Corporate Neglect in Nursing Homes
Trial - September 2008 – Page 52
By: David Couch

The Corporate Shell Game

Since big business started running nursing homes, there has been a constant struggle among the corporations, the regulators, and the residents, but increasingly, the profit motive has been winning out. And nursing home owners have discovered ways to avoid responsibility when abuse is discovered. Many for instance, set up myriad “buffer” corporations to insulate the real decision makers from liability and hide corporate assets.

In the fall of 2003, the Journal of Health Law published an article for its readers in the industry describing how to work this corporate shell game. As the article noted, nursing homes face serious potential risks: exclusion from Medicare and Medicaid, financial liability for government overpayments, and tort claims. The article advised nursing home owners to set up multiple corporations, separating the real estate investment from the nursing home operation and creating a limited liability corporation and creating a limited liability corporation for each individual nursing home in the corporate chain.

Under this scenario, the corporation that owns and operates the nursing home would lease the real estate from the corporation that owns the real estate. The authors recommended doing this for each home in the corporate chain, leading to endless layers of managerial responsibility. And since some homes may be connected to hundreds of separate corporations, this manipulation makes it appear that the nursing home has no substantial assets, meaning it cannot reimburse the government for any Medicare or Medicaid overpayments, and it cannot pay damages to the victims of its neglect.

To make matters worse, many corporations that were once publicly held have become private, making it even more difficult to determine who is really running the show and is ultimately responsible for bad decisions. Many of these corporations no longer carry any liability insurance; some carry inadequate amounts. Lawyers representing injur3d residents and their families face an enormous challenge pinning down exactly who should be held accountable for abuse or neglect.

Recently, the New York Times examined data collected by government agencies from 2000 to 2006 and concluded that some nursing homes that were acquired by large private investors had cut staff and other expenses to levels below the legal minimum requirements. And many of these homes scored worse than the national averages in 12 of 14 indicators that regulators use to track ailments of nursing home residents.

In the past, the liability of these parent corporations or individual decision makers was predicated on the legal theory of piercing the corporate veil. While this theory may still work in some instances, corporate defense attorneys have developed solid strategies to defeat it, so your best approach is to pursue alternative liability theories.

The strongest cause of action in these circumstances is an action in these circumstances is an action for direct liability against a parent corporation and its executive decision-makers. Executives who know that residents are being neglected – know that adequate resources, including staff, are not being provided – and reward administrators for increasing profits instead of providing good care can and must be held responsible.

One recent case that illustrates this principle of direct liability well, although it is not a nursing home case, is Forsythe v. Clark USA, Inc. A parent company, an oil refiner, instructed one of its subsidiaries to use a budget strategy that required the subsidiary to cut operating costs for training, maintenance, supervision, and safety. As a direct result, unqualified and untrained employees caused a fire that killed two people.

The Illinois Supreme Court held that “a parent corporation can be held liable if, for its own benefit, it directs or authorizes the manner in which its subsidiary’s budget is implemented, disregarding the discretion and interests of the subsidiary, and thereby creating dangerous conditions.

In nursing homes, the link between staffing and quality of case is clear. If cuts in staff and resources in a nursing home lead to harm, then whoever made the decision to make those cuts should be held accountable to those harmed by it.

One observer summed up eloquently the challenges plaintiff lawyers face in nursing home litigation:

Care in the health field is a word with a double meaning: It means to provide for the needs of the patient, but it also means to care what becomes of another human being. Caring does not come naturally to the businessmen who run nursing homes, not to bureaucrats either; one cannot legislate caring. Why should we care? Not, I believe, for the money alone. Most of this book has been about the money – the profits nursing home operators make on the tax revenues guaranteed to them by government. It is important for the public to know the facts set forth here, but that is not all of it. If it were, we could respond that, well, it’s only money, and other industries are stealing from us on a vaster scale. But the nursing homes are stealing more from us – they are stealing lives, not just money. At the very heart of things, then, the message of this book is about people.

Considering the recent interest in nursing home regulation and the rise in litigation, you might think this passage was written recently. But the excerpt is from Mary Adelaide Mendelson’s book Tender Loving Greed, published in 1974.

Unfortunately, the problems that Mendelson documented still exist today. They may even be growing.

As lawyers who care about people. And who want to hold the greedy accountable for stealing lives, it is up to us to see that they stop. It is up to us to see that these problems do not continue for yet another generation.