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Contact Us Spring 2001; Volume 2, Number 1
Features: Health Care for the Elderly
Policy Considerations for Nursing Home Quality Improvement
Ralph Leonard, M.D.
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Despite an annual cost of nearly 90 billion dollars, nursing homes in the United States continue to attract media attention for providing unacceptably low care for their 1.6 million residents (USHHS 1999). The problem of nursing home quality variation has been recognized for more than 30 years, but as the population ages, the number of people who will depend on that care makes nursing home quality a growing public health concern. In the last five years, several large studies on nursing home quality have been conducted and some of the most innovative legislation has been enacted. The continuing challenge for policymakers in the coming years will be to improve quality while minimizing expenditures. This review describes the major theories, relevant economic concepts, and associated studies on the determinants of nursing home quality. In addition, this paper summarizes recent and proposed cost-containing policy options that may improve quality by using regulations and market forces.

Magnitude and Severity of the Problem

A study funded by the Health Care Financing Administration (Harrington 1999) recently revealed statistics concerning U.S. national nursing home residents, nursing home facility characteristics and facility deficiencies for the last eight years. In the survey, more than sixty percent of nursing homes were sited for being below the standard of federal regulation (commonly known as a deficiency), of which 9.5 percent were considered to put residents at immediate risk for harm. Table one shows the categories and national percentage averages of deficiencies for the 16,500 nursing homes.

There have been some notable improvements in the care provided by nursing homes in the last ten years. These improvements are a result of reductions in the use of physical and chemical restraints (which in turn reduce the frequency and severity of associated side effects from these restraints), an increase in the rate of routine health assessment and a downward trend in the total average percent of deficiencies in nursing homes. These improvements are probably due to the Omnibus Reconciliation Act of 1987 (OBRA), which required Medicaid or Medicare sponsored facilities to use the Resident Assessment Instrument and comply with numerous other provisions intended to improve resident care (Fries 1997, Hash 1998). The downward trend in the average percentage of deficiencies may be a result of both harsher Federal penalties for nursing homes that are deficient (enacted in 1995) and of state imposed penalties.

Although there has been a slight improvement in some categories, the current rate of violations for all parameters is still unacceptably high and can lead to suffering, unnecessary hospitalizations and escalating costs which are largely funded by the public.

Thumbnail of Table 1
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Since the boom of the nursing home industry in the early 1960s, research has been conducted to determine the causes of nursing home quality variation (Greene 1981, Holmberg 1968). However, only recently has the issue of staffing shortages been widely accepted as a potential cause of these problems (Linn 1977, Cohen and Spector 1996, Harrington et al 2000).1

Since fewer nurses and nursing aides must provide the same amount of care for the residents of a facility, the volume and intensity of work that nursing assistants do, which is already labor intensive and low-paying, is accentuated.

The working conditions and compensation that nursing home staff receive are important for three major reasons. First, employees who are injured may endure morbidity such as back strain, causing some to miss work or to quit. Second, some of those who do continue to work under these conditions admit that the stress of the job impacts their relationship with residents and may even be a risk factor for inflicting abuse (Pillemer 1989, Sheridan 1992). Finally, a high rate of turn-over among nursing assistants (often more than 75% but even up to 400% per year in some regions) thwarts the teaching and internal quality improvement by nurses and senior managers, and may contribute to their own 40% annual turn-over rate (Sheridan 1992, Banaszak-Holl 1996, Singh 1998).

Nursing home deficiencies are correlated with lower quality of care and staffing shortages, and have a disproportional representation among the for-profit nursing home industry (Linn et al., 1977, Greene 1981, Spector and Takada 1991, Davis 1991, Cohen and Spector 1996, Mukamel 1997, Davis 1998, Spector 1998, DeParle 2000).1 This may seem counter-intuitive, however, since it is the for-profit sector of most U.S. industries that provides superior products, service and efficiency. Thus, debate exists as to whether the poor staffing and building aesthetics common to nursing homes are due to a sub-cost Medicaid reimbursement or an intentional profit maximizing strategy. Because actual industry profits are not easily ascertained, one can only speculate from growth trends, bankruptcies and limited studies.

Before 1998 it was generally believed that the nursing home industry was profitable, in large part because of government reimbursement for residents' costs as reported by nursing homes. In just 10 years, the payments from Medicaid to nursing homes increased from $0.5 billion to more than $13.5 billion under this fee-for-service/cost system and "payments for ancillary services [grew] at a pace five times that of service usage" (Pelovitz, 2000).

Because of the escalating costs, Medicaid changed the reimbursement to the Prospective Payment System (PPS) as of July 1998, which is analogous to the Diagnosis Related Group (DRG) used by hospitals. A single fee is now paid for a diagnosis rather than individual itemized expenses, which has dramatically reduced expenditures. But, prior to the PPS, system many nursing homes expanded, and with the subsequent change in reimbursement, have since had financial problems which have resulted in their operating under the protection of Chapter 11 bankruptcies while they attempt to solve financial problems (Pelovitz 2000). HCFA asserted that the bankruptcies do not imply poor profit but rather over-expansion during the more profitable years prior to PPS (Pelovitz 2000).

Although some nursing homes may seem to have been abandoned by owners, there is evidence that their profits are being maximized as much as possible. For example, until the law preventing nursing home eviction was passed just under a year ago, nursing homes were forcing the discharge or transfer of many of their Medicaid reimbursed residents (Hash 1999). One can speculate that a given nursing home may have intended to increase the proportion of private pay residents from whom they collect a higher daily price than they would from Medicaid residents; for once a resident has expended his assets and become eligible for Medicaid, the profits for the nursing home are reduced. However, while it would seem that a nursing home would not be able to maximize its profit with just Medicaid residents, the existence of facilities which have only Medicaid residents suggests that at least breaking even is possible (Saphir 2000).

Yet even if nursing homes are unable to obtain their ideal profit, one would still expect them to increase their quality to maximize their profits. However, such a conclusion assumes a functioning free market; only then can an optimal state for both supplier and consumer be reached. In contrast, the nursing home industry epitomizes the market failure in the greater health care system because it too fails several requirements for the existence of a free market. More specifically, a free market can only function optimally when it is not obstructed by asymmetric information, barriers to entry, externalities, or related factors.2

Information asymmetry implies that either the consumer or producer has an informational disadvantage about the quality of the proposed product or service, its worth and other options. Nursing homes are perhaps the extreme example within the health care field of the producer's asymmetric information advantage since thirty to forty percent of nursing home residents are cognitively impaired (Harrington 1999). Such impairment may hinder a prospective resident from effectively distinguishing between the quality of facilities when choosing a nursing home.

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Spring 2001, Volume 2, Number 1
Table of Contents
Editor's Note
Features: Medicare Symposium
Features: Interviews
Features: Health Care for the Elderly
Health Highlights
In Focus

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