Summary: PACS Group, Inc. (NYSE:PACS)
PACS Group is a $6.7 billion Utah-based operator of skilled nursing facilities (SNFs) that serves 29,000 patients daily. Its stock is up 104% since its April IPO, making it among the most successful IPOs of 2024.
Despite operating in a highly competitive and highly regulated industry, PACS claims to have discovered a winning “turnaround” formula for transforming poorly performing SNFs into cash spigots.
Our 5-month investigation, including interviews with 18 former employees, competitors, and an analysis of 900+ detailed facility-level cost reports, revealed that PACS’ “turnaround” strategy largely boils down to systematically scamming taxpayer-funded healthcare programs.
In one key example, PACS abused a COVID-era waiver, inappropriately accessing skilled care Medicare benefits for thousands of patients across its national portfolio of facilities, according to our investigation.
We estimate the scheme drove more than 100% of PACS’ operating and net income from 2020 – 2023, enabling PACS to IPO in early 2024 with the illusion of legitimate growth and profitability.
Typically, at SNFs, “skilled care” Medicare programs can drive up to 3x more revenue per day than Medicaid. However, these programs are normally only accessible after a 3-day hospital stay.
During COVID, Centers for Medicare and Medicaid Services (“CMS”) waived the hospital-stay requirement to keep patients out of already overwhelmed hospitals, allowing patients to access Medicare benefits if they demonstrated a need for skilled nursing care.
However, exposure to COVID and even a positive COVID test were not considered a skilled need, per the DoJ and the American Health Care Association (“AHCA”). Despite this, some SNF operators still claimed those with COVID or those merely exposed to COVID qualified for Medicare-covered skilled care—immediately tripling per-patient revenue.
In one such case, California-based SNF operator ReNew Healthcare settled charges with the DOJ in April 2024 for “knowingly submitting false Medicare Part A Claims” through the waiver based on COVID exposure, according to the settlement agreement between ReNew and the DOJ.
Former PACS employees in California, Texas, Ohio, and South Carolina explained how PACS engaged in the same scheme as ReNew, but at a much larger scale, across its national portfolio and for the entirety of the pandemic.
One former facility administrator told us: “When you see the stuff that comes out with ReNew, you’re like: ‘Oh we [PACS] were doing the same thing.”
Another former administrator said: “[ReNew] settled with CMS for $7 million for improperly using these waivers… ReNew is small… If this were PACS, you might be talking in the hundreds of millions.”
A former PACS regional manager told us as little as one Covid case would be used to flip an entire building to Medicare: “… As soon as one person tested [COVID-19] positive in our building, boom, wildfire, every single person gets flipped [to Medicare], absolutely inappropriately”.
Most revenue earned under the waiver scheme was booked as pure profit, as one former administrator told us: “The margins are – probably 90% of that flows to the bottom line”. A former regional manager told us: “It’s additional revenue with nearly zero additional cost.”
As of June 30th, 2024, 63% of PACS’ portfolio was in California, where detailed facility-level financial reports are publicly available. These financial reports show an inexplicable rise in Medicare revenue at PACS facilities throughout the pandemic.
When the COVID waiver was implemented, even 26 of PACS’ longest-owned “mature” facilities, which had previously seen stagnating Medicare revenue from 2017 – 2019, inexplicably grew their skilled care revenue from Medicare by 190%, from $52.2 million in 2019 to $151.5 million in 2022, according to the facilities’ financial reports.
PACS’ primary competitor, the Ensign Group, grew Medicare revenue by just 23% during the same period, indicating this was not an industry-wide trend. In 2022 alone, PACS booked 188% more Medicare skilled care revenue than Ensign on a per bed basis, according to facility financial reports.
Another competitor, Plum Healthcare, grew its skilled care revenue from Medicare by just 8% during the first 2 years of the pandemic, despite having full access to the COVID waiver. In November 2021, PACS acquired Plum Healthcare, and promptly increased Medicare skilled care revenue by 173%, from $112 million in 2021 to $306 million in 2022, according to the facilities’ financial reports.
A former Plum Healthcare employee told us: “When [PACS] took over, they had a much more aggressive view of things, where you could have, let’s say that same nurse that was sick got COVID, you would end up picking up every single patient who has [Medicare Part A] in the entire building… we’d go from like 20 Medicare patients to 70 or 80 overnight.”
PACS’ quarterly Medicare revenue declined by an estimated $90 million in each of the 2 quarters after the expiration of the COVID waiver, according to PACS’ financial statements, indicating that PACS generated hundreds of millions of high-margin Medicare dollars from the waiver scheme leading up to its IPO.
A PACS former administrator said: “You know it was funny, there was a posting on LinkedIn about PACS. It was like an analyst talking about them going public and it said, ‘financially PACS group has demonstrated strong performance with net income of $113 million on revenue of $3.1 billion in 2023…’ We all read this and were passing it around, and were like, if they only knew, it’s all the waivers.”
Following the waiver scheme, PACS’ Medicare skilled care revenue declined sharply in 2H 2023. But it rebounded in 1H 2024, according to PACS’ financial statements. Former employees described a “new trick” to get back to “COVID level profitability” involving billing thousands of unnecessary respiratory and sensory integration therapies to Medicare Part B regardless of clinical need or outcomes.
One former California-based administrator commented: “… now there’s a new trick that they’re all using. It’s with Part B, Medicare Part B, that they’re maximizing stuff to get back to these COVID-level profitability things [and] CMS is going to get wind of that pretty soon too… there’s buildings that used to bill, in an average month they bill maybe $15,000 in [Medicare] Part B revenue. Now they’re billing $500,000…”
The former administrator said: “… they’re putting everyone on respiratory therapy for Part B, and they’re putting everyone on sensory integration, even if it’s not really that applicable. They’ll come up with ‘oh they coughed once last month so they must need respiratory therapy’…”
PACS would “basically falsify documentation” by charting that they had performed various therapies when they hadn’t, according to a former clinical director: “… you don’t have time to provide 15-minute treatments 5 times a shift and do all of the charting that encompasses that. They would do the bare minimum or fill in the blanks when they didn’t actually do it.”
Former employees also detailed another scheme whereby PACS attempts to fool regulators by “renting” licenses from third parties to “hang” on buildings. It then either employs unlicensed administrators or has administrators manage multiple buildings in excess of state mandated limits.
A former employee from Colorado told us: “They would pay a licensing fee of like $1,000 a month or $2,000 a month to hang someone’s license… It was very common to have people’s licenses covering multiple buildings and not having enough actual licensed people working. They also had the Regional Director’s licenses hanging in buildings also, even though they weren’t working in the buildings.”
Regional Vice Presidents (RVP) generally oversee ~15 facilities, per company disclosures. Despite this, we found an example of an RVP that was simultaneously also listed as the administrator for a SNF facility, a completely different title, role, and set of responsibilities – and received $1.5 million in compensation for the latter position, according to the facility’s financial reports.
We also believe PACS purposely misleads shareholders by reporting that 75% of its SNFs have CMS 4 or 5 star quality measure ratings, when the standard should be overall ratings. Quality measure ratings are just one of 3 ratings that comprise an overall rating.
The motive for the misleading disclosure seems obvious: only 29% of PACS’ facilities have 4 or 5 star overall ratings, while 46% are 2 star or lower, according to CMS records.
California SNFs must meet minimum staffing requirements, specifically for certified nurse assistants (CNAs), to increase their CMS star ratings and to qualify for significant state bonus programs. PACS lies to regulators about this too, according to former employees.
A former senior PACS manager told us that PACS secretly lists uncertified nurse aides (NAs) as certified in the system, in an apparent scheme to cheat staffing ratios: “… they’d been working for 2 years under a license that wasn’t there… Maybe 1/3 of their buildings, if not more, had these NAs listed as CNAs.”
A former manager also detailed a documentation practice whereby PACS would retroactively add fake RN hours “across the board” in another apparent scheme to meet minimum staffing requirements, boost star ratings, and avoid costly penalties.
PACS’ hiring practices seem to purposely enable these schemes. For example, the company claims its administrator-in-training (AIT) program produces qualified administrators, who operate “autonomously,” serving as “local CEOs” for each facility. It credits this “local leadership” model as a key success driver.
But former employees say PACS’ AIT program is designed to produce lightly trained, inexperienced, overpaid staff who then “fall in” with management’s shady directives: “They look the other way… because as soon as you look the problem in the eye, you can’t buy your wife the next Porsche…”
A former administrator told us: “… part of the reason of hiring these really, really, young guys is that they don’t know better. They will do whatever the upper management tells them to do…”. Another said: “…they just hired young guys that had no experience in the business that didn’t even understand the risk or the regulations.”
In one example, PACS hired a former solar panel salesman with no prior industry experience and quickly installed him as the administrator of a 132-bed, loss-making facility. He took the facility from a ~$1 million loss to a $6.8 million profit in 1 year during COVID, earning $1.6 million in his second year as an administrator— according to the facility financial reports, more than 9x the state average compensation.
PACS’ two co-founders, Jason Murray and Mark Hancock, paid themselves $194.5 million in dividends prior to the April 2024 IPO and have sold $656.5 million in stock since. They have also pledged a total of 19 million shares for margin loans, collectively cashing out an estimated $1 billion since the beginning of COVID.
Co-founder Jason Murray claimed in a March interview that money isn’t a “big factor” in his life, saying: “… the best way I feel like I can spend my money is to give it away, honestly.”
Since COVID, Murray and Hancock have embarked on a spending spree that has included purchasing 2 private jets, luxury and commercial real estate, and sponsorships of Utah’s most popular sports teams, despite PACS not operating facilities in the state.
Overall, we believe PACS risks significant regulatory penalties. Further, if PACS is forced to curtail its many ongoing billing and staffing schemes, we believe it will be revealed for what it is: an unprofitable roll-up of distressed SNFs with no path to legitimate profitability under the current profoundly corrupt leadership.
Initial Disclosure: After extensive research, we have taken a short position in shares of PACS Group, Inc. (NYSE:PACS). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.
