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Factor substitution in nursing homes.

John Cawley1, David C Grabowski, Richard A Hirth

  • 1Department of Policy Analysis and Management, College of Human Ecology, Cornell University, Ithaca, NY 14853-4401, USA. JHC38@cornell.edu

Journal of Health Economics
|January 31, 2006
PubMed
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Nursing homes substitute labor for materials when wages rise, increasing psychoactive drug use and decreasing care quality. This factor substitution poses risks to resident health and mortality.

Area of Science:

  • Health Economics
  • Healthcare Management
  • Labor Economics

Background:

  • The nursing home industry faces critical decisions regarding resource allocation.
  • Factor substitution, particularly labor for materials, impacts care quality and resident outcomes.
  • Understanding these economic dynamics is crucial for policy development.

Purpose of the Study:

  • To quantify the degree of factor substitution in the U.S. nursing home sector.
  • To examine the relationship between nursing home wages and the use of materials (e.g., medications) versus labor.
  • To assess the policy implications of factor substitution on resident morbidity and mortality.

Main Methods:

  • Analysis of longitudinal data from 1991-2000 covering nearly all U.S. nursing homes.

Related Experiment Videos

  • Application of instrumental variables (IV) methodology to correct for measurement error in nursing home wages.
  • Econometric modeling to estimate the elasticity of substitution between labor and materials.

    • Main Results:

    • Evidence of significant factor substitution in the nursing home industry.
    • Higher nursing home wages correlate with increased utilization of psychoactive drugs.
    • Higher nursing home wages are associated with a decline in overall care quality.

    Conclusions:

    • Factor substitution in nursing homes, driven by wage increases, can lead to detrimental outcomes for residents.
    • The use of materials-intensive care methods, such as increased psychoactive drug prescriptions, is linked to adverse health events.
    • Policy interventions may be necessary to mitigate the negative consequences of factor substitution on nursing home quality and resident safety.