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«The Effect of Competition on Nursing Home Expenditures under Prospective Reimbursement John A. Nyman Thefor-profit nursing home's incentive to ...»

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Yet average total costs may reflect some expenditures that do not contribute to the quality of patient care. It is interesting that, when the same analyses were performed with direct patient care costs as the dependent variable, the same general pattern of results prevailed. For every additional empty bed on average in the market, direct patient care expenditures rose by $.16. If located in a relatively underbedded market, expenditures would rise by $.38; if located where average excess capacity is relatively large, expenditures would rise by only $.02, and insignificantly. Likewise, an additional dollar of reimbursement would result in $.49 of direct patient care expenditures for homes HSR: Health Services Research 23:4 (October 1988) located in underbedded markets and S. 70 for homes located where there are more empty beds. Overall, if the average nursing home from the underbedded sample was located where more beds were available, that home would incur $2.32 more in direct patient care costs per patient day or about $110,000 more per year. Of the variables that can be linked to the need to compete for patients, only the percentage of Medicaid patients showed a coefficient with a magnitude inconsistent with earlier results. Still, this coefficient was insignificant. Despite this one failing, the results from the direct patient care regressions generally reinforce the earlier findings and are consistent with a link between the lack of need to compete for patients and poor-quality care.

IMPLICATIONS FOR POLICY

Government policies are at least partially responsible for the creation of excess demand. Almost all states have enacted certificate-of-need legislation and at least 12 states have imposed construction moratoria on nursing home beds in recent years (Swann and Harrington 1986).

These policies have constrained the supply of beds in the face of demand increases caused by an aging population and by the incentive embodied in prospective reimbursement of hospitals to discharge patients earlier and in more dependent conditions.

The most direct policy response to this problem, and probably the most appropriate one, is to eliminate excess demand. This could be accomplished by either increasing the supply of beds or constraining demand. Increasing the bed supply does not necessarily mean eliminating certificate-of-need completely, although this measure would no doubt help. Governments have competing goals, and one of these goals is the containment of costs, especially the costs of the Medicaid program. In light of cost considerations, perhaps a better plan would be to determine first an optimal level of excess supply - that is, one that ensures that nursing homes will be forced to compete for patients - and to direct certificate-of-need policy toward achieving that goal.

Alternatively, excess demand could be eliminated by restricting access to nursing home care to those Medicaid patients who can meet a more rigorous set of admission standards. If about the same number of patients are served or fewer, this may mean no substantial increase in total costs. Additionally, such a restriction would ensure that nursing homes could not choose to admit only the lighter-care patients, since they presumably would be ineligible for care. The disadvantage of restricting demand is that some people who are currently deemed deserving of Medicaid benefits would (still) be disenfranchised of those Competition and Nursing Home Expenditures benefits. Nevertheless, the government would choose which prospective patients would be disenfranchised under this policy, as opposed to the nursing homes, which are able to choose which patients to exclude under excess demand. Clearly, alternative modes of care would need to be found for the disenfranchised, and this would mean an increase in total costs.

In recent years, a number of states (such as Wisconsin) have converted from retrospective to prospective systems. Currently, caseadjusted prospective systems are gaining popularity. Under all prospective or flat-rate systems, the increase in nursing home expenditures that would accompany an increase in competition for patients would not be borne by a direct increase in the costs of Medicaid programs, as it would have under a retrospective system.

These increases in costs would simply translate into decreased profit margins per patient day in the for-profit homes. In the nonprofit homes, the increased competition may mean either smaller revenue surpluses in the short run or greater productivity in the long run as the same workers are asked to work harder in order to provide competitive-quality care with existing financial resources.

Perhaps a better interpretation of this shrinking profit (surplus) margin and increased productivity would be that a larger percentage of the Medicaid reimbursement payment is being used to produce adequate-quality patient care. This form of efficiency in the use of government funds should be seen as desirable - a standard against which the success of state Medicaid programs can be evaluated.

ACKNOWLEDGMENTS

Helpful comments on an earlier draft of this article were received from James Rohrer and two anonymous referees. Michael McKillip and Debra Magrosky provided able assistance in managing the data set.

The author, of course, is responsible for any errors or oversights.

NOTES





1. A number of these studies have included a variable measuring the number or percentage of empty beds in the individual homes. This variable is generally included to test whether an increase in the number of empty beds increases fixed costs per patient day, and thus total costs per patient day.

Nowhere is this variable included as a measure of the need to compete for patients. Indeed, information on the occupancy of an individual firm proHSR: Health Services Research 23:4 (October 1988) vides little information on the need to compete for patients in the market.

For example, a completely occupied nursing home might reflect either the firm's having successfully competed (if there are a great number of empty beds in other nursing homes in the market) or not having had to compete at all (if all the firms in the market are full and had waiting lists).

If this were a retrospectively reimbursed state, we would have the opposite 2.

expectation. Under retrospective reimbursement, all costs incurred are reimbursed. Therefore, the incentive under that system is to increase expenditures, but not necessarily by purchasing inputs that improve patient care. Managers may benefit from increased expenditures if their job is made easier, more prestigious, or more enjoyable. Managers will act on these incentives only to the extent that they have Medicaid patients.

With private patients, they can still maximize profits and thus are interested in minimizing costs. Therefore, under retrospective reimbursement, average cost increases as the percentage of Medicaid patients increases.

3. Note that this relationship would be difficult to attribute to lower reimbursement rates constraining the level of quality that can be provided by the home, since the reimbursement rate is controlled for in both equations and since the difference between the equations is based on the average excess capacity variable and not on the reimbursement rate. Attributing this relationship to lack of competition and not inadequate reimbursement rates is consistent with other research. Nyman (1988) shows evidence that, when located in underbedded markets, 100 percent Medicaid homes have over four times as many weighted violations as when they are located where beds are relatively available. This is true, again controlling for the level of the reimbursement rate.

Marginal spending that exceeds marginal Medicaid revenue suggests that 4.

nursing homes cross-subsidize only when they are forced to by competition. Rather than viewing cross subsidization as a payment by private patients of part of the Medicaid patients' bill because the reimbursement rate is too low, this finding suggests that cross subsidization is a natural consequence of competition that might occur even if reimbursement rates were raised significantly.

5. Even at this level, excess demand may not be eliminated.

REFERENCES

Birnbaum, Howard, Christine Bishop, A. James Lee, and Gail Jensen. "Why Do Nursing Home Costs Vary? The Determinants of Nursing Home Costs." Medical Care 19 (November 1981):1095-1107.

Bishop, Christine E. "Nursing Home Behavior under Cost-Related Reimbursement." Discussion Paper No. 9. Waltham, MA: University Health Policy Consortium, 1979.

. "Nursing Home Cost Studies and Reimbursement Issues." Health Care Financing Review 5 (Spring 1980):47-63.

Caswell, Robert J., and William 0. Cleverly. "Cost Analysis of the Ohio Nursing Home Industry." Health Services Research 18 (Fall 1983): 359-82.

Competition and Nursing Home Expenditures Christianson, Jon B. "Long-Term Care Standards: Enforcement and Compliance." Journal of Health Politics, Policy and Law 4 (Fall 1979):414-34.

Kmenta, Jan. Ekments of Econometrics. New York: Macmillan, 1971, 373.

Koetting, Michael. Nursing-Home Organization and Efficiency: Profit versus Nonprofit. Lexington, MA: Lexington Books, 1980.

Lee, A. James, and Howard Birnbaum. "The Determinants of Nursing Home Operating Costs in New York State." Health Services Research 18, Part II (Summer 1983):285-308.

Meiners, Mark R. "An Econometric Analysis of the Major Determinants of Nursing Home Costs in the United States." Social Science and Medicine 16 (1982):887-98.

Nyman, John A. "Excess Demand, the Percentage of Medicaid Patients and the Quality of Nursing Home Care."Journal ofHuman Resources 23 (Winter 1988):76-92.

. "Prospective and 'Cost-Plus' Medicaid Reimbursement, Excess Medicaid Demand, and the Quality of Nursing Home Care."Journal of Health Economics 4 (September 1985):237-59.

Palm, David W., and Scott Nelson. "The Determinants of Nursing Home Costs in Nebraska's Proprietary Nursing Homes." Socioeconomic Planning Sciences 18, no. 3 (1984):171-77.

Ruchlin, Hirsch S., and Samuel Levey. "Nursing Home Cost Analysis: A Case Study." Inquiry 9, no. 3 (1972):3-15.

Scanlon, William J. "The Market for Nursing Home Care: A Case for an Equilibrium with Excess Demand as a Result of Public Policy." Ph.D.

diss., University of Wisconsin, Madison, 1979.

Schlenker, Robert E. "Case Mix Reimbursement for Nursing Homes."Journal of Health Politics, Policy and Law 11 (Fall 1986):445-61.

Schlenker, Robert E., and Peter W. Shaughnessy. "Case Mix, Quality, and Cost Relationships in Colorado Nursing Homes." Health Care Financing Review 6 (Winter 1984):61-71.

Smith, Howard L., and Myron D. Fottler. "Costs and Cost Containment in Nursing Homes." Health Services Research 16 (Spring 1981): 17-42.

Smith, Howard L., Myron D. Fottler, and Borje 0. Saxberd. "Does Prospective Payment Encourage Nursing Home Efficiency?" Evaluation and the Health Professions 8 (June 1985):209-21.

Swan, James H., and Charlene Harrington. "Estimating Undersupply of Nursing Home Beds in States." Health Services Research 21 (April 1986):57-84.

Ullmann, Steven G. "Cost Analysis and Facility Reimbursement in the LongTerm Health Care Industry. Health Services Research 19 (April 1984):83-102.

. "The Impact of Quality on Cost in the Provision of Long-Term Care." Inquiry 22 (Fall 1985):293-302.

U.S. Congress. Senate. Committee on Finance. The Social Security Amendments of 1972: Report to Accompany H.R.1., 92d Cong., 2d sess. S. Rept.

92-1230:287-88.

U.S. Congress. Senate. Special Committee on Aging. Subcommittee on Long-Term Care. Nursing Home Care in the United States: Failure in Public Policy, 93rd Cong., 2d sess., 1974:205-09.

HSR: Health Services Research 23:4 (October 1988) Vladeck, Bruce C. Unloving Care: The Nursing Home Tragedy. New York: Basic Books, 1980, 12 et passim.

Walsh, ThomasJ. "Patient-Related Reimbursement for Long-Term Care." In Reform and Regulation in Long-Term Care. Edited by Valerie LaPorte and Jeffery Rubin. New York: Praeger, 1979, 153-67.

Wisconsin, State of. Department of Health and Social Services. Methods of Implementation for the Nursing Home Reimbursement Formula for January 1 throughJune 30, 1983 as Approved by theJoint Committee on Finance on March 16, 1983. Madison, WI: Department of Health and Social Services, 1983.

. Methods ofImplementationfor the Nursing Home Reimbursement Formulafor July 1, 1983 through June 30, 1984 as Approved by the Joint Committee on Finance and as Approved by the Governor. Madison, WI: Department of Health and Social Services, 1984.



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