An econometric analysis of the major determinants of nursing home costs in the United States

This study presents statistical cost function estimates based on data from the 1973-1974 National Nursing Home Survey. Using multiple regression techniques, multiplicative and additive models of both total cost and operating cost are presented. Findings from the analysis contribute to the growing literature on nursing home costs and provide added insight to a number of important topics. Economies to scale are indicated with an optimum size in the 300-400 bed range. Flat-rate reimbursement systems and other systems which set rates prospectively are shown to be associated with significantly lower nursing home costs when compared to the incentives of cost based systems with or without limits and the incentives of private financing. Increases in both the admission rate and the occupancy rate are associated with higher costs though only the latter relationship proves of much practical significance, with the cost savings more pronounced for facilities starting with low occupancy rates. The profit motive is confirmed as an important incentive for containing costs. Holding several important level or scope of service indicators constant, proprietary nursing homes were found to have total costs 7% lower and operating costs 11% lower than in the voluntary non-profit nursing homes. The range of therapeutic services available and the type of staff coverage of the daily shifts provided in the nursing homes are confirmed as key cost determinants. Evidence is also provided which suggests that residents with mid-level dependency are relatively more costly to treat than those who are completely dependent or independent. The usefulness of other facility descriptions and quality proxy measures as cost determinants is also explored. The results are compared to those from other recent nursing home cost function studies.