As the year 2020 dawned at, ORPEA, the world’s largest retirement home group, entered turbulent waters. The publication in France of the book “Les Fossoyeurs” (The Gravediggers), which blows the whistle on the illegal, fraudulent and immoral activities of the French group, blew the lid off a scandal. However, the book by Victor Castanet, the culmination of an investigation lasting several years, simply confirms everything that employees, unions, residents and their families have been speaking out against for years.
In the space of just a few days, the company’s share collapsed, plummeting from 85 euros per share to less than 35; at the time of writing, as more revelations have followed, shares are worth barely 13 euros. This has taken its market capitalisation from 5.4 billion euros at the end of 2021 to a shade over 950 million euros in October 2022. Several senior management figures, including the CEO and the CFO, were ousted, while others, feeling the tide beginning to turn, jumped ship; criminal investigations, parliamentary committees and official complaints are underway. The ORPEA scandal has had repercussions for the entire long-term care sector, driving down the share prices of the biggest players.
Yet before the scandal broke the ORPEA story was celebrated by many from the worlds of business and politics as a model of efficiency and success. The benefits of the liberalisation and privatisation of the long-term care sector were extolled, as was the development of the European champions of the grey dollar, ready to take over the world with their excellence and expertise. Today, this positive image of commercial retirement homes is held by very few, but there are still many – chiefly senior politicians – seeking to play down the facts and circumstances, imputing these to ORPEA alone. Meanwhile nobody is questioning the rules and policies that created this highly competitive and limited market and allowed these multinational to flourish and develop.
In this article, we will look at the stages of the development of a small group of retirement homes from southern France into a mammoth of the care sector now active in more than 20 countries and generating a turnover of more than four billion euros. We will unpick the business model that has had financial backers salivating for years and which has become the reference of the sector.
A very French tale
Like its direct competitors, which include the biggest players in the sector in Europe –KORIAN, COLISÉE and DOMUSVI – ORPEA began its journey on the French retirement homes market. France is one of Europe’s largest markets (650,000 beds, one quarter of which are commercial), second only to Germany (950,000 beds, 40% of which are commercial), but unlike its neighbour [1], France started to see the emergence of major national private groups in the early 1990s. This has its root cause in various unique characteristics of the French system.
Firstly, unlike other European countries, companies in France must be issued an accreditation in order to operate a new care establishment [2]. The State gives out these accreditations very sparingly, taking account of the needs of the area in which the home is to be located. This system gives businesses already up and running an advantage, as they are protected from competition and can adapt the services they offer to the requirements of the authorities. This privileged access to the market guarantees operators a high occupation rate and therefore profitable activity, particularly as the accreditation is free of charge. The “difficulties” in securing an accreditation for new places in retirement homes encourages businesses to develop various strategies: legally, via lobbyists or the use of intermediaries and project managers; or sometimes, as in the case of ORPEA, illegally, by means of insider trading, bribery or other forms of corruption.
In this way, ORPEA became the master of obtaining accreditations, gradually building a fiercely effective network of influence. Its close links to senior officials of regional healthcare agencies (allowing it to keep an ear to the ground on forthcoming accreditations and their content) and the world of politics gave it a considerable lead over its competitors. This is undoubtedly the area in which its founder, Jean-Claude Marian, most excelled. In the département of Aisne, in northern France, this murky relationship would give ORPEA the fertile ground it needed for its rapid expansion in the early 1990s. Certainly, at around this time – thanks, amongst other things, to its privileged contacts with Xavier Bertrand (general counsellor, then member of Parliament for Aisne, then Secretary of State and, finally, Minister of Health and close friend of Nicolas Sarkozy) – a considerable number of accreditations would allow the group to virtually double in size [3]. Between its foundation in 1989 and the year 1995, ORPEA would grow from a single care home to 46, most of them in Aisne!
Furthermore, the French system of crédit-bail leasing, an instrument that is unique to the French taxation system, allows groups in their infancy, like ORPEA, to build up a financial safety net. The mechanism allows the operator to purchase a building it is currently leasing at a purchase price that takes account of rent already paid. It is thanks to this system that ORPEA was able to acquire a large number of properties over time, considerably bolstering its assets. The real estate portfolio of the group was valued at over eight billion euros in 2021 [4]!
Various tax advantages as well as the distinctly ambiguous relationships between the businesses and the administrative and political authorities in securing accreditations supported the emergence of large groups on French soil. However, this national dynamic coincided with a general tendency in Europe towards the liberalisation of national markets under the banner of “free choice” for residents [5], without which the national developments could never have taken place; these developments gave private care homes access to grants for their activities, on the same footing as state or private non-profit homes. This system broadly places the public and commercial sectors into competition with each other, which tends to favour the latter, in view of its greater capacity to reduce production costs [6]. Additionally, the funding of care homes based on the level of dependency of their residents and the level of medical support they require has the effect of standardising the service offer; it favours the concentration of supply because of economies of scale, which again benefits commercial groups, as their financial muscle allows them to grow faster. Finally, benefits paid directly to care home residents are a vital element in their continued financial ability to acquire a market service [7].
These national reforms geared to the market come in the context of the creation of the European single market in the late 1980s and early 1990s; this gave private commercial businesses access to calls for tender for the provision of public services, renamed services of general interest and subject to the rules of the single market and competition [8]. In this framework, the EU acted as a major stimulus during the 1990s and 2000s for policies of liberalising (and therefore privatising) sectors that had previously been governed by the State and shielded from the profit motive.
Centralization and performance indicators
In the course of its dizzying rise, ORPEA would refine the management tools of its care homes and clinics, taking full advantage of the synergies offered by its relatively large size. For instance, instead of the traditional system of management for each individual care home that is standard in the sector, ORPEA very soon began radically to centralise its decision-making; all of the group’s homes would be subject to compulsory performance indicators, the two most important of which were the occupation rate (number of residents in each home as a percentage of available beds) and earnings before interest, tax, depreciation, amortisation and restructuring or rent costs (EBITDAR). The indicator targets were 95% and 26% respectively; homes not achieving these performances would have to find new residents very quickly (allowing no time to evaluate their individual needs) or take cost-saving measures, irrespective of the consequences for employees or residents.
This meant that the position of care home manager at ORPEA quickly became pointless, as managers’ hands were tied by policies decided at group level. The pressure brought to bear by managers higher up in the chain (in the person of regional management) forced them to make decisions they would have been highly unlikely to make had they enjoyed greater autonomy. Incidentally, the turnover of ORPEA care home managers is very high: between 10% and 15% of them reportedly left the group every year [9]!
Cost cutting wherever possible
In any care home, staff costs are by far the highest outgoing. ORPEA therefore rapidly set in place a system to optimise its wage bill, obviously to save money, but also to acquire public money fraudulently. A number of techniques were used [10].
The first consisted of moving employees whose wages were subsidised by regional public institutions to other homes in the country owned by the group. Another was to outsource hosting responsibilities (paid for by the company) to the carer (paid for by the state) and vice versa; this allowed the company to reduce hosting staff or, conversely, to pay for hosting staff out of public money usually earmarked for care staff. The third and final technique was one of not finding replacements to stand in for care staff during their absences, even though their wages would still be paid to ORPEA. ORPEA also abused fixed-term contracts that are usually strictly governed by the French State. In France, where the rule is the permanent contract, the use of fixed-term contracts must be temporary and cannot be used as permanent employment. To get round this rule, ORPEA invented fictional permanent contracts to which it linked the fixed-term contracts it used.
Procurement management for food and protective equipment provided another area in which savings could be made. At ORPEA, food is calculated down to the last penny; care home managers and their kitchen staff have a fixed daily budget for meals of around four euros for three meals and one snack; they are not allowed to go over this amount, even if this leads to food rationing. Many complaints about the quality of meals and even cases of malnutrition were reported in the group’s care homes. ORPEA has centralised its food procurement through an arm in Switzerland, KAUFORG, a subsidiary of SENEVITA (the brand name it operates under in Switzerland). KAUFORG is at thoroughly mixed up in the ORPEA scandal, with official investigations flagging up practices of maximising profit at the expense of all other considerations (quality, quantity) [11]. It is worth noting that the cost-cutting measures did not apply to everybody: the procurement subsidiary paid its directors, mostly senior staff from the ORPEA group, very generously. Furthermore, KAUFORG sold services to its suppliers (financing of customer satisfaction surveys, product performance analysis, etc.), as is common in the retail sector. These techniques are somewhat more questionable when used in the world of care homes…
KAUFORG took money for “services rendered” from two of ORPEA’s largest suppliers in France and elsewhere: HARTMANN and BASTIDE, suppliers of incontinence protection and medical equipment respectively. Both companies actively participated in ORPEA’s misappropriation of public funds, by means of system of retro-commissioning [12] whereby ORPEA and the suppliers entered into a framework contract setting exorbitant prices for healthcare material and other medical equipment. The high price paid by ORPEA out of taxpayers’ money was returned by the suppliers at the end of the year in the form of a retrocession, without a word to the authorities. There are active complaints into these practices underway.
The director of operations, Jean-Claude Brdenk, and Loic Battesti, head of efficiency, both of whom have now been removed from the group, formed the backbone of this management regime; they were the group’s merciless cost-killers, with the full backing of financial directors Jean Yves Lemasne (who would go on to become group CEO), Sébastien Mesnard and, of course, the great leader himself, Jean-Claude Marian, founder of ORPEA and its CEO until 2017.
All of this means that from its humble beginnings in the late 1980s until its stock market flotation in 2002, ORPEA honed a highly profitable business model thanks to this centralised and standardised management and extreme cost-cutting. ORPEA was now in the financial position to conquer a European market with liberalisation in full flow. This market was of particular interest as the prospects for growth in France were compromised, as new accreditations had been frozen due to market maturation and changes have been made to the procedures for obtaining them [13].
Setting out to conquer Europe
ORPEA was one of the first major French groups to start expanding its activities into the rest of Europe. In 2004, the company opened its first two care homes in Italy. In 2006, the company decided to strike out into three other countries: Belgium, Spain and Switzerland. The pace of development varied greatly between these countries, but it was firstly in Belgium, then, later, in Switzerland and Spain, that the French company would build its new foreign strongholds. Between 2006 and 2013, ORPEA confined itself to these four countries; its turnover in Belgium, accounting for the lion’s share of its income earned outside France, would account for nearly 10% of the group’s revenue in 2013 [14].
Belgium, then, quickly became the group’s test market at European level. There are several reasons for this. Firstly, Belgium has a disproportionately high number of care home beds for its size and is one of the best-equipped European countries in the sector. Furthermore, it has a high share of commercial beds, particularly in Brussels, where ORPEA would take its first steps. Secondly, it is a neighbouring country and geographically close to the regions of northern France where ORPEA grew to prominence. Its proximity to Luxembourg, where the group already had real estate management companies [15], is doubtless another factor. Furthermore, Jean-Claude Marian went to live in Brussels, probably for tax reasons, which allowed him to establish privileged connections with local politicians and businesspeople.
The growth strategy in these first four countries could be described as organic, in other words regular, driven by the construction of new homes and with a turnover growing slowly but steadily. In Belgium, however, ORPEA made several major acquisitions, allowing it to develop its activities in leaps and bounds, as with the acquisition of MEDIBELGE (Belgian activities of the group MEDITER) in 2010.
It is this bulk acquisition strategy that ORPEA would set in place to make its debut on Europe’s largest care homes and health clinics market, Germany. By purchasing the third-largest commercial player in the field of clinics and psychiatry, CELENUS KLINIKEN, in 2014, followed by the purchase of VITALIS, a regional group of 25 care homes and clinics one year later, ORPEA rapidly became a major player on the long-term care market of the country. It is currently the third-largest commercial actor, behind KORIAN and ALLOHEIM.
The same strategy would be put to work in Austria, where ORPEA bought the SENECURA group in 2015. The years 2014 and 2015 represented a period of strong development through acquisitions of portfolios in Switzerland, Austria and Germany. By 2017, these three countries accounted for more than 30% of the group’s turnover [16].
It was also around 2015 that the group expanded its activities into Eastern Europe, notably Poland and the Czech Republic, but with a smaller-scale entry onto these markets, where the care home “industry” is far less developed than in Western Europe. In 2020, ORPEA made an impressive debut on the Irish market, becoming the country’s largest private operator through the acquisition of FIRSTCARE, BELMONT HOUSE and BRINDLEY HEALTHCARE.
Finally, ORPEA is also attempting an equally modest expansion outside Europe, with the construction or acquisition of care homes in China (2016) and Latin America (Brazil, Chile and Uruguay in 2019, followed by Mexico and Colombia). This indicates that the group feels that its growth potential is to be found in the markets of Eastern Europe and Latin America, where there is a combination of little infrastructure and large ageing populations.
The Luxembourg and Swiss financial centers at the heart of the ORPEA empire
French journalist Victor Castanet’s book “Les Fossoyeurs” documented how ORPEA made use of opaque jurisdictions to hide real estate transactions connected to their care homes in mainland France from the French tax authorities or to pay generous commissions to their agents [17].
In Luxembourg, for instance, there are dozens of companies with direct or indirect links to ORPEA holding considerable financial or real estate assets. It is not easy to trace the financial movements between these companies and, therefore, the final destination of these movements. This was the case with the company LIPANY [18], owned by Roberto Tribuno, the former CEO of ORPEA Italy, which played a kind of ping-pong with ORPEA, buying and selling companies between them, producing gains and making it hard to tell where the money was going.
It is highly interesting to note that Marc Verbruggen, the chairman of ORPEA Belgium, is on the board of most of the companies set up by ORPEA in Luxembourg, alongside the financial director of the group, Sébastien Mesnard, and Tom Faber, an important figure within the group who can be found at the helm of many of its companies in Luxembourg, Belgium and Germany, including LAURITA BELGIUM, which is part of the shadowy network of LIPANY [19].
Switzerland also played a significant role for the ORPEA group beyond the operation of the care homes it owns in the country (SENEVITA, operating nearly 50 care homes). We looked at one example of this earlier with the company KAUFORG, the group’s central food procurement arm, which also served to reward the group’s directors handsomely. But the Swiss stock market was also used to distribute secret commissions to people working indirectly for the group or to provide discrete remuneration to various actors involved in the group’s transactions.
The real estate factor
In France, Luxembourg and elsewhere, real estate has been important for the development of the ORPEA group. Its portfolio currently represents more than eight billion euros in assets [20]; the company owns around half of the care homes it operates. This is not always been the case; in the early days, ORPEA owned a higher proportion of its homes, largely thanks to the French crédit-bail system described above. Over time, the gradual shedding of these assets gave it powerful leverage to fund its national and international acquisitions.
Aside from the cash they generate, selling some or all of its bricks and mortar has had several advantages for the group. It gives them lower operating costs in the first years, making it easier to become established [21]. This is down to the fact that the business does not have to bear the costs and debt for construction and it does not have to start paying rent until the building is ready for use. Finally, although this is not the case with ORPEA, the operator does not always have the skill set or positions required to manage real estate assets, which is a very different undertaking from managing care homes.
Yet this strategy has a downside. The rent very quickly becomes a very considerable expenditure item, keeping operating profit down. Furthermore, full ownership of its real estate assets improves the company’s balance sheet and assets. ORPEA’s strategy therefore fluctuated between consolidating properties and selling some of them off, depending on the company’s needs.
In the case of Belgium, for instance, ORPEA opted to create a subsidiary holding most of the group’s real estate companies in the country, ORPIMMO, to which most of its care homes pay rent: this effectively means that ORPEA pays rent to itself. This has one considerable advantage to the group: it pays very little tax on the operation of the care homes, as their accounts appear to suffer from the high rents paid, meaning that they make no profit and therefore pay no tax. ORPEA Belgium’s real estate companies, the principal beneficiaries, also serve to distribute dividends to their board members, most of whom are the senior executives of the group in France (CEO Jean-Claude Marian until 2017, chief operations officer Jean-Claude Brdenk, financial director Sébastien Mesnard) and Belgium (the chairman, Marc Verbruggen, and his CEO, Geert Uytterschaut). Under this system, more than seven million euros were paid out to these directors in 2020…
Property sales by major groups such as ORPEA or KORIAN opened up a huge market for major real estate or insurance investors, principally from Belgium. COFINIMMO, AEDIFICA, CARE PROPERTY INVEST and AG Insurance went on to develop their activities in the “healthcare real estate” sector and accompanied the development of these major operators in the Netherlands, Germany and the United Kingdom.
Today, furthermore, the ORPEA group needs to shed a chunk of its real estate portfolio. This strategy, which was decided upon even before the scandal, is now a necessity. In the wake of the publication of “Les Fossoyeurs” and the accompanying scandal, the group is now struggling to finance itself on the markets. What makes matters worse is the fact that the company is in so much debt (to the tune of nearly 10 billion euros [22]) that its profitability is being eaten into by the rise in energy and other costs and it may find the authorities somewhat reluctant to issue it any new operating permits just at present.
ORPEA is therefore planning to sell real estate assets to a total of one billion euros by next year and the same again by 2025. However, the slow-down of the real estate market could make this operation trickier than anticipated. ORPEA’s accounts are in the red and having to cease trading has become a possibility …
Conclusions
To sum up, ORPEA’s tremendous success is based principally on four factors:
A low-cost model
ORPEA developed an ultra-profitable business model based on financial benchmarks and extreme centralisation of management; this gave it resources it needed to grow rapidly. ORPEA managed to import methods from the retail sector to manage its procurement, became a master in the art of reducing salary costs, partly by abusing public schemes in the field, whilst using violence and threats against its staff and having no scruples about rationing the provision of healthcare equipment or even food to its residents.
The French political sectors
ORPEA benefited from the complicity of certain political and administrative authorities in France. Thanks to its powerful network of influence, made up of key players from the world of politics and senior public service, the company was first in the queue for accreditations and benefited from a lack of serious oversight of its field of activity. Certainly, it was the express intention of certain French political sectors to promote the emergence of major private long-term care groups, doubtless for ideological reasons, but also on financial grounds, which is less easy to admit to.
The deregulation of the European market
None of this story would have been possible without the conducive general framework decided upon by the European institutions, allowing liberalisation at national level and the expansion of businesses on the European market. Since the late 1980s, there has been a liberal vision of health and care, which has made no secret of a preference for the development of commercial provision, which is considered to be more efficient and to shift the burden of the ageing population away from the taxpayer.
The use of tax havens
The ORPEA scandal is further proof of the damage caused by the existence of tax havens in Europe. The company could not have acted without the Luxembourg and Swiss financial centers, which were used to keep considerable real estate and financial assets from the taxman as well as to hide transactions on these assets so that the profits from them could be channelled into the group’s bank accounts and those of the directors and intermediaries.
There are three levels of consequences from this model:
The ill-treatment of residents and employees
There is no such thing as a miracle! Reducing staff costs has immediate consequences for working conditions: lack of staff, employees who are not always qualified to do their jobs, next to no monitoring, etc. This has consequences not only for the staff, but it also negatively affects the quality of care and support for residents. ORPEA’s model is effectively geared to the ill-treatment of staff and residents.
Tax optimization
The ORPEA model, which always takes legality to its limits, exploits every blind spot and loophole in the legislation, with no qualms about abusing public schemes that are supposed to ensure the well-being of the elderly. In this way, taxpayers’ money ended up directly in the pockets of the shareholders and directors of the group.
Enriching shareholders and directors
This is the ultimate objective of the model: to reward the shareholders, make profit and increase the share price in order to keep growing and get even richer, all the while writing big fat paychecks for the group’s directors, by means both fair and foul. Jean-Claude Marian, the chief architect of the ORPEA model, for instance, is reported to be worth more than one billion euros – which are safe from the French taxman, as the good doctor is now a Belgian citizen.
Far more than the consequences of its directors’ practices, then, the ORPEA scandal represents the breakdown of the neoliberal vision and implementation of policies for the ageing population. To avoid having to accept the possibility of political responsibility at the highest level, therefore, many people would rather blame the admittedly unlimited cynicism of the group’s historic directors.
This failure, which has had terrible consequences for the elderly and those who care for and support them, forces us not only to call for criminal consequences for those directors, but also to ensure that the political responsibility rests with those who made it possible.
Firstly, the French authorities, those which fund and those which regulate, which long closed their eyes to the multinational’s actions, despite constant reports from workers, unions, residents and their families.
Secondly, every civil servant, local, regional or national agent, who supported the growth of the group, sometimes by legal means, turning a blind eye to the human consequences.
Finally, those responsible at national and EU level, who have sought for decades to make elderly care into a market just like any other that needs to be liberalised and privatised to make it more efficient and to save the state money. The common market rewards those who keep costs down to a minimum, which automatically gives a competitive advantage to those which mistreat their employees and residents.
Unless we learn political lessons from this disaster and move away from the neoliberal paradigm that has captured health and welfare provision, our parents and grandparents today, and we tomorrow, will end our days in suffering and indignity.
Sebastian Franco, GRESEA
