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1. Do For-Profit and Not-for-Profit Nursing Homes Behave Differently?.......................................................... 1

Bibliography...................................................................................................................................................... 15

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Document 1 of 1

Aaronson, William E; Zinn, Jacqueline S; Rosko, Michael D

The Gerontologist 34. 6 (Dec 1994): 775-86.

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The purpose of this study was to examine behavioral differences between for-profit (FP) and not-for-

profit (NFP) nursing homes. Previous studies have failed to establish consistent behavioral differences. This

study uses a simultaneous equation model to control for potential endogeneity among system variables, with

model parameters estimated using 3SLS. The study provides evidence that NFPs provide significantly higher

quality of care to Medicaid beneficiaries and to self-pay residents than do FPs, as evidenced by better staffing

and better outcomes among nursing homes with residents at higher risk for adverse outcomes. [PUBLICATION

ABSTRACT]

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Headnote The purpose of this study was to examine behavioral differences between for-profit (FP) and

not-for-profit (NFP) nursing homes. Previous studies have failed to establish consistent behavioral differences.

This study uses a simultaneous equation model to control for potential endogeneity among system variables,

with model parameters estimated using 3SLS. The study provides evidence that NFPs provide significantly

higher quality of care to Medicaid beneficiaries and to self-pay residents than do FPs, as evidenced by better

staffing and better outcomes among nursing homes with residents at higher risk for adverse outcomes. Key

Words: Ownership, Care staffing, Quality, Adverse outcomes, Case mix, Payer mix O'Brien, Saxberg, and

Smith (1983) asked the question, "For-profit or not-for-profit, does it matter?" Several studies have assessed

differences between for-profit (FP) and not-for-profit (NFP) nursing homes in terms of access, cost, efficiency,

and quality. While these studies have focused on the influence of ownership on nursing home behavior,

consistent behavioral differences between FP and NFP nursing homes have not been established (Davis,

1991). The lack of consistent results may in part be related to the use of analytical techniques which do not

control for potential endogeneity among case and payer mix, payment rates, and facility characteristics (Lee,

Birnbaum, &Bishop, 1983). This study investigates behavioral differences between FP and NFP nursing homes

in Pennsylvania by using a simultaneous equation model to control for the effects of endogeneity. In assessing

differences between FP and NFP nursing homes, it is useful to identify the comparative effectiveness of each

ownership type. Organizations are effective to the extent that they identify and meet the needs of multiple

constituents (Zammuto, 1982), including customers, potential customers, regulators, and payers. Nursing

homes perform a social function that exposes them to public scrutiny. The use of nursing home services is

considered by many to be undesirable, but possibly inevitable. Thus, access to and quality of nursing home

care are important public policy issues. Second, nursing homes are the recipients of public money through the

Medicare and Medicaid programs. Thus, government has a stake in the cost-effective operation of nursing

homes. Third, NFP nursing homes are publicly subsidized through tax exemptions, including tax-exempt capital

financing. Thus, NFPs have added responsibilities to provide substantive community benefits related to their

tax-exempt status (American Association of Homes for the Aging, 1993). Empirical Studies of Nursing Home

Ownership O'Brien et al. (1983) reviewed several studies of differences in FP and NFP status that focused on

the influence of ownership on nursing home behavior. The predominant finding of the studies reviewed was that

NFP homes had higher quality, but lower efficiency (higher costs). Fottler, Smith, and James (1981) had

concluded that quality and profitability were antithetical concepts and that administrators who were required to

maximize profits faced a dilemma when state regulatory agencies imposed minimum quality standards. O'Brien

12 March 2013 Page 1 of 15 ProQuest
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et al. (1983) also noted that NFP facilities may (1) purposefully operate at a deficit over a long period of time; (2)

have a restricted constituency; and (3) enjoy a measure of support from the sponsoring organization. Thus,

higher costs necessary to support higher quality are acceptable to NFPs, and also beneficial in attracting self-

pay patients. Since many NFP nursing homes have religious affiliations, they may focus on specialized market

niches defined by the denominational constituency. Religious affiliation may also project an image of high

quality and compassionate care, which in turn would provide a competitive advantage in the self-pay market.

While Cohen and Dubay (1990) did not find theoretical justification to hypothesize higher self-pay use rates in

NFPs, they speculated that higher quality offered by NFPs may be associated with greater private demand in

NFPs. Ullman (1987), in a study of the behavior of nursing home administrators, proposed that administrators of

FP nursing homes have an incentive to maximize facility profits subject to a minimum quality constraint.

However, NFP nursing home administrators may pursue objectives that enhance personal prestige by

increasing the quantity and quality of services in the facility. Thus, staffing may appear in the maximand of the

objective function of NFP facilities. By contrast, staffing may be viewed as a cost to be controlled in profit-

maximizing FP facilities. While a number of studies have suggested that NFP status may be associated with

better staffing and higher quality of service (Davis, 1991; Greene &Monahan, 1981), Zinn, Aaronson, and Rosko

(1993), who used a standardization model to adjust for casemix related risk of adverse outcomes, found that FP

ownership status was not associated with adverse outcomes such as pressure sores, restraint, or urethral

catheterization rates. However, they did not use a simultaneous equation model to account for the endogenous

effects of staffing, Medicaid use, payment rates, and case mix. Nyman and Bricker (1989) found that FPs were

more efficient, but also found evidence that NFPs did not provide the level of quality necessary to explain the

efficiency differences. Nursing Home Service Quality Defining and measuring the quality of nursing home

services has been difficult for regulators, consumers, and researchers (Kane &Kane, 1988). While service

quality is an elusive concept in nursing homes, it is clear that important constituencies have found quality to be

unacceptably low. The Institute of Medicine (1986) identified inadequate supervision of care by physicians and

professional nurses as a primary reason for poor quality, and called for increased standards for nurse staffing.

Obviously, nurse staffing alone does not assure high quality. The report went further and stated that the most

valid proxy measures for quality included care outcomes. The Institute's report served as the model for the

enactment of the Nursing Home Reform amendments of the Omnibus Budget Reconciliation Act of 1987. This

act was intended to improve the quality of care in nursing homes and specifically identified outcome measures

as important criteria of quality. Donabedian (1966) identified three dimensions of health services quality:

structure, process, and outcome. With the exception of Zinn et al. (1993), most studies of nursing home quality

have used structural variables as proxy measures of quality (Davis, 1991; Creene &Monahan,1981). This study

builds on the model developed by Zinn et al. (1993) in that outcome variables are identified as proxy measures

of quality. These measures include pressure sores and restraint usage. Pressure sores are an importantproblem in nursing homes. The prevalence of pressure sores has been estimated to range from 2.6% to 24%

and is associated with increased risks for mortality (Brandeis, 1990). Pressure sores are one of the most

common, preventable, and treatable conditions associated with immobility in the elderly (Kane, Ouslander,

&Abrass, 1989). If NFP status is associated with higher levels of staffing and if NFP objectives include a quality

objective, then NFP ownership should be associated with lower rates of pressure sores. Restraint use is also a

problem in nursing homes. An Institute of Medicine (1986) study found that there is excessive use of restraints

in nursing homes. On average, 41% of all nursing home residents were placed in restraints in 1989, compared

to 25% in 1977 (Tinetti, Liu, &Ginter, 1992). Coughlin, McBride, and Liu (1990) found that persons who were

confused or functionally incapacitated were more likely to become permanent admissions to nursing homes.

Restraints may be used to control aggression (common among persons with dementias) or to prevent injuries

(falls in debilitated individuals). However, immobility resulting from restraint use may increase the risk for

pressure sores, depression, mental and physical deterioration (Evans &Strumpf, 1989), and may increase risk



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for mortality as well (Miles &Irvine, 1992). Behavioral Models of Nursing Home Behavior We developed

conceptual models of behavioral differences between FPs and NFPs. The empirical literature suggests that FPs

and NFPs differ in payer mix, cost, and staffing. Scanlon (1980) presented a theoretical model of the nursing

home market, on which our conceptual model was built. The mathematical conceptualizations of the FP and

NFP models are presented in Appendix A. The assumption that FPs were profit maximizers was used as the

basis for the conceptual model of FP behavior. The model suggests that profits will be maximized when the

marginal costs and marginal revenues of Medicaid patient days and self-pay patient days are equal. However,

the Medicaid payment rate is subject to a rate ceiling. Consequently, if Medicaid costs are high, the Medicaid

price will exceed the ceiling and the nursing home will not provide services to Medicaid patients. Profit-

maximizing nursing homes are subject to market forces in the self-pay market (Nyman, 1989; Scanlon, 1980;

Zinn, Aaronson, &Rosko, 1992), suggesting that they must offer a product that is competitively priced and

provides a level of quality acceptable to the market. Given the constraints on profitability identified in the

conceptual model, one strategy would be to maintain Medicaid resident costs at or below the Medicaid payment

rate ceiling. Since the ceiling is not known in advance, nursing homes must base decisions on estimates of final

retrospective reimbursement rates in order to achieve maximum profits. Setting costs too low may adversely

affect quality and, as a consequence, reduce self-pay demand. Setting costs too high may violate the rate

ceiling and reduce profitability. Alternatively, considering the nature of firms and limits on rationality (March

&Simon, 1958; Thompson, 1967) less than rational nursing home decision makers may shift the excess cost of

care onto self-pay residents through higher payment rates. However, this strategy is risky since it may diminish

the quantity of care demanded by self-pay residents who are price sensitive (Nyman, 1989; Scanlon, 1980) and

increase reliance on Medicaid payments. Given the need to remain within the rate ceiling, equation 8 (see

Appendix A) suggests further that profit-maximizing nursing homes must keep the marginal cost of care for

Medicaid residents low. Heavy care residents generate greater marginal cost and, thus, are more likely to be

discriminated against by FPs with high rates of Medicaid use. The existence of excess Medicaid demand allows

FPs to practice this type of discrimination (Nyman, 1990). While FP behavior is assumed to be profitmaximizing,

there is little agreement as to the prime motives for NFP behavior. The conceptual model of NFP behavior

presented in Appendix A is based on Scanlon's model of NFP behavior, which assumes that NFPs maximize

services, subject to profit constraints. Scanlon's model implies that revenue from private residents will be used

to subsidize Medicaid residents when a favorable shift in private demand occurs, allowing for an increase in

capacity. Thus, service expansion has two purposes: to increase selfpay participation, and to increase the

home's ability to cross-subsidize Medicaid patients. Consequently, there is limited incentive to "game" (setting

costs at a level that will maximize profits from Medicaid without jeopardizing private demand) the Medicaid rates

and, thus, a greater likelihood that NFP nursing homes will be reimbursed at the rate ceiling, since costs are

more likely to exceed the ceiling. By definition, scale is fixed in the short run and may be difficult to increaseeven over a long period of time due to bed supply regulations (certificate of need). In order to increase capacity,

nursing homes may add unregulated residential services, such as independent living or personal care units, to

accommodate the anticipated shift in private demand. Cohen, Tell, Greenberg, and Wallack (1987) found that

continuing care retirement communities were attractive to persons with moderate to high incomes who were

interested in protecting their assets. However, independent living capacity may allow nursing homes greater

latitude in subsidizing Medicaid residents, since they provide increased access to the self-pay market. As

inferred from Scanlon's (1980) model, we expected NFPs with independent living capacity to continue to serve

Medicaid residents. Methods Sources of Data The individual nursing home serves as the unit of analysis in this

study. Nursing home data for 1987 were obtained from three sources: (1) the Medicare and Medicaid

Automated Certification System (MMACS) data files; (2) the Pennsylvania Department of Health Long-Term

Care Facilities Questionnaire; and (3) Health Profiles of Pennsylvania Counties published by the State Health

Data Center. Nursing homes are required to submit responses to the certification survey questionnaire as part



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of recertification for Medicare and Medicaid (MMACS). The survey is completed on one day and provides

information on staffing, services, and resident characteristics. The resident characteristic data were used to

calculate a nursing home specific case mix index, known as the long-term care index. The calculation of this

index is presented in Appendix B. Pennsylvania required, in addition to the certification survey questionnaire,

the completion of a comprehensive questionnaire on annual use, employment, and payment characteristics.

The three sources of data were merged into one data base and provided information on utilization, prices,

facility characteristics, resident characteristics aggregated to the facility level, and county demographics and

economic conditions. Definitions and descriptive statistics by ownership type for the variables used in the

analysis are presented in Table 1. The merged data base consisted of 449 free-standing, nongovernmental

Pennsylvania nursing homes with complete information of which 269 (59.9%) were FP and 180 (40.1%) were

NFP. Model Estimation - Statistical Analysis Previous studies have observed that there is considerable

endogeneity among payer mix, case mix, occupancy, nurse staffing, and payment rate variables (Cohen

&Dubay, 1990; Lee et al., 1983). Thus, a simultaneous equation system was constructed to identify the

behavioral effects associated with ownership on case mix, patient outcomes, Medicaid use, and payment rates.

In the payer mix models, payment rates and case mix on the right side of the equation were considered to be

endogenous. In the payment rate models, Medicaid use and case mix were considered to be endogenous,

while payment rate and case mix were viewed as endogenous in the staffing model. In the adverse outcomes

models, we assumed payer mix and case mix as right-hand variables to be jointly determined with the

dependent variable. In the case mix models, we also assumed that staffing and Medicare use were

endogenous. A summary of the regression equations is shown in Table 2. The simultaneous equation model

was first estimated using two-stage least squares. This technique was selected since all reduced form

equations were either exactly identified or overidentified, and the system is nonrecursive (Kennedy, 1985).

However, examination of the error variance-covariance matrix of the structural equations suggests that

correlation between the error terms between equations exceeded one-third in at least four cases. While the

more robust two-stage least squares (2SLS) may be desirable, Kennedy (1985) recommends the use of three-

stage least squares (3SLS) to estimate models under these circumstances, in order to increase the efficiency of

the estimators. Accordingly, the model was estimated using 3SLS. Only the third-stage estimations for the

Medicare use, case mix, nurse staffing and occupancy models are reported. However, it should be noted that,

while a few of the coefficients in the 3SLS differed in magnitude and significance, there were no differences in

coefficients used to test hypotheses. The order condition was applied in examining the non-zero coefficients for

each of the equations. An examination of the results for nonzero coefficients showed that all equations were

exactly identified or overidentified.



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Hypotheses Payer Mix and Payment Rate Models. - The first model that we specified had Medicaid use as the

dependent variable. Based on previously reported empirical research, Medicaid use was hypothesized to be



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higher among FPs than among NFPs. However, based on the conceptual model, we hypothesized that

Medicaid use in FPs would be associated with higher self-pay payment rates. Higher self-pay payment rates act

in two ways. First, they reduce the quantity of self-pay patient days in a price-sensitive market (Nyman, 1989).

second, higher self-pay payment rates result in more rapid asset "spend-down" and Medicaid conversion. Thus,

we included an FP Self-pay interaction term in order to test this hypothesis. The self-pay payment rate is also

likely to be adjusted as Medicaid use goes up; thus, it is endogenous as a right-hand variable. Medicaid use

was also hypothesized to be associated with lower levels of functional severity and higher discharge rates in

FPs since less heavy care is likely to be associated with lower costs, and higher discharge rates prevent asset

spend-down followed by Medicaid eligibility. However, these case mix measures are likely to be influenced by

the Medicaid use rate as well. Since independent living capacity may attract self-pay residents to the nursing

home, it was anticipated that lower Medicaid use rates would be associated with independent living capacity.

However, we had hypothesized that NFPs with independent living capacity (ILC) were likely to have higher

Medicaid use rates than FPs who developed independent living to maximize self-pay and profits. An ILC FP

interaction term was included to test this hypothesis. Medicaid demand variables were included as controls.

Next, we developed a model to explain the Medicaid payment rate. The payment rate is influenced by nursing

home decisions regarding cost and use, but is subject to a rate ceiling. The conceptual models suggest that FPs

have a greater incentive to "game" the Medicaid payment rates, since hitting the rate correctly maximizes

profits. Thus, we concluded that NFP payment rates were more likely to be at or close to the rate ceiling. Thus,

the Medicaid payment rate was hypothesized to be negatively associated with FP status, and positively

associated with case mix and staffing variables. Market cost variables were included as controls. The self-pay

payment rate was hypothesized to be positively associated with FP status and was also expected to be

associated with higher Medicaid use among FPs. Case Mix Models. -There is considerable variability among

nursing homes in terms of case mix. Case mix affects staffing needs, facility costs, and patient outcomes. Thus,

it was important that we specify case mix as a dependent variable. Case mix is a complex construct; thus, all of

its dimensions cannot be measured directly. We selected two proxy measures of case mix: the long-term care

index and the discharge rate. The long-term care index is an aggregate measure of functional severity which

was calculated for each facility (see Appendix B). The discharge rate is a proxy for the extent to which the

nursing home specializes in short-term rehabilitative or post-acute care (Cohen &Dubay, 1990). Higher

discharge rates were expected to be associated with FP status (Cohen &Dubay, 1990). Facility and market

characteristics expected to be associated with bed turnover or the level of functional severity were included as

controls. The association between the long-term care index and ownership is indeterminant based either on

theory or empirical evidence (Cohen &Dubay, 1990). However, functional severity is likely to be higher among

older residents (age 85 and older) and among residents who are restrained more frequently (Evans &Strumpf,

1989). The discharge rate was expected to be positively associated with FP status, the Medicare use rate, andthe proportion of RNs in the facility, all suggestive of short-term rehabilitative care (Cohen &Dubay, 1990). Care

Staffing Model. - Care staffing is a structural measure of quality (Cohen &Dubay, 1990). Both the empirical

research and the conceptual model suggest that care staffing is higher among NFPs than FPs. However, care

staffing is also jointly determined with case mix and payment rate variables. Thus, case mix and payment rates

were included on the right side of the equation as endogenous variables. Bed size and market supply variables

were included as controls. The log of beds was used because the incremental changes in regulation determined

minimum staffing according to number of residents, unit size, and number of nursing units. Regulation-driven

staffing needs were expected to grow at a decreasing rate with numbers of residents due to the dual

requirements of minimum nursing hours per resident day and minimum staffing levels per nursing unit and per

facility. Adverse Outcomes Models. - Two models were specified, one each for the pressure sore rate and for

the restraint use rate, to assess the impact and interaction of facility and risk characteristics on adverse

outcomes. Pressure sore rates were expected to be positively associated with personal risk factors, including



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functional severity, percent age 85 and older, restraint use, and Medicaid payment status. Restraints applied

properly and monitored appropriately do not materially increase the risk for pressure sores. However, when the

restraints are applied incorrectly or when protocols for monitoring are not followed, the risk of pressure sores is

increased even in individuals under no additional risk. As suggested by prior research, NFPs may have a quality

objective. Thus, we hypothesized that when controlling for risk factors, the pressure sore rate will be positively

associated with FP status. FP Risk factor interaction terms were included in the equation to test this

hypothesis. Staffing, size, and market variables indicating excess Medicaid demand (Nyman, 1990) were

included as controls. Restraint use was also assumed to be associated with personal risk factors, such as the

number of confused residents (self/other protection), functional severity (safety), and Medicaid payment status.

Again, FP interaction terms were included to test the hypothesis that FPs were more likely to have greater

restraint use among residents at risk than NFPs. Size, staffing and county-level Medicaid proportion variables

were included as controls. Results The results of the simultaneous-equation model estimation can be found in

Tables 3 and 4. The system-weighted R-square across all models was .4335. Only coefficients achieving a

significance level of p


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The Medicaid payment rate model results are presented in Table 3B, and the self-pay payment rate model

results are presented in Table 3C. The self-pay payment rate was positively associated with FP ownership, but

the Medicaid payment rate was not associated with ownership. The self-pay payment rate was positively

associated with the Medicaid use rate. However, the coefficient of the FP Medicaid use rate interaction term

was not significant, contrary to our expectations. Case Mix. -Tables 3D and 3E present the results of the case

mix model estimations. The long-term care index was not associated with ownership status, a result consistent

with our expectation. Surprisingly, functional severity is negatively associated with two of the risk factors for

functional severity, percent of residents 85 and older, and the Medicaid use rate. The FP interaction terms with

proportion of residents 85 and older and the Medicaid use rate suggest that FPs with a greater proportion of

these high-risk residents have higher levels of functional severity than do NFPs. The long-term care index was

found to be positively associated with a third risk factor, restraint use. The FP Restrained residents interaction

term coefficient suggests that FPs with higher restraint use rates have lower rates of functional severity than do

NFPs with high restraint usage. As expected, higher discharge rates (Table 3E) are positively associated with

FP ownership. However, the coefficient on the FP interaction with Medicare use is negative, suggesting that

FPs with higher Medicare use rates have lower discharge rates than NFPs with high Medicare use rates. This

may be due to the greater use of hospitals as sources of admission by FPs (thus, higher Medicare use rates

and lower discharge rates) or greater propensity to admit permanent nursing home residents to hospitals for

brief stays, resulting in eligibility for Medicare benefits upon a hospital discharge. Care Staffing. - The estimated

coefficients for the care staff per bed model are presented in Table 4A. As hypothesized, NFP nursing homes

have higher levels of care staffing than FPs. Although direct care staffing was positively associated with

payment rates, as expected, the measure was negatively associated with the case mix measures. While this

finding requires additional investigation, the association may be due to variation in care needs associated with

the measures. For example, nursing homes with high discharge rates may provide a considerable amount of

rehabilitation. Nurses and rehabilitation staff may provide services more efficiently and patients may be

expected to perform more self-care. Patients who are confused but functionally less debilitated may require

more staff-intensive supervision than persons with high levels of functional severity, explaining the negative sign

of the long-term care index coefficient. Adverse Outcomes. - The results of the adverse outcomes models are

presented in Tables 4B and 4C. Consistent with previous observations (Zinn et al., 1993), the pressure sore

rate is negatively associated with FP status (Table 4B). As expected, the pressure sore rate is positively

associated with functional severity. However, the pressure sore rate is negatively associated with the three

remaining risk factors, Medicaid payment status, restraint use, and proportion of residents 85 and older. The

coefficients of the interaction terms provide evidence that the pressure sore rate is associated with the personal

risk factors in FPs, not NFPs. That is, each of the FP Risk factor interaction coefficients is positive andsignificant. These findings suggest that when FPs have residents at risk for pressure sores, their pressure sore

rates are higher than among NFPs with equal risk profiles, supporting our hypothesis that when case mix and

personal risk are controlled, adverse outcomes are higher among FPs. The negative coefficient on the FP

binary variable may be a result of FPs having lower patient risk profiles for pressure sores. The restraint use

rate was not observed to be associated with FP status (Table 4C). The restraint use rate is positively associated

with the three factors expected to place residents at higher risk for restraint use: the Medicaid use rate, the

number of confused residents, and the long-term care index. The FP interaction terms for confused residents

and the long-term care index suggest that FPs with residents at risk for restraint use due to these factors are

more likely to use restraints than NFPs, supporting our hypothesis that greater restraint use is likely in FPs once

personal risk factors are controlled. However, the FP Medicaid use rate interaction term suggests that FPs

with heavy Medicaid utilization are less likely to restrain residents than are NFPs with high rates of Medicaid

utilization. Results in Table 3D suggest that FPs with high restraint use rates in turn have lower rates of



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functional severity. Thus, FPs with heavy Medicaid use may be more adept at behavior control and restraint use

than NFPs. Discussion This study has examined behavioral differences between FP and NFP nursing homes,

using a simultaneous equation model. The model estimations were used to test hypotheses that were based on

a conceptual model of behavioral differences between FPs and NFPs, and previously reported empirical

research. Thus, compared to previous studies, we have used a more systematic approach to assessing

differences between FPs and NFPs. We found that FPs differed significantly from NFPs in areas of cost and

quality, but not access. Several studies (Nyman, 1989,1990; Scanlon, 1980) have found that the nursing home

market is characterized by chronic excess Medicaid demand. Since the market for nursing homes can be

partitioned into public and private markets, and since public markets are characterized by excess demand

(Bishop &Dubay, 1991; Nyman, 1990; Scanlon, 1980), greater access to the public market may be considered a

positive social contribution. Previous research had suggested that FPs have higher Medicaid proportions,

suggesting greater access to Medicaid eligibles. This study found that there is no difference in Medicaid

proportions according to ownership. However, lower Medicaid use rates are associated with independent living

capacity. While NFPs are more likely to have independent living units, FPs are more likely to use independent

living to increase self-pay market share. Cohen et al. (1987) proposed continuing care retirement communities

as a viable private sector alternative to increased government funding of long-term care. The association of low

rates of discharge, lower self-pay payment rates, and continuing care retirement community status with NFP

ownership suggest that NFPs are better able to conserve personal funds and prevent asset spend-down to

Medicaid eligibility levels. The ability to do so may be related to care subsidies for self-pay patients, allowing

reduction of self-pay payment rates. FPs are likely to have higher self-pay payment rates. Higher self-pay

payment rates among FPs may be related to case-mix, the discharge rate in particular, or they may be a

response to a high Medicaid share, low Medicaid payment rates, and the need to cost shift to protect profits.

Contrary to our expectation, FPs were not found to have lower Medicaid payment rates. However, FPs with

higher Medicaid use rates have lower Medicaid payment rates, suggesting lower costs than their NFP

counterparts with high Medicaid use rates. The association of NFP ownership with higher levels of staffing

would suggest that costs are higher in NFPs as a result of better staffing. Thus, NFPs with higher Medicaid use

rates are more likely to have Medicaid payment rates at or near the rate ceiling, a finding consistent with our

hypothesis. While access by publicly supported residents is an important criterion of social contribution, the

issue is complicated by the trade-off between quality and access. Nyman (1990) found that quality suffers due

to excess Medicaid demand. That is, as demand by Medicaid eligibles for nursing home admission increases

relative to supply, nursing homes are no longer subjected to the rigors of competition. He argued that it was not

the low Medicaid payment rates that resulted in lower than expected quality, but the lack of market discipline,

which allows nursing homes to overlook issues of service quality. In this study, adverse outcomes were

observed to be positively associated with market control variables representing excess Medicaid demand; thus,this study provides additional support for Nyman's conclusion. Access to Medicaid eligibles has been

problematic, not just in terms of admission and quality of stays, but also in terms of appropriateness. Payment

systems based on two levels of care, skilled and intermediate, have been identified as a cause for nursing home

discrimination against heavy care residents at admission (Rosko, Broyles, &Aaronson, 1987). Medicaid heavy

care residents may be more subject to discrimination at admission due to the dual disincentives of Medicaid

status and heavy care needs. Within the context of a payment system based on two levels of care, association

of heavy care resident loads with high Medicaid use would suggest greater social contribution. While a study by

Buchanan (1992) found that Pennsylvania adjusts payment level for heavy care case mixes, the same study

indicated that heavy care residents in Pennsylvania are hard to place. In this study, we found that FPs with

higher levels of Medicaid use had a higher functional severity index. Association between functional severity

and Medicaid use in FPs may suggest that FPs are less likely to discriminate against heavy care Medicaid

eligibles at admission. However, high rates of functional severity associated with high Medicaid use in FPs may



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also suggest poor quality care. This study provides evidence that NFP status is associated with better care

outcomes, a dimension of quality considered to be the best proxy measure of service quality (Donabedian,

1966; Institute of Medicine, 1986). The adverse outcomes models clearly indicate that FPs with high-risk

residents have higher rates of adverse outcomes than NFPs. NFPs are more likely to house permanent

residents, as evidenced by significantly lower discharge rates. Thus, NFPs also house a significantly higher

proportion of the oldest patients, those 85 and older. These patients should be at greater risk for such adverse

outcomes as pressure sores, functional severity, and dementias with consequent restraint use, but were

observed to experience lower rates of adverse outcomes in NFPs. The cause of higher rates of adverse

outcomes in FPs may be either lower levels of staffing resulting in less resident supervision, or poorer process

quality. For example, pressure sore rates may be higher in FPs due to inadequately observed care protocols,

improper application of restraints, or insufficient staff relative to care needs. Nyman (1988) observed that quality

in nursing homes is not associated with cost and that quality can be improved through policies providing quality

incentives. He stated that nonprofits may be more motivated to provide better care, explaining better outcomes

among NFPs. The one exception to the observed differences in outcome by ownership was the restraint use

rate. While FPs are more likely to use restraints with increasing functional severity (safety risks) and with

increasing numbers of confused residents (self/other protection) than NFPs, it appears that FPs with high

Medicaid use rates are less likely to use restraints. NFPs with high rates of Medicaid use provide quality of care

that is not better and may be worse than their FP counterparts when it comes to excessive use of restraints.

Thus, the study provides evidence that NFPs produce significantly higher quality of care to Medicaid

beneficiaries and to self-pay residents than do FPs. In consideration of the differences in self-pay payment

rates, NFPs provide better value and are less likely to shift excess Medicaid costs onto self-pay residents. This

may be due to the extensive availability of independent living units among NFPs, or to operating subsidies from

charitable sponsors or endowments. The broader range of residential services may allow NFPs to take

advantage of private demand for residential services and to assist potential nursing home residents in managing

the financial risk of nursing home entry by providing an element of insurance (Cohen et al., 1987). This allows

NFPs to better serve the Medicaid residents that are admitted. There are a few study limitations that may affect

generalizability. First, while there are a number of possible models, we chose to emphasize the relationships

among certain variables we considered to be endogenous and/or which help to identify nursing home

organizational effectiveness. Other models are possible and may change the perceived relationships. second,

we focused on one state, Pennsylvania. While this limited the confounding effects of environmental

characteristics (i.e., differences in Medicaid payment method), the state-specific industry and its environment

may have sufficient distinctiveness to limit applicability across geopolitical lines. For example, FP nursing

homes represent 59.9% of the free-standing, nongovernmental nursing homes in Pennsylvania, compared to

75% nationwide. The higher proportion of NFPs may distort market behavior when compared to markets inwhich FPs clearly predominate. References References American Association of Homes for the Aging. (1993).

The social accountability program. Washington, DC: AAHA Publications. Bishop, C., &Dubay, L. (1991).

Medicare patient access to posthospital skilled nursing facility care. Inquiry, 28, 345-356. Brandeis, C. (1990).

The epidemiology and natural history of pressure ulcers in elderly nursing home residents. Journal of the

American Medical Association, 264, 2905-2909. Buchanan, R. (1992). Medicaid payment policies for nursing

home care: Case mix, access and heavy care. Journal of Health Administration Education, W, 621-648. Cohen,

J., &Dubay, L. (1990). The effects of Medicaid reimbursement method and ownership on nursing home costs,

case mix and staffing. Inquiry, 27, 183-200. Cohen, M., Tell, E., Greenberg, )., &Wallack, S. (1987). The

financial capacity of the elderly to insure for long-term care. The Gerontologist, 27, 494-502. Coughlin, T.,

McBride, T., &Liu, K. (1990). Determinants of transitory and permanent nursing home admissions. Medical

Care, 28, 616-631. Davis, M. (1991). On nursing home quality: A review and analysis. Medical Care Review, 48,

129-166. Donabedian, A. (1966). Evaluating the quality of medical care. Milbank Memorial Fund Quarterly, 44,



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166-206. Evans, L., &Strumpf, N. (1989). Tying down the elderly: A review of the literature on physical

restraints. Journal of the American Geriatrics Society, 37, 65-74. Fottler, M., Smith, H., &James, W. (1981).

Profits and patient care quality in nursing homes: Are they compatible? The Gerontologist, 21, 532-538.

Greene, V., &Monahan, D. (1981). Structural and operational factors affecting quality of patient care in nursing

homes. Public Policy, 29, 399-415. Institute of Medicine. (1986). Improving the quality of care in nursing homes.

Washington, DC: National Academy Press. Kane, R. A., &Kane, R. L. (1988). Long-term care: Variations on a

quality assurance theme. Inquiry, 25, 132-146. Kane, R., Ouslander, J., &Abrass, I. (1989). Essentials of clinical

geriatrics (2nd ed.). New York: McCraw-Hill. Kennedy, P. (1985). A guide to econometrics (2nd ed.).

Cambridge, MA: The MIT Press. Lee, A., Birnbaum, H., &Bishop, C. (1983). How nursing homes behave: A

multi-equation model of nursing home behavior. Social Science and Medicine, 77, 1897-1906. March, J.,

&Simon, H. (1958). Organizations. New York: ]ohn Wiley &Sons. Miles, S., &Irvine, P. (1992). Deaths caused

by physical restraints. The Gerontologist, 32, 762-766. Newhouse, ). (1970). Toward a theory of nonprofit

institutions: An economic model of a hospital. The American Economic Review, 60, 145-155. Nyman, ). (1988).

Improving the quality of nursing home outcomes: Are adequacy- or incentive-oriented policies more effective?

Medical Care, 26, 1158-1171. Nyman, J. (1989). The private demand for nursing home care. Journal of Health

Economics, 8, 209-231. Nyman, ). (1990). The future of nursing home policy: Should policy be based on an

excess demand paradigm? Advances in Health Economics and Health Services Research, 77, 229-250.

Nyman, J., &Bricker, D. (1989). Profit incentives and technical efficiency in the production of nursing home care.

Review of Economics &Statistics, 77,586-601. O'Brien, J., Saxberg, B., &Smith, H. (1983). For-profit or not-for-

profit: Does it matter? The Cerontologist, 23, 341-348. Rosko, M., Broyles, R., &Aaronson, W. (1987).

Prospective payment based on case-mix: Will it work? Journal of Health Politics, Policy and Law, 72, 683-701.

Scanlon, W. (1980). Atheory of the nursing home market. Inquiry, 17, 25-41. Thompson,). (1967). Organizations

in action. New York: McCraw-Hill. Tinetti, M., Liu, W., &Cinter, S. F. (1992). Mechanical restraint use and fall-

related injuries among residents of skilled nursing facilities. Annals of Internal Medicine, 776, 369-374. Ullman,

S. (1987). Ownership, regulation, quality assessment and performance in the long-term health care industry.

The Cerontologist, 27, 233-239. Zammuto, R. (1982). Assessing organizational effectiveness: Systems change,

adaptation and strategy. Albany, NY: State University of New York Press. Zinn, J., Aaronson, W., &Rosko, M.

(1992). The basis for competition in the nursing home industry: A managerial perspective. Journal of Health

Administration Education, 10, 595-610. Zinn, J., Aaronson, W., &Rosko, M. (1993). Variations in the outcomes

of care provided in Pennsylvania nursing homes: Facility and environmental correlates. Medical Care, 31, 475-

487. Received July 30, 1993 Accepted June 7, 1994 AuthorAffiliation William E. Aaronson, PhD,1 Jacqueline S.

Zinn, PhD,1 and Michael D. Rosko, PhD2 AuthorAffiliation 1 Department of Health Administration, Temple

University, Speakman Hall (006-00), Philadelphia, PA 19122. Address correspondence to Dr. Aaronson at this

address. 2 Department of Health and Medical Services Administration, Widener University, Chester,Pennsylvania.



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Studies; Nursing homes; Mortality; Efficiency; Quality standards; Regulatory agencies; Costs; Risk;

Customer services; Competitive advantage; Health services; Profitability

Health Facilities, Proprietary -- economics, Health Facilities, Proprietary -- standards, Homes for the

Aged -- economics, Homes for the Aged -- standards, Humans, Least-Squares Analysis, Medicaid,; Medicare,

Models, Organizational, Nursing Homes -- economics, Nursing Homes -- standards, Outcome Assessment

(Health Care), United States, Health Facilities, Proprietary -- organization &; administration (major), Homes for

the Aged -- organization & administration (major), Nursing Homes -- organization & administration (major),

Ownership -- economics (major), Quality of Health; Care (major)

The Gerontologist

34

6

775-86

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1994

Dec 1994

1994

Oxford University Press, UK

Oxford

United Kingdom

Medical Sciences, Gerontology And Geriatrics

00169013

GRNTA3

Scholarly Journals

English

Feature

Tables; References; Equations

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Citation style: APA 6th - American Psychological Association, 6th Edition

Aaronson, W. E., Zinn, J. S., & Rosko, M. D. (1994). Do for-profit and not-for-profit nursing homes behave

differently? The Gerontologist, 34(6), 775-86. Retrieved from

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