many of them afflicted with dementia. Records of the state in the western United States have chronicled the damage.
The episodes of violence and neglect inside the McMinnville facility, if sad, are not particularly unique. Page through the regulatory records and court files of any state and one will come across such horror stories.
The history of the facility itself reflects a larger reality of the assisted living business. Hundreds of such facilities — some exemplary, some deeply troubled — change hands each year, many of them scooped up by the large chains that have come to dominate this swiftly expanding industry.
Such deals typically well serve the large companies that drive them. Often enough, however, they do little to improve conditions in places like the facility in McMinnville, where ownership turmoil can compound the unaddressed problems that undermine care.
In less than three years, the McMinnville facility came under the ownership of three different companies, including two of the most prominent chains in the United States. The first, Sunwest Management, collapsed under nearly $2 billion in unpaid debt, a spectacular implosion that led federal prosecutors to label the company a Ponzi scheme and file criminal fraud charges.
The second was a three-way joint venture between Blackstone, the private equity firm, Emeritus Senior Living, the nation’s largest assisted living company, and a real estate company. As part of the deal, Emeritus took over the operation of the facility, dubbing it Emeritus at Osprey Court.
The joint venture held onto the property for a few years before selling it in 2012 to a real estate investment trust with a vast portfolio of health care properties. That trust immediately leased the facility back to Emeritus. Today, Emeritus, under close scrutiny from Oregon regulators due to the continued problems in McMinnville, has decided to subcontract the facility’s operations to an outside firm.
There has been one constant for the elderly residents: dubious living conditions.
Throughout all the changes, there has been one constant for the elderly people who call the place home: dubious living conditions.
Just last April, citing the facility’s “chronic” inability to follow state laws, the Oregon Department of Human Services, which regulates assisted living in the state, moved to revoke its license and shutter it permanently.
For Emeritus, the ongoing legal troubles 2013 fines, failed inspections, a string of scathing state investigations 2013 has not kept the company from generating revenue at the McMinnville facility. Internal company records show the facility pulled in approximately $1 million during the first six months of 2013.
A company spokeswoman, Karen Lucas, said Emeritus was not currently making a profit on the facility, but rather investing money in improving its operations.
Conceived as a humane alternative to nursing homes, assisted living facilities typically offer apartment-like rooms, meals, and help to people too ill or frail to live independently, most of them elderly. Over the past decade, large chains have become a major force in the assisted living business throughout North America, which now houses some 750,000 in the United States alone. There are at least 35 American companies with 1,000 or more beds, many of them, like Emeritus, publicly traded.
Some industry analysts say the increase in chain ownership has had virtues: a more professional and sophisticated workforce inside the facilities; cheaper prices for consumers; the financial wherewithal to invest in improvements, whether in the level of 24-hour care offered or the quality of food served. A trade group for the industry says customers express high levels of satisfaction in surveys the group has conducted.
But others, including advocates for the elderly, frustrated state regulators, and academics who study the industry, say chains’ expanding footprint in assisted living has also come with serious downsides. In some cases, companies that are under pressure to produce returns for investors and saddled with debt from acquiring facilities cut back on items that affect care, such as staffing, training and basic upkeep.
In the churn of what can often seem like real estate swaps, critics say, places like McMinnville can get lost, becoming specks in financial empires, lines on a balance sheet.
In just the past few years, one major player, Sunrise Senior Living, was purchasedby a real estate trust in a deal valued at $4.3 billion; a private equity fund acquired another large company, Assisted Living Concepts, which had been embroiled in litigation with its former top executive; and Emeritus bought a mobile nursing firm and took control of facilities spread across eight states that had been run by a competing chain.
“It’s about, “How do I make a buck?'” said John Bowblis, an economist and assistant professor at Miami University’s Farmer School of Business in Ohio. “It seems a lot of the human element has been taken out of it.”
A particularly grim year
The McMinnville facility has been operating for a decade, but 2009 seems to have been a particularly grim year for the facility’s residents.
In separate incidents, two men were arrested and convicted for sexually abusing elderly women with dementia. In one case, the husband of a resident sexually assaulted another woman in the facility; in the other, a nursing assistant at the facility was found guilty of sexually assaulting a woman living at the facility and sentenced to more than eight years in prison.
A state investigator, in records examined by ProPublica, noted something remarkable about the case involving the nursing assistant: he had been hired to work at the McMinnville facility even though he’d accumulated five criminal convictions between 2005 and 2008.
The facility was, at the time, owned and managed by Sunwest. Chief executive Jon Harder oversaw Sunwest’s national operations from the company’s headquarters in an office complex in Salem, 30 miles from McMinnville. He’d built the company into one of the industry’s leading players, amassing a collection of roughly 300 facilities that claimed to generate$500 million in annual revenues.
But by 2006, a year after it had acquired the McMinnville facility, Sunwest was in financial trouble. And in the ensuing years it became the target of federal investigators. Prosecutors ultimately produced a 56-count fraud indictment in federal court in Portland, alleging that Harder, in an effort to hide the company’s growing losses, went on “an acquisition binge,” one financed by $130 million he illegally obtained by misleading more than 1,000 investors and banks.
Harder has pleaded not guilty in the case, which is still unresolved. He could not be reached for comment, and his attorney, Christopher Schatz, declined to be interviewed.
By late 2008 Sunwest was buckling under a reported $2 billion in debt. In McMinnville, the company had defaulted on a $26.9 million mortgage on the facility, property records show. The company eventually became embroiled in bankruptcy proceedings, and auctioned off its assets under the scrutiny of a judge and dozens of private attorneys
Before the sale, Sunwest had been in conflict with the state due to a string of “significant” regulatory violations, according to Christina Higby, the corrective action coordinator for the licensing wing of the Oregon Department of Human Services. Higby said the department deployed an array of “different sanctions,” including fines and a written plan aimed at bringing the facility into compliance with state laws during the Sunwest era.
When the facility was sold, that compliance plan was scrapped. From the state’s perspective, it was a new beginning.
Emeritus became the largest assisted living company in the country
For Emeritus, the 2010 deal was, in the words of the company’s chairman, a “game-changing event.” Emeritus and its partners had acquired 144 Sunwest facilities for $1.3 billion. It was an attractive enough proposition that the Blackstone Group, a prominent private equity firm in New York, had put much of the money into the deal.
The purchase helped make Emeritus the largest assisted living company in the country– the company would staff and manage the old Sunwest buildings and hold a small ownership stake in them. And as a general rule, the company’s strategy of buying up properties offered a tax advantage, allowing Emeritus to list the real estate as assets with declining values, reducing its tax burdens.
But the company’s rapid expansion had pushed its debt load to nearly $2 billion, and Bowblis, the Ohio economist, said that is one of the perils of these kinds of acquisitions. Locked into debt payments and short of cash, like homeowners who’ve signed onto a mortgage too big for their monthly budget, companies like Emeritus can be forced to cut costs elsewhere.
Brian Kaskie, associate director of the University of Iowa’s Center on Aging, has seen what often happens next: staff cuts, fewer training sessions for workers, a falloff in the quality of the food provided in the company’s facilities.
“Individual facilities may be unable to provide good care because the parent corporation isn’t giving them enough money,” Kaskie said. “It’s all spread-sheet driven.”
In an interview late last year, Granger Cobb, the chief executive officer of Emeritus, said the company’s debt obligations were not an impediment to delivering quality care.
“We’ve been never been in a position where we felt like our capital structure was too heavy on the debt side,” Cobb said. “We’ve always felt very comfortable about our revenue stream and our cash flows. And the beauty about our business — and part of the reason I’m so passionate about it is — if you do a really good job of delivering the care and service and creating high customer satisfaction, you’re going to stay full from an occupancy standpoint. You’re going to be able to charge a fair price for your product and rest of it just, kind of takes care of itself.”
The financial and regulatory records reviewed by ProPublica don’t show spending or revenue for individual facilities, so it is unclear how changes at Emeritus have affected the 57-bed McMinnville property. The company says it has invested amply in improving the facility.
But in 2011, the state had to press Emeritus to agree to bolster its employee training in key areas.
After conducting inspections in late 2011 and early 2012, the human services department concluded the facility was putting seniors at “risk for serious harm,” and barred Emeritus from admitting any new residents, according to interviews and state records. The restriction was eventually lifted, but regulatory violations continued to pile up, with the department citing the facility in at least 14 separate subsequent complaint investigations.
In one case, the state faulted Emeritus for failing to give a resident a prescription medication for nearly a month. In another, the state determined that the facility neglected a client so severely the person nearly died. After losing 21 pounds during the course of a month, state records show, the resident was sent to the hospital suffering from respiratory failure, kidney failure, pneumonia, sepsis, and dehydration. Hospital staff promptly pumped five liters of fluid into the person.
In the eyes of the department, the failure of Emeritus staffers to address the resident’s mounting health problems constituted “abuse.”
Lucas, the company spokeswoman, said Emeritus disputes the state’s finding. ProPublica asked the company what, precisely, it disputed about the state’s investigation, or whether it could provide any more detail about the incident. The company said it would not comment further.
Many of the other violations involved episodes in which residents with dementia physically attacked one another. Oregon’s human services department has repeatedly faulted Emeritus staffers for failing to intervene to prevent the violence.
“Emeritus overtook operations of Osprey Court from Sunwest, which admitted residents with psychiatric disorders,” Lucas said in an email response to questions from ProPublica. “These types of health conditions are characterized by an increased risk of behavioral issues, including aggressive behaviors towards other residents and staff. Many of those residents were still living at the community when Emeritus took it over.”
By the fall of 2012, the facility had changed owners again. This time the joint venture organized by Emeritus sold it and 128 other properties to HCP, a real estate investment trust. HCP leased the McMinnville facility back to Emeritus, which continued to run the place.
This transaction appears to have been a score for Emeritus. The company had put a relatively modest amount into the original deal, buying a 6 percent sliver of equity in the properties, according to securities filings; the rest of the cash was put up by the other joint venture partners. On an earnings call, a company executive was exuberant: “As a result of this transaction, within two short years,” Emeritus had turned an “initial $20 million investment into $140 million,” said chief financial officer Robert Bateman. After expenses, Bateman continued, the company would be looking to net $110 million.
On Southwest Hill Road, there was no obvious indication that anything had changed: Emeritus workers kept working. The brown-and-white Emeritus signs remained out front.
Regulators reluctant to close assisted-living facilities
Regulators in many states are hesitant to permanently close assisted living facilities — shutting down a troubled operation can sometimes cause even more trouble, in the form of costly litigation and scrambles to relocate seriously ill seniors. In Oregon, the human services department moved to shut down only one of the state’s 475 facilities during 2013.
It was Emeritus at Osprey Court, the McMinnville facility.
For the state, the biggest concern in McMinnville was the “sheer volume” of regulatory violations, said Diana Norton, deputy director for the department’s licensing wing. Norton said Emeritus had been granted “many opportunities” to turn things around but couldn’t consistently adhere to state laws.
In a written notice, the department said the facility’s failures posed a “threat to the health, safety, and welfare” of its clients.
“When you get to the point where the state is revoking the facility license, it is a sign that the whole operation is on fire,” said Eric Carlson, directing attorney of the National Senior Citizens Law Center.
Lucas, the spokeswoman for Emeritus, said in an email that the company could not comment on the pending dispute with the state over the license revocation effort.
“Emeritus saved Osprey Court from bankruptcy and its residents from bankruptcy’s impact,” Lucas said. “Had we not done so, many of these residents would have been displaced with nowhere to go. We have invested substantially in measures designed to enhance the care environment to meet the unique needs of Osprey Court’s residents, a number of whom have psychiatric disorders. We are committed to seeing this through.”
While there are no national statistics, industry experts say it’s unusual for a facility owned by a major chain to be closed; it’s far more common for regulators to shut down establishments run by small companies. Larger chains often have the financial resources to challenge such actions in court, and they typically run facilities with many more residents, both of which give regulators pause when considering terminating a facility’s license.
Brian Lee recently reviewed three years of license revocation data for Florida. “I saw no corporate facilities,” said Lee, head of Families for Better Care, an advocacy group, and a former state ombudsman for assisted living and nursing homes. “They’re all small operators.”
In Oregon — as in most states — the process of pulling a facility’s license can unfold slowly over the span of months or even years. Emeritus, which has fought to hold onto the license, is slated to argue its case during an administrative hearing in February. Should it lose, the company is entitled take the matter to civil court.
Today, Emeritus continues to run Osprey Court, though the company has quietly handed over the day-to-day management to a consulting firm, Aidan Health Services, according to the human services department and Emeritus employees.
“As a part of our commitment to providing quality care and the well-being of Osprey Court’s residents and families, we have engaged Aidan Health Services to help in that regard,” Lucas said in her reply to ProPublica. “We sought additional resources because of the location and challenges of the physical environment, something Emeritus does on occasion.”
At some point, Emeritus may be forced to abandon its little outpost in McMinnville, but the company’s march toward ever greater growth seems set to continue: It recently snapped up another 38 facilities in a single acquisition.
UPDATE, January 22, 2014: California lawmakers introduced a dozen legislative proposals aimed at stiffening regulations governing the state’s roughly 7,700 assisted living facilities, residences that offer room and care to tens of thousands of frail or ailing people, most of them seniors.