Was a Private Equity Takeover of Bausch and Lomb Meant to Conceal Its Legal Settlements of Cases of Eye Infections?

This week, the Associated Press reported on yet another way health care corporations may keep information that reflects poorly on their products out of public view. The story involved fungal eye infections that particularly afflicted users of a specific contact lens cleaning solution:

More than 700 lens wearers in the United States and Asia say they were exposed to a potentially blinding infection known as Fusarium keratitis while using ReNu with MoistureLoc, a new-formula multipurpose solution for cleaning, storing and moistening soft contact lenses.

Sometimes, the damage was irreparable. Seven people in Florida, Maryland, New York, Oregon, Tennessee and West Virginia had to have an eye removed. At least 60 more Americans needed vision-saving corneal transplants.

The U.S. Centers for Disease Control and Prevention confirmed 180 cases in 35 states from June 2005 through September 2006, when the agency's dedicated surveillance stopped, according to Dr. Benjamin Park, a CDC epidemiologist. CDC continued to hear of sporadic, unconfirmed cases in the months after MoistureLoc was withdrawn, Park said.

'Surveillance usually captures the tip of the iceberg and sometimes it captures a larger tip than other times,' Park said in an interview.

Among out-of-court settlements reached in May was a potential bellwether case brought by Andrea Martin, a Broadway actress and comedienne whose eye was scarred. In Colorado, a corneal transplant ended a race-car driver's career. In Baltimore, a chimney-sweep business owner who lost an eye got hooked on painkillers.

Leading eye doctors and government scientists concluded that MoistureLoc, launched in 2004 with novel disinfectant and moisturizing ingredients, was the only lens solution that contributed to the outbreak. Yet the mechanics of how it caused the problem are still not fully clear.

AP alleged that Bausch and Lomb kept the cases out of public view by using a previously unknown (at least to me) strategy:

Contact lens maker Bausch & Lomb Inc. had an overriding reason for going private in 2007: It wanted to handle a devastating recall of its flagship lens cleaner, its chief executive said, 'without a lot of outside distraction.'

Over the past year, away from the glare of public scrutiny, the optical products company has quietly settled nearly 600 fungal-infection lawsuits — with dozens more individual claims yet to be resolved. The cost so far: Upward of $250 million.

With some fungal lawsuits still unresolved, the prospect of Bausch & Lomb's health care nightmare being aired in court has not entirely faded — which heartens some lawyers and doctors.

'The truth has been very carefully buried, and it appears to have been buried going back to the beginnings of the outbreak,' said Dr. Arthur Epstein, who was chairman of the American Optometric Association's contact lens and cornea section during the highly publicized crisis.

'All settlements were predicated on silence about the clinical findings and blame and so forth. My hope was that what actually happened would become part of public record in a courtroom. That way, we'd be able to learn from it and move on and make sure it never happened again.'

When Bausch & Lomb was acquired by private equity firm Warburg Pincus for $3.67 billion in October 2007, Chief Executive Ronald Zarrella said the deal would allow the company 'to pursue the growth path we were on ... without a lot of outside distraction.'Zarrella retired last year.

'hey can do all this out of the public eye — guys like me aren't sitting there scrutinizing the financial impact of every single settlement,'said analyst Jeff Johnson of Robert W. Baird & Co. in Milwaukee. 'you can completely focus on your brand and on doing what's right by the patient.'

So, if I understand this correctly, after Warburg Pincus took the company private, it was no longer required to file certain reports with the US Securities and Exchange Commission (SEC), including reports that would have had to acknowledge the multiple settlements the company made of cases alleging adverse effects of its contact lens solution. What is striking is the allegation by the AP that "taking the company" private was a strategy meant to conceal the settlements of these cases, (rather than a strategy implemented to fulfill other aims, which had the side effect of diminishing reporting of these cases' results.)

Again, I am hardly an expert, but relatively opaque private equity firms like Warburg Pincus seem to have become increasingly influential in the US economy, and to have an increasing role in health care. In 2007, we had posted how private equity firms running nursing homes, including Warburg Pincus, seemed to contribute to the opacity of their operations. More recently, we posted about how leaders of private equity, and of other kinds of firms in the finance arena, seem to also increasingly be leaders to which medical schools report.

One final note... A quick tour through the Warburg Pincus website reveals how involved the firm is in health care. The firm claimed that as a "direct equity investor in healthcare for more than 30 years, Warburg Pincus has invested more than $4 billion in approximately 120 healthcare companies." Furthermore, the firm seems quite intertwined with the leadership of academic medicine. It has a Life Sciences Advisory Board, of which three of four members are current leaders in academic medicine. The most prominent, Dr Michael Rosenblatt, Dean of the Tufts University School of Medicine, did not disclose this relationship in several versions of his biography published on the university web-site. (See the Tufts administration version here, and the Tufts Medical Center version here.)

Oh, what a tangled web we have weaved in health care, a web that continually frustrates transparency and makes it hard to figure out who was responsible for what when things go wrong.

Post Title → Was a Private Equity Takeover of Bausch and Lomb Meant to Conceal Its Legal Settlements of Cases of Eye Infections?

A Web of Deception Ensnares US Nursing Homes

The New York Times just published a report of some important investigative reporting about changes in how US nursing homes are currently managed, or mismanaged, leading to bad effects on patients' outcomes and safety. As an example, the report recounted the case of an elderly women who died in the Habana Health Center in Tampa, FL. The article made a series of key points,

• The homes were acquired by private equity companies not usually associated with health care.
• The companies drastically cut the costs of their acquisitions.
• These cost cuts decreased care, apparently leading to poor outcomes.
• The private equity companies set up complex corporate structures for their acquisitions, hiding their ownership, and thwarting lawsuits and regulation.

I have summarized supporting quotes for each point below.

Acquisition by Private Equity Companies

The changes seem to stem from the acquisition of many nursing homes and nursing home chains by "large Wall Street investment companies .... Those investors include prominent private equity firms like Warburg Pincus and the Carlyle Group, better known for buying companies like Dunkin’ Donuts. As such investors have acquired nursing homes, they have often reduced costs, increased profits and quickly resold facilities for significant gains."

The acquisitions involved were substantial. "But in recent years, large private investment groups have agreed to buy 6 of the nation’s 10 largest nursing home chains, containing over 141,000 beds, or 9 percent of the nation’s total. Private investment groups own at least another 60,000 beds at smaller chains and are expected to acquire many more companies as firms come under shareholder pressure to sell."

Drastic Cost Cutting

The major manifestations of mismanagement seem to be drastic cost cutting.

'The first thing owners do is lay off nurses and other staff that are essential to keeping patients safe,' said Charlene Harrington, a professor at the University of California in San Francisco who studies nursing homes. In her opinion, she added, 'chains have made a lot of money by cutting nurses, but it’s at the cost of human lives.'

The Times’s analysis of records collected by the Centers for Medicare and Medicaid Services reveals that at 60 percent of homes bought by large private equity groups from 2000 to 2006, managers have cut the number of clinical registered nurses, sometimes far below levels required by law. (At 19 percent of those homes, staffing has remained relatively constant, though often below national averages. At 21 percent, staffing rose significantly, though even those homes were typically below national averages.) During that period, staffing at many of the nation’s other homes has fallen much less or grown.

Nurses are often residents’ primary medical providers. In 2002, the Department of Health and Human Services said most nursing home residents needed at least 1.3 hours of care a day from a registered or licensed practical nurse. The average home was close to meeting that standard last year, according to data.

But homes owned by large investment companies typically provided only one hour of care a day, according to The Times’s analysis of records collected by the Centers for Medicare and Medicaid Services.

For the most highly trained nurses, staffing was particularly low: Homes owned by large private investment firms provided one clinical registered nurse for every 20 residents, 35 percent below the national average, the analysis showed.

Poor Patient Outcomes

In turn, such cost cutting was associated with poor outcomes.

The typical nursing home acquired by a large investment company before 2006 scored worse than national rates in 12 of 14 indicators that regulators use to track ailments of long-term residents. Those ailments include bedsores and easily preventable infections, as well as the need to be restrained. Before they were acquired by private investors, many of those homes scored at or above national averages in similar measurements.

In addition,

Regulators with state and federal health care agencies have cited those staffing deficiencies alongside some cases where residents died from accidental suffocations, injuries or other medical emergencies.

Federal and state regulators also said in interviews that such cuts help explain why serious quality-of-care deficiencies — like moldy food and the restraining of residents for long periods or the administration of wrong medications — rose at every large nursing home chain after it was acquired by a private investment group from 2000 to 2006, even as citations declined at many other homes and chains.

The typical number of serious health deficiencies cited by regulators last year was almost 19 percent higher at homes owned by large investment companies than the national average, according to analysis of Centers for Medicare and Medicaid Services records.

In the case of Habana Health Center,

Habana’s managers increased occupancy, and cut expenses by laying off about 10 of 30 clinical administrators and nurses, Medicare filings reveal. (After regulators complained, some positions were refilled and other spending increased.) Soon, Medicare regulators cited Habana for malfunctioning fire doors and moldy air vents.

'Those owners wouldn’t let us hire people,' said Annie Thornton, who became interim director of nursing around the time Habana was acquired, and who left about a year later. 'We told the higher-ups we needed more staffing, but they said we should make do.'

Regulators typically visit nursing homes about once a year. But in the 12 months after Formation’s acquisition of Habana, they visited an average of once a month, often in response to residents’ complaints. The home was cited for failing to follow doctors’ orders, cutting staff below legal minimums, blocking emergency exits, storing food in unhygienic areas and other health violations.

Soon after, nursing home inspectors wrote in Centers for Medicare and Medicaid Services documents that Habana was at fault when a resident suffocated because his tracheotomy tube became clogged. Although he had complained of shortness of breath, there were no records showing that staff had checked on him for almost two days.

Five months later, Mrs. Hewitt discovered that her mother had a large bedsore on her back that was oozing pus. Mrs. Garcia was rushed to the hospital. A physician later said the wound should have been detected much earlier, according to medical records submitted as part of a lawsuit Mrs. Hewitt filed in a Florida Circuit Court.

Three weeks later, Mrs. Garcia died.

Complex, Opaque Corporate Structures

Particularly fascinating and disturbing was the evidence that the nursing homes' managers evaded regulation, and legal responsibility for what they were doing by creating immensely complicated and opaque corporate structures.

Private investment companies have made it very difficult for plaintiffs to succeed in court and for regulators to levy chainwide fines by creating complex corporate structures that obscure who controls their nursing homes.

By contrast, publicly owned nursing home chains are essentially required to disclose who controls their facilities in securities filings and other regulatory documents.

The Byzantine structures established at homes owned by private investment firms also make it harder for regulators to know if one company is responsible for multiple centers. And the structures help managers bypass rules that require them to report when they, in effect, pay themselves from programs like Medicare and Medicaid.

For example,

Formation bought Habana, 48 other nursing homes and four assisted living centers from Beverly Enterprises, one of the nation’s largest chains, for $165 million.

Formation immediately leased many of the homes, including Habana, to an affiliate of Warburg Pincus. That firm spread management of the homes among dozens of other corporations, according to documents filed with Florida agencies and depositions from lawsuits.

Each home was operated by a separate company. Other companies helped choose staff, keep the books and negotiate for equipment and supplies. Some companies had no employees or offices, which let executives file regulatory documents without revealing their other corporate affiliations.

Current staff members at Habana declined to comment. Formation Properties I said it owned only Habana’s real estate and leased it to an independent company, and thus bore no responsibility for resident care.

That independent company — Florida Health Care Properties, which eventually became Epsilon Health Care Properties and subleased the home’s operation to Tampa Health Care Associates — is affiliated with Warburg Pincus, one of the world’s largest private equity firms. Warburg Pincus, Florida Health Care, Epsilon and Tampa Health Care all declined to comment.

The example of Habana Health Center showed how the complex and opaque corporate structures thwarted regulators.

Those [government] citations never mentioned Formation, Warburg Pincus or its affiliates. Warburg Pincus and its affiliates declined to discuss the citations. Formation said it was merely a landlord.

'Formation Properties owns real estate and leases it to an unaffiliated third party that obtains a license to operate it as a health care facility,' Formation said. 'No citation would mention Formation Properties since it has no involvement or control over the operations at the facility or any entity that is involved in such operations.'

Florida’s Agency for Health Care Administration has named Habana and 34 other homes owned by Formation and operated by affiliates of Warburg Pincus as among the state’s worst in categories like 'nutrition and hydration,' 'restraints and abuse' and 'quality of care.' Those homes have been individually cited for violations of safety codes, but there have been no chainwide investigations or fines, because regulators were unaware that all the facilities were owned and operated by a common group, said Molly McKinstry, bureau chief for long-term-care services at Florida’s Agency for Health Care Administration.

And even when regulators do issue fines to investor-owned homes, they have found penalties difficult to collect.

'These companies leave the nursing home licensee with no assets, and so there is nothing to take,' said Scott Johnson, special assistant attorney general of Mississippi.

Complex corporate structures also enable nursing home management to evade scrutiny of what they charge.

Government programs require nursing homes to reveal when they pay affiliates so that such disbursements can be scrutinized to make sure they are not artificially inflated.

'The government tries to make sure homes are paying a fair market value for things like rent and consulting and supplies,' said John Villegas-Grubbs, a Medicaid expert who has developed payment systems for several states. 'But when home owners pay themselves without revealing it, they can pad their bills. It’s not feasible to expect regulators to catch that unless they have transparency on ownership structures.'

In the case of Habana Health Center,

For example, Habana, operated by a Warburg Pincus affiliate, paid other Warburg Pincus affiliates an estimated $558,000 for management advice and other services last year, according to reports the home filed.

However, complex corporate structures make such scrutiny difficult. Regulators did not know that so many of Habana’s payments went to companies affiliated with Warburg Pincus.

Summary

We see some very familiar themes in this sorry tale.

Health care is increasingly dominated by large organizations. In this case, some of these organizations are not usually identified with health care, and the identity of other organizations is secret.

The leadership of many health care organizations will put their financial self-interest ahead of patients' interests.

The leadership of many health care organizations will hide what they are doing, evade responsibility, and thwart accountability by deliberate complexity and outright deception.

Until the leadership of health care organizations becomes more transparent and accountable, things are likely to continue to go downhill.

Once again, "sunlight is the best disinfectant."

Post Title → A Web of Deception Ensnares US Nursing Homes