The determinants of nursing home costs in Nebraska's proprietary nursing homes

In the past few years nursing home care expenditures in Nebraska and the U.S. have been the fastest growing component of total health care expenditures. This rate of increase is particularly alarming in view of the fact that nursing home care is financed primarily by the Medicaid program or direct out-of-pocket payments. In fact, given the cutbacks in federal and state funds for this program, consumers will be forced to allocate a larger share of their income to meet the costs of nursing home care. Although nursing home expenditures have grown at an extremely rapid rate, relatively few empirical studies exist which analyze the cost function of nursing home providers. The purpose of this study is to identify factors which have directly influenced the cost of nursing home care in Nebraska and to evaluate the current Nebraska Medicaid reimbursement system in terms of its impact upon nursing home costs. The study was limited to a sample of 40 nursing homes in Nebraska which represents 42% of the total proprietary nursing homes in the state. The sample was limited to those facilities licensed only as an Intermediate Care Facility--I and they had to be receiving some Medicaid revenue. The data were averaged over the period of 1977-79, but the year of analysis corresponded to 1978. Multiple regression analysis was used to measure the effect of the hypothesized independent variables upon two different measures of cost--the average total cost per patient day and the average variable cost per patient day. In the first regression model 76% of the variance was explained and 71% was explained in the second equation. The results of this analysis are basically consistent with the findings of other studies and indicate that the number of staffing hours, patient mix, facility age, administrator experience and administrative intensity are significant determinants of nursing home costs. The most important finding from a policy perspective is that the current retrospective cost-related Medicaid reimbursement system does not provide incentives for minimizing costs. In fact, the present system encourages administrators to overutilize resources and charge higher prices. Considerable evidence exists which suggests that a prospective system would encourage a more efficient allocation of resources without adversely affecting the quality of care. Given the increase in the state's share of the total Medicaid budget, it would appear that a change to a prospective system is critical in order to maintain the financial accessibility to nursing home care by all Nebraska residents.