The marginal cost of nursing home care, New York, 1983

The Economies of Scale for Nursing Home Care

Using a modified hybrid short-term operating cost function and a national sample of nursing homes in 1994, the authors examined the scale economies of nursing home care. The results show that scale economies exist for Medicare postacute care, with an elasticity of –0.15 and an optimal scale of around 4,000 patient days annually. However, more than 68 percent of nursing homes in the analytic sample produced Medicare days at a level below the optimal scale. The financial pressures resulting from the implementation of a prospective payment system for Medicare skilled nursing facilities may further reduce the quantity of Medicare days served by nursing homes. In addition, the results show that chain-owned nursing homes do not have lower short-term operating costs than do independent facilities. This indicates that the rationale behind recent increasing horizontal integration among nursing homes may not be seeking greater cost efficiency but some other consideration.

The policy implications of the cost structure of home health agencies

PURPOSE

To examine the cost structure of home health agencies by estimating an empirical cost function for those that are Medicare-certified, ten years following the implementation of prospective payment.

DESIGN AND METHODS

2010 national Medicare cost report data for certified home health agencies were merged with case-mix information from the Outcome and Assessment Information Set (OASIS). We estimated a fully interacted (by tax status) hybrid cost function for 7,064 agencies and calculated marginal costs as percent of total costs for all variables.

RESULTS

The home health industry is dominated by for-profit agencies, which tend to be newer than the non-profit agencies and to have higher average costs per patient but lower costs per visit. For-profit agencies tend to have smaller scale operations and different cost structures, and are less likely to be affiliated with chains. Our estimates suggest diseconomies of scale, zero marginal cost for contracting with therapy workers, and a positive marginal cost for contracting with nurses, when controlling for quality.

IMPLICATIONS

Our findings suggest that efficiencies may be achieved by promoting non-profit, smaller agencies, with fewer contract nursing staff. This conclusion should be tested further in future studies that address some of the limitations of our study.

Incremental cost of postacute care in nursing homes

OBJECTIVES

To determine whether the case mix index (CMI) based on the 53-Resource Utilization Groups (RUGs) captures all the cross-sectional variation in nursing home (NH) costs or whether NHs that have a higher percent of Medicare skilled care days (%SKILLED) have additional costs. DATA AND SAMPLE: Nine hundred and eighty-eight NHs in California in 2005. Data are from Medicaid cost reports, the Minimum Data Set, and the Economic Census.

RESEARCH DESIGN

We estimate hybrid cost functions, which include in addition to outputs, case mix, ownership, wages, and %SKILLED. Two-stage least-square (2SLS) analysis was used to deal with the potential endogeneity of %SKILLED and CMI.

RESULTS

On average 11 percent of NHs days were due to skilled care. Based on the 2SLS model, %SKILLED is associated with costs even when controlling for CMI. The marginal cost of a one percentage point increase in %SKILLED is estimated at U.S.$70,474 or about 1.2 percent of annual costs for the average cost facility. Subanalyses show that the increase in costs is mainly due to additional expenses for nontherapy ancillaries and rehabilitation.

CONCLUSION

The 53-RUGs case mix does not account completely for all the variation in actual costs of care for postacute patients in NHs.

The costs of turnover in nursing homes

BACKGROUND

Turnover rates in nursing homes have been persistently high for decades, ranging upwards of 100%.

OBJECTIVES

To estimate the net costs associated with turnover of direct care staff in nursing homes. DATA AND SAMPLE: Nine hundred two nursing homes in California in 2005. Data included Medicaid cost reports, the Minimum Data Set, Medicare enrollment files, Census, and Area Resource File.

RESEARCH DESIGN

We estimated total cost functions, which included in addition to exogenous outputs and wages, the facility turnover rate. Instrumental variable limited information maximum likelihood techniques were used for estimation to deal with the endogeneity of turnover and costs.

RESULTS

The cost functions exhibited the expected behavior, with initially increasing and then decreasing returns to scale. The ordinary least square estimate did not show a significant association between costs and turnover. The instrumental variable estimate of turnover costs was negative and significant (P = 0.039). The marginal cost savings associated with a 10% point increase in turnover for an average facility was $167,063 or 2.9% of annual total costs.

CONCLUSION

The net savings associated with turnover offer an explanation for the persistence of this phenomenon over the last decades, despite the many policy initiatives to reduce it. Future policy efforts need to recognize the complex relationship between turnover and costs.

Cost implications of organizing nursing home workforce in teams

OBJECTIVE

To estimate the costs associated with formal and self-managed daily practice teams in nursing homes.

DATA SOURCES/STUDY SETTING

Medicaid cost reports for 135 nursing homes in New York State in 2006 and survey data for 6,137 direct care workers.

STUDY DESIGN

A retrospective statistical analysis: We estimated hybrid cost functions that include team penetration variables. Inference was based on robust standard errors.

DATA COLLECTION

Formal and self-managed team penetration (i.e., percent of staff working in a team) were calculated from survey responses. Annual variable costs, beds, case mix-adjusted days, admissions, home care visits, outpatient clinic visits, day care days, wages, and ownership were calculated from the cost reports.

PRINCIPAL FINDINGS

Formal team penetration was significantly associated with costs, while self-managed teams penetration was not. Costs declined with increasing penetration up to 13 percent of formal teams, and increased above this level. Formal teams in nursing homes in the upward sloping range of the curve were more diverse, with a larger number of participating disciplines and more likely to include physicians.

CONCLUSIONS

Organization of workforce in formal teams may offer nursing homes a cost-saving strategy. More research is required to understand the relationship between team composition and costs.

Cost and Quality

BACKGROUND

Although both quality and cost are important concerns for long term care (LTC) facility management and policy, the relationship between cost and quality is poorly understood. Such knowledge is necessary to guide facility management and policy action.

OBJECTIVE

We sought to determine the net effect of quality on cost in LTC hospital settings.

STUDY SAMPLE

A 4-year panel dataset from April 1997 through March 2002 comprising observations from 99 LTC hospitals were included in this analysis.

METHODS

We examined the relationship between direct resident costs and 7 indicators of quality for long-stay residents. We used panel data methods to control for unobserved facility-level characteristics.

RESULTS

We found that increases in restraint use and incident pressure/skin ulcers were associated with lower per diem costs, whereas incontinence prevalence was associated with higher per diem costs.

CONCLUSIONS

Our results point to different implications regarding cost and quality for different quality indicators. Although facilities have a strong internal business case to improve quality in incontinence, policy-makers may need to provide financial incentives to encourage reductions in restraint use and incident skin ulcers so as to defray potential higher costs associated with improving quality in these areas.

The effect of state medicaid case-mix payment on nursing home resident acuity

OBJECTIVE

To examine the relationship between Medicaid case-mix payment and nursing home resident acuity.

DATA SOURCES

Longitudinal Minimum Data Set (MDS) resident assessments from 1999 to 2002 and Online Survey Certification and Reporting (OSCAR) data from 1996 to 2002, for all freestanding nursing homes in the 48 contiguous U.S. states.

STUDY DESIGN

We used a facility fixed-effects model to examine the effect of introducing state case-mix payment on changes in nursing home case-mix acuity. Facility acuity was measured by aggregating the nursing case-mix index (NCMI) from the MDS using the Resource Utilization Group (Version III) resident classification system, separately for new admits and long-stay residents, and by an OSCAR-derived index combining a range of activity of daily living dependencies and special treatment measures.

DATA COLLECTION/EXTRACTION METHODS

We followed facilities over the study period to create a longitudinal data file based on the MDS and OSCAR, respectively, and linked facilities with longitudinal data on state case-mix payment policies for the same period.

PRINCIPAL FINDINGS

Across three acuity measures and two data sources, we found that states shifting to case-mix payment increased nursing home acuity levels over the study period. Specifically, we observed a 2.5 percent increase in the average acuity of new admits and a 1.3 to 1.4 percent increase in the acuity of long-stay residents, following the introduction of case-mix payment.

CONCLUSIONS

The adoption of case-mix payment increased access to care for higher acuity Medicaid residents.

Nursing home spending patterns in the 1990s: the role of nursing home competition and excess demand

OBJECTIVE

To examine nursing home expenditures on clinical, hotel, and administrative activities during the 1990s and to determine the association between nursing home competition and excess demand on expenditures.

DATA SOURCES/STUDY SETTING

Secondary data sources for 1991, 1996, and 1999 for 500 free-standing nursing homes in New York State.

STUDY DESIGN

A retrospective statistical analysis of nursing homes' expenditures. The dependent variables were clinical, hotel, and administrative costs in each year. Independent variables included outputs (inpatient and outpatient), wages, ownership, New York City location, and measures of competition and excess demand.

DATA COLLECTION/EXTRACTION METHOD

Variables were constructed from annual financial reports submitted by the nursing homes, the Patient Review Instrument and Medicare enrollment data.

PRINCIPAL FINDINGS

Clinical and administrative costs have increased over the decade, while hotel expenditures have declined. Increased competition was associated with higher clinical and administrative costs while excess demand was associated with lower clinical and hotel expenditures.

CONCLUSIONS

Nursing home expenditures are sensitive to competition and excess demand conditions. Policies that influence competition in nursing home markets are therefore likely to have an impact on expenditures as well.

The economic implications of case-mix Medicaid reimbursement for nursing home care

In recent years, there has been large growth in the nursing home industry in the use of case-mix adjusted Medicaid payment systems that employ resident characteristics to predict the relative use of resources in setting payment levels. Little attention has been paid to the access and quality incentives that these systems provide in the presence of excess demand conditions due to certificate-of-need (CON) and construction moratoria. Using 1991 to 1998 panel data for all certified U.S. nursing homes, a fixed-effects model indicates that adoption of a case-mix payment system led to increased access for more dependent residents, but the effect was modified in excess demand markets. Quality remained relatively stable with the introduction of case-mix reimbursement, regardless of the presence of excess demand conditions. These results suggest that CON and construction moratoria are still important barriers within the nursing home market, and recent quality assurance activities related to the introduction of case-mix payment systems may have been effective.

Does prospective payment really contain nursing home costs?

OBJECTIVE

To examine whether nursing homes would behave more efficiently, without compromising their quality of care, under prospective payment.

DATA SOURCES

Four data sets for 1994: the Skilled Nursing Facility Minimum Data Set, the Online Survey Certification and Reporting System file, the Area Resource File, and the Hospital Wage Indices File. A national sample of 4,635 nursing homes is included in the analysis.

STUDY DESIGN

Using a modified hybrid functional form to estimate nursing home costs, we distinguish our study from previous research by controlling for quality differences (related to both care and life) and addressing the issues of output and quality endogeneity, as well as using more recent national data. Factor analysis was used to operationalize quality variables. To address the endogeneity problems, instrumental measures were created for nursing home output and quality variables.

PRINCIPAL FINDINGS

Nursing homes in states using prospective payment systems do not have lower costs than their counterpart facilities under retrospective cost-based payment systems, after quality differences among facilities are controlled for and the endogeneity problem of quality variables is addressed.

CONCLUSIONS

The effects of prospective payment on nursing home cost reduction may be through quality cuts, rather than cost efficiency. If nursing home payments under prospective payment systems are not adjusted for quality, nursing homes may respond by cutting their quality levels, rather than controlling costs. Future outcomes research may provide useful insights into the adjustment of quality in the design of prospective payment for nursing home care.

Nursing home costs and risk-adjusted outcome measures of quality

BACKGROUND

The inadequacy of quality of care in nursing homes has been and continues to be a focus of public concerns. Understanding the relationship between quality and costs can offer guidance to policies designed to encourage high quality.

OBJECTIVES

To investigate the relationship between costs and quality of care in nursing homes, and to test the hypothesis that higher quality may be associated with lower costs.

RESEARCH DESIGN

Statistical regression techniques were used to estimate nursing home variable-cost functions that included three risk-adjusted outcome measures of quality. Quality measures were based on decline in functional status, worsening pressure ulcers, and mortality. The study hypothesis was tested by an F test for the exclusion of nonlinear quality variables in the cost functions.

SUBJECTS

The study included 525 free-standing private and public nursing homes in New York State, or 84% of all nursing homes in the state during 1991.

RESULTS

F tests rejected the hypotheses that the three quality measures could be excluded from the cost function and that the association between costs and quality was linear. An inverted U-shaped relationship between quality and costs suggests that there are quality regimens in which higher quality is associated with lower costs.

CONCLUSIONS

Policies that encourage research to identify care protocols and management strategies leading to better outcomes and lower costs, as well as policies that encourage dissemination of such practices, may prevent decline in quality despite the continued financial constraints faced by nursing homes.

The substitutability of adult foster care for nursing home care in Oregon

OBJECTIVES

This study investigates the degree of substitutability of adult foster care for nursing home care in Oregon.

METHODS

Using three tests, the authors determined (1) the extent to which an additional adult foster care resident in a county reduces the number of nursing home residents in that county, (2) which characteristics of residents and facilities are important in sorting residents into either nursing homes or adult foster care facilities, and (3) the price elasticity of demand for adult foster care, using the county as the unit of observation.

RESULTS

It was found that for every additional foster care resident in a county, a nursing home loses 0.85 residents-almost a one-to-one substitution ratio.

CONCLUSIONS

Despite the high degree of substitutability, residents perceive important differences in the characteristics of the two forms of care. Indeed, private residents are, on average, willing to pay twice as much for nursing home care as for adult foster care, suggesting that these differences are important. Finally, private consumers are sensitive to price differences among adult foster care facilities. The implications for policy are discussed.

Do case-mix adjusted nursing home reimbursements actually reflect costs? Minnesota's experience

Some states have adopted Medicaid reimbursement systems that pay nursing homes according to patient type. These case-mix adjusted reimbursements are intended in part to eliminate the incentive in prospective systems to exclude less profitable patients. This study estimates the marginal costs of different patient types under Minnesota's case-mix system and compares them to their corresponding reimbursements. We find that estimated costs do not match reimbursement rates, again making some patient types less profitable than others. Further, in confirmation of our estimates, we find that the percentage change in patient days between 1986 and 1990 is explained by our profitability estimates.

Do elderly Medicaid patients experience reduced access to nursing home care?

This paper uses data from the National Long-Term Care Survey and the Area Resources File to analyze the problem of diminished access to nursing home care for elderly Medicaid patients. Using a proxy for the length of time on a waiting list before nursing home entry as my measure of access, I find evidence suggesting that nursing home operators in some areas preferentially admit private patients. Waitlisting of Medicaid patients appears to be a problem mainly in counties in which a high proportion of potential nursing home patients are private and counties in which bed supply is low.