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

Health Services Research, August, 2005 by Dana B. Mukamel, William D. Spector, Alina Bajorska

Nursing homes provide a complex array of services to a heterogeneous group of patients. They offer both clinical care and a living environment that serves as the residents' home. Nursing homes allocate their revenue-constrained resources between these various products in ways that depend on the market environment they face.

In this study, we examine costs associated with clinical care, hotel services, and administration in New York State (NYS) nursing homes during the 1990s. We choose this time period because throughout this decade nursing homes experienced several major changes in their environment, which may have had an impact on their resource allocation decisions. In the next section, we describe these changes and discuss how they might have affected costs. We then examine data for 1991, 1996, and 1999 to determine if these changes have occurred and to what degree.

TRENDS IN NURSING HOME DEMAND, SERVICES, AND COSTS

Nursing home activities and, hence, costs can be divided into three major categories: clinical (medical and personal) care, hotel services, and administration. This typology is useful because as we discuss below, each type of cost is subject to different influences and is likely to exhibit different trends. Furthermore, each influences different aspects of nursing home care. Table 1 defines these three cost categories in terms of cost centers as reported by nursing homes in their annual financial reports.

During the 1990s, the environment for nursing homes changed in ways that likely affected all three cost categories: sub-acute care continued to grow and became an important line of business for many nursing facilities, the competitive environment changed with many nursing homes markets no longer exhibiting excess demand, and the introduction of the Minimum Data Set (MDS) reporting system and increased regulations and fraud investigations increased the administrative burden that nursing homes had to meet.

Sub-acute care, consisting of medically intensive short stays for patients recuperating from an acute hospital episode, became an important component of nursing home care during the 1990s. This was in response to incentives created by prospective payment under Medicare and the emergence of managed care organizations looking for more cost-effective alternatives to long hospital stays, which often require rehabilitation care. National statistics show that the percent of residents aged 65 and over who have Medicare as a primary source of payment at admission, all of whom are sub-acute care patients, increased from 4.9 percent in 1985 to 25.9 percent in 1995, and 32.8 percent in 1999 (Hing 1987; Dye 1997; Anonymous 2002), with a commensurate increase in Medicare expenditures for nursing home care (from $2.4 billion in 1990 to $11.6 billion in 1996). This increase in sub-acute care is expected to have influenced behavior of nursing homes in two ways. First, sub-acute care is much more medically intensive than long-term custodial care. Thus, as nursing homes treat more sub-acute patients, more resources would have to be allocated to clinical activities to meet the needs of these patients. Second, when nursing homes compete in the market for sub-acute patients, they recognize that these patients are primarily interested in the quality of the clinical services they provide (Spector and Mukamel 2001). Therefore, the growth in sub-acute care would create incentives for nursing homes to increase investment in clinical care, incentives that are likely to be stronger the more competitive the market. In a resource constrained environment, it may also lead to reduced investment in hotel services, services which are more important to the long-stay residents than to the sub-acute, short-stay-patients.

During the 1990s, competition in the market for long-term care services also changed. Nursing homes increasingly faced competition from home care and assisted living, which are alternatives to nursing home care for less debilitated and cognitively impaired individuals. At the same time, many states either abolished moratoria on nursing homes construction or relaxed certificate-of-need regulations (Harrington et al. 1997). The decrease in demand and increase in bed supply eliminated the excess demand that nursing home experienced historically in many markets (Scanlon 1980; Nyman 1989a). During the 1990s, average occupancies declined to below 90 percent (Khoades, Poter, and Krauss 1998), suggesting that excess demand conditions no longer prevailed (Nyman 1993). Even in NYS, where nursing home occupancies remained above 96 percent throughout the 1990s, waiting time in a hospital ward for a nursing home bed declined from 33.4 days in 1991 to 11.3 days in 1999 (authors calculations from the NYS hospital discharge data set--SPARCS). The percent of NYS nursing homes facing excess demand (see definition and further discussion below) declined from 62.6 percent in 1991 to 16.3 percent in 1999. In excess demand markets, in which patients, particularly those covered by Medicaid, have to wait long periods for a bed to open, competition is limited to private pay and Medicare residents. Thus, while in the early 1990s many nursing homes were competing for Medicare and private-pay patients only, by the end of the decade they were competing for Medicaid patients as well. The emergence of competition for Medicaid patients is expected to affect investments in both clinical and hotel services. Long-term care residents, unlike post-acute patients, have preferences not only over the clinical care they receive but also the hotel services the facility offers, because they spend long periods of time in the facility (often until death) and it becomes their home. Thus, when nursing homes no longer face excess demand, they will have incentives to invest not only in clinical services but also in hotel services.