Cost and efficiency in nursing homes: a stochastic frontier approach

The average level of cost inefficiency in New York nursing homes is estimated at 29%, based on a two-year panel of 164 Skilled Nursing Facilities and 443 combination Skilled and Health Related Facilities. The stochastic frontier cost function is fit to the data utilizing the composed error model, wherein statistical noise and allocative and technical inefficiency are jointly estimated. There is no change in efficiency between 1987 and 1990, and it does not vary between for-profit and not-for-profit homes. Excessive managerial and supervisory personnel and diseconomies of size are linked to inefficient operation. Chronic excess demand is suggested as a cause of the high level of inefficiency.