An Econometric Analysis of Costs and Scale Economies in the Nursing Home Industry
This paper examines costs in the nursing home industry, an issue of concern to policymakers because Medicaid pays about half of the expenditures on nursing home care. The paper estimates two cost functions for a sample of Texas nursing homes in 1983: one assumes that all homes provide the same quality of care, the other considers quality differences. The results indicate that there are economies of scale in the production of nursing home care. This suggests that many states could serve the same number of Medicaid patients at a lower total cost if occupancy rates were higher, and that a fixed rate reimbursement policy could lower costs.
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