Nursing home performance under case-mix reimbursement: responding to heavy-care incentives and market changes

To examine the effect of case mix-adjusted reimbursement policy and market factors on nursing home performance.

Data from Medicaid certification inspection surveys, Medicaid cost reports, and the Kentucky State Center for Health Statistics for the years 1989 and 1991, to examine changes in nursing home performance stemming from the adoption of case mix-adjusted reimbursement in 1990.

In addition to cross-sectional regressions, a first-difference approach to fixed-effects regression analyses was employed to control for facility differences that were essentially fixed during the survey years and to estimate the effects of time-varying predictors on changes in facility expenditures, efficiency, and profitability.

Facilities that increased the proportion of Medicaid residents and eliminated excess capacity experienced higher profitability gains during the beginning phase of case-mix reimbursement. Having a heavy-care resident population was positively related to expenditures prior to reimbursement reform, and it was negatively related to expenditures after the case-mix reimbursement policy was introduced. While facility-level changes in case mix had no reliable influence on costs or profits, nursing homes showing an increased prevalence of poor-quality nursing practices exhibited increases in efficiency and profitability. At the market level, reductions in excess or empty nursing home beds were accompanied by a significant growth in home health services. Moreover, nursing homes located in markets with expanding home health services exhibited higher increases in costs per case-mix unit.

Characteristics of the reimbursement system appear to reward a cost minimization orientation with potentially detrimental effects on quality of care. These effects, exacerbated by a supply-constrained market, may be mitigated by policies that encourage the expansion of home health service availability.