RICHMOND, Va — Tens of millions of dollars in costs reported by a Virginia nursing home chain could not be justified or verified through regulatory reviews of the facilities' financial reports. Though external auditors flagged what they said appeared to be certain "inflated" expenses, the state's Medicaid agency said it did not refer those claims for any further investigation.
According to the Department of Medical Assistance Services (DMAS), Virginia's Medicaid agency, the audits were focused on identifying related-party transactions, which occur when a nursing home conducts business with another company under common ownership or control. Related-party transactions in the nursing home industry are common but have drawn scrutiny from some consumer advocates and experts who argue they may lead to increased costs above market rates.
Ultimately, the findings from the audits will have no impact on the amount of taxpayer money the nursing homes will receive after state lawmakers recently moved to delay the recalculation of Medicaid rates by multiple years.
$65 million in costs not allowed
For nearly two years, CBS 6 has heard from many families who raised concerns that their loved ones suffered in nursing homes that were part of the Lifeworks Rehab chain.
According to federal records, the chain has overall performance and staffing ratings below the national average. It also had two of the state's worst-performing facilities, according to federal records, though one of those nursing homes underwent a recent operator change.
In previous interviews, some family members questioned how the facilities were prioritizing financial resources.
"The first problem would be Medicaid. [If] Medicaid stopped paying them, I bet you they'd get their act together," said Cynthia Jefferson, whose loved one lived in a nursing home that was part of the Lifeworks Rehab chain until an operator change occurred last month.
Taxpayer dollars make up a majority of most nursing homes' revenue, as most patients are insured through the Medicaid and Medicare programs. To show the government how that money is being used for patient care, providers submit annual cost reports to the government. At the state level, those reports are used during certain years to set Medicaid reimbursement rates.
CBS 6 has obtained audits of cost reports for all 37 facilities for this chain, which DMAS tracks under a different name, Innovative Healthcare Management, for the 2024 cost reporting year. The audits were completed by contractors for DMAS.
Combined, they identified tens of millions of dollars in disallowed, unsubstantiated, and what auditors said appeared to be "inflated" expenses.
"What happens is that they're overreporting expenses and so that makes it look like they're making less profit. These disallowances are basically profits," said Dr. Charlene Harrington, professor emeritus at the University of California, San Francisco, who has studied nursing home quality and finances for four decades.
But Venson Wallin, managing director at BDO's Industry Specialty Services Group, said not all excess in costs reflect "exorbitant" profit.
"It might be profit in that it's more than what your cost was, but it may, if you compared it to the ongoing market rate, it might be the market rate," Wallin said.
A spokesperson for the nursing homes, Mindie Barnett, said the auditing process is simply reconciling real costs faced by providers with expenses that are recognized under regulations.
"All costs were to enhance care of residents and are believed to have been properly documented," Barnett said in a statement. "This is an ongoing process between these facilities and the state regulator, and we will address any questions directly with the regulator."
After auditors' adjustments, about $65 million in total costs reported by the 37 facilities were disallowed, meaning DMAS would not consider those expenses reimbursable, and they would not be factored into rate-setting processes.
Related-party payments, 'excessive' purchases, and possible 'inflated' costs
The same kinds of disallowed expenses were identified by auditors across nearly every facility — including management fees above the limit paid to suspected related parties, undocumented consulting and corporate payroll costs, lobbying dues, and unsubstantiated related-party employee benefit costs.
At some facilities, auditors also removed what they called "excessive bulk purchases" that they said appeared to be made at the end of the year "solely to inflate costs" during a reporting year that would determine Medicaid payments for the next three-year cycle.
Auditors warned that "any artificial inflation of costs during this period may lead to inaccurate rate-setting and overpayment."
Auditors said they were further concerned that multiple facilities made questionable equipment purchases on the same date from a New York-based vendor, totaling close to $10 million. They said more documentation was needed to assess the appropriateness of the purchases.
At Colonial Heights Rehabilitation and Nursing Center, auditors removed more than $600,000 in management fees over the regulatory limit paid to nine suspected related-party entities. Those companies included Medical Facilities of America Consulting, Heritage Consulting, LLC, Innovative Health Care Management, Forest Holdings, M&M Capital Holdings, Garden View Holdings, Vita Healthcare Group, MFA Heritage Consulting, and MFA Clinical Consulting, according to DMAS.
Colonial Heights, which underwent an operator change last month, did not disclose any of these entities as related parties on its submitted cost report. In an appeal, the provider disputed the related-party connections.
Republican Senator Glen Sturtevant, whose district includes Colonial Heights, said he was troubled by the findings.
"It would appear from the audit that DMAS did that they are creating all of these opportunities of self dealing, to be able to pay themselves for lots of different things, basically pick whatever price they want, and then expect to get reimbursed by the state for it," Sturtevant said.
According to the audits, auditors limited hundreds of thousands of dollars in related-party management fees across many other facilities in the Central Virginia region including $896,000 at Glenburnie Rehabilitation and Nursing Center, $407,000 at Parham Healthcare and Rehabilitation Center, and $753,000 at Westport Rehabilitation and Nursing Center. Westport underwent an operator change last month.
Medicaid agency not investigating further
When asked whether DMAS was initiating any further investigation related to audit findings, spokesperson Kedra Keith said, "The cost report discrepancies and lack of supporting documentation identified during the audit did not indicate a need for further investigation. However, if additional information comes to light that warrants further review, DMAS would evaluate the information and make any appropriate referrals."
Specific to Colonial Heights and the auditors' claim that certain expenses appeared to be "inflated," Keith said DMAS "lacks the necessary information to assess whether the costs were inflated."
She added the agency "could" refer the findings to the Medicaid Fraud Control Unit but has not done so "due to the absence of adequate supporting documentation, which prevents a clear assessment of the costs' allowability."
Both Harrington and Wallin pushed back on that reasoning.
"The company is responsible for having adequate documentation, so that's a violation of the rules, and that's not an excuse," Harrington said.
"I would say that they definitely need to pursue getting that documentation," Wallin said. "There are ways that the agencies can enforce their inquiry."
Meanwhile, Democratic Delegate Rodney Willett, who chairs a powerful healthcare committee in the legislature, said he has high confidence in DMAS' oversight.
"I've heard directly from them. This is on their radar. No one's going to hide the ball here now. The information, the numbers are there. They're being looked at. If there's an issue, then action is going to be taken," Willett said.
According to DMAS, Innovative appealed adjustments for all 37 facilities. Those appeals are currently going through a settlement process, and a final outcome has not been determined.
Keith said DMAS focused its auditing on related-party transactions and selected which accounts to review based on factors like significant cost increases from the previous year and unclear account descriptions.
Last year, CBS 6 investigations revealed some facilities paid what experts described as unusually high related-party rent to a landlord under common ownership in the 2024 cost reporting year. The amounts significantly exceeded what Medicaid would pay under its fair rental value methodology. Barnett previously said the rents were justified as they reflected market rates and capital investments.
However, DMAS did not audit any capital-related costs as part of the auditing process. Keith explained this was because capital costs do not affect Medicaid rates or reimbursement. Capital rates are determined through a separate fair rental value accounting principal.
Previously, DMAS has said the oversight and enforcement it conducts rests solely within the context of setting rates. It "does not have authority to broadly oversee" how nursing homes pay related parties or invest resources, a spokesperson said.
Keith said the 2024 cost reports were audited through a desk review, which according to Wallin, is not as thorough as a field audit, which would involve auditors physically visiting facilities.
DMAS has not attempted to recover any money associated with the disallowances because the 2024 cost reports have not been used to set rates, Keith said.
Audit findings will not change facilities' Medicaid funding
Ultimately, none of the audit findings will have any effect on the amount of Medicaid funding the facilities receive.
DMAS typically rebases nursing facility rates every three years. The next rebasing was set for 2027, which would have relied on 2024 cost report data.
But in the 2026 General Assembly session, Del. Willett proposed a budget amendment deferring rebasing until 2030, meaning the audited reports will not be used for rate setting.
Willett said this decision was not connected to audit findings.
"What would have been the current approach, they were going to be using data that was affected by Covid, and all the parties involved, the state side of it, the industry side of it, felt like that really was not fair, really not accurate, because it was such an extraordinary time," Willett said.
However, the current rates were rebased in 2024, which used 2021 cost reports — a peak year for Covid.
When asked whether that meant the current rates may not be accurate too, Willett said, "I'm not sure about as to if there were any adjustments made to that, because again it was such an extraordinary time, but I do have a lot of confidence in our Medicaid agency. The leadership there is incredible. They're on the case, and I feel like they're going to do a great job here."
The move to delay rebasing was supported by industry groups including the Virginia Health Care Association.
"Taking the time to examine the methodology used to set Medicaid’s rates for nursing home care is essential because too many nursing homes already face a funding gap between the cost of care and what Medicaid pays because the Medicaid base rate remains too low," VHCA spokesperson Amy Hewett said in a statement.
Wallin agreed that funding shortfalls remain a significant hurdle for providers, saying, "When you have 65 to 90% of your overall reimbursement tied to a program that is at or below cost, that's a real challenge.”
But Harrington argued that while nursing homes' margins appear thin on paper, true profits remain unclear.
In industry guidance issued in 2024, a federal inspector general's office said it was concerned that nursing home owners may be misrepresenting profitability by overstating payments to related parties. The guidance said these practices typically appear in related-party rent transactions and related-party management arrangements.
"The amount of money we're spending on nursing homes is just excessive compared to the care and services that residents are getting, so I see it as a crisis," Harrington said.
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