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

Excess demand was significantly associated with lower clinical (p = .02) and hotel costs (p = .02) but not lower administrative costs (p = .26). Clinical costs in excess demand markets were lower by 1.6 percent and hotel costs were lower by 1.7 percent.

DISCUSSION

This paper examines the allocation of resources in nursing homes in NYS during the 1990s in three categories: clinical services, hotel services, and administration. We hypothesized that the trend toward sub-acute care would increase clinical expenditures and may potentially result in cutbacks on hotel services. We also hypothesized that regulatory changes and a federal focus on fraud and abuse would increase administrative costs. Furthermore, higher nursing home competition as well as lack of excess demand would be associated with higher expenditures in all categories. In general these hypotheses were confirmed. Clinical and administrative costs grew during the period while hotel costs declined. Higher competition was associated with higher expenditures and excess demand was associated with lower costs.

These findings suggest that policies that influence competition among nursing homes, such as certificate of need regulations or policies encouraging alternatives to nursing homes, will influence nursing home expenditures: increased competition and elimination of excess demand will increase costs. An important question bearing on the value of increased competition is whether these additional expenditures translate into more services and services of higher quality. The answer to this question is outside the scope of this paper. We can offer, however, two observations. In a previous study (Mukamel and Spector 2000, and authors calculations), we found that clinical quality in NYS nursing homes in 1991 (as measured by risk-adjusted mortality and risk-adjusted decline in functional status) was higher in more competitive areas, suggesting that higher clinical expenditures may be associated with better care. On the other hand, the higher administrative costs in more competitive areas may not be "productive" if they are directed toward activities such as advertising. Thus, increased competition may both enhance and detract from the scope and quality of services that nursing homes offer, and the net effect would need to be determined empirically in future research.

The decrease in hotel costs during the period we studied may be a result of difficult choices that nursing homes have had to make. The increase in administrative costs, which may have been forced on them by governmental actions, and in clinical costs, presumably directed at the demand for sub-acute services, coupled with a resource constrained environment in which revenues for the majority of patients are determined by Medicare and Medicaid and not by the market, may have left nursing homes with the need to cut resources in hotel services. Hotel services are of particular importance to the long-stay residents, who live in the facility until their death. The trends we observe raise a concern that this aspect of care, which likely affects the quality of life of long-stay residents, may have deteriorated. Furthermore, it suggests that nursing homes may be trading off the needs of their long-stay versus their short-stay, post-acute residents.