Bethesda, Maryland-based MidCap seemingly prospered, too, even as care at Atrium’s Midwest nursing homes deteriorated. In the first three months of 2018 alone, the lender charged the operators of the Atrium nursing homes fees of $540,000 to extend the maturity date of loans,
a lawsuit, later settled, against the lender claims. Meanwhile, at one Atrium facility in Appleton, Wisconsin, a federal inspection in May of that year found that the facility didn’t ensure residents received appropriate care to prevent urinary tract infections. One resident left unchecked for seven hours was found wearing underwear soaked with urine and feces.

As the financial vise on Atrium tightened in the summer of 2018, MidCap’s monthly payments rocketed from $500,000 to more than $900,000, the lawsuit against the lender alleged. The rise came amid reports of stalled food deliveries and inadequate physical therapy services because bills had gone unpaid, according to the federal indictment.

MidCap was not named in the Breslin indictment for its role in Atrium’s troubles but it received a scorching rebuke for its actions when the Wisconsin Department of Health Services said it “wantonly disregarded its societal responsibilities in pursuit of profit,” according to a court filing by Wisconsin Attorney General Joshua Kaul in early 2019. MidCap disagrees with this characterization, the lender said.

The lawsuit against the lender in 2019 also blamed MidCap for the failure of the Atrium nursing homes in Wisconsin claiming it “allowed and assisted Breslin in the looting of the facilities” so that it “could reap millions of dollars in fees, interest and loan repayments.” MidCap denies the allegations.

And, after Atrium’s financial troubles came into public view, a Wood County Circuit Court judge scolded MidCap for seeking to limit its financial commitment to the struggling nursing home by cutting funding and effectively forcing the closure of four facilities. “They refused to lend more money as they had promised to do because they didn’t want those operations ongoing because those operations had been singled out as money losers, as bad ones,” said Judge Nicholas J. Brazeau Jr. The move to seek the court’s permission to abandon the facilities could only be called a “shocking turn,” the judge said at a May 2019 hearing. MidCap told POLITICO there was no “promise” to lend money and no “shocking turn” of events.

Atrium wasn’t MidCap’s only troubled nursing home client.

In South Dakota, nursing homes operated by Skyline Healthcare were on the brink of failure in the spring of 2018 after MidCap cut funding amid signs that Skyline, too, could not pay its bills. As the facilities wrestled with insufficient funds, MidCap sought monies it said it was owed even though Skyline had already paid back the principal and interest on its loans, according
to an August 2019 court filing contesting MidCap’s claims. Included were “float” charges of more than $327,000 for funds that were immediately available as soon as they were wired, the court filing claimed, as well as a charge of nearly $109,000 for lending lines that Skyline did not use and a minimum balance fee of $27,756.17, both detailed in an affidavit submitted to the court by a MidCap official. The lender said that the credit agreement between itself and Skyline allowed for “float” interest which reflected the risk that a payment to its account could be reversed. A “float” interest feature,
it noted to the court, is customary for credit lines like the one used by Skyline.

MidCap declined to answer detailed questions submitted by POLITICO. In a statement, the company said that MidCap “engages with its borrowers in a manner consistent with its duties and legal requirements as a lender and as provided in the terms of its loan agreements.” The company added that “as with any third-party lender, MidCap Financial does not oversee day-to-day operations of its borrowers and is not in a position to know or manage its borrowers’ operational or safety activities, particularly in instances where a borrower’s fraudulent activity is intentionally well-hidden from regulators and lenders alike.” In the case of both Atrium and Skyline, MidCap said it did not recover the full loan balance that it was owed.

Michael Polsky, a lawyer appointed to manage Atrium’s finances as it was flailing, echoed the lender’s view. “Of all the 300 some cases I have been involved in, I have never seen more extensive fraudulent conduct by the principals of a business than I have in this case,” said Polsky, who as part of his practice has relationships with the banking and bankruptcy groups at every large law firm in Wisconsin, including MidCap’s lawyers.

For its part, a spokeswoman for Apollo said while the company has its roots in private equity, it is an alternative asset manager today. More than two-thirds of its assets under management are in credit products and private equity is the smallest part of its business, she noted. Apollo has $76.8 billion in assets invested in private equity, according to the company’s website and, as of Sept. 30, it had $631 billion in total assets under management. The spokeswoman noted that MidCap Financial, which Apollo took a stake in in 2013, is a business which originates loans for middle-market companies. It is funded by investors “with long-duration capital,” she said.

In that way, MidCap is similar to private equity funds. PE investment vehicles are also financed by investors with a long-term horizon yet they’re still under pressure to generate returns, a feature of their business which makes them unsuitable players in the health care space, according to critics.

The Atrium and Skyline cases, as described in court documents, offer a rare but penetrating view of the behind-the-scenes maneuvers of big money players. MidCap was not the only lender to Atrium and Skyline but it has a sizable presence in the business of lending to nursing homes. And its actions at least in Wisconsin drew the glare of state law enforcers, sparked sharp words from a local judge and made the lender the target of litigation.

“Without the access to capital,” said Sam Brooks, director of public policy at the Washington-based National Consumer Voice for Quality Long-Term Care, inexperienced nursing home operators “would not be in this space.”

The risks are growing as private equity firms and their lending units are helping a new generation of owners consolidate control of the industry at a time when nursing facilities for elderly people are already in short supply.

“This is not Toys ‘R’ Us,” the iconic retailer that folded a decade after private equity firms acquired it and saddled it with debt, said Toby S. Edelman, a senior policy attorney at the Center for Medicare Advocacy, quickly noting that she doesn’t mean to diminish the job losses from the toy store chain’s implosion. But “when it is a nursing home, we are talking about people’s lives.”

In February 2022, Biden announced sweeping nursing home reforms that included steps to lift the veil on the ownership of facilities. In November, 2023, as part of a bid to provide greater transparency of private equity’s footprint in the nursing home industry, the Centers for Medicare and Medicaid Services
unveiled a rule that will require nursing homes to disclose whether private equity firms own or help operate facilities. Under the new rule, a nursing home enrolled in Medicare or Medicaid will be required to provide details of “additional disclosable” parties — a group that is loosely defined. It includes any person or entity that exercises operational, financial or managerial control over the facility or provides financial or cash management services.

It’s unclear if the rule will shed light on the role of a lender like MidCap. It is “too ambiguous,” said Brooks, whose group pushes for better care in the nation’s nursing homes and submitted comments on the rule when it was proposed. “We are concerned that a player like MidCap might believe the regulations do not apply to them.”

The new rule does reveal that the Centers for Medicare and Medicaid Services is aware of the risks to residents. Its rule cites two studies published in 2021:
An analysis in the National Bureau of Economic Research asserting private-equity ownership increases the short-term mortality of Medicare patients by 10 percent as some frontline staffing is cut back, and
research by Weill Cornell investigators published in the Journal of the American Medical Association contending that private equity pressure to generate high investment returns could lead to reduced staffing, services, supplies or equipment adversely impacting the quality of care. The study concluded that private equity firms’ acquisitions of nursing homes were associated with higher Medicare costs and increases in emergency-department visits and hospitalizations for chronic and acute illnesses.

Less explored is the role of private equity-linked lenders in the nursing home business. Such lenders appear more willing to extend loans to inexperienced operators than banks partly because they are loosely regulated investment pools, not funded by consumer deposits and untethered by banks’ strict capital requirements, which have only increased since the 2008 financial crisis. “While U.S. finance companies may compete with banks, they often focus on higher-risk lending,” said ratings agency Standard & Poor’s broadly in an April report on a MidCap entity. And they are “not subject to the significant prudential regulatory oversight of banks’ capital and liquidity.”

The remoteness of private equity-linked lenders from the communities in which they’re investing — inoculating them from the danger of reputational damage — also may explain their willingness to pull the plug quickly when loans sour. “Many of the new ‘shadow bank’ market makers are fair-weather friends,” wrote JPMorgan Chase Chief Executive Officer Jamie Dimon in a letter to investors this year, broadly describing his concerns about the financial system and not singling out any one player. “They do not step in to help clients in tough times.”

Richard Scheffler, professor of health economics and public policy at the University of California at Berkeley, elaborated, saying “a bank like Wells Fargo — they want to protect their brand name.” But private equity firms, he said, “would be willing to take some smacks on their trade name to get a higher rate of return.”

Private equity firms, he added, “look for regulatory cracks and, in health care, there are a huge number of them.”

Despite the billions of dollars that the government pours annually into nursing homes through Medicare and Medicaid, the industry has struggled to serve a growing population of elderly people. Rising costs and a devastating pandemic exposed the sector’s frailties and left its workers overwhelmed.

The challenges have forced many independent, family-owned homes to sell to bigger regional players or directly to private equity.

For a time, the investors seemed like they offered an answer to the industry’s problems. Consolidation of smaller facilities, the thinking went, could yield economies of scale and cost savings that could be used to improve resident care.

The flood of steady government payments into nursing homes helped too, making them attractive for the investors.

Medicare and Medicaid spend more than $100 billion a year on nursing homes and continuing care retirement communities and an ever-larger share of federal dollars goes to skilled nursing facilities which are either owned outright by private equity funds, or, as in the case with Atrium and Skyline, are financed by a private equity-linked lender.

Defenders of private equity argue that the funds provide much-needed capital to an industry that must grow to serve an aging society. Yet, private equity’s focus on short-term revenue generation may align poorly with the practices needed to serve a vulnerable population, academics and consumer advocates said.

The emphasis on consolidation is not “primarily to deliver higher quality healthcare more efficiently, but to engage in financial arbitrage and to gather leverage that can be used to bargain against suppliers, payors and patients,” stated
a May 2021 report by Scheffler; Laura Alexander, then-vice president of policy at the American Antitrust Institute, which advocates for stricter merger scrutiny; and James Godwin, at the time a researcher at the Nicholas C. Petris Center on Health Care Markets and Consumer Welfare, a group focused on improving care for low- and middle-income households.

One sign that the private equity industry’s investment in the sector is not a panacea to the nation’s nursing home crisis is the rising number of nursing home facility closures. Between June 2015 and June 2019, more than 550 nursing homes that were certified by Medicare, Medicaid or both closed, according to
a February 2020 report by LeadingAge, a group of nonprofit elderly services providers, with closures accelerating through the study period. “The closure of nursing homes is on an upward trajectory,” warned LeadingAge on the eve of the pandemic.

As of 2021, roughly 70 percent of nursing homes were for-profit facilities. This includes those owned by private equity firms, which comprised 11 percent of all nursing homes, according to the Centers for Medicare and Medicaid Services, noting estimates vary. The statistic underestimates the influence of private equity in the nursing home business because it fails to take into account the indirect roles played by private equity-affiliated lenders like MidCap.

Some of the challenges that policymakers are contending with have their roots in a legal strategy aimed at shielding owners’ assets from liability that gained currency two decades ago: Splitting the ownership of the real estate of a nursing home property from the company running the facility.

The separation, posited in
a 2003 article in the Journal of Health Law, was seen as a way to protect owners of nursing homes from claims arising from Medicare and Medicaid program violations. It had an added benefit: The corporation that owned the real estate could charge rent to the nursing home. This “would allow them to show a loss to the facility itself, while at the same time obscuring how this money was used,” according to
a 2023 Consumer Voice report entitled “Where do the Billions of Dollars Go? A Look at Nursing Home Related Party Transactions.”

The split played to the strength of private equity firms. It also presented a lucrative opportunity to lenders like MidCap, which provides operating loans that are typically secured by the fee payments flowing into the nursing homes from Medicaid, Medicare and private insurers. And it was popular with fledgling operators like Breslin and Joseph Schwartz of Skyline who, unlike seasoned nursing home owners, had limited access to capital.

MidCap, which lends to both owners of nursing home properties and to their operators, was willing to give smaller, independent players like Breslin and Schwartz the financial firepower to expand.

Schwartz
was indicted in early 2022 for allegedly failing to pay nearly $39 million in payroll and unemployment taxes on behalf of his workers. He pleaded not guilty to all counts in the indictment. Schwartz’s lawyer didn’t respond to questions.

A trial date hasn’t been set. MidCap was not named in the indictment.

The lender has avoided legal tarnish despite the critical role it played in the troubled expansions of Atrium and Skyline. Thanks in part to its generous funding, Schwartz, an insurance broker with little experience running nursing homes, amassed about 90 facilities in 18 months. Breslin, fortified with MidCap’s money, expanded from New Jersey to the Midwest, taking the operating reins of profitable facilities owned by the Rice family in Wisconsin in 2015, only to drive the homes toward bankruptcy three years later.

A lawyer for owner Larry Rice said his client had no comment.

The Rice homes were the centerpiece of Breslin’s westward push. As part of his expansion, he also assumed the operations of other facilities including the now-shuttered Atrium Weston home and three others that were leased from Sabra Health Care REIT, a large real estate investment trust that invests in properties in the health care sector.

At least 15 percent of the roughly $2 billion in real estate-linked health care loans that MidCap once touted on its website have gone to companies – including giant nursing home operator Genesis HealthCare — that have since run into operational or financial problems, according to a POLITICO analysis. And some of MidCap’s biggest flops aren’t showcased on its website. Among them: Philadelphia’s storied Hahnemann University Hospital, which went bankrupt a year-and-a-half after MidCap financed its takeover by a private equity firm. MidCap declined to comment on the performance of its borrowers.

In the case of Atrium and Skyline, it is MidCap’s role in providing operating loans to fund the day-to-day running of facilities that has raised the most questions among critics.

In South Dakota, MidCap said in court papers its loans helped Skyline bridge the gap between the date it provided skilled nursing services and the date it was paid for them.

But while owners of nursing home properties may need financing to fund the purchase of a facility, much like a homeowner requires a mortgage to buy a home, consumer advocates argue that operating loans in this industry are largely unnecessary.

Many companies need loans to operate because they don’t have cash on hand to weather ebbs and flows in their businesses while waiting for customers to pay. Operating loans or working capital lines help tide over companies between the time an order is placed and fulfilled and when payment is rendered.

But that’s less of an issue with nursing homes where a steady stream of cash arrives from Medicare, Medicaid and private insurers. Instead, say critics, operating loans are often used as a mechanism for the owners and private equity firms and real estate investment trusts to extract money from the facilities.

“When you think of a nursing home, it is a constant inflow of money,” said Ernest Tosh, a plaintiffs’ attorney in Texas who brings elder-abuse cases. He said that nursing home operators tend to seek operating loans — often referred to as revolving lines of credit — because they don’t want their money tied up in the business. “When the business starts faltering, they are taking larger and larger amounts on the line of credit until they go bankrupt,” he said. “If the revolving lines of credit weren’t there, the owners would have a stronger interest in managing the business properly.”

Charlene Harrington, professor emerita of sociology and nursing at the University of California, San Francisco, concurs. “The way they financially manage these companies,” she said, “is to look like they are losing money every year.” When payments from Medicare and Medicaid flow in, the nursing homes pay their bills and the owner-operators pull out excess cash, said Harrington.

Born in the ashes of the financial crisis, MidCap was started in 2008 by a group of health care bankers from Merrill Lynch. The late Thomas Lee, a private equity luminary, was an early investor. He predicted that MidCap was a company that can “do well by doing good.”

Among its clients was Breslin, a former executive of Care One, a large nursing home company in New Jersey. After Breslin left Care One, he worked as a consultant for Larry Rice, a businessman in Wisconsin who owned a group of nursing homes.

In 2014, he persuaded Rice to enter into a deal where Breslin and a company he had newly formed would eventually acquire the nursing home properties Rice owned in the Midwest.

MidCap stepped in to help finance the transaction, which followed the same playbook of countless nursing home deals: A split of the facilities’ real estate from the operations of the nursing home.