The effect of chain ownership on nursing home costs

Although it is commonly assumed that chain ownership will result in lower costs due to economies of scale, the empirical evidence with respect to the effect of chain ownership on nursing home costs is mixed. Chain for-profit nursing homes will have a cost advantage over independent for-profit homes only if there are firm-level (multiple-home) economies of scale. For the study population of Texas nursing homes in 1983, cost structures differed sufficiently across ownership types to warrant estimating separate cost functions by ownership type. The results indicate that, when other factors affecting cost are held constant, chain homes have lower average costs than independent homes at intermediate and high levels of output, but higher average costs at low and very high levels of output. The results highlight the importance of considering whether or not to pool data across ownership categories when estimating nursing home cost functions.