The effect of competition on nursing home expenditures under prospective reimbursement.

The for-profit nursing home's incentive to minimize costs has been maligned as a major cause of the quality problems that have traditionally plagued the nursing home care industry. Yet, profit-maximizing firms in other industries are able to produce products of adequate quality. In most other industries, however, firms are constrained from reducing costs to the point where quality suffers by the threat of losing business to competing firms. In the nursing home industry, competition for patients often does not exist because of the shortage of nursing home beds. As a result, one would expect that nursing homes located in areas where there is excess demand would spend less on patient care than homes located where the bed supply is relatively abundant. This hypothesis is tested using Wisconsin data from 1983. It is found that, in counties with relatively tight bed supplies, an additional empty bed in all the homes in the county will force each home to increase expenditures by $.62 per day for each patient in the home. Overall, the average nursing home located in underbedded markets would spend $5.12 more per patient day or about $240,000 more annually (in 1983 dollars) if it were located in a market where it was forced to compete for patients. The implications for public policy are discussed.     

Estimating patient-level nursing home costs.

This article presents a methodology developed to estimate patient-level nursing home costs. Such estimates are difficult to obtain because most cost data for nursing homes are available from Medicare or Medicaid cost reports, which provide only average values per patient-day across all patients (or all of a particular payer's patients). The methodology presented in this article yields "resource consumption" (RC) measures of the variable cost of nursing staff care incurred in treating individual nursing home patients. Results from the application of the methodology are presented, using data collected in 1980 on a sample of 961 nursing home patients in 74 Colorado nursing homes. This type of approach could be used to link nursing home payments to the care needs of individual patients, thus improving the overall equity of the payment system and possibly reducing the access barriers facing especially Medicaid patients with high-cost care needs.     

Explaining state Medicaid nursing home reimbursement

Medicaid nursing home reimbursement methods and per diem rates affect costs, quality, equity, and access. State rate-setting is a laboratory of policymaking, which can inform state and federal Medicaid reform initiatives. This paper explains state Medicaid nursing facility rates in 1979-1994. Findings suggest that prospective facility-specific methods constrained rates in some but not all periods, particularly when older cost-reports were employed in rate-setting. Analysis failed to show that prospective class rate-setting methods constrained rate increases. Findings suggest that the efficacy of reimbursement methodology to control rates depends upon wider health care policy trends and that future facility-level analyses should consider policy contexts as between states.     

Survey-based indices for nursing home quality incentive reimbursement.

Incentive payments are a theoretically appealing complement to nursing home quality assurance systems that rely on regulatory enforcement. However, the practical aspects of incentive program design are not yet well understood. After reviewing the rationale for incentive approaches and recent State and Federal initiatives, the article considers a basic program design issue: creating an index of nursing home quality. It focuses on indices constructed from routine licensure and certification survey results because State initiatives have relied heavily on these readily accessible data. It also suggests a procedure for creating a survey-based index and discusses a sampling of implementation issues.     

Analysis of nursing home capital reimbursement systems

An increasing number of States are using a fair-rental approach for reimbursement of nursing home capital costs. In this study, two variants of the fair-rental capital-reimbursement approach are compared with the traditional cost-based approach in terms of after-tax cash flow to the investor, cost to the State, and rate of return to investor. Simulation models were developed to examine the effects of each capital-reimbursement approach both at specific points in time and over various periods of time. Results indicate that although long-term costs were similar for the three systems, both fair-rental approaches may be superior to the traditional cost-based approach in promoting and controlling industry stability and, at the same time, in providing an adequate return to investors.     

Medicaid reimbursement and the quality of nursing home care.

An influential series of papers have found that an increase in Medicaid reimbursement decreases the level of nursing home quality in the presence of certificate-of-need (CON) and construction moratorium regulations. Using more recent national data, an outcome-oriented measure of quality, and an alternative methodology, this study finds a positive, albeit small, effect of reimbursement on quality. Although this paper does find some evidence of excess demand within the market for nursing home care, this new finding is attributed to a decline in nursing home utilization over the last two decades.     

Nursing home levels of care: reimbursement of resident specific costs.

The companion paper on nursing home levels of care (Bishop, Plough and Willemain, 1980) recommended a "split-rate" approach to nursing home reimbursement that would distinguish between fixed and variable costs. This paper examines three alternative treatments of the variable cost component of the rate: a two-level system similar to the distinction between skilled and intermediate care facilities, an individualized ("patient-centered") system, and a system that assigns a single facility-specific rate that depends on the facility's case-mix ("case-mix reimbursement"). The aim is to better understand the theoretical strengths and weaknesses of these three approaches. The comparison of reimbursement alternatives is framed in terms of minimizing reimbursement error, meaning overpayment and underpayment. We develop a conceptual model of reimbursement error that stresses that the features of the reimbursement scheme are only some of the factors contributing to over- and underpayment. The conceptual model is translated into a computer program for quantitative comparison of the alternatives.     

Case-mix reimbursement for nursing home services: simulation approach.

Nursing home reimbursement based on case mix is a matter of growing interest. Several States either use or are considering this reimbursement method. In this article, we present a method for evaluating key outcomes of such a change for Connecticut nursing homes. A simulation model is used to replicate payments under the case-mix systems used in Maryland, Ohio, and West Virginia. The findings indicate that, compared with the system presently used in Connecticut, these systems would better relate dollar payments to measure patient need, and for-profit homes would benefit relative to nonprofit homes. The Ohio methodology would impose the most additional costs, the West Virginia system would actually be somewhat less expensive in terms of direct patient care payments.     

The effect of chain ownership on nursing home costs.

Although it is commonly assumed that chain ownership will result in lower costs due to economies of scale, the empirical evidence with respect to the effect of chain ownership on nursing home costs is mixed. Chain for-profit nursing homes will have a cost advantage over independent for-profit homes only if there are firm-level (multiple-home) economies of scale. For the study population of Texas nursing homes in 1983, cost structures differed sufficiently across ownership types to warrant estimating separate cost functions by ownership type. The results indicate that, when other factors affecting cost are held constant, chain homes have lower average costs than independent homes at intermediate and high levels of output, but higher average costs at low and very high levels of output. The results highlight the importance of considering whether or not to pool data across ownership categories when estimating nursing home cost functions.     

Medicaid case-mix nursing home reimbursement in three states

Case-mix nursing facility payment raises issues of access, quality, equity, and cost. Case-mix should better match payment to costs, improve access, and provide incentives to increased staffing and quality of care; but it may also increase costs. This paper reports analysis of Medicaid cost-report data from three case-mix states. Case-mix did not discourage capacity building and was more equitable for providers. Medicaid access declined in one state but increased in another. There were shifts toward greater skilled care in two states, with evidence of greater focus of resources on patient care. Case-mix showed no evidence of cost-constraint and some signs of increased costs. Whether such mixed outcomes are viable in the current era remains to be seen.     

Medicaid nursing home reimbursement policies, rates, and expenditures.

Nursing home expenditures, along with those of hospitals, have been a target of cost containment efforts because they constitute a growing share of overall public expenditures for health. Of the total $287 billion spent on personal health care in 1982, $27 billion (9.5 percent) was spent on nursing home care (Gibson, Waldo, and Levit, 1983). Nationally, nursing home expenditures increased at a rate of 17.4 percent between 1980 and 1981 and 12.9 percent between 1981 and 1982, more rapidly than overall health care expenditures (Gibson, Waldo, and Levit, 1983).     

Using hospital-specific costs to improve the fairness of prospective reimbursement

Payment rates in Medicare's Prospective Payment System (PPS) are based on averages of historical hospital costs. Compared to reimbursing each hospital's own costs, pricing at the average of costs implies a massive redistribution of payments among hospitals. Because not all sources of hospital costs are accounted for in the PPS, some of this redistribution is 'unfair'. Information in hospital-specific costs on unmeasured patient severity and input prices can be exploited to reduce payment inequities. However, fully hospital-specific rates are not optimal because costs also reflect treatment intensity and efficiency differences among hospitals.     

A comparison of patient-centered and case-mix reimbursement for nursing home care.

The trend in payment for nursing home services has been toward making finer distinctions amont patients and the rates at which their care is reimbursed. The ultimate in differentiation is patient-centered reimbursement, whereas each patient's rate is individually determined. This paper introduces a model of overpayment and under-payment for comparing the potential performance of alternative reimbursement schemes. The model is used in comparing the patient-centered approach with case-mix reimbursement, which assigns a single rate to all patients in a nursing home on the basis of the facility's case mix. Roughly speaking, the case-mix approach is preferable whenever the differences between patient's needs are smaller than the errors in needs assessment. Since this condition appears to hold in practice today, case-mix reimbursement seems preferable for the short term.     

Trends in Medicaid nursing home reimbursement: 1978-89

Medicaid nursing home reimbursement is of concern because of implications for nursing home expenditures. This article presents data on State Medicaid nursing home reimbursement methods, ratesetting methods, and average per diem rates, refining earlier data and updating through 1989. A trend in the early 1980s toward adopting prospective systems played out by the end of the decade. There were trends, however, toward casemix methods, which may increase access for high-need patients, and toward cost-center limits on nursing, which may provide incentives to lower quality care. Analysis supports previous findings that prospective systems allow greater control over increases in rates.     

The effects of ownership and ownership change on nursing home industry costs.

OBJECTIVE. This study examines the effects of ownership type and ownership change on nursing home cost structures, differentiating patient care costs from plant costs. DATA SOURCES. Administrative data from the Michigan Department of Social Services, Medical Services Administration (Medicaid), and the Michigan Department of Public Health are used. Cost data are based on audited cost reports for 393 nursing care facilities in Michigan in 1989. Other facility characteristics are based on data from the 1989 annual licensing and certification survey conducted by the Michigan Department of Public Health. STUDY DESIGN. A series of ordinary least squares regressions is estimated, in which the dependent variable is either per diem patient costs or per diem plant costs. Ownership types are defined as chain, proprietary non-chain, freestanding non-profit, government-owned, and hospital-based facilities. Pooled estimation techniques, as well as separate regressions by ownership type, are presented to test for interaction effects. Key variables include whether a facility changed ownership in the preceding five years and whether chain facilities are in-state- or out-of-state-owned, in addition to size, payer mix, and case mix. PRINCIPAL FINDINGS. Behavioral differences among nursing home ownership types in respect to patient care costs tended to distinguish government-owned and hospital-based facilities from the freestanding homes rather than the usual distinction between for-profit and not-for-profit classes. Variables traditionally included in nursing home cost studies, such as size, occupancy, payer mix and case mix, were found to have similar effects on per diem patient care costs for freestanding non-profit homes as well as for chain proprietary facilities. With regard to the effects of ownership change on per diem plant and per diem patient costs, however, there are few differences among ownership types. Chain and non-chain for-profit facilities, non-profit homes, and hospital long-term care units that had changed ownership reported significantly higher per diem plant costs than facilities without a change of ownership, but did not spend more on patient-related costs. Michigan Medicaid plant reimbursement system policy changes instituted in 1985 to promote continued ownership of facilities were not entirely successful. CONCLUSIONS. Non-profit homes look increasingly like their for-profit counterparts with respect to spending on patient care costs. Increased competition for the more lucrative private-pay patients, coupled with declining state Medicaid reimbursement to nursing homes, may have blurred the historical distinctions between the non-profit and for-profit sectors in the nursing home industry. An exception to increasing homogeneity within the nursing home industry is the tendency of proprietary homes to experience more frequent changes of ownership, which results in higher capital costs passed on to state Medicaid programs. Findings from this study indicate that while facility sales increase per diem plant costs, they do not result in increased spending for direct patient care, suggesting that state Medicaid programs may be indirectly subsidizing facility sales with no accompanying increase in expenditures for patient care. To discourage frequent facility sales, state Medicaid programs may need to consider alternative methods of reimbursing nursing home owners for capital costs.     

The initial effects of the prospective payment system on nursing home patients.

We examined the discharge outcomes and admission characteristics of patients admitted to Southern California skilled nursing facilities (SNFs) for the first time following an episode of hospitalization in 1980, 1982-83 (all pre-prospective payment system), and all admissions during July through September 1984 (post-prospective payment). The proportion of patients covered by Medicare on admission was 18 per cent in 1980, 36 per cent in 1982-83, and 57 per cent in 1984. For patients discharged within 30-60 days to SNFs, in all three time periods more Medicare than non-Medicare patients were bed-bound, had indwelling catheters, and were comatose. There were only modest case-mix differences between the groups and no changes over time in discharge outcomes, including the proportion dying in the SNF, or being returned to a hospital. The time-related changes that were found preceded the implementation of the diagnosis related group (DRG) based prospective payment system.     

Nursing home cost studies and reimbursement issues.

This review of nursing home cost function research shows that certain provider and service characteristics are systematically associated with differences in the average cost of care. This information can be used to group providers for reasonable cost related rate-setting or to adjust their rates or rate ceilings. However, relationships between average cost and such service characteristics as patient mix, service intensity, and quality of care have not been fully delineated. Therefore, econometric cost functions cannot yet provide rate-setters with predictions about the cost of the efficient provision of nursing home care appropriate to patient needs. In any case, the design of reimbursement systems must be founded not only on technical information but also on public policy goals for long-term care.     

Does prospective payment encourage nursing home efficiency?

The health-care field is increasingly sensitive to the effect of third-party reimbursement policies on health-care organization performance. The ability to attain low costs and high net income, for example, is particularly affected by prospective reimbursement. Theoretically, prospective payments should provide an incentive to health-care organizations to implement better control over performance. These ideas are examined in a study of nursing homes. Results of this analysis indicate that management control practices contribute to efficient performance. The association of this finding with prospective reimbursement is discussed from the perspective of implications for health-care organizations.