The effect of civil money penalties on the financial performance of nursing homes

TL;DR

This study examines how civil money penalties affect nursing homes' financial performance, finding significant decreases in net income margins.

Contribution

The study introduces a novel analysis of CMPs' financial impact using a large dataset and fixed effects modeling.

Findings

CMPs equivalent to 1-3 days of expenses caused significant net income margin declines.

Short-term debt increases were minimal and modest.

CMPs may risk financial stability if not carefully calibrated.

Abstract

Civil money penalties (CMPs) are an important tool for holding nursing homes accountable for regulatory noncompliance. These fines can range from a few thousand to hundreds of thousands of dollars. Meanwhile, many nursing homes operate under financial strain, which has been linked to compromised quality of care. This study assesses the impact of CMPs on 2 indicators of financial performance: net income margin and short-term debt.

These indicators were regressed on penalty size using a 2-way fixed effects model, encompassing 87,249 facility-year observations from U.S. nursing homes from 2012 to 2019. The dollar amount of penalties was expressed in equivalent days of operating expenses to account for variation in facility sizes, and the analysis controlled for the nursing home characteristics and market conditions.

A negative relationship was found between the size of penalties and net income margin. Penalties equivalent to less than 1 day of expenses were associated with a 0.86 percentage-point decrease in net-income margin; 1-day penalties with a 1.48-point decline; 2-day penalties with a 2.49-point reduction; and those equivalent to 3+ days corresponded to a 3.56-point decline. Effects on short-term debt were minimal, with only modest increases seen.

These findings raise a concern for regulators that CMPs, if not carefully calibrated, have the potential to cross the boundary from deterring violations to jeopardizing the financial stability of nursing homes. If a facility struggles to absorb the cost, a CMP could inadvertently affect the care provided to residents.

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