Is higher nursing home quality more costly?

Widespread issues regarding quality in nursing homes call for an improved understanding of the relationship with costs. This relationship may differ in European countries, where care is mainly delivered by nonprofit providers. In accordance with the economic theory of production, we estimate a total cost function for nursing home services using data from 45 nursing homes in Switzerland between 2006 and 2010. Quality is measured by means of clinical indicators regarding process and outcome derived from the minimum data set. We consider both composite and single quality indicators. Contrary to most previous studies, we use panel data and control for omitted variables bias. This allows us to capture features specific to nursing homes that may explain differences in structural quality or cost levels. Additional analysis is provided to address simultaneity bias using an instrumental variable approach. We find evidence that poor levels of quality regarding outcome, as measured by the prevalence of severe pain and weight loss, lead to higher costs. This may have important implications for the design of payment schemes for nursing homes.