Public Reporting and Demand Rationing: Evidence from the Nursing Home Industry

This paper examines an under‐explored unintended consequence of public reporting: the potential for demand rationing. Public reporting, although intended to increase consumer access to high‐quality products, may have provided the perverse incentive for high‐quality providers facing fixed capacity and administrative pricing to avoid less profitable types of residents. Using data from the nursing home industry before and after the implementation of the public reporting system in 2002, we find that high‐quality nursing homes facing capacity constraints reduced admissions of less profitable Medicaid residents while increasing the more profitable Medicare and private‐pay admissions, relative to low‐quality nursing homes facing no capacity constraints. These effects, although small in magnitude, are consistent with provider rationing of demand on the basis of profitability and underscore the important role of institutional details in designing effective public reporting systems for regulated industries. Copyright © 2014 John Wiley & Sons, Ltd.