In Churn of Assisted Living Deals, An Island of Misery

by A.C. Thompson

The one-story beige building on
Southwest Hill Road in McMinnville, Ore. – 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. State records have chronicled the damage.
The episodes of violence and neglectt
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 country. 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.
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 – fines, failed inspections, a string of scathing state
investigations – 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,
which now houses some 750,000 Americans. There are at least 35 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
Chapter 1.
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

Chapter 2.
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

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
an interviewlate 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
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
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.
Chapter 3.
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
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
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.

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