The New York attorney general on Tuesday filed a lawsuit alleging a long-running financial fraud involving a major owner of U.S. nursing homes.
The lawsuit involves a single New York nursing home allegedly controlled by Long Island nursing home investor Ephram Lahasky and his partners. The facility’s owners diverted funds intended for resident care to increase their personal profits, New York attorney general Letitia James alleged in the complaint, in part by causing the nursing home to pay inflated rent and management fees to related entities and using the facility as collateral to cash in on multimillion-dollar loans. The consequences for the 100-plus residents of the Villages of Orleans Health and Rehabilitation Center in Albion, NY, were devastating, according to the complaint, as the understaffed and poorly maintained facility deprived them of essential medical care and basics such as meals, hygiene and hot water.
The case compounds the transparency and care-quality concerns that have surrounded the fast-growing nursing home operations of Lahasky, which were the subject of a MarketWatch article earlier this year. Lahasky testified that he owns several hundred nursing homes, including three in New York, according to Attorney General James’s complaint, which names Lahasky as a defendant. A major addition to that portfolio came late last year, when Lahasky acquired Diversicare Healthcare Services, which operates more than 60 nursing homes.
Asked whether James is investigating any other facilities affiliated with Lahasky, a spokeswoman for the attorney general said, “our nursing home investigations are ongoing.” The attorney general’s office worked closely with the U.S. Department of Health and Human Services on the Villages of Orleans investigation, she said.
Details in the complaint also shed new light on the challenges facing regulators as they seek to hold owners accountable for the quality of nursing-home care, which is largely taxpayer-funded through Medicaid and Medicare. One individual, Bernard Fuchs of Nassau County, NY, was listed as the facility’s sole owner in regulatory submissions, whereas in fact he was a silent, minority partner who testified that he had never even visited the Villages of Orleans, according to the complaint. The Centers for Medicare and Medicaid Services, the federal agency overseeing nursing homes, released new nursing-home ownership data in September, aiming to improve information on facilities under common ownership. The CMS database still lists Fuchs as the sole owner of the Villages of Orleans.
“The regulatory and oversight system has not kept up with the increasing sophistication of the nursing home industry,” said Richard Mollot, executive director of the Long Term Care Community Coalition, a nonprofit resident advocacy group.
Lahasky did not respond to requests for comment. Early this year, Lahasky told MarketWatch that “all you hear about is the bad stuff,” adding that “nobody hears about the average facility” where residents get all the care they need. Fuchs could not be reached for comment.
Since the start of 2015, owners of the Villages of Orleans diverted more than $18.6 million, or more than 20% of the facility’s operating budget, pocketing that amount as “up-front profit,” the New York attorney general alleged. Some of that money allegedly came from mortgage proceeds. Two years after obtaining a $6.3 million mortgage in January 2015 to finance the original purchase of the facility, owners got a $15 million loan to refinance that mortgage and immediately took more than $4 million as a cash distribution, the attorney general alleged. In December 2020, the facility was refinanced again, this time through the U.S. Department of Housing and Urban Development, and an additional $3.6 million was withdrawn as profit, according to the complaint. Those allegations underscore longstanding concerns about HUD-backed loans helping to prop up poorly run nursing homes.
The facility had to repay the inflated mortgage principal and interest out of its operating account, the complaint alleged. Under its “predatory” lease agreement with the related-party property holding company, the facility had to pay monthly debt service on the mortgage, plus $50,000 per month, and profits of up to $1 million per year, according to the complaint. With the triple-net lease, the tenant was also responsible for real estate taxes, building insurance, maintenance and utilities. Such hefty expenses helped create the false impression that the facility is unprofitable, the complaint alleged.
“Most nursing homes are complaining they’re losing money,” whereas profits are often siphoned out through related-party organizations, said Charlene Harrington, professor emerita at the University of California San Francisco.
Fuchs testified that Lahasky was at the “top of the pyramid,” responsible for handling lease agreements, bank accounts, and managing operations at the Villages, according to the complaint. Lahasky testified that he “can’t manage… a falafel stand,” the complaint said.
Among the owners of the real property holding company, according to the complaint, is Benjamin Landa, another major New York nursing home investor. Lahasky told MarketWatch earlier this year that Landa helped him get into the nursing home business about a decade ago.
“The lawsuit has no merit whatsoever,” said Howard Fensterman, an attorney for Landa, adding that Landa owns an 8% interest in the real estate entity and is not an owner of the nursing home operations. “A landlord can always refinance a building and take money out of the building if they choose,” he said. “It has nothing to do with the operations.”
Staffing and resident care suffered as hefty profits were extracted, according to the complaint. Residents allegedly suffered malnourishment and dehydration and developed severe infections due to inadequate wound care. One resident sent a friend more than 1,000 texts asking for help with getting food and water and other basics, according to the complaint. The New York attorney general’s Medicaid fraud control unit calculated that if the owners had paid themselves just $360,000 less in 2020, the Villages could have provided an additional 15,000 hours of direct care to residents during that first year of the pandemic. The facility was so short-staffed that COVID quarantine protocols weren’t followed, and employees who had a fever were told to go outside for an hour before having their temperature checked again, according to the complaint. Early last year CMS labeled the Villages a “special focus facility,” a designation for nursing homes with several years worth of serious quality issues.
The New York attorney general is seeking restitution of the money the defendants “fraudulently transferred” to themselves, appointment of a receiver and financial monitor to oversee the facility’s financial operations, and an order removing Lahasky and his partners from any role at the Villages and any related entity, among other measures, according to the complaint.
The New York case adds to a long string of legal troubles for Lahasky-affiliated facilities. Sam Halper, also named as a defendant in James’s lawsuit, was indicted in August for allegedly falsifying staffing records at a Pennsylvania nursing home co-owned by Lahasky. CHMS Group, another defendant in the James case and a Lahasky-affiliated provider of administrative services, is also a defendant, along with several facilities co-owned by Lahasky, in a U.S. Department of Labor lawsuit alleging a failure to compensate employees for all overtime hours worked. Attorneys for Halper, who pleaded not guilty to federal criminal charges, did not respond to a request for comment. CHMS has denied the Labor Department allegations in court. A lawyer for CHMS Group did not respond to a request for comment.