Originally published by the International Journal of Health Services in 2020
The Program of All-Inclusive Care for the Elderly (PACE) has provided, for more than 4 decades, high-quality, cost-effective medical and social care to older people in the United States under nonprofit ownership. Recent rulings by the Centers for Medicare & Medicaid Services (CMS), however, will fundamentally change the initial intent and operation of the program. CMS’s final rule (4168-F) removes the provision that PACE operators be nonprofit. This article provides the legislative background for the final ruling and critiques the study that was used to justify the removal of the nonprofit provision. Although the Balanced Budget Act of 1997 listed a number of requirements for evaluating for-profit PACE programs, the secretary of the Department of Health and Human Services did not follow them before establishing for-profit PACE sites as permanent providers. It also argues that the ruling was made without much evidence that for-profit compared to nonprofit operators can provide a similar level of quality of care, access, and cost-effectiveness and urges policymakers to increase regulatory accountability, given what we know about other shifts in profit status and health care.
The Program of All-Inclusive Care for the Elderly (PACE) has provided, for more than 4 decades, high-quality, cost-effective medical and social care to older people, especially those with low incomes, in the community who would otherwise need a nursing home level of care – and has done so, until a recent Centers for Medicare & Medicaid Services (CMS) ruling – under nonprofit ownership. PACE integrates Medicare, an entitlement program that provides beneficiaries who are 65 years and older with hospital and medical insurance, with Medicaid, a health care assistance program for low-income individuals. PACE receives a capitated payment for those who are dually eligible for Medicare and Medicaid. For those who are not Medicaid-eligible, Medicare is combined with private pay. PACE uses an interdisciplinary team of primary care providers, registered nurses, dietitians, personal care attendants, drivers, social workers, and others who work together to provide care to almost 50,000 participants in 31 states. Eligibility for PACE includes being 55 or older, having a PACE program nearby, needing a nursing home level of care, and having the ability to live safely in the community. The average age of an enrollee is 76, 95% of participants live in the community, 90% are dually eligible for Medicare and Medicaid, and 35% need help with an average of 5 to 6 activities of daily living.1
Recent CMS rulings will fundamentally change the initial intent and operation of the program. PACE has operated since the 1970s as a nonprofit program. CMS’s final rule (4168-F) removes the provision that PACE operators be nonprofit, thus allowing for-profit-operated programs.2 This move is controversial, given the lack of evidence that for-profit PACE operators can provide a similar level of quality of care that is also cost-efficient, and raises questions about the motives behind the decision.
In the following, I provide the legislative background for the final ruling and critique the study that was used to justify the removal of the nonprofit provision. I argue that the ruling was made without much evidence that for-profit compared to nonprofit operators can provide a similar level of quality of care, access, and cost-effectiveness, especially given what we know about other shifts in profit status and health care. Finally, I urge policymakers to implement rules and enforcements to ensure that, under for-profit operation, PACE continues to provide quality, cost-effective care.
Legislative Background Leading to the Removal of the Nonprofit Pace Operator Requirement
Since the 1970s, nonprofits have operated PACE, and in 1999 an interim final regulation officially established nonprofits as permanent PACE program providers under Medicare and Medicaid. The Balanced Budget Act (BBA) of 1997 allowed the secretary of the Department of Health and Human Services (DHHS) to establish for-profit PACE sites as permanent providers, but only after an evaluation study of their cost-effectiveness, quality of care, and access to care was completed. The final rule implementing this provision required that the total number of enrollees in the demonstration evaluation be at least 800 (or a number that was still statistically sufficient for an evaluation as determined by the DHHS secretary) and that participating plans be in operation for 3 years before they could be included in the evaluation. It also required that the evaluation assess whether enrollees in for-profit PACE were frailer than enrollees in nonprofit PACE, whether access to and quality of care were lower in for-profit than nonprofit PACE, and whether the cost to Medicare and/or Medicaid was higher in for-profit PACE compared to nonprofit PACE.3
Findings and Issues in the Pace Profit-Status Evaluation
In 2015, Mathematica, under contract with CMS, released a 2013 report that compared the PACE for-profit demonstration project to the existing nonprofit organizations, and the results were presented to Congress. There were several issues with the study design and methodologies, and the findings of the evaluation did not ultimately reflect the final decision. These issues are fully elaborated by Gonzalez (2017) and summarized in the following.4 The study examined 3 of the 4 BBA evaluation criteria, including the number of lives, population characteristics, and quality of care. Although the BBA evaluation required a minimum of 800 enrollees (or as determined by the DHHS secretary to be statistically significant), 333 out of 585 for-profit enrollees and 326 out of 2,787 nonprofit enrollees were included in the evaluation. Another requirement – that plans should have been in operation for at least 3 years – was largely ignored, with the inclusion of 3 out of 4 for-profit plans and 1 out of 4 nonprofit plans in operation for less than 3 years. Furthermore, findings comparing frailty, access to care, and quality of care showed that nonprofit-operated PACE programs outperformed for-profit PACE programs on most measures. Finally, the study did not evaluate cost-effectiveness by profit status despite the BBA requirement. This issue is perhaps the most important because cost-effectiveness is often the rationale behind allowing for-profits to deliver public-sector services. In sum, there was a lack of adherence to the BBA statements outlining how an evaluation should proceed and a lack of a full consideration of the Mathematica evaluation’s methodology and findings.
Nonetheless, based on the evaluation, the DHHS stated that, “With respect to the BBA statements, the Department of Health and Human Services (HHS) cannot conclude that any of the 4 statements are true.”5 In August 2016, a notice was placed in the Federal Registry that proposed removing the restriction governing profit status in § 460.60(a) in its entirety.
Concerns similar to those outlined above were expressed directly to CMS via comments on the proposal. They are summarized by CMS as follows:
Commenters expressed concerns about CMS allowing for-profit entities to be POs [Providers of Service]. Many commenters believed that although the evaluation of the for-profit PACE demonstration found no significant reasons to restrict PACE to not-for-profit entities, CMS should continue its evaluation to identify and better understand any potential differences driven by ownership by a for-profit entity and to ensure that regulatory oversight is applied uniformly to all POs as it pertains to service utilization, participant frailty and outcomes and costs and experience … One commenter recommended CMS consider continuing its evaluation for up to 3 years for the for-profit POs …
CMS’s response to these valid comments was simply, “As a result of the comments, we are making no changes to our proposal and finalizing this provision as proposed,” and the PACE Final Rule removed the nonprofit operator requirement.6
The Rise of For-Profit Pace
The impetus behind allowing for-profit operation of PACE programs came from several sources. Studies showed that PACE was cost-effective, making expansion of the program attractive to the federal government seeking to control Medicare and Medicaid spending.7 The BBA of 1997 allowed for-profit PACE operators on a demonstration basis with the hope that for-profit operators could expand the program and save money. Existing nonprofit operators and advocates, however, viewed the goals of PACE as being at odds with for-profit operation and were opposed to the legislation.8 Nonetheless, expansion proved slow, and a decade and a half later, only 4 for-profit demonstration programs were operating, all in Pennsylvania.9
In early 2016, for-profit interest in PACE began to grow with support from the National PACE Association, which viewed for-profit investment as a mechanism to expand the number of programs.10 Although the exact number of for-profit PACE operators has not yet been disclosed, InnovAge, a for-profit corporation, recently stated that it has become the largest PACE operator based on the number of older people served.11InnovAge, previously a nonprofit PACE provider, became a for-profit PACE operator in 2016 after a private equity investment was made by Welsh, Carson, Anderson & Stowe. InnovAge attributes its rapid growth in several states to the private equity investment, and Tom Scully, general partner of the firm and former CMS administrator, agrees: “ … I’ve become a huge advocate of the PACE model … It is the best way to care for frail seniors but it has received little attention and grown very slowly due to limited access to new capital.”12Andrew Slavitt – another former CMS administrator and the founder and general partner of Town Hall Ventures, a venture capital and private equity firm – has also taken an interest in PACE by investing in Welbe Health, which delivers 2 PACE programs in California.13 Clearly, both for-profits and private equity firms see the benefit and value of PACE and want to expand the program, but is their interest in operating and investing in PACE programs cause for concern? The following describes some of the issues that have emerged with private equity investment and for-profit ownership in other health care settings.
Lessons From For-Profit Ownership in Other Health Care Sectors
The following, rather than providing a full literature review, provides observations about profit status and private equity in other types of health care that, like PACE, also serve vulnerable populations or those living with multiple health conditions and increased health care needs who are at risk of harm, financial exploitation, and death. It also provides evidence that questions whether for-profit-operated and -owned health care can deliver quality care to vulnerable populations.
For-profit ownership is often justified as being more efficient and cost-effective than nonprofit-operated health care. However, there is reason to question whether for-profits can deliver quality care to frail populations. The difference between for-profit and nonprofit ownership and operation lies in motivation, incentives, and accountability, although some have argued that these differences are narrowing as charitable funding has declined, encouraging nonprofits to operate in a more efficient, business-like manner.14For-profits are motivated by market forces – that is, to control costs while delivering a product or service in the hopes of making a profit to be distributed among leadership and shareholders. Nonprofits are typically motivated by a social cause to provide a service and, like for-profits, they are incentivized to control costs. However, nonprofits differ in that they tend to reinvest funds into the organization for the benefit of the people it serves. For-profits are accountable largely to shareholders and investors; nonprofits are accountable to boards of directors and to the communities in which they operate.15
Private equity investment in health care has increased over the past few decades, and these companies’ goals differ from those of nonprofits and for-profits. Private equity firms gather large sums of capital from wealthy individuals and institutions and make high-risk, high-return investments by buying and trading well-established, private companies.16 To buy companies, private equity firms typically use a strategy called a “leveraged buyout” in which the firm applies high levels of debt on the company and uses the company’s assets and cash as collateral. After the buyout, the private equity firm takes control of the company’s operation, with little accountability and interest in the nature of the business itself. This arrangement has a greater potential for harm – much more than general for-profit ownership – because, after private equity investment, decision-making becomes based on strategies to maximize value for investors with no stake in the operation and continuity of the company – a key difference between standard for-profit ownership and private equity-backed investment.16
Researchers have found several key changes when an organization undergoes private equity investment. Corporations often continue a pattern of divesting by selling facilities, diversifying assets by buying profitable facilities such as short-term rehab, intensifying corporate control, and reducing staffing and staff hours, which has been shown to negatively affect quality of care.17 Key changes include establishing limited liability companies or business entities created to protect members from the debt accrued by the business and from legal actions against it, rebranding, relocating, and increasing the staffing mix.17,18 Finally, corporations will sometimes use their acquisitions to launch new products and services (e.g., pharmacy services) via contracts with their facilities, which is profitable to the corporation because it ensures that the facility will be a dedicated customer; however, it reduces competition from other companies that might offer a lower cost or a better-quality service or product.17
Although research has documented shifts that occur at the corporate level, whether the shift to private equity and for-profit ownership results in negative outcomes is still somewhat debated in the research literature. What the research does show is that there are strategies corporations can use to extract a profit from existing programs that would otherwise not be profitable from an investment perspective. The following describes how for-profits could employ strategies that maximize profits, including selecting and maintaining a profit-favorable population, providing care in lower-cost settings, and extracting profits in the form of rent. It also provides examples of possible negative outcomes of private equity investment and for-profit ownership in hospice, Medicare Advantage (MA), nursing homes, and managed long-term services and support (MLTSS).
Hospice has provided end-of-life care in the United States since the 1970s. In 1982, the Tax Equity and Fiscal Responsibility Act created the Medicare Hospice benefit and a capitated per diem payment system. The number of hospices grew rapidly between 2000 and 2015, almost doubling during this time. Most of the growth is attributable to the rise of for-profit hospices.19For-profit hospice has been found to employ profit-maximizing strategies, including retaining longer-stay patients who have a greater number of low-cost days compared to shorter-stay patients, providing care in assisted living where reimbursement can be higher, and inappropriately billing for expensive general inpatient care.20–24 Several reports show that for-profit hospice spending and costs are higher. A study conducted by the Medicare Payment Advisory Commission (MedPAC) in 2008 found that for-profit hospices were more likely than nonprofit hospices to exceed the Medicaid aggregate cap.25 A 2011 Government Accountability Office (GAO) report showed that spending for hospice care provided in skilled nursing facilities increased 70%, from $2.55 billion in 2005 to $4.31 billion in 2009.26 Another GAO report found that for-profit hospices receive a larger proportion (58%) of Medicare payments – a finding they attribute to for-profits being more likely to have beneficiaries with a non-cancer diagnosis and longer lengths of stay.27 In 2016, CMS implemented a new hospice payment system for the routine home care level of care (1 of the 4 levels of hospice care and reimbursement rates) to better align the actual cost of care that was being provided with reimbursement rates, thus reducing hospices’ ability to take advantage of low-cost, longer-stay days. The new payment rates are based on 2 per diem rates: a higher rate for the first 60 days and a lower rate for days 61 and beyond.28 The research literature also shows that for-profit hospices provide a narrower range of services, have lower staffing ratios, and have fewer registered nurse visits – all of which have the potential to negatively affect quality of care.24,29,30
MA, the private alternative to traditional, fee-for-service (FFS) Medicare, has significantly increased enrollment over the last decade – and today, almost 35% of those who are eligible for Medicare are enrolled in MA plans.31 Although private insurance alternatives have always existed alongside traditional Medicare, it wasn’t until 2003 that major legislative changes created MA and a fixed, per-enrollee payment to MA plans (i.e., capitated payments such as PACE). The rationale for allowing MA plans includes cost savings compared to traditional Medicare and better-quality care. However, it’s not clear that MA is accomplishing these outcomes or that traditional Medicare was not already achieving these goals. Between 2008 and 2018, Medicare payments to MA increased almost 50% and, although enrollment during this time also increased, it’s unlikely that increases in MA payments are entirely attributable to increases in the number of enrollees.32Researchers have found, for example, that MA plans engage in cream skimming: enrolling healthier, less costly individuals.33 A 2010 MedPAC report finds that regarding quality of care, enrollment, and access to care, MA plans were positive or stable; however, they were not cost-effective, with Medicare spending in 2009 being about $14 billion more for MA enrollees than if they remained in FFS.34 Reforms in the 2010 Affordable Care Act reduced payments to MA plans, bringing them more in line with traditional Medicare.35The most recent (2019) MedPAC report suggests that 2010 ACA reforms reduced the gap in payments to MMA versus FFS; however, cost, quality, and enrollment issues remain.36
Skilled nursing provides another example of for-profit incentives and quality of care, staffing level, and cost outcomes. Nonprofits have received federal funds to construct nursing homes in accordance with hospital standards since amendments were made to the Hill-Burton Act in 1954. In the late 1950s, for-profits became eligible to receive aid from the Small Business and Federal Housing Administrations to construct and run nursing homes.37 Today, the majority of nursing homes – 70% – are operated by for-profits.38 For decades, researchers have studied whether for-profits provide similar quality care that is cost-effective compared to nonprofits, and numerous studies find that nonprofits outperform for-profits. Systematic reviews and meta-analyses of these studies show lower quality of care – especially, a greater number of pressure ulcers – and lower staffing levels in for-profit compared to nonprofit nursing homes.39,40 Reliable cost data and reporting by profit status have been limited in the United States and in other countries.41 A 2016 GAO study, nonetheless, shows that margins reported in Medicare cost reports are larger in for-profit-operated skilled nursing facilities, at 19% compared to 15% in nonprofit facilities and 13% in government-run facilities. The report also shows that for-profit and chain facilities spend less on both direct and indirect care.26
Recently, private equity investment has taken an interest in skilled nursing, raising concerns about quality of care. For example, as reported in 2018 in the Washington Post, in December 2007, Carlyle Group, a large, international private equity firm, bought HCR ManorCare, a nursing home chain that operates hundreds of nursing homes and assisted living facilities in several states, for $6.1 billion plus fees and expenses. Carlyle provided $1.3 billion for the deal and borrowed the remainder. In 2011, Carlyle Group sold most of HCR ManorCare’s real estate to HCP, a real estate company. HCP began extracting rent from the previous owner, HCR ManorCare, a common strategy in private equity called a “sale lease back.” With rent set to increase 3.5% per year combined with transaction and annual management fees, HCR ManorCare was forced to cut back on expenses and spending between 2010 and 2014. Between 2014 and 2016, it cut back even further, and it is during this time especially that the Washington Post reported increases in health code violations. The number of violations rose 3 times faster than those at other U.S. nursing homes.42
The research findings on private equity investment in nursing homes and subsequent outcomes are complex. Some research finds that among for-profit nursing homes and chains, private equity firms continue patterns of low staffing and low quality of care after investment.17,43 Other findings suggest that the Medicaid population in nursing facilities declines after private equity investment, indicating a decline in access to nursing home beds for lower-income individuals and those who can’t afford to private pay, and that deficiencies in nursing homes purchased by private equity increased over time.43,44 With regard to cost, a 2011 GAO report finds that between 2003 and 2008, private equity-backed skilled nursing homes, compared to other for-profit and nonprofit skilled nursing homes, have higher cost and higher margin increases.45Finally, researchers examining changes at the corporate level find several profit-maximizing strategies after private equity investment, including increasing the debt ratio of the nursing home chain, protecting investors by establishing limited liability companies, separating nursing home operators from the property company, ensuring that contracts with the nursing homes for services are with other companies that the private equity firm owns, and using the nursing facilities as launch companies for new products and services.17
The shift to MLTSS has raised similar concerns about the ability of for-profits to operate health care for vulnerable, low-income older people. MLTSS provides long-term care to older people using a capitated rate paid to Medicaid Managed Care Organizations (MCOs) that are responsible for beneficiaries’ Medicaid health benefits and other services. These MCOs are largely for-profit health maintenance organizations that have displaced the operation of the Aging Network, a nonprofit organization of federal, state, and local agencies created by the Older Americans Act.46 State Medicaid programs began shifting to MLTSS in 1990, and the BBA of 1997 made it easier for states to enroll Medicaid recipients in managed care.47 MLTSS operates in 22 states and has grown from 19 programs in 2012 to 41 in 2017 – almost doubling during that time.48,49 The goal of the shift to MLTSS is to expand home- and community-based services (HCBS), improve quality of care, improve access, provide budget stability, and control cost.50 However, as Williams points out, many states have expanded HCBS without MLTSS, there is no clear indication that quality of care improves after MLTSS implementation (due to a lack of data and accountability), the numbers of those waiting for HCBS have not declined, and there is little evidence of cost savings.51 Furthermore, health maintenance organizations can become incentivized under capitated payments to reduce provider payments, limit networks, or restrict services.52 Several GAO reports call for better data reporting to be able to evaluate performance.53,54
In sum, there are several strategies that for-profits and private equity employ to maximize profits in hospice, MA, managed care, and nursing homes that could negatively impact access, quality of care, and cost – and there is no reason to think that similar strategies couldn’t be employed in the for-profit operation of and private equity investment in PACE.
Findings of CMS’s Pace Audit and Enforcement Report
To date, no scholarly research beyond the Mathematica report has been conducted on profit status and PACE. However, CMS is required to monitor the performance of PACE programs, and in 2018, CMS released a report that audited 74 (67 nonprofit and 7 for-profit) of the 124 existing PACE programs.55 CMS scored PACE programs based on its review of their quality of care, care planning, and services requested and provided. The scores ranged from 0.6 to 9, with lower scores indicating better outcomes. With regard to profit status, the report showed a lower average score (2.40) for nonprofits compared to for-profits (2.53), indicating slightly better outcomes in nonprofit-operated PACE programs. The report also provided information about enforcement actions taken against PACE programs that substantially failed to follow PACE contract requirements. Two nonprofit operators received sanctions in the form of an immediate suspension of enrollment and 1 for-profit operator received a civil money penalty of more than $35,000 for failing to provide items and/or services. As the number of for-profit programs increases along with continued private equity investment, this report, along with future research, will hopefully further elucidate for-profit versus nonprofit PACE performance.
The final ruling (CMS-4168-F) has the potential to undermine a program that has successfully operated for more than 4 decades under nonprofit operators, especially given the lack of evidence that for-profit operators will continue its success. For-profits and private equity are promising to give PACE the capital it needs to expand – which is laudable, given the program’s success; however, given the evidence of how for-profits have operated in other health care sectors, accountability and transparency will be key to maintaining the original goals of PACE: serving frail, older people in the community in a cost-effective manner. Although payment reforms have been largely successful in MA and hospice, better data are needed to fully align the capitation rate with the demographic and health status of enrollees and the number and intensity of services provided.28,36 Similar to recommendations made in MedPAC’s 2019 report to Congress on the status of traditional Medicare and MA, PACE providers should be required to submit monthly, demographic, and detailed encounter data to CMS for better program oversight.56 These data should be reported and analyzed by CMS to evaluate quality of care, ensure that providers are not engaging in cream skimming, and to adjust payments whenever necessary. Enforcement mechanisms such as civil money penalties, fines for non-compliance with the rules governing PACE programs, and termination of the contracts of providers that fail to provide the required services under the program will continue to be important to ensure quality of care. However, unlike nursing homes, not all PACE providers are surveyed each year, increasing the possibility of undetected violations of the PACE contract with CMS in providing quality of care, care planning, and services requested and provided.55 Therefore, like nursing homes, all PACE programs should be surveyed annually and those found in non-compliance should receive some form of penalty depending on the severity of the deficiency.
In sum, it is unlikely that the final rule will be overturned. However, the PACE experience in the United States should serve as a cautionary tale. For-profit ownership and private equity investment in health care are not unique to the United States and, given the risk of lower quality of care, less access, and increased cost, other nations looking to reform their existing health care sectors should take heed.