Texas Nursing Homes Are Hiding Profits. A Federal Study Shows How, and Why It Matters to Every Patient and Family.

The nursing home industry has spent decades telling regulators, legislators, and courts the same thing: we cannot afford to do better. Profit margins are thin. Medicaid rates do not cover costs. New staffing requirements will bankrupt facilities and force closures. A peer-reviewed study published by the National Bureau of Economic Research dismantles that argument with data.

Economists Ashvin Gandhi of UCLA Anderson and Andrew Olenski of Lehigh University published a working paper titled Tunneling and Hidden Profits in Health Care through the NBER in March 2024, revised September 2025. Their conclusion: 68 percent of nursing home profits are systematically hidden from regulators, legislators, and malpractice claimants through a practice called tunneling. The facilities are not poverty-stricken. They are making money and they are making lots of it.  Then they move it.

This finding has direct consequences for Texas families involved in nursing home neglect cases, for policymakers setting Medicaid reimbursement rates, and for courts evaluating whether understaffing reflects a genuine resource constraint or a deliberate financial choice.

What Is Tunneling, and How Does It Work in Nursing Homes?

Tunneling is the transfer of profits and assets out of a closely monitored entity into related companies owned by the same person or group. The term describes the process of removing assets through an underground tunnel, moving value off the books of the entity that regulators watch and onto the books of entities they do not.

In nursing homes, tunneling works through two primary mechanisms: related-party real estate transactions and related-party management fees. Both are documented in the Gandhi and Olenski study using more than two decades of Illinois nursing home financial data, a dataset that is uniquely detailed because Illinois has required nursing homes to report related-party transactions for longer than most states.

The real estate mechanism works through a sale-leaseback transaction. The nursing home sells its building to a company owned by the same operator, then pays that company rent to stay in the same building it just sold. The nursing home's direct ownership costs, depreciation, interest, and taxes, go down. But the rent paid to the related party more than replaces those savings. The study found that transitioning to a related-party real estate arrangement increases a facility's yearly real estate costs by an average of $1,744 per bed, a 42.4 percent increase over the mean.

The property sale itself is a second tunneling opportunity. The study found that related parties typically buy nursing home real estate at a significant discount to its actual value. The researchers estimated that an average of $54,396 per bed in asset value is transferred off the nursing home's balance sheet in a typical related-party property sale. By 2019, they calculated that approximately 19.6 percent of the entire industry's real estate value had been moved off nursing home balance sheets through these transactions.

The management fee mechanism is structurally identical. The nursing home stops paying for management directly and starts paying a related-party management company instead. The new management payments exceed the direct costs they replace. The study found that using a related-party management company increases management costs by an average of $1,124 per bed, a 24.6 percent increase over the mean.

The researchers confirmed that these cost increases do not reflect real improvements in services. They found no evidence that using related parties improves clinical or operational outcomes. In the study's own words, these “transactions exist essentially entirely on paper.”

How Widespread Is This Practice, and What Does It Hide?

The study found that 77 percent of U.S. nursing homes transact with related parties, according to 2021 federal cost report data. That figure alone signals that this is not a fringe practice. It is the industry norm.

The headline finding is that 68 percent of nursing home profits in 2019 were hidden through markups paid to related parties. The average facility engaged in tunneling concealed $379,382 in profits. At the high end of the distribution, the 95th percentile facility hid $1,292,657 in a single year. Those are not rounding errors. Those are deliberate financial decisions.

The study explains what those hidden profits would buy. If facilities had spent their concealed profits on registered nurses instead, the mean staffing ratio across all nursing homes in the country would have increased from 0.69 hours per resident per day to 0.93 hours per resident per day. That is a 35.7 percent increase in the most skilled, most expensive, and most consequential category of nursing care. In Illinois specifically, compliance with the registered nurse component of the federal minimum staffing rule would have risen from 55.2 percent of facilities to 78.8 percent.

The study also recalculates the industry's true investment returns after accounting for hidden profits. Federal cost reports imply an internal rate of return of 4.83 percent on a typical nursing home investment, well below standard investment hurdle rates. Once tunneled profits and assets are added back, the true return rises to 13.11 percent. That figure is consistent with what independent healthcare investment analysts actually report. The poverty narrative does not survive contact with the corrected data.

Why Do Nursing Homes Have Every Incentive to Hide Profits?

The study names four distinct financial and regulatory reasons why nursing home operators benefit from understating profitability. Each one is directly relevant to Texas.

First, public reimbursement rates. Many states, including Texas, use facility cost reports when setting Medicaid reimbursement rates. When facilities overstate costs and understate profits, regulators respond by paying more. The study notes that 31 states explicitly considered facilities' reported costs when deciding Medicaid reimbursement rates, creating a direct financial incentive to inflate related-party payments.

Second, lobbying against quality regulation. The industry's primary argument against staffing minimums, safety rules, and other quality mandates is that facilities cannot afford to comply. Federal advocacy groups for both for-profit and non-profit nursing homes warned that the 2023 federal minimum staffing proposal would cause facilities to close. That argument depends entirely on the accuracy of the cost report data the study found to be systematically distorted.

Third, malpractice liability. This is the most relevant to families pursuing legal claims. Moving profits and assets into related entities makes the nursing home appear judgment-proof. A facility with thin reported margins and no significant real estate on its balance sheet presents a weaker target for litigation than the same facility with its true financial picture visible. The study found that shielding real estate assets from liability through related-party transactions reduces a nursing home's malpractice-related costs by 32.4 percent, approximately $25,885 per year. That is a measurable, quantified benefit from making it harder to collect on a negligence judgment.

Fourth, general opacity. Even apart from those specific benefits, operators prefer to keep executive compensation, profit margins, and ownership structures away from public scrutiny. Tunneling makes cost reports opaque by design.

Is Tunneling Illegal?

The study is explicit that the tunneling practices it documents are “likely legal”. The transactions are disclosed in cost reports. Related-party relationships are not prohibited. The conduct the researchers describe is not fraud in the criminal sense. It is legal self-dealing that exploits gaps in regulatory oversight.

That said, the study notes that accusations of tunneling have generated federal enforcement actions in some contexts. Providers reimbursed on a cost-plus basis have faced federal charges for using related-party transactions to obtain inflated Medicare reimbursements. The line between aggressive tax and liability planning and fraudulent misrepresentation of costs to a federal payer is not always clear, and the study acknowledges that the practices documented may shade into fraud in particular cases.

For purposes of civil litigation, legal does not mean irrelevant. The corporate structure of a nursing home, the identity of its related-party payees, the value of assets that have been sold out of the entity, and the management fees being paid to a sister company are all discoverable and potentially probative. They bear on whether the facility's ownership made a deliberate choice to minimize visible assets and suppress profitability, which goes directly to the financial feasibility defense.

What Does This Study Mean for Texas Nursing Home Neglect Cases?

Texas law requires a nursing home to provide care that meets accepted professional standards. When a facility does not maintain adequate staffing and a resident is harmed, the central defense is often that the facility lacks the resources to staff at a higher level. The Gandhi and Olenski study provides academic evidence, grounded in two decades of financial data, that this defense is often a product of accounting choices rather than economic reality.

The study documents that nursing homes structurally suppress visible profitability to deter malpractice claims. That is not inference. That is one of four explicitly named incentives the researchers examine, and they quantify the malpractice benefit directly. A nursing home that has moved its real estate into a related entity is conducting a documented litigation strategy, not just routine business planning.

For Texas families, this means two things. First, the argument that a facility simply could not afford to staff adequately deserves direct scrutiny in any case where the facility uses related-party transactions. Second, discovery in nursing home cases should include financial relationships between the defendant facility and any commonly owned entities, particularly real estate companies and management companies. Those relationships are where the money is.

Texas Health and Safety Code Chapter 242, Texas Administrative Code Chapter 554, and Texas Civil Practice and Remedies Code Chapter 74 establish the legal standards governing nursing facility care and the procedures for bringing a claim when those standards are violated. Federal requirements appear in 42 CFR Part 483. Both frameworks obligate facilities to provide sufficient care regardless of how the owner chooses to structure the entity's finances.

What Should a Texas Family Do If a Loved One Was Harmed in a Nursing Home?

If you believe a family member suffered harm due to inadequate staffing, neglect, or substandard care at a Texas nursing home, take these steps immediately.

• Obtain your relative's complete medical records. Under Texas Health and Safety Code §241.154, a patient or authorized representative has the right to request records, and the facility must respond within a specific time period. Request those records before anything is altered or unavailable.
• Document everything. Photographs of injuries or conditions, written notes about conversations with staff, dates and times of every incident, and the names of anyone present. Electronic health records in nursing facilities carry audit trails. Those trails are evidence.
• Contact a Texas medical malpractice attorney before the statute of limitations expires. Under Texas Civil Practice and Remedies Code §74.251, the general limitations period for medical malpractice claims is two years from the date the claim accrues, with specific rules governing when that period begins in nursing home cases.
• File a complaint with the Texas Health and Human Services Commission. Regulatory findings do not replace a legal claim, but they create an official record and can be important evidence in litigation.

We Can Help

At The Borah Law Firm, PLLC, we represent patients and families across Texas in medical malpractice cases. We only handle these cases — nothing else. If you believe a loved one received substandard nursing home care, we can help you understand whether a case exists and what your options are.

Contact us today for a confidential case review.

Frequently Asked Questions

What is the NBER study on nursing home tunneling?
The study is a working paper titled Tunneling and Hidden Profits in Health Care, authored by economists Ashvin Gandhi of UCLA Anderson and Andrew Olenski of Lehigh University. Published through the National Bureau of Economic Research in March 2024 and revised in September 2025, it uses more than two decades of Illinois nursing home financial data to measure the extent to which nursing home operators move profits and assets into related companies to hide them from regulators, legislators, and malpractice claimants.

What is a related-party transaction in a nursing home?
A related-party transaction occurs when a nursing home pays for goods or services from another company that shares the same ownership. Common examples include rent paid to a landlord entity owned by the same operator, and management fees paid to a management company owned by the same operator. The Gandhi and Olenski study found that 77 percent of U.S. nursing homes engaged in related-party transactions as of 2021, and that the payments made in these transactions substantially exceed the actual cost of the goods and services provided.

Can the financial structure of a nursing home affect a malpractice case in Texas?
Yes. A nursing home's financial structure, including its related-party relationships, the transfer of real estate to sister entities, and management fee payments to commonly owned companies, is relevant to litigation in at least two ways. First, it bears on the financial feasibility defense, which is the argument that the facility could not afford to staff adequately. Second, finding all entities that received value from the facility is necessary to find assets that may be available to satisfy a judgment. Discovery in Texas nursing home cases should include requests for the facility's cost reports, related-party disclosures, and ownership structure documentation.

Does the NBER study cover Texas nursing homes specifically?
The empirical data in the Gandhi and Olenski study comes from Illinois, which has required nursing homes to report related-party transactions for more than two decades. The researchers note that related-party transactions are common across the entire U.S. nursing home industry based on federal cost report data. The study's findings on the structure and incentives of tunneling apply to the industry nationally. Texas nursing homes file the same federal cost reports and operate under the same ownership structures documented in the study.

How do I find out if a Texas nursing home uses related-party transactions?
Federal cost reports filed by Medicare and Medicaid-certified nursing homes are publicly available through CMS. Those reports include disclosures of related-party transactions. ProPublica's Nursing Home Inspect tool at projects.propublica.org/nursing-homes provides searchable access to CMS data including inspection records, deficiency citations, staffing levels, and ownership information. For detailed financial records, including line-item related-party disclosures, a formal records request or discovery process may be required.

About the Author: J.T. Borah is a Texas medical malpractice attorney and founding attorney of The Borah Law Firm, PLLC, in Austin, Texas. His practice is limited exclusively to medical malpractice cases involving hospitals, nursing homes, and other medical institutions. He has been recognized as a Texas Super Lawyer. He is often asked to lecture at legal seminars on medical malpractice issues and has lectured to attorneys from 18 states.

​AI writing tools assisted Mr. Borah in preparing this article. All legal standards, citations, and factual claims were reviewed by Mr. Borah as a licensed Texas attorney.

This article is for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship.