Using Organizational Structures to Achieve Disgrace and Profit

A must-read New York Times article about the nursing home industry demonstrates how shrewd design of organizational structures can create unethical outcomes and, at the same time, mega profits.

Reporter Charles Duhigg describes in excruciating detail how the Warburg Pincus private equity firm purchased a Florida nursing home company in 2002, stripped the homes of trained staff, allowed care to deteriorate, and insulated itself from liability through dizzyingly complex layers of interlocking corporations.

Arnold Whitman, the only executive brave enough to talk with Duhigg explained the organizational structure this way: “Lawyers were suing nursing homes because they knew the companies were worth billions of dollars, so we made the companies smaller and poorer, and the lawsuits have diminished.”

Whitman invokes a “we-are-no-worse-than-anyone-else” argument to defend Warburg Pincus’s ethics: “We should be recognized for supporting this industry when almost everyone else was running away.” This claim would have moral force if the new owners at least tried to reengineer “production processes” at the homes to achieve better outcomes per dollar invested rather than simply slashing costs in a way that allowed them to resell the chain to General Electric four years after the original purchase at an estimated profit of $500 million.

In addition to blocking suits, the corporate layering insulates owners from existential recognition of the pain they are inflicting. Ethical health care requires empathy by all who are involved in it – not just front line workers. If the owners’ parents were residents of the nursing home chain it is not likely that staffing would have been so brutally cut.

If the New York Times had brought this kind of reportorial skill to bear on U.S. government claims prior to the invasion of Iraq we might now have some governmental energy to pay attention to the nursing home disgrace.