Navigating Difficult Legal Waters

From risk management to false advertising, law firms specializing in senior care weigh in on the toughest areas for developers, owners and operators.

By Jeff Shaw 

With today’s seniors housing product often combining elements of multifamily, hospitality and healthcare, the potential legal complications are many. A lot of these entanglements are rooted in the history of seniors housing. For-profit companies are a relatively new concept in the sector, only gaining major market share within the last 30 years or so. 

This shift from local and nonprofit to national and for-profit is what has led to growing concerns about the industry becoming more litigious, according to Joel Goldman, a partner with California-based law firm Hanson Bridgett.

“I’ve been doing this for over 30 years, and when I started our clients were church-sponsored nonprofits. The people living there were members of the church, and there were not a lot of lawsuits,” says Goldman. “We’ve gone from being a mom-and-pop industry to having large, publicly traded companies involved. That, in and of itself, puts us on the radar screen and makes us targets.”

This move toward larger, national, for-profit companies comes at a legal cost. There is both more litigation and more government regulation affecting the industry now than ever before.

“I have no doubt that the whole regulatory arena is going to continue to grow,” says Goldman. “We’re not going to see less regulation. We’re going to see more.”

George Mesires, head of the seniors housing and care practice of Faegre Baker Daniels, agrees that the growing size of seniors housing has increased the need for lawyers’ involvement.

“Legal work has become more complex as the ownership of seniors housing properties has consolidated from the highly fragmented market of mom-and-pop owners to institutional owners with complex corporate ownership structures, sophisticated private equity and institutional investors,” says Mesires.

Although the sector features a wide range of legal issues, law professionals highlight a few key areas.

Tread softly with sales, marketing

In a high-profile lawsuit that began in 2015, the Pennsylvania attorney general went after 14 skilled nursing facilities operated by Golden Gate National Senior Care, claiming that the company failed to provide proper care and misled customers about the services provided.

That attorney general was forced to resign and even sentenced to prison for perjury and abuse of office in 2016. The lawsuit was thrown out last March. However, the seniors housing industry didn’t come out of the ordeal unscathed.

The operator claimed that it hadn’t participated in false advertising because its claims were “puffery” — intentional exaggerations that weren’t to be taken literally — and the court agreed. 

“The outcome of the case appears to indicate that the company did nothing wrong in its advertising because it did not contain false representations of specific conditions at the facilities,” explains Nancy Reynolds, leader of the long-term care practice group at LeClairRyan. “The lessons learned are to limit advertising statements to opinions, aspirations, motives, intentions or optimism — standard puffery — while avoiding clearly false statements and promises that are too specific.”

Although the court threw out the case, the incident revealed that the seniors housing industry might be overstating its ability to help seniors in marketing materials. Additionally, even winning a lawsuit is expensive and damaging to a community’s reputation.

“Operators are becoming much more careful. We’re advising them to line up customer expectations with legal documents and what’s actually being done in the community,” says Jill Steinberg, partner with law firm Arent Fox LLP. “Ask yourself: Are you at risk of failing to do what you say you’re going to do, either in your agreements or what you’ve laid out for customers?”

Clear communication with prospective customers is extremely important, says Goldman, and can even reduce liability. “If you create realistic expectations, then residents’ families are less likely to file complaints and less likely to sue you.”

He also recommends using modern technology such as video conferencing to make sure distant family members are part of the decision-making process and present in the resident’s life. The loudest, most difficult family members are often those who are far away. They may behave that way due to guilt or simple feelings of disconnection.

“Technology allows us to bring that person who’s 3,000 miles away into the community,” says Goldman.

It’s also critical that the marketing/sales team members, whose top priority is making the sale, refrain from making medical decisions in lieu of the care team members, whose top priority is resident health. 

“I’ve seen residents who should not have been admitted, but who were because a marketing person or even an executive director wanted to fill a bed. They didn’t really think through the long-term ramifications,” says Goldman. “Knowing what your capabilities are is critical.”

Beware of acuity creep

Timing a senior’s move along the continuum of care is a delicate decision, and one that can have severe legal ramifications. 

On one hand, keeping a senior in assisted living for too long can lead to overly frail residents who are a better fit for the medical expertise of skilled nursing. On the other hand, residents and their families often want to delay that move, and “transfer trauma” could cause problems with injuries or even death.

In the first scenario, an operator could be sued for refusing to move a resident to skilled nursing, even if the family begged to keep the resident there. In the second, an operator could be accused of transferring a patient improperly and causing an injury.

“If you keep a resident too long and something bad happens, the licensing agency won’t care that the family begged you to keep that resident,” says Goldman. “A lot of times the family that begged you to keep them turns around and sues you anyway.”

The diverse range of services, regulations and capabilities unique to each assisted living community further complicates this problem. Unlike the fairly clear-cut nature of the skilled nursing sector, the assisted living sector includes a wide variety of communities.

“I have clients that only provide memory care and others that don’t provide memory care at all. I have some that have 24/7 nurses, while some don’t have a nurse at all,” says Goldman. “A resident who may be appropriate for one community might be completely inappropriate for another. That makes it difficult for hospital discharge planners to know where to send residents.”

The key is for operators to know what services they are good at delivering and communicate that clearly through marketing and hospital partnerships.

Plan for future regulations

In the wake of back-to-back hurricanes hitting Texas and Florida in 2017, a rash of new regulations are either already hitting the seniors housing sector or on the way. Most notably, a new state regulation in Florida currently working its way through the courts would require that nursing homes all have backup generators. The regulation follows the death of 12 seniors in the wake of Hurricane Irma, when power outages prevented air conditioning from working in the sweltering heat.

“There’s always more and more regulation,” says Arent Fox’s Steinberg. “That’s a one-way street.”

Unfortunately, when it comes to government involvement, there tends to be more overreaction than appropriate changes, says Goldman.

“I expect some of the legislation introduced as a result of the bad press will be particularly silly. They’ll look at one thing that happened in one situation and then try to propose an across-the-board solution.”

Regulatory issues will be intensified by the fact that much of this legislation will come on a state-by-state basis, resulting in a “patchwork,” says Steinberg. Although it’s tough to plan for specific regulations, operators should make sure they’re sufficiently prepared for future emergencies.

“Make sure that all of your emergency systems actually work and that you have adequate disaster recovery and emergency preparedness plans in place,” says Steinberg. “There will be new regulations coming, but is your plan, in and of itself, going to be effective?”

Making this regulatory environment even more difficult is the number of new entrants to the seniors housing niche, both as developers and operators, adds Steinberg. Their ignorance on the intricacies of senior living can lead to legal problems when it comes to contracts and regulatory compliance.

“Your documents need to be specifically tailored to this industry,” says Steinberg. “Very often people come in and think it’s just an apartment building. Doing business in this world — given the inherent regulatory risks — you want to make sure your documents reflect those risks and are structured to avoid risk.”

Owners should “make sure they know who they’re doing business with” when an operator is chosen, adds Steinberg.

Developers should also be aware of signs that we’re at a market peak for seniors housing right now, cautions Mesires of Faegre Baker Daniels. Valuations in the acquisitions market have plateaued, while occupancy rates are trending downward and face further compression from robust development. 

Although he doesn’t believe we’re entering another Great Recession, Mesires does suggest the seniors housing industry is facing a cyclical downturn. He was heavily involved in many of the bankruptcies during the Great Recession and says we can expect to see distressed communities in the near future. 

Mesires sees two vulnerable market segments. First, skilled nursing operators face a variety of headwinds, including “uncertainty surrounding government regulation and reimbursement, shorter stays, general healthcare regulatory risk and increased scrutiny by enforcers,” says Mesires. 

Second, single-site, nonprofit CCRCs are vulnerable because of heightened competition from for-profit providers, and the potential inability to advance refund bond debt under pending tax legislation.

However, Mesires doesn’t expect to see a repeat of the rash of bankruptcies experienced during the Great Recession. 

One of the greatest lessons learned during the last downturn was that filing a bankruptcy case erodes enterprise value and investor recoveries, prompting all constituents to find a non-bankruptcy solution for a distressed property, says Mesires.

“These aren’t widget companies,” says Mesires. “You’re dealing with the most frail constituency in our society. It’s not like you can just shutter it like a factory.”