Nursing Home Fees Suit Faces Dismissal

A California nursing home reform group has pursued a novel legal attack on the state and a nursing home chain saying patient care suffers when control of homes is turned over to management companies for exorbitant fees.

But the argument got a cool reception from U.S. District Judge Jon S. Tiger Tuesday.

California and managers of 40 nursing homes through Country Villa Services Corp. want Tiger to dismiss the suit brought by the California Advocates for Nursing Home Reform.

They argue CANHR wants to invalidate two state laws as purportedly preempted by federal law. Tethering the two state and federal nursing home regulations is “illogical,” according to Nimrod Elias, deputy attorney general.

Elias said the federal law deals only with health facilities that wish to participate in Medicare, making an attack on California’s licensing laws “entirely meritless.”

Tiger appeared inclined to grant the request during arguments Tuesday, but he did not rule from the bench and will issue an opinion later.

“I think the motion to dismiss is well taken,” Tiger told Russell Balisok, attorney for CANHR.

“The intent of the complaint is that these management agreements siphon off more money than would otherwise be paid,” Tiger said.  “But I don’t see anything [in the law] that says there is a cap on payment of management fees,” he said.

“Let’s say they do siphon off money and it causes worse care.  That’s pretty speculative.  There isn’t an injury, there is a likelihood of care of a lower quality,” he said.

But Balisok responded, “There is nothing wrong with a management agreement.  What we are complaining about is an agreement, approved by the state, in which the entire operation of facilities was delegated to the management company.”

He argued that violates federal law and that the state failed to consider that in approving the deal for the Country Villa services company, owned by Steven Reissman.

The suit alleges that Country Villa Service Corp. receives 5 percent of a nursing home’s gross revenue as compensation for its management, which is well beyond the actual cost of management.  As a result, there is less money to go the patient care, according to the suit.

Instead of compensation for actual management services, the fee “is designed by the nursing home industry in California and by CVSC in particular, to allow monies that would and should otherwise go to providing care to patients to be carried on the books of nursing home operators as an ‘administrative expense’ and paid to CVSC instead,” the suit states.

“Nothing in the regulations makes it unlawful to maximize profit,” Tigar said.

“Absolutely not,” Balisok responded.

“There is no limit on what can be paid to a management company,” the judge said.

But Balisok responded that the focus of the lawsuit was not profits but the company must first do the job of caring for patients to the “highest practical level” as the law states, before profit is considered.

In addition, federal reimbursement of Medicare expense includes the cost of malpractice insurance, which means there is no incentive for a company to improve conditions because any liability is paid by the insurer and the cost of the insurance falls to taxpayers.

Tigar responded, “So if Congress determined malpractice coverage was not reimbursed that would solve the problem?”

“You want to create a negative incentive against bad conduct,” he said.

Balisok said the management agreement delegates management control from the nursing home with the state license to a management company with no license.

The lawsuit accuses Country Villa of unfair business practices and seeks a declaration that its management agreements violate federal law and an order to disgorge fees it has received for several years.

Case:  CANHR v. Chapman, No. 12-cv-6408JST