MEMPHIS, Tenn. — When one of Martha Jane Pierce’s sons peeledback the white sock that had been covering his 82-year-old mother’sright foot for a month, he discovered rotting flesh.

“It looked like a piece of black charcoal” and smelled “likedeath,” her daughter Cindy Hatfield later testified. After Pierce,a patient at a Memphis nursing home, was transferred to a hospital,a surgeon had to amputate much of her leg.

One explanation for Pierce’s lackluster care, according tofinancial records and testimony in a lawsuit brought by the Piercefamily, is that her nursing home, Allenbrooke Nursing andRehabilitation Center, appeared to be severely underfunded at thetime, with a $2 million deficit on its books in 2009 and a scarcityof nurses and aides. “Sometimes we’d be short of diapers, sheets,linens,” one nurse testified.

That same year, $2.8 million of the facility’s $12 million inoperating expenses went to a constellation of corporations controlled by twoLong Island accountants who, court records show, owned Allenbrookeand 32 other nursing homes. The homes paid the men’s othercompanies to provide physical therapy, management, drugs and otherservices, from which the owners reaped profits, according to courtrecords.

In what has become an increasingly common business arrangement,owners of nursing homes outsource a wide variety of goods andservices to companies in which they have a financial interest orthat they control. Nearly three-quarters of nursing homes in theUnited States — more than 11,000 — have such business dealings,known as related party transactions, according to an analysis ofnursing home financial records by Kaiser Health News. Some homeseven contract out basic functions like management or rent their ownbuilding from a sister corporation, saying it is simply anefficient way of running their businesses and can help minimizetaxes.

But these arrangements offer another advantage: Owners canestablish highly favorable contracts in which their nursing homespay more than they might in a competitive market. Owners thensiphon off higher profits, which are not recorded on the nursinghome’s accounts.

The two Long Island men, Donald Denz and Norbert Bennett, andtheir families’ trusts collected distributions totaling $40 millionfrom their chain’s $145 million in revenue over eight years — a 28percent margin, according to the judge’s findings of fact. In 2014alone, Denz earned $13 million and Bennett made $12 million,principally from their nursing home companies, according topersonal income tax filings presented in court.

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KaiserHealth News is a nonprofit news service covering healthissues. It is an editorially independent program of the KaiserFamily Foundation that is not affiliated with Kaiser Permanente.

Typical nursing home profits are “in the 3 to 4 percent range,”said Bill Ulrich, a nursing home financial consultant.

In 2015, nursing homes paid related companies $11 billion, atenth of their spending, according to financial disclosures thehomes submitted to Medicare.

In California, the stateauditor is examining related party transactions at anothernursing home chain, Brius Healthcare Services. Rental prices to thechain’s real estate entities were a third higher than rates paid byother for-profit nursing homes in the same counties, according toananalysis by the National Union of Healthcare Workers.

Such corporate webs bring owners a legal benefit, too: When anursing home is sued, injured residents and their families have amuch harder time collecting money from the related companies — theones with the full coffers.

After the Pierce family won an initial verdict against the nursing home, Denz andBennett appealed, and their lawyer, Craig Conley, said they wouldnot discuss details of the case or their business while the appealwas pending.

“For more than a decade, Allenbrooke’s caregivers have promotedthe health, safety and welfare of their residents,” Conley wrote inan email.

Dr. Michael Wasserman, the head of the management company forthe Brius nursing homes, called corporate structures a “nonissue”and said, “What matters at the end of the day is what the carebeing delivered is about.”

Networks of jointly owned limited liability corporations arefully legal and used widely by other businesses, such asrestaurants and retailers. Nonprofit nursing homes sometimes usethem as well. Owners can have more control over operations — andbetter allocate resources — if they own all the companies. In manycases, industry consultants say, a commonly owned company willcharge a nursing home lower fees than an independent contractormight, leaving the chain with more resources.

“You don’t want to pay for someone else to make money off ofyou,” Ulrich said. “You want to retain that within yourorganization.”

But a Kaiser Health News analysis of federal inspection andquality records reveals that nursing homes that outsource torelated organizations tend to have significant shortcomings: Theyhave fewer nurses and aides per patient, they have higher rates ofpatient injuries and unsafe practices, and they are the subject ofcomplaints almost twice as often as independent homes.

“Almost every single one of these chains is doing the samething,” said Charlene Harrington, a professor emeritus of theSchool of Nursing at the University of California-San Francisco.“They’re just pulling money away from staffing.”

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Kaiser Health News is a nonprofit news servicecovering health issues. It is an editorially independent program ofthe Kaiser Family Foundation that is not affiliated with KaiserPermanente.

Early signs of trouble

Martha Jane Pierce moved to Allenbrooke in 2008 in the earlystages of dementia. According to testimony in the family’s lawsuit,her children often discovered her unwashed when they visited, withan uneaten, cold meal sitting beside her bed. Hatfield said incourt that she had frequently found her mother’s bed soaked inurine. The front desk was sometimes vacant, her brother GlennPierce testified.

“If you went in on the weekend, you’d be lucky to find one nursethere,” he said in an interview.

After a stroke, Pierce became partly paralyzed and nonverbal,but the nursing home did not increase the attention she received,said Carey Acerra, one of Pierce’s lawyers. When Pierce’s childrenvisited, they rarely saw aides reposition her in bed every twohours, the standard practice to prevent bedsores.

“Not having enough staffing, we can’t — we weren’t actually ableto go and do that,” one nurse, Cheryl Gatlin-Andrews, testified ina deposition.

KHN’s analysis of federal inspection, staffing and financialrecords nationwide found shortcomings at other homes with similarcorporate structures:

Homes that did business with sister companies employed, onaverage, 8 percent fewer nurses and aides. As a group, these homeswere 9 percent more likely to have hurt residents or put them inimmediate jeopardy of harm, and amassed 53 validated complaints forevery 1,000 beds, compared with the 32 per 1,000 that inspectorsfound credible at independent homes. Homes with related companieswere fined 22 percent more often for serious health violations thanwere independent homes, and penalties averaged $24,441 — 7 percenthigher.

For-profit nursing homes employ these related corporations morefrequently than nonprofits do, and have fared worse thanindependent for-profit homes in fines, complaints and staffing, theanalysis found. Their fines averaged $25,345, which was 10 percenthigher than fines for independent for-profits, and the homesreceived 24 percent more substantiated complaints from residents.Overall staffing was 4 percent lower than at independentfor-profits.

Ernest Tosh, a plaintiffs’ lawyer in Texas who helps otherlawyers untangle nursing company finances, said owners oftenexerted control by setting tight budgets that restricted the numberof nurses the homes could employ. Meanwhile, “money is siphoned outto these related parties,” he said. “The cash flow gets reallyobscured through the related party transactions.”

The American Health CareAssociation, which represents nursing homes, disputed any linkbetween related businesses and poor care. “Our members strive toprovide quality care at an affordable cost to every resident,” thegroup said in a statement. “There will always be examples ofexceptions, but those few do not represent the majority of ourprofession.”

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Kaiser Health News is a nonprofit news servicecovering health issues. It is an editorially independent program ofthe Kaiser Family Foundation that is not affiliated with KaiserPermanente.

‘Piercing the corporate veil’

The model of placing nursing homes and related businesses inseparate limited liability corporations and partnerships has gainedpopularity as the industry has consolidated through purchases bypublicly traded companies, private investors and private equityfirms. A 2003 article in theJournal of Health Law encouraged owners to separate theirnursing home business into detached entities to protect themselvesif the government tried to recoup overpayments or if juries leviedlarge negligence judgments.

“Holding the real estate in a separate real-property entity thatleases the nursing home to the operating entity protects the assetsby making the real estate unavailable for collection by judgmentcreditors of the operating entity,” the authors wrote. Suchrestructuring, they added, was probably not worth it just for“administrative simplicity.”

In 2009, Harvard Medical School researchers found the practice hadflourished among nursing homes in Texas, which they studied becauseof the availability of state data. Owners had also insertedadditional corporations between them and their nursing homes, withmany separated by three layers.

To bring related companies into a lawsuit, attorneys mustpersuade judges that all the companies were essentially acting asone entity and that the nursing home could not make its owndecisions. Often that requires getting access to internal companydocuments and emails. Even harder is holding owners personallyresponsible for the actions of a corporation — known as “piercingthe corporate veil.”

At a 2012 Nashville conference for executives in the long-termhealth care industry, a presentation slide from nursing homeattorneys titled “Pros of Complex Corporate Structure” stated:“Many plaintiffs’ attorneys will never conduct corporate structurediscovery because it’s too expensive and time consuming.” Thepresentation noted another advantage: “Financial statement inpunitive damages phase shows less income and assets.”

A lawyer in Alabama, Barry Walker, is still fighting an11-year-old case against another nursing home then owned by Denzand Bennett, according to court records. Walker traced theownership of Fairfield Nursing and Rehabilitation Center back tothe men, but he said the judge had allowed him to introduce theownership information only after the Alabama Supreme Court orderedhim. That trial ended with a hung jury, and Walker said asubsequent judge had not let him present all the information to twoother juries, and he dropped the men from the lawsuit. The homeclosed a few years ago but the case is still ongoing despite twomistrials.

“The former trial judge and the current trial judge quitefrankly don’t seem to understand piercing the corporate veil,” hesaid. “My firm invested more in the case than we can ever hope torecover. Sometimes it’s a matter of principle.”

The complexity of the ownership in Pierce’s case was a majorreason it took six years to get to a trial, said Ken Connor, one ofthe lawyers for her family. “It requires a lot of digging tounearth what’s really going on,” he said. “Most lawyers can’tafford to do that.”

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Kaiser Health News is a nonprofit news servicecovering health issues. It is an editorially independent program ofthe Kaiser Family Foundation that is not affiliated with KaiserPermanente.

The research paid off in a rare result: In 2016, the jury issueda $30 million verdict for negligence, of which Denz and Bennettwere personally liable for $20 million. The men’s own tax returnsbolstered the case against them. They claimed during trial theydelegated daily responsibilities for residents to the home’sadministrators, but they reported on their tax returns that they“actively” participated in the management. The jury did not findthe nursing home responsible for Pierce’s death later in 2009.

The fight is not over. Denz and Bennett are appealing theverdict, the damages, their inclusion and the trial judge’sdecisions. They argue that Tennessee courts should not havejurisdiction over them since they spent little time in the stateand neither was involved in the daily operations of the home or insetting staffing levels. Their lawyers said jurors should neverhave heard from nurses who hadn’t cared directly for Pierce.

“No way did I oversee resident care issues,” Bennett testifiedin a deposition.

Deficient in the end

Whoever was responsible for Pierce’s care, her family had nodoubt it was inadequate. Her son Bill Pierce was so horrified whenhe finally saw the wound on his mother’s foot, he immediatelyinsisted that she go to the hospital.

“The surgeon said he had never seen anything like it,” Hatfieldsaid in an interview. “He amputated 60 percent of the leg, abovethe knee.”

After her amputation, Pierce returned to the nursing homebecause her family did not want to separate her from her husband,who was also there.

At the trial, the nursing home’s lawyers argued that Pierce’sleg had deteriorated not because of the infection but because herblood vessels had become damaged from a decline in circulation. Thejury was unpersuaded after nurses and aides testified about howAllenbrooke would add staffing for state inspections while the restof the time their pleas for more support went unheeded.

Workers also testified that supervisors had told them to fill inblanks in medical records regardless of accuracy. One example:Allenbrooke’s records indicated that Pierce had eaten a full mealthe day after she died.

Data journalist Elizabeth Lucas contributed to thisreport.

KaiserHealth News is a nonprofit news service covering healthissues. It is an editorially independent program of the KaiserFamily Foundation that is not affiliated with KaiserPermanente.