The Market for Nursing Home Quality

David Grabowski

University of Alabama at Birmingham

Background

• The standard economic model of quality competition assumes:– Privately purchased care

– Perfectly informed consumers

– Choice across providers

– No government intervention

• The NH market clearly deviates from all of these assumptions

History

• In the 1970s, states generally paid for NH care on a cost-based basis

• Little information typically available to potential NH consumers

• Certificate-of-need and construction moratoria often created excess demand for services– Occupancy rates were above 95%

Current Market (Times Have Changed)

• States generally pay for care on a case-mix adjusted prospective basis

• Public quality reporting now available• CON/moratoria no longer relevant in many NH

markets due to the growth in assisted living– Occupancy rates now around 87%– One-third of facilities that call themselves "assisted

living" have been in business for five or fewer years, and 60% have been in operation for ten or fewer years (Hawes et al., 1999)

Examples: Market for Quality

• Beverly Enterprises, Inc.– Currently experimenting with model of “resident-

centered” care in 10 NHs in order to gain competitive advantage

• Wellspring Innovative Solutions, Inc.– 11 NHs formed alliance to compete on the basis of quality

for managed care business

• Philadelphia/Buffalo LTC markets– Philadelphia has experienced growth in CCRCs due to

increased housing wealth; Buffalo has experienced growth in assisted living due to large pensions of retired factory workers

Research: Market for Quality

• Innovation– Competition among nursing homes associated with more

Alzheimer’s and sub-acute care units (Banaszak-Holl et al., 1996)

• Facility closures– High deficiency facilities more likely to voluntarily exit the

market (Angelelli et al., 2003)

• Response to Medicaid Payment Changes– Higher Medicaid payment rates are associated with better quality

(Grabowski, 2001)

Grabowski & Angelelli, in press HSR

Effect of Medicaid Payment on patient-level risk-adjusted pressure ulcer incidence

ElasticityAll Markets - 0.16* High Occupancy Markets - 0.06High Medicaid Homes - 0.31*

* = statistically significant at the 1% level

Research Needs

1) What are the returns to greater competition in today’s marketplace?– Earlier work finds that more concentrated markets

achieve better outcomes (Zinn, 1994)• I/O theory generally holds that when market share is

concentrated in a few large firms, competition is diminished• In health care markets, concentration may diminish the effect

of information asymmetry, which could increase competition (Pauly and Satterthwaite, 1981)

– Need to update this work with more recent data and better quality measures

Research Needs

2) Can we adjust Medicaid payment policy to better harness market forces?– Why not reward high quality providers with

higher Medicaid payment rates?– Demonstration-based evidence supports such a

payment system (Norton 1992)– Additional demonstrations…– Tradeoffs of investment in NH and other LTC

settings

Research Needs (cont.)

3) Will greater consumer information create greater quality competition?– We need more research on the relationship

between consumer information and consumer choice.

– Limited knowledge of how hospital discharge planners influence process

Research Needs (cont.)

4) What is the return to increased NH regulation?– State and Federal governments both are

discussing increased minimum staffing standards

– Federal government continues to use costly survey and certification process

– Are there market-based alternatives that may encourage more efficient outcomes?

Research Needs (cont.)

5) What is the role of assisted living and other NH substitutes towards encouraging good outcomes?– There is no research tying growth in assisted living

market to NH quality

– Very limited government intervention in assisted living markets in most states

• Thus, no systematic data

– However, some states have put assisted living providers under CON