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Institute of Medicine (US) Committee on Implications of For-Profit Enterprise in Health Care; Gray BH, editor. For-Profit Enterprise in Health Care. Washington (DC): National Academies Press (US); 1986.

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For-Profit Enterprise in Health Care.

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The Changing Structure of the Nursing Home Industry and the Impact of Ownership on Quality, Cost, and Access

Catherine Hawes and Charles D. Phillips


Many observers view the increasing ''corporatization" of American health care as the most significant development since the passage of Medicare and Medicaid. While there is general consensus about the trend toward corporatization, there is little agreement about the impact of this development on the cost, quality, and accessibility of American health care. Recently, the for-profit segment in the modern hospital sector has become prominent with the rapid growth of proprietary corporate chains. The nursing home sector has, however, been dominated by proprietary. providers for decades, and publicly held corporations owning and operating nursing homes have been prevalent since the late 1960s.

Until fairly recently, nursing homes have not attracted substantial attention from researchers, except for studies on costs. Relatively few studies have focused on quality., and even fewer have investigated accessibility. Virtually none have focused on nursing home "chains," that is, corporations owning and operating nursing homes in a number of states. There are, however, a few empirical studies that address the impact of the type of ownership on nursing homes. They provide suggestive information about the incentive structure of these ownership forms and about what policymakers can expect if current trends continue.

This paper will explore what is known about the impact of ownership and the corporatization of health care in the nursing home industry. It will discuss the history of nursing homes, identify the current structure of the industry and the public policies that have contributed to this structure, and indicate potential results if current ownership trends persist. Finally, it will attempt to apply what is known about developments in nursing homes to the hospital sector.

Nursing home care is the third largest segment of the health care industry. It will continue to grow in prominence with increasing longevity, shifts in morbidity, and changing demographic, social, and economic patterns in the family. Given present demographic trends, (in particular, the dramatic growth of the 85 years of age and older segment of the population), the United States will need to increase its nursing home bed supply by an estimated 57 percent between 1980 and the year 1995 to keep pace with the current level of utilization (Harrington and Grant, 1985; Doty et al., 1985; Lane, 1984). Some experts predicted the need for an additional 1 million to 1.5 million beds by the year 2000, based on current utilization, prior rates of increase in utilization, and estimated rates of dependency among the elderly (Rice, 1984; Scanlon and Feder, 1984; U.S. DHHS, 1981b; Weissert, 1985). By 2040, 4.3 million elderly are expected to be institutionalized (Doty et al., 1985).

This apparent need for additional long-term care beds presents policymakers with an important opportunity to affect the future shape of the long-term care system. The debate about whether proprietary interests should be permitted to remain in the nursing home business, however, "is essentially moot" (Vladeck, 1980). For-profit interests own more than 75 percent of the nursing homes nationwide and are rapidly expanding in the home health and life care markets. Yet, today's public policy decisions on reimbursement, health planning, licensure, and the use of low-interest bonds for new construction can affect the structure of tomorrow's industry. Thus, the possibility exists for public policies to significantly affect the structure of the health care sector.

Public policymakers have a clear stake in the emerging shape of the nursing home industry. First, government has a fundamental regulatory role as the primary purchaser of formal long-term care services. It dispenses more than half of the dollars spent for nursing home care and assists in paying for nearly 70 percent of all the patients in nursing homes.1 As such, government has a responsibility to ensure that its funds are well spent.

Second, the regulatory system bears a significant responsibility for the quality of nursing home care because of the frailty of most consumers. Consumers needing long-term care generally suffer from a bewildering array of chronic physical, functional, or mental disabilities. In fact, studies indicate that the nursing home population is becoming even more aged and disabled, and this trend is likely to continue (GAO, 1982, 1983b; Manton, 1984). These consumers have only a limited ability to choose rationally among providers of long-term care. They have poor access to accurate information, limited ability to evaluate the information, and multiple disabilities that restrict their mobility and ability to switch easily from one provider to another. Thus, consumers have little to influence facilities' decisions and behavior.

Third, most nursing home patients lack advocates to represent their interests. An estimated 30 percent of the patients have no living immediate family members, and as many as half have no relatives nearby (Brody, 1977; U.S. Senate Special Committee on Aging, 1974). While physicians may recommend nursing home placement, they seldom choose the facility. Placement decisions for many individuals entering nursing homes are made by case workers and hospital discharge planners. These individuals may have the best interest of the patient at heart, but they labor under a set of incentives in which locating an empty bed—in any facility that will accept the patient—is a strong priority. Even when family members are present, they too labor under the burden of needing to locate an available bed while lacking useful information on the comparative merits of different providers.

As a result, government's role in quality assurance is essential. Moreover, it is crucial. Despite considerable improvement in nursing homes since the inception of Medicare and Medicaid, substandard quality of patient care and quality of life remain serious problems nationwide. Inadequate nutrition, dehydration, overdrugging, excessive use of physical restraints, failure to provide prescribed therapies, inattention to the psychosocial needs of nursing home residents, and ineffective government regulatory activity are but a few of the problems commonly cited (Mech, 1980; Kane, 1983; Kane et al., 1979; Himmelstein et al., 1983; Zimmer, 1979; Ohio Nursing Home Commission, 1979; Virginia Joint Legislative Audit and Review Commission, 1978; Mendelson, 1974; Texas Nursing Home Task Force, 1978; AFL-CIO, 1977, 1983b; U.S. Senate Special Committee on Aging, 1974, 1975a, b; U.S. DHEW, 1975a; Ray et al., 1980; Ouslander et al., 1982; California Health Facilities Commission, 1982; California Commission on State Government Organization and Economy, 1983; Illinois Legislative Investigating Commission, 1983; Missouri State Senate, 1978; New Jersey State Nursing Home Commission, 1978).

Furthermore, nursing home costs have escalated at an even more dramatic rate than costs for hospital care. Discrimination against recipients of Medicaid and those individuals with heavy-care needs is widely acknowledged (Harrington and Grant, 1985; GAO, 1979, 1983a, b; Feder and Scanlon, 1981; Scanlon, 1980a, b; Vogel and Palmer, 1983). Given these problems in quality, cost, and accessibility of nursing home care, information about the impact of ownership is essential to rational policymaking in long-term care, particularly given the ability of public policies to restructure the industry.

Public Policy and the Growth of Nursing Homes

The nursing home industry is generally seen as an outgrowth of Medicare and Medicaid, but its roots are older and more complex. The industry is heir to both the almshouse and the hospital. Indeed, nursing home policy combines elements of health, welfare, and housing policy in a schizophrenic and nearly uncontrollable amalgam of increasing cost, substandard care, and discrimination against both those most in need of care and those least able to pay for such care. It has also produced a large new industry that grew and became profitable largely by providing services to the infirm and disabled poor.

Our current long-term care system is fundamentally a creature of government policy. Yet, nursing homes and now home health, retirement, and life care communities have rarely been directly addressed as policy issues of some consequence. As Vladeck (1980) observes,

By and large, nursing home policy has been made not only with limited foresight, but largely by people who, at the time, were primarily concerned with doing something different. It has been an afterthought, a side effect of decisions directed at other problems.

The nursing home industry has grown as a result of a multiplicity of factors. It has thrived on the infusion of public dollars (through a variety of programs), a growth in need due to changes in demographics and shifts in morbidity patterns toward chronic diseases, and the interplay of policies aimed at other institutions (e.g., almshouses, mental institutions, and acute care hospitals). In the process of growing, the industry, has also fundamentally changed. Some of the most profound changes include an increasingly medically oriented setting, a shift from smaller to larger facilities, a move away from government-owned and voluntary homes to proprietary ones. Most recently, the industry has witnessed a growing concentration of ownership in multifacility chains that are diversifying vertically as well as horizontally.

Poor Laws and Poor Houses2

From colonial times to the Great Depression, public policy in the United States followed the tradition of the English poor laws, leaving care of the destitute to local governments and relying almost totally on "indoor relief' rather than direct income assistance. For the aged and infirm poor in America, this meant that the only form of public support was institutional, largely in almshouses and poor farms (Vladeck, 1980; Dunlop, 1979). There was, however, private support for the aged and infirm during this period. Approximately the same number of individuals resided in charitable private homes for the aged, sponsored largely by immigrant and religious groups, as lived in the poor homes.3

Taken together, the almshouses, poor farms, and charitable homes for the aged housed approximately 100,000 elderly Americans. Nearly as many aged individuals, an estimated 70,000, were inmates of mental hospitals (Vladeck, 1980; Dunlop, 1979; Markus, 1972; Waldman, 1983). Conditions in the mental institutions were undoubtedly wretched; however, it was the abominable conditions in almshouses and the destitution of 7 million aged Americans that commanded policymakers' attention during the 1920s and early 1930s. These concerns shaped the Social Security Act and helped frame the growth of what became the nursing home industry.

Social Security and Old Age Assistance

The original entry of proprietary providers into the business of owning and operating nursing homes was an unforeseen and probably unintended consequence of the Social Security Act of 1935, which also established a federal grants-in-aid program to the states for old age assistance (OAA). OAA was a need-based (means-tested) cash grant program designed to provide income support to the elderly poor who would not yet draw sufficient benefits from the old age insurance (OAI) section of the act. Because of the scandals about almshouses and poor farms, however, the act prohibited payment of the cash grant to any "inmate of a public institution."

In effect, the framers of Social Security determined that OAA would not be used for the maintenance of almshouses. These restrictions enabled new OAA beneficiaries to turn elsewhere for care and assistance when they became incapable of caring for themselves (or being cared for) at home. Meager as most of the states' OAA payments were, they still provided the elderly with sufficient purchasing power to obtain institutional care without becoming wards of the cities or counties. The existing nonprofit institutions were accustomed to relying on payments from residents, supplemented by charitable contributions. As the Great Depression deepened, fewer residents and their families were capable of paying their share, and charitable contributions also began to dwindle. Nevertheless, voluntary organizations were slow to appreciate the opportunity that OAA provided. By the end of the 1930s, the total number of individuals these facilities served was nearly the same as before the onset of the depression (Vladeck, 1980; McClure, 1968; Thomas, 1969).

Private board and care homes for pensioners had existed for some years, but the Social Security Act's transfer of cash into the hands of the aged helped begin the transformation of this sector into a predominantly proprietary nursing home industry. The new flow of income to older people allowed private homes to provide some health services or supervision for those in need—rather than just board and care. In addition, the economic problems engendered by the depression encouraged many individuals—whose only resources were their labor and the possession of a house—to enter the business of providing "nursing" care in their homes.

While the business was tiny by comparison to today's industry, the combination of OAA payments with the growing proportion of the aged in the population spurred growth of the industry, particularly the proprietary "morn and pop" sector (U.S. Senate Committee on Labor and Public Welfare, 1960; McClure, 1968; Thomas, 1969).4 As Table I indicates, the period between 1939 and 1950 was one of significant growth, a certain sign of the impact of increased purchasing power among the elderly as a result of Social Security and OAA.

TABLE 1. Nursing Home Statistics by Year.


Nursing Home Statistics by Year.

Post-World War II and the Eisenhower Era

After World War II, developments in the hospital sector affected nursing homes. Chronic disease hospitals began to upgrade their services to provide rehabilitative care. In addition, some acute care hospitals added beds to provide lower-cost care for patients needing subacute or extended recuperative care (Harrington and Grant, 1985). Although hospital-affiliated facilities did not capture a significant share of the market, they opened the way for the entrance of the medical profession into long-term care and for the eventual development of professional standards in what had primarily been a board and care industry (Lane, 1981, 1984; Dunlop, 1979).

This transformation of the nursing home industry was furthered by the extension of Hill-Burton grants to public and nonprofit organizations for the construction of nursing homes. Apart from minimal state licensing laws, there were no regulatory standards for what kind of care these nursing homes should provide. In administering Hill-Burton, the Public Health Service (PHS), formulated the first standards on physical plant design and construction as well as staffing patterns in nursing homes, further transforming these institutions into more medically oriented settings. They now belonged to health as well as welfare policy (Vladeck, 1980; Lane, 1984).

Two developments during the 1950s had a major impact on the growth and structure of the industry and attracted the first speculators to investment in nursing homes. The first was a vendor payment system, authorized under the 1950 amendments to the Social Security Act and expanded in 1956. This provided for federal matching funds to the states for direct payments to nursing homes (the "vendors") for care provided to OAA recipients. The second was increased availability of government-backed loans, through the Small Business Administration (SBA) and the Federal Housing Act (FHA), for nursing home construction and conversion (Markus, 1972).

The vendor payment system and increased government dollars available for nursing home care helped regularize payments, an attractive feature for businessmen. Perhaps most important for the long-run shape of the industry, it gave nursing home providers an identifiable political entity to be lobbied for rate increases and favorable regulations. The vendor payment program thus shaped a system in which the cost, quality, and level of services are decided in a transaction between vendors (providers) and the state, creating the politics of long-term care.

The availability of loans for nursing home construction and conversion through the SBA and FHA also had a major impact on the structure of the industry. Hill-Burton construction grants were only available for nonprofit providers, but SBA and FHA loans could be made to for-profit entities. Certainly these funds had an impact on the expansion of the proprietary sector, helping not only to increase bed supply but also to shift the facilities from converted homes with relatively few beds to the larger, more modern, single-purpose building that is the norm today. Additionally, it made builders and real estate speculators aware of a new and potentially very, profitable market for investment—nursing homes. As Lane (1984) observes, "This capitalization of the profession by prudent real estate businessmen seeking a secured return on their investment helps to explain the proprietary nature of the industry."

Direct payment to vendors and construction loans attracted the first significant group of proprietary operators, many of whose names eventually became synonymous with nursing home scandals—the Bergmans, Hollanders, Kosows, and the first rumored involvement of the Mafia in the industry (Mendelson, 1974). These public policies also resulted in significant increases in government spending and growth in the number of nursing home beds. In 1950, there were fewer than 9,000 nursing homes with approximately 250,000 beds (Dunlop, 1979). Total spending for nursing home care was just $187 million, or 1.5 percent of national health expenditures, and government paid only 10 percent of the nursing home expenditures (Gibson, 1979). By 1960, there had been a 181 percent increase in total national spending on nursing home care, and government was paying approximately 22 percent of that total.

Even with this expansion, the growth in beds was not sufficient to keep pace with the increasing numbers of elderly who needed long-term care. The U.S. General Accounting Of-flee (GAO) estimated that by the early 1960s, the shortage of adequate nursing home beds was between 250,000 and 500,000 (Elliott, 1969; Spitz, 1976).5 Thus, one of the major concerns in Congress with the passage of Medicare and Medicaid was the availability of funds for long-term care.

The Development of Medicare and Medicaid

During the decade following the 1965 passage of Medicare and Medicaid, there was a dramatic expansion in the supply of nursing home beds and an even more dramatic escalation in costs. New facilities were built, and a more sophisticated set of owners emerged, including the multistate, multifacility systems or chains. These developments were largely a product of four factors: (1) the availability of funding; (2) the method of reimbursing facilities; (3) increasing demand; and (4) federal health and safety regulation.

The Expansion of Coverage

The original framers of Medicare were well aware that the inclusion of nursing home services could destroy the fiscal viability of the system, particularly if it covered the kind of long-term custodial care most nursing homes were then providing. Despite this, substantial inflation in hospital rates during the 1950s and early 1960s made it desirable to have less costly alternatives than hospitals for patient convalescence (interview with Wilbur Cohen, personal communication, 1980; U.S. Senate Committee on Finance, 1970; Vladeck, 1980). Thus, as originally conceived, Medicare covered only hospital care, but was amended to add coverage for convalescing patients in "extended care facilities" (ECFs). With anticipated daily costs about half those of convalescent care in a hospital, ECFs were seen as a cost-efficient form of institutional care.

Although the extended care provision of Medicare was soon to haunt its framers, its impact pales beside that of another amendment to the Social Security Act, Title 19 or Medicaid. Medicaid attracted little attention from policymakers, and coverage of skilled nursing home care was included almost by default—again through vendor payments and without much definition or a budgetary limit. This coverage (and the eventual extension to intermediate care as well) provided the financial fuel for the further growth of the nursing home industry.

With the passage of Medicare and Medicaid, sufficient funds were available to many of the elderly for much pent-up need to be translated into demand for and utilization of nursing home care. It was not, however, only the infirm aged residing in the community who came to demand nursing home care. Nursing home care also emerged as a substitute for housing (and some care or supervision) previously provided to many of the elderly in other settings, particularly mental institutions (Dunlop, 1979; Manard et al., 1975; Vladeck, 1980; Scanlon and Feder, 1984; Harrington and Grant, 1985). One observer estimated that 25 percent of the increase in nursing home utilization between 1960 and 1970 can be attributed to the deinstitutionalization or diversion of individuals from mental institutions into nursing homes (Morton Research Company, 1982).

Consumers of care and their families had a multitude of reasons for choosing nursing homes over other forms of institutional care. But it was also in the interest of the states and localities. In these other settings, most of the costs were borne by state and local governments, while transfer to a nursing home usually meant the state could collect the federal matching funds for the care of these individuals in nursing homes under the Medicaid program. As a result of these diverse factors, including reductions in hospital lengths of stay, the percentage of elderly persons in nursing homes rose 58 percent in the decade between 1950 and 1960 and 107 percent between 1960 and 1970.

A combination of factors, therefore, fueled the demand for and utilization of nursing home beds. Increased but unevenly distributed expenditures under Kerr-Mills led to significant growth, but it was the passage of Medicare and Medicaid in the mid-1970s, in conjunction with demographic trends, that led to substantially extended demand by the elderly for nursing home care. From the viewpoint of potential providers, expansion was a result not only of increased demand, but also the increased availability of public reimbursement and the attractiveness of the rates set up under these new programs, a result of the policymakers' desire to assure substantial provider participation. While they expanded eligibility, Medicare and Medicaid could accomplish little if too few individuals and organizations were willing to provide services to program beneficiaries. To attract providers to the program—and increase the supply of nursing home beds—the federal government pursued two basic policies, one related to reimbursement and another to regulation.

Increased Reimbursement Rates. First, Medicare adopted a cost-based reimbursement policy very, similar to that it employed for hospitals. Providers were basically reimbursed for their reported costs. The formula placed no ceiling on reimbursement rates, and variations in reported costs between providers were ignored. In addition, the program provided proprietary nursing homes a "profit" based on their net invested equity in the facility. Finally, the American Hospital Association (AHA) lobbyed effectively for Medicare to reimburse hospitals for mortgage interest as well as depreciation of capital equipment, including the facility. This was extended to nursing home reimbursement. As a result, investors were virtually assured of covering their mortgage payments—and having a positive cash flow (from depreciation) as well in the first years of the mortgage—through the Medicare program. They were also virtually assured of having their costs covered as well as receiving in effect a guaranteed profit (Shulman and Galanter, 1976; Vladeck, 1980; Ohio Nursing Home Commission, 1979; Washington Senate, 1978).

Lenient Regulatory Posture. Medicare also adopted a policy of easing nursing homes' entrance into the program. Although enacting mandatory minimum health and safety regulations for facilities participating in Medicare, the federal government estimated that few facilities could actually meet even the minimum standards. Consequently, granted nursing homes were given participatory status in Medicare and Medicaid if they were in "substantial" (rather than full) compliance with the new federal minimum health and safety standards. The homes simply had to present to the survey and certification agency a plan for correcting their violations in order to be certified and receive payments.

This lenient regulatory posture, combined with open-ended, full-cost reimbursement, a guaranteed profit factor, and interest plus depreciation for capital reimbursement in a program financially supported by the federal government, made investment in nursing homes very attractive. In addition, government funding and the aging of the population ensured the industry of a ready supply of customers. Thus, government policies eliminated much of the risk generally associated with most investments and nearly all new ventures—while promising substantial profits to those with the knowledge and ability to manipulate the system. As a result, in less than a decade the industry expanded its total supply of beds from approximately 460,000 (in 1965) to more than 1.1 million beds (by 1973) an increase of 139 percent in less than a decade.6

Expenditures grew even more rapidly. In 1950, total expenditures for nursing home care were less than $190 million, with government paying only 10 percent of that total. By 1960, government paid 22 percent of a total of $526 million. By 1965, just before the onset of Medicare and Medicaid, expenditures totaled $1.328 billion, an increase in just 5 years of 153 percent. Between 1960 and 1974, expenditures on nursing home care grew approximately 1400 percent (U.S. Senate Special Committee on Aging, 1974). By 1978, the nation spent $15.8 billion on nursing homes, with government paying 53 percent of the total (Gibson, 1979). And by 1982, expenditures for nursing home care exceeded $27 billion annually with government paying nearly 55 percent of the total (GAO, 1983b). In 1984, expenditures on nursing home care exceeded $32 billion with government paying 49 percent (Levit et al., 1985).

The Emergence of Nursing Home Chains

At the same time that the industry was growing and expenditures were skyrocketing, the pattern of ownership and control in the industry was undergoing a significant change. Unlike the hospital sector, the proprietary nursing home firms industry has been prevalent and growing since the 1930s. The trend away from government and nonprofit facilities accelerated. In 1969, 64.5 percent of all nursing home beds were in proprietary facilities. By 1980, 81 percent of all the facilities and 69 percent of the beds were proprietary. During the same period, the proportion of beds in nonprofit facilities decreased from 25.8 percent to 22.7 percent, with government owning only 8 percent (U.S. National Center for Health Statistics, 1984). But the most significant development in the immediate post-Medicare period was the development of proprietary corporate nursing home chains. In 1966, only a handful of firms owning nursing homes were registered with the Securities and Exchange Commission (SEC). By 1969, that number had expanded to 58 and by 1970 had reached nearly 90 (Spitz, 1976).7

The post-Medicare need for capital was enormous because of the demand for new beds. New nursing home construction was needed to cope with existing bed shortages as well as to replace obsolete facilities that were often converted mansions, farmhouses, hotels, and motels. One way to secure capital for nursing home expansion was borrowing. Some owners calculated that once they had enough for a down payment on their first home (with interest and depreciation as part of the government reimbursement rate), government revenues could be expected to cover the cost of a first mortgage. The same was true for second-, third-, and even fourth-position mortgages. With few fiscal controls, the program provided virtually open-ended reimbursement for Medicare patients. Moreover, the owners could use the capital generated by these additional mortgages for whatever purposes they chose. Many used them to pyramid their nursing home holdings. With Medicaid, similar opportunities existed in the states through both reimbursement systems modeled on Medicare and through "flat-rate" systems. Under the latter methods, nursing home owners received a set fee for each Medicaid patient day—regardless of what they actually spent on patient care. Many owners used part of these funds to purchase new facilities, pyramiding their acquisitions on current holdings.

Publicly held nursing home chains had even more options for financing new growth. Going public with the sale of stock was an alternative to borrowing. In addition, a public market for a company's stock enhances its ability to attract borrowed funds, since the stock can be offered as collateral to secure loans. As it turned out, the stock market proved to be a very successful new source of capital for the nursing home industry. In 1969 alone, 40 nursing home corporations sold stock worth $340 million.

During the late 1960s, the "Fevered Fifty," corporations owning or planning to own nursing homes, emerged as the "hottest" stocks on the market. In a 1969 article in Barron's, J. Richard Elliott, Jr. (1969) explained the phenomenon:

Of late . . . [al kind of frenzy seems to grip the stock market at the merest mention of those magic words: "convalescent care," "extended care," "continued care.'' All euphemisms for the services provided by nursing homes, they stand for the hottest investment around today. Companies never before near a hospital zone—from builders like ITI's Sheraton Corporation, National Environment, and Ramada Inns, to Sayre and Fisher . . . have been hanging on the industry's door. "Nobody, a new-issue underwriter said the other day, "can lose money in this business. There's just no way."

Even while the industry was telling state legislatures that it faced bankruptcy if Medicaid rates were not dramatically increased, some nursing home owners were promoting themselves on Wall Street as the most profitable investment around. According to stock prospectuses issued by some publicly held chains, the guaranteed government revenue and the growing number of elderly combined to produce an expected return on investment of at least 20 to 25 percent per year. These potential profits for the parent corporations were to be further augmented by the development of subsidiaries that would sell ancillary goods and services to the nursing homes—such as pharmaceuticals, food service, laundry, management, real estate development, and construction. The reported price/earnings ratios of the new nursing home chains were as much as 40 times that of blue chip stocks. For instance, in 1969 the price/earnings multiple for Bernard Bergman's Medic-Home chain was 179; for Unicare, another major nursing home chain, the multiple was 700 (Elliott, 1969).

The boom in nursing home stocks, however, was relatively brief, and the bust was spectacular. By 1971-1972, the stock prices had fallen far below their high marks of 1969. Medicenters of America, whose price per share had reached almost $60 during the late 1960s, was selling at less than $4 by the mid-1970s. And the same decline was true for all the chains. Four Seasons Nursing Centers, certainly the most publicized of the chains and the first to list its shares on a major exchange, started out as a housing construction company. Its stock ran up to nearly $100 per share in 1969. By 1970, when the SEC suspended trading, it was selling for 6¢ per share.

The bankruptcy of Four Seasons was a result of massive fraud, with the president, partners of the corporation's accounting firm, and two officers of a brokerage firm indicted for securities violations. This stock fraud was one factor in cooling off the market for nursing home stocks. Continuing scandals about poor care and patient abuse also dampened investors' enthusiasm. But perhaps the most important factor involved a serious miscalculation about the role of Medicare in paving for nursing home care.

A surprising number of the new nursing home entrepreneurs, like many of their investors and an unhappy number of Social Security recipients, initially assumed that Medicare and its unlimited, cost-plus reimbursement system would finance most of the nursing home care of the nation's elderly. In fact, given the original Medicare limitations and further restrictions on eligibility, and coverage introduced during the Nixon administration, Medicare paid for relatively little of the nation's expenditures on nursing home care. Table 2 illustrates the actual funding pattern that has emerged.

TABLE 2. Nursing Home Expenditures by Payer (percentage).


Nursing Home Expenditures by Payer (percentage).

The predominantly extended-care (or sub-acute care) market funded by Medicare, which was anticipated by the nursing home entrepreneurs, never materialized. The mainstay of the nursing home market proved to be the long-stay resident—an individual suffering from chronic rather than acute diseases and disabilities, unable to pay for her or his own care, and unable to qualify for Medicare coverage. And Medicaid was not as uniformly generous a payer as Medicare.8

Despite this, it was the Medicaid program that removed the lid from expenditures on vendor payments to nursing homes. The initial legislation basically left the decision on how to reimburse nursing homes almost entirely to the states. Some provided generous rates under cost-based systems similar to the Medicare payment program; others provided a fixed (or "flat") rate for all facilities. Such fixed rates were independent of actual nursing homes' costs, differences in the severity. of patient case mix, and quality of care. In general, however, Medicaid rates, tied to state welfare programs, were lower than Medicare rates. Yet Medicaid was an open-ended program, paying for the care of all eligible program beneficiaries, and its eligibility.

The limitations on Medicare coverage, retroactive claim denials, and payment and eligibility limitations imposed by most Medicaid programs made the nursing home industry less attractive financially. In addition, after the rapid expansion in bed supply during the initial investment euphoria, many nursing home beds were empty by the early 1970s, further contributing to some homes' financial difficulties. During this period, many nursing homes survived and prospered by either lowering expenditures (often by cutting back on food and staffing) or by engaging in real estate manipulations (see Ohio Nursing Home Commission, 1979; New York State Moreland Act Commission, 1975; and Shulman and Galanter, 1976).

The effects of this situation were varied. First, conditions in nursing homes continued to be a cause of concern for consumers and policymakers. Many attributed seriously substandard care not only to the failure of the regulatory system but also to the incentives inherent in many Medicaid reimbursement policies, particularly "flat-rate" systems (U. S. Senate Committee on Finance, 1972). Second, the trafficking in nursing home real estate—that is, the sale and resale of nursing homes—as well as inflated lease and rental charges artificially increased the cost of providing care. Nursing home chains slowed their rate of growth. From 1969 through the mid-1970s, the market share of the major multistate nursing home chains remained relatively stable. Policy changes in the 1970s, however, would significantly alter the structure of the industry.

In summary, four factors led to the creation of a nursing home sector and its expansion between 1930 and 1970: (1) increased demand resulting from shifts in mortality and morbidity, as well as the substitution of care in nursing homes for housing that had been provided to the elderly in other institutional settings, such as almshouses, poor farms, and mental hospitals); (2) increased funds available to pay for such care through government programs such as OAA and Social Security payments, Kerr-Mills, and finally Medicare and Medicaid; (3) favorable reimbursement rates and payments made directly to the vendors of nursing home services; and (4) a lenient regulatory posture toward nursing homes.

Public Policy Changes and the Growth of Nursing Home Chains: The 1970s and 1980s

The dominant trend in the nursing home industry during the 1970s and 1980s has been increasing concentration and corporatization of ownership. This transformation has been stimulated by changes in reimbursement and regulatory policy, health planning restrictions on bed supply, easier access for "chains" to expansion capital, and tax policies. Between 1982 and 1983, the 25-30 largest chains increased their control of total beds by another 15 percent. Although the holdings of chains remained relatively stable during the early 1970s, the late 1970s brought about a spate of merger and acquisition activities. Between 1972 and 1980, with most of the activity occurring after 1976, the three leading chains dramatically increased their control of nursing home beds and facilities. Beverly Enterprises increased its facilities by 600 percent, ARA its holdings by approximately 250 percent, and Hillhaven by 200 percent. This growth pattern far outdistanced the growth rate in the total number of nursing home beds and facilities, which was only 18 percent during the same period. The Modern Healthcare annual surveys of multifacility systems show that between 1979 and 1982, the major investor-owned chains increased the proportion of all nursing home beds they controlled by 50 percent.

Some observers, including leaders of some of the major chains, predict that within the next 5 years, half of all nursing homes will be operated by proprietary chains, with the majority controlled by the 5 to 10 largest chains (LaViolette, 1983). Certainly, the growth rate of the largest chains has been spectacular (Tables 3 and 4). In 1973, the three largest chains owned only 2.2 percent of the beds. By 1980, the three largest chains controlled 6.4 percent of the beds nationwide, and by 1982, Beverly, ARA, and Hillhaven owned, leased, or managed 9.6 percent of all nursing home beds, a 2-year increase of 54 percent.

TABLE 3. Nursing Home System Ownership, 1972.


Nursing Home System Ownership, 1972.

TABLE 4. Nursing Home System Ownership, 1983.


Nursing Home System Ownership, 1983.

This picture of increased concentration, however, is somewhat misleading. The three largest chains have substantially increased their holdings largely through acquisition of small-to-medium chains, rather than through the purchase of individual facilities. Thus, this increased concentration does not represent a substantial increase in the control of total beds by the chains. It simply reflects the very largest chains' purchase of or merger with other large-to-medium multifacility systems. Despite the major increases in holdings by firms such as Beverly, the industry remains fairly fragmented, largely controlled by individual owners and small (5- to 20-facility) local and regional chains. Further, the rate of growth of the largest chains could be somewhat slowed as the number of medium-sized chains that can be efficiently acquired diminishes.9

Despite misperceptions about current levels of concentration, policymakers should focus attention on the industry's changing structure. Although the chains do not control an enormous proportion of nursing homes nationwide, chains have achieved very significant market penetration in some areas of the country. In some regions of the country, the four largest nursing home operators already control between 60 and 100 percent of bed capacity. In Texas, for example, Beverly and ARA alone control nearly 25 percent of the beds, dominating many geographic areas of the state. The U.S. Department of Justice has been concerned about some of the merger and acquisition activity of the major chains. In January 1984, for example, it filed suit to block Beverly's plan to acquire Southern Medical Services, arguing that this acquisition would "substantially lessen" competition in four major markets in which Beverly would control between 29 and 48 percent of the total licensed nursing home bed capacity. Further, the major chains' predictions about their growth and increased concentration may well be accurate. The concerns many observers feel about such concentration is not only that it lessens competition but that it also substantially reduces the ability of the regulatory agencies to control the behavior of the highly concentrated providers.

Several factors have contributed to the concentration of nursing home ownership. First, new and stricter licensing and certification standards put smaller, independent facilities out of business. Second, the increasing complexity of public reimbursement systems favors more sophisticated owners. In addition, capital reimbursement policies encouraged trafficking in nursing homes (the sale and resale of facilities) and other real estate manipulations that also favor more sophisticated operators. Third, there is a strong and increasing demand for nursing home and other forms of long-term care. Fourth, nursing home investment is profitable, making expansion an attractive alternative for investors. Fifth, attempts to contain spiraling nursing home costs, particularly in the Medicaid program, have led states to restrict the supply of beds, encouraging acquisitions rather than new construction for firms that wish to expand. Sixth, acquisitions are easier for large, investor-owned firms, particularly the publicly held ones, because they have better access to financial markets. Seventh, tax policies adopted during the Reagan administration, as well as its position on anti-trust, have encouraged mergers.

Changes in Regulatory Policy

During the early 1970s, the recurrent scandals about nursing home conditions and patient abuse that erupted periodically in newspapers and legislative committee hearings, combined with the too frequent tragedies of nursing home fires, led to some changes in regulatory and reimbursement policy, particularly in 1972 amendments to the Social Security Act. During the mid-to-late 1970s, states became more stringent about requiring nursing home compliance with federal standards, particularly the 1967 Life Safety Code (LSC), which in 1974 was extended to cover intermediate as well as skilled facilities.10 Many states also went beyond the minimum federal standards by implementing stricter licensing requirements.

The imposition of strict building and fire safety code regulations—and the enforcement of these standards—meant the eventual demise of most of the "morn and pop" facilities that were still operating out of old converted homes, farm houses, motels, and hotels. By and large, these were relatively small facilities with fewer than 50 beds and usually fewer than 25 beds. The cost of converting such homes into the more modem, fire-resistant structures required by federal and often state laws was too high for many of these operators.

Many such homes went out of business or converted again (e. g., into boarding homes for the mentally retarded). For example, after a decade of leading the nation in nursing home fire deaths, Ohio adopted a sprinkler requirement as part of the state fire code for nursing homes. Largely as a result, 102 nursing homes went out of the business between January 1975 and March 1978. Of these homes, nearly 20 percent had fewer than 12 beds, and only 12 percent had more than 50 beds. These nursing home beds were replaced by newer and larger facilities, predominantly by homes that are part of chains (Ohio Nursing Home Commission, 1979). This was a pattern common to many states. For example, the Washington Senate Select Committee on Nursing Homes documented a 14 percent decline in the number of licensed facilities during the 1965-1975 period. However, the number of licensed nursing home beds increased by nearly 32 percent during this same period (Washington Senate, 1978).

This pattern of small, individually owned nursing homes closing was repeated throughout the nation. Between 1969 and 1980, the number of nursing home beds in the nation increased by more than 73 percent, but facilities with fewer than 50 beds declined by 27.7 percent. The growth was primarily in larger facilities, with 100 or more beds (Harrington and Grant, 1985). Over 6,000 nursing homes, nearly 28 percent of the total facilities, closed between 1971 and 1976. During this same period, 4,800 new (and larger) nursing homes opened. As a result, the average size of nursing homes grew, from 54.5 to 68.9 beds (Sirrocco, 1983).

Through enforcement of building and fire safety standards, government policy contributed to the demise of the "mom and pop" nursing home. However, the nursing home chains, particularly those that sold stock on the open market, had entered the business with Medicare, and most of their facilities were newly built. So, enforcement of new building and fire safety, code standards did not represent a serious problem for most of them. Indeed, enforcement of these standards helped the chains by eliminating some competitors (closing from 10 to 20 percent of the homes from state to state) and giving them an opportunity to construct new, larger facilities.

This regulatory strategy also relieved some of the pressure for regulatory reform and for enforcement of stronger health and welfare standards that might have been more troublesome to the chains. States tended to concentrate on the easily measured physical plant aspects of nursing home standards. The more subjective and difficult problem of assuring that the quality of care provided to patients was acceptable received much less attention. In short, the concentration of regulatory attention and efforts on the physical plant aspect of nursing homes focused regulatory energy largely on the "more and pop" facilities, while the figures on nursing home closings gave the appearance that regulatory agencies were "cleaning up the mess" in long-term care. The more general problems of quality of life and care that existed in chain-owned and individually owned facilities, including the "more and pop" operations, received relatively little regulatory attention. Thus, the nursing home chains, particularly those that were publicly held, suffered little from the new but limited regulatory stance of government.

Changes in Reimbursement Policy

There were a variety of reimbursement systems in effect during the first 15 years of the Medicare and Medicaid programs, and few states had identical methodologies. Large chains became very, skilled in manipulating each system so as to maximize their income and growth, but most independent owners lacked such sophistication. In addition, as noted, the chains concentrated their initial efforts on participation in Medicare, and they become especially skilled at manipulating Medicare's retrospective reimbursement system and state systems modeled on Medicare.

Medicare's reimbursement system, along with similar Medicaid reimbursement policies, paid nursing homes nearly all of the costs the homes reported they incurred in caring for program beneficiaries, plus a profit factor. At best, these systems gave operators few incentives to purchase efficiently. At worst, such systems encouraged fraud, abuse, and manipulation of loopholes that increased costs without necessarily improving patient care or quality of life. Since homes were guaranteed reimbursement of their costs, many saw the potential for making a profit off those costs by setting up subsidiaries that sold goods or services to the nursing homes. In this way, the parent company could make a profit from the sale to their nursing homes of goods and services that would be a reimbursable cost on the books of the nursing homes. Thus, many of the big chains diversified, forming subsidiaries that include real estate development, construction, management services, medical equipment, laundry, linen, food, and housekeeping services (information from 10K reports filed with the SEC by the corporations; Ohio Nursing Home Commission, 1979; Levinson, 1984; U.S. DHEW, 1978).

Both the inspector-general of the U.S. Department of Health, Education, and Welfare11 (HEW) (1978) and the GAO (1979, 1983a) studied this vertical integration and concluded that such practices drove up costs significantly, without necessarily improving services. Moreover, they found that it was nearly impossible to enforce Medicare and Medicaid regulations that limited the price that owners could charge for goods and services sold to related nursing homes (non-arms-length transactions). It is particularly difficult to enforce such rules in multistate chains, where the home office is in a different state from the facilities being regulated and audited by the state Medicaid agencies. Even the large insurance companies that are fiscal intermediaries for Medicare experienced significant problems in auditing chain home offices and subsidiaries to determine whether the prices charged to the nursing homes were reasonable (GAO, 1979; U.S. DHEW, 1978).

Chains that had diversified were also better prepared for the reimbursement policy changes that came with the 1972 amendments to the Social Security Act. Because of the record of seriously substandard care that was believed to result from the rather perverse incentives inherent in the "flat-rate" payment system used by many state Medicaid programs, Congress required that nursing homes participating in the Medicaid program be reimbursed by the states on a "reasonable cost-related" basis. While this did not mean that every, home would receive reimbursement for all costs, it did require that homes report their costs to the state Medicaid agency. The Medicaid reimbursement rate would then be based on those reported costs considered "reasonable." Like Medicare's reimbursement system, this policy tended to favor the more sophisticated providers, the multistate chains and diversified firms.

The small "mom and pop" operations had grown up under state fiat-rate systems and had had no need to understand refinements such as stock-swaps, debentures, sale, and leaseback arrangements, or intercompany loans. Profit-making under a cost-related reimbursement system is a good deal more complicated. The new nursing home chains, with management skilled in the manipulation of Medicare's system, the intricacies of cost reporting, and the benefits of and organization to make purchases of ancillary, goods and services from related suppliers, were perfectly positioned to take full advantage of these new Medicaid reimbursement policies.

Capital reimbursement policies under Medicare and most Medicaid programs also favored acquisition activity. First, Medicare and most of the state Medicaid programs reimbursed nursing homes for mortgage interest and depreciation.12 This made many individual owners willing to sell and made it financially feasible for the chains to debt-finance many of their acquisitions. Second, tax policy favors sales and acquisitions. Owners experience declining tax deductions as their facilities age. In addition, capital gains (profits from the sale of buildings and equipment) are taxed at a lower rate than income from owning and operating the facility. Thus, individual owners are often willing to sell facilities. Finally, purchasers find acquisition attractive under many state plans and under Medicare reimbursement policies, since they can usually revalue the capital asset (basically the facility) following acquisition. This has meant that most reimbursement systems have treated the purchase price as the value of the facility and reimburses depreciation expenses accordingly. This, combined with full payment for the mortgage interest, makes government the primary. payer for nursing home acquisitions and significantly reduces the risk for the acquirer.

Prospective payment systems, the most recent attempt to solve the continuing problem of escalating health care costs, remove many of the profitable features just discussed. Such systems do not eliminate the possibility of healthy profits, but they do require management skilled in planning and cost control. As Montgomery Securities observes, "Logic suggests that a prospective payment system should be favorable for efficient and large operators who benefit from economies of scale" (Montgomery Securities, 1983). In addition, chains that operate in several states often have the advantage of familiarity with such systems in one or more states and can efficiently adapt to its introduction in other states. Finally, while these policies may have achieved their purpose of containing (at least in part) escalating costs, any reduction of operating revenues available for direct patient care makes investment less attractive to nonprofits (Ohio Nursing Home Commission, 1979).

Strong Demand for Long-Term Care

The strong and growing demand for long-term care services is also attracting corporate owners to the business of providing nursing home care. Several factors contribute to this: demographic trends; decreased availability of family support and a shift from private residences to nursing homes; and the substitution of nursing home care for acute care hospitals as a result of changes in Medicare policies. Each of these factors is expected to contribute significantly to a demand for nursing home expansion.

Although experts disagree about the magnitude of likely growth in the aged population, they agree that it will be significant during the next 50 years. Moreover, they agree that the growth rate win be most dramatic for age groups of 75 years and older, the segment of the population most likely to need nursing home care. Under current utilization patterns, 5 percent of the elderly reside in a nursing home on any given day, but at some time during their lives, 20 percent of the elderly will be in a nursing home (Palmore, 1976; Kastenbaum and Candy, 1973). If this utilization pattern continues, the aging of the population alone will result in significant additional demand (Manton, 1984; Weissert, 1985; Montgomery Securities, 1983).

Additional demand may also result from shifts in kinship patterns and familial relationships.13 The number of widowed and single elderly is expected to increase within the next 15 years, and this has traditionally been a factor in increasing nursing home placements for the aged who have chronic physical and functional impairments (Weissert and Scanlon, 1983). Further, the increased involvement of women in the labor force, of elderly women with no living children, and of aged persons with fewer children may reduce the availability of children to care for elderly parents in their homes (GAO, 1983a, b; Manton, 1984). Montgomery Securities (1983), in advising potential nursing home investors, predicts that this combination may result in a net shift of 20 to 30 percent of the infirm elderly from private residences to institutional settings.

Changes in public policy may also increase the demand for nursing home care. In the past, to qualify for Medicare coverage of care in a skilled nursing facility (SNF), an individual had to have had at least a 3-day stay in an acute care hospital prior to the transfer to a nursing home. The Tax Equity and fiscal Responsibility Act of 1982 eliminated this requirement and some analysts predict that, if implemented by the U.S. Department of Health and Human Services (HHS), this could produce a 10 percent increase in demand for nursing home beds (Montgomery Securities, 1983).

A second policy change that may stimulate more use of nursing homes is Medicare's prospective payment system for hospitals, which seems to encourage hospitals to discharge Medicare patients as soon as medically feasible. As a result, elderly individuals requiring sub-acute or convalescent care are now more likely to be transferred to a nursing home when possible, rather than being left to convalesce in the hospital. Many analysts, such as Carl Sherman, a health care industry analyst with Oppenheimer and Company, believe that this shift in hospital payment policy will be a boon for the nursing home industry (Punch, 1984).

Taking all these factors into account, Montgomery Securities has developed "unit growth model" for nursing homes over the next 8 to 10 years. Changing demographics and shifts from private residences to nursing homes are expected to generate an average annual increase in demand for nursing home care of 7.6 percent. The shift of patients out of hospitals and into nursing homes would add an expected 1.4 percent annually to demand. The substitution of alternative sources of long-term care (e.g., home health and adult day care) could lead to an annual 3.1 percent reduction in demand. On the basis of these assumptions and estimates, Montgomery Securities expects an increased demand for nursing home beds of 5.9 percent annually between 1983 and 1990.


Investment analysts who are bullish on the market in "gray gold" expect continued growth in nursing home profit margins. Certainly, recent investment in nursing homes has paid handsomely. For instance, Beverly Enterprises experienced stock price gains around 700 percent between 1978 and 1981, and National Health Enterprises experienced an even more spectacular 900 percent increase (Blyskal, 1981). In fact, Beverly's growth in profits has far exceeded its growth in bed size. During 1981, its profits increased by 48 percent, and in 1982 by 38 percent. And Beverly was not alone. The major multistate chains responding to the survey by Modern Healthcare reported a 47.7 percent increase in profits between 1982 and 1983 (Punch, 1984). Even in "tight" reimbursement states such as Texas (see Table 5) and California, returns on equity are impressive.14 In California, 700 facilities had average annual returns on equity ranging from 58 percent to 154 percent in fiscal years 1983 and 1984 (U.S. Senate Special Committee on Aging, 1984).

TABLE 5. Industry, Average Profits per Facility in Texas (percentage).


Industry, Average Profits per Facility in Texas (percentage).

Health Planning and Limitations on Bed Supply

While the demand for long-term care services has been growing, the nursing home bed supply has not kept pace. Between 1963 and 1973, the supply of nursing home beds increased about 8 percent annually. But with the introduction of health planning and certificate-of-need (CON) legislation, that rate slowed. Between 1976 and 1980, the annual rate of growth in nursing home beds was only about 2.9 percent, and between 1981 and 1983, the growth rate was 1.75 percent per year. Nine states show slight losses in the total number of beds since 1981 (GAO, 1983b; Harrington and Grant, 1985). This decline in the growth of bed supply is primarily due to two factors: restrictive health planning requirements and high construction costs.15

As Table I shows, during the early and mid-1970s the supply of beds exceeded demand. As a result, many homes faced financial difficulties because of low occupancy rates, and the chains did not significantly expand. The imposition of health planning and CON requirements for new facility construction initially served the interests of the existing nursing home industry. As a result, these new measures were largely unopposed by this industry.

The initial goal of CON was cost containment, and state policies in the 1980s, which include strict CON requirements, explicit moratoria on nursing home bed construction, and refusal to certify new facilities for Medicaid participation, are designed to limit Medicaid expenditures. Without such limits, "the total costs of nursing home care for people eligible for Medicaid support (in a nursing home) would exceed what states are willing or able to pay" (Scanlon and Feder, 1984). However, these public policies also allow nursing home operators to increase revenues through higher charges to private patients, make discrimination against Medicaid patients possible, and encourage the concentration of ownership by creating incentives for firms to expand through acquisitions.

The average occupancy rate in nursing homes nationwide is at least 95 percent, and many facilities, particularly the better ones, have long waiting lists. This situation places the industry in a favorable position, given the limited availability, of alternatives to nursing home care. First, occupancy rates are strongly and directly related to profitability. Second, tight supply allows nursing homes to select or "cream" from the queue of individuals seeking placement. By and large, facilities discriminate against "heavy-care" patients who require substantial hands-on care and against Medicaid patients in favor of the more lucrative private-pay patients (U.S. Senate Special Committee on Aging, 1984; Ohio Nursing Home Commission, 1979; Minnesota Senate and House, 1976). Engaging in these practices increases a home's likelihood of achieving substantial profits.

While these factors have made nursing home investment financially attractive, CON and similar regulations generally prevent new construction. Combined with high capital and construction costs, health planning policies thus encourage expansion through acquisition rather than new construction (Kuntz, 1981a; Punch, 1984). So, while several chains have plans to begin new construction, their rate of expansion through construction does not nearly approach their rate of growth through acquisition.

Access to Capital

The scarcity of capital for expansion, improvement, or modernization makes it difficult for the small operator to compete with the larger chains and tends to encourage further consolidation of ownership. Single, independently owned facilities may continue to be absorbed by small chains—which may in turn be acquired by larger chains. The scale of operations, management sophistication, and ability to sell stock give the larger, multifacility chains a significant advantage in the capital market (LaViolette, 1982; Birney, 1981; Valiante, 1984).

Since significant expansion of the industry is predicted and will be needed by an aging population, the large, proprietary firms are in the best position to take advantage of these new opportunities and to expand their holdings. Without a significant change in public policies (such as restricting use of low-interest industrial revenue bonds), the predominant pattern is likely to be future expansion and increased acquisition by the leading chains.

Tax Policies and a Loosening of Merger Rules

The structure and growth of the nursing home industry have also been affected by tax and anti-trust merger policies that were not specifically directed at nursing homes. Two significant sources of return to nursing home investors are largely dependent on the structure of the tax code. For example, there are tax savings resulting from rules on depreciation and after-tax capital gains. As real estate investments, nursing homes are not subject to the standard limitation on deductions, an advantage for a highly leveraged (low equity) industry like nursing homes. In addition, many nursing homes are organized as both an operating corporation and as a real estate partnership, with a lease or management contract between the two formal corporate entities (Shulman and Galanter, 1976; Baldwin and Bishop, 1983). This arrangement allows the partners to take depreciation and interest deductions against their personal income. Thus, there are substantial tax advantages to nursing home ownership.

These and other tax advantages accrue more to investors in high tax brackets than to nonprofit entities16 or the original ''room and pop" investors. This influences who is most interested in purchasing any asset, including nursing homes. As Baldwin and Bishop (1983) observe,

To an investor whose marginal tax bracket (including federal and state taxes) is 50 percent or greater, a dollar of deduction is worth as much or more than a dollar of revenue. For tax-exempt investors . . . a dollar of revenue is worth a full dollar, but tax deductions are worthless.

Thus, the effect of such tax policies is to make nursing home investment more attractive to high-tax-bracket entities than to nonprofit firms and low-bracket investors. Baldwin and Bishop (1983) argue,

If the supply of investment opportunities is restricted .... then a natural "investor clientele" for nursing homes lies in the high tax brackets. It is not surprising, in light of these results, that "mom and pop" owner-operators of nursing homes have found any profitable opportunities for expansion of nursing home capacity snapped up by more wealthy corporate and private investors. In like manner, a nonprofit organization will find that, if a potential investment is worthwhile on a present value net flow equivalent basis . . . then it would be even more worthwhile to for-profit owners.

Several other tax policies contribute to the trend toward a new ownership structure. First, individuals or firms that have owned a nursing home for a long time find that the tax advantages of depreciation and the positive cash flow from Medicare and Medicaid reimbursement for depreciation have substantially declined, creating an incentive to sell. Thus, for longtime owners, such as the "mom and pop" operators, the incentive is to sell. In essence, as Baldwin and Bishop (1983) argue, public policy may also have had the unforeseen side effect of making ownership of homes attractive "only to certain high bracket individual and corporate investors."

Other policies, such as the investment tax credit (ITC) and the accelerated depreciation (ACRS) provisions of the Economic Recovery Tax Act (ERTA) of 1981, for instance, provided tax incentives for corporations to increase their investment in new plant and equipment and to increase productivity (Congressional Quarterly Almanac, 1981, pp. 92-93). However, in the nursing home sector (as in others) these provisions of the tax code seem also to have induced more economic concentration by making a firm worth more to an acquirer than to its stockholders (Trautman, 1984).17 Certainly, there was a boom in nursing home mergers and acquisitions following passage of ERTA. For Beverly Enterprises, Unicare, Hillhaven, and ANTA, for instance, 1981-1982 was a time of substantial growth, and during that period, 11 of the 25 largest chains merged with or were acquired by other chains.18

While the federal tax code was encouraging mergers and acquisitions, the Department of Justice announced a liberalization of its regulations on mergers. It began to use a new method of measuring industrial concentration and developed more lenient rules regarding horizontal integration. In addition, Justice issued guidelines under which conglomerate mergers between companies with a customer-supplier relationship will have fewer problems. Thus, nursing home chains experienced fewer restrictions on either vertical or horizontal growth and at the same time were beneficiaries of tax policy changes that encouraged such growth.


Many factors, including a rapidly aging population and the availability of public assistance in paying for such care, have contributed to the growth of the nursing home sector. As shown, Medicare and some Medicaid systems seem to have provided nursing home investors with overly generous compensation, especially during the early years of these programs. At the least, by paying for the cost of care, as well as interest, depreciation, and an essentially guaranteed return on equity, public reimbursement systems made nursing home investment extremely attractive. The result was a rapid flow of capital into this sector.

Three public policy changes during the early 1970s helped eliminate the excess supply of nursing home beds and make investment in the nursing home sector even more attractive. To a large degree these developments favored the larger, multifacility proprietary firms—the chains. The expansion of coverage to individuals needing intermediate care spurred increased demand.19 At the same time the extension of the LSC to those facilities providing intermediate care eliminated many of the original "mom and pop" investors who owned relatively small facilities that could not be profitably operated if upgraded to meet LSC requirements. In addition, many of these small operators lacked the same kind of access to capital for renovation or new construction as publicly held and larger multifacility firms. Finally, the imposition of health planning, and other limits on bed supply have encouraged acquisitions rather than new construction for investors that wish to expand their nursing home holdings.

Medicaid (and to a lesser extent, Medicare) reimbursement for interest and depreciation made nursing home investment attractive from a real estate viewpoint, and this was augmented by the tax advantages from depreciation and from capital gains rules. Thus, high interest rates and construction costs, CON and moratoriums on new nursing home construction, the availability of capital for the larger operations (particularly the chains), and tax and reimbursement policies were part of a constellation of factors that contributed to a climate favoring mergers and acquisitions. As Baldwin and Bishop (1983) argue,

It is no surprise that the new investors were not the small owner-operators who had built nursing home capacity and provided care since the mid-1930s; nor were the owners of new capacity the charitable enterprises that had also been active in providing care in the past. Instead, they were for-profit corporations and partnerships that could benefit from the cash flow, tax savings, and capital gains on real estate transactions.

The Impact of Ownership on Cost, Quality, and Access

Nearly 20 years have passed since Medicare and Medicaid began disgorging first millions and now billions of dollars a year for nursing home care. During that time, health and safety regulations governing nursing homes have been developed at both the state and federal level, and the industry has become dominated by investors who seem to be increasingly sophisticated businessmen. Despite these developments, quality of care and quality of life for residents in the nation's nursing homes continue to be problems. Quality varies from excellent to seriously substandard. In addition, long-term care is beset by escalating costs and serious access problems for the elderly poor and those who require a substantial amount of exceptionally skilled care or extensive "hands-on" care (U.S. Senate Special Committee on Aging, 1984).

This section examines the various arguments, assertions, and hypotheses about the impact of ownership type on cost, quality, and access, using available empirical studies and analyses of state regulatory agency reports to examine the effect of ownership structure on nursing home performance.

The Impact of Ownership Type on Quality

Questions about the impact of nursing home ownership on service delivery have provoked considerable theoretical speculation as well as some empirical research (e.g., Bishop, 1980; Weisbrod and Schlesinger, 1983). In general, the view is that whether a nursing home is owned and operated by a proprietary or nonprofit organization will affect not only the cost and quality of care but also whether or not it is equally available to all persons needing such care. The issue has taken on new urgency in the minds of many observers and policymakers with the growth of the for-profit sector in long-term care, particularly with the emergence and growing presence of nursing home chains.

Debates about the impact of ownership type on the performance of nursing homes are often tied to arguments about the alleged benefits and shortcomings of private versus public ownership in health care generally. Critics of proprietary ownership generally speculate on the potential negative effects associated with the goal of profit maximization. They argue that a fundamental conflict may exist between the primary purpose of a proprietary business—to show a profit—and the provision of high-quality care. Since nursing home patients are typically so vulnerable physically and mentally and become impoverished in paying for nursing home care, most observers agree that patients are often unable to protect their own interests in the nursing home.20 Thus, critics fear that in a conflict between achieving a profit and providing high-quality care, the care of the patient is likely to suffer (Butler, 1976; Fottler et al., 1981; Beattie and Bullock, 1964; AFL-CIO, 1977).

Many social theorists have argued that a community of nonprofit service providers is more desirable, given the history and orientation of voluntary organizations. These groups are rooted in the tradition of mutual benefit organizations, such as the religious and fraternal organizations, charitable groups, and labor unions that started old-age institutions for their members in the early part of this century. Their primary goal is seen as the provision of care and service, not achieving a profit (Via-deck, 1980; Weisbrod and Schlesinger, 1983; Harris, 1981; Lasch, 1979).21

This section reviews several types of information about the impact of ownership type on quality, including impressionistic findings; empirical analyses that use structural and resource input measures of quality; data from state licensure and certification agencies on violations (basically of structural or input measures of quality); complaints lodged by nursing home patients and their families; and an empirical analysis that uses process and outcome measures of quality. Some new data on the impact of chain ownership on quality are also presented.

Impressionistic Evidence

Impressionistic findings suggest that nonprofit facilities tend to provide better quality of care and quality of life, but these findings are hardly conclusive. Brooks and Hoffman (1978) visited many intermediate care facilities (ICFs) in the Cleveland metropolitan area and concluded,

We . . . are impressed with the noticeable differences between the two types of ownership. In general, homes for the aged (nonprofits) appear to have a more "homey" atmosphere, to be more adequately staffed, to be kept in better repair, to be more closely linked to community organizations, and to have more patient activities than do proprietary intermediate care nursing homes.

Vladeck (1980) deals with this issue in his book, Unloving Care. On the basis of his observations and interviews, Vladeck concludes,

. . . on the average, voluntary, facilities are somewhat better than proprietary ones. The worst nursing homes are almost exclusively proprietary. But in the middle ranges, there is substantial overlap. The best way to visualize the difference might be to conceive of the range of quality in each of the two types of nursing homes as a quasi-normal distribution .... The two distributions overlap markedly, with the mean for the voluntaries slightly higher than the mean for proprietaries, and with the voluntaries having a shorter low-quality tail.

Winn and McCaffree (1976) conducted a study of 282 nursing homes identified by state officials (in 16 states) as being high-quality homes and developed a different impression· (Their purpose was to study how the patterns of services received by patients in these excellent facilities differed from other facilities.) They observed that the proportion of nonprofit facilities identified as "high quality" did not differ from the proportion of nonprofit facilities in the population. However, without information about the distribution of the "adequate" and "seriously substandard" facilities, one cannot conclude that no difference exists.

The performance of nursing home chains is even more difficult to evaluate, even impressionistically, since it seems to vary. significantly from chain to chain. In a study for a congressional committee, Richard Levinson (1984) and other staff interviewed state Medicaid and health department officials regarding the impact of chain ownership on quality. Most state officials lacked systematic information about quality of care, much less how it varies by type of ownership. Also, state officials often do not know which facilities are part of multifacility. chains. However, while officials are concerned about the growing concentration of nursing home chains and the future implications of this trend, many currently view the chains in a fairly favorable light. Thus, Levinson notes, that though responses "are anecdotal and impressionistic, at best,"

. . . respondents from the state Medicaid administrations commonly report that the chains have been responsible for bringing a number of local privately owned facilities ("room and pop" homes) which were substandard operations up to the minimum acceptable level . . . . The chains have the capital to upgrade institutions they purchase and are sometimes unwilling to jeopardize their name for deficiencies that can be remedied. Indeed, they indicated that some chains would not allow a facility they purchased to run under their name until it was brought up to—or close to—the minimum acceptable standard. It must be emphasized that these facilities are not necessarily viewed by state administrators as offering "good quality" care, but are just good enough to meet state standards .... Some credit the chains with helping them to remove the worst abuses in nursing home facilities.

In interviewing officials from several states, we heard much the same about the nursing home chains, but the view differed markedly depending on the chain under discussion. In four states where one chain operated, state officials cited it as the worst performer among all the chains—with quality of care a major problem in many of its facilities. Two other nursing home chains, however, were cited as making efforts to upgrade the facilities they purchased.22

Some state officials, like Governor John Carlin of Kansas, have expressed concern about the growing concentration of chain ownership, which they fear may lead to decreased competition and increased costs. Also corporations with facilities in one state and headquarters in another state are seen as more difficult to regulate. Several state officials expressed concern that large chains could exercise too much influence in state rate setting and regulatory. issues with threats to withdraw from the Medicaid program. In addition, some state officials felt "outclassed" when regulatory actions involved legal proceedings because of the chains' high-priced and highly qualified legal representation, while state agencies typically must rely on relatively inexperienced lawyers.

Other state officials, however, felt that the chains were often more responsive to state Medicaid and survey agencies than were individual owners. Some cited the managerial ability of some chains in this regard. Others, like Dr. Janice Caldwell of the Texas Department of Human Resources, felt that a chain is more likely to take corrective action promptly when one of its facilities is cited for deficiencies because the parent corporation would be unwilling to jeopardize its relationship with state agencies and place all its facilities at risk of increased regulatory activity.23

Our impression, based on visits to more than 200 facilities and interviews with state officials, ombudsmen, and families of nursing home patients, is that nonprofit, church-affiliated homes tend to provide better quality of care and quality of life than proprietary facilities. Excellent facilities are found in each category, but truly wretched ones are almost always proprietary. However, one's evaluation of the performance of nursing homes may differ according to the dimension of quality under consideration. For example, Ms. Iris Freeman, head of the nursing home advocates program in Minnesota, observes that her office receives complaints about all types of facilities; complaints about quality of care tend to be about proprietary facilities, while complaints about violations of patients' rights (particularly about paternalism toward patients) tend to be lodged against non-profits (Freeman, personal communication, 1985). Clearly, definitive conclusions about differences in quality are difficult to reach· However, most observers' general impressions seem to be that nonprofits, on the average, provide better quality. as it is generally understood.

Empirical Research: Variations in Input Measures of Quality

The findings of empirical studies on the relationship of ownership to resource input and structural measures of quality. are occasionally inconsistent, although most have found significant differences between for-profit and nonprofit facilities in the amount of resources allocated to direct patient care. What these differences indicate, however, is a matter of substantial debate. The validity of resource inputs, such as nursing hours per patient or expenditures on raw food, as surrogates for quality. has been questioned by critics who argue that such measures may hear little relationship to either quality. of care or quality of life in a facility, (O'Brien et al., 1983; Levey et al., 1973; Kane et al., 1983). Several studies have failed to find any statistically significant relationship between structural factors or resource inputs and process and outcome measures of quality (Lee, 1984; Kurowski and Breed, 1981).

Despite such criticisms of input measures of quality, their use can be supported on several grounds. First, the availability of resource inputs is clearly a precondition to their use in patient care (Kosberg and Tobin, 1972; Kosberg, 1973). Second, the lack of correlation between resource input or structural measures of quality and process or outcome measures may be due to the lack of variation in these independent variables in the homes studied (Linn et al., 1977; Kurowski and Breed, 1981). Third, some studies have found some resource inputs to be related to both process and outcome measures of quality of patient care (e.g., Kurowski and Breed, 1981; Shaughnessy et al., 1980). Linn et al. (1977) found that the number of registered nurse (RN) hours per patient day was positively associated with patient survival, improvement, and discharge from the nursing home. Raw expenditures on food and the availability of individual dietary, planning were also associated significantly with two of the outcome measures of quality of care. In a 1977 study of homes rated as superior, the American Health Care Association found that these homes outscored other facilities in the number of RN hours per patient day but were lower in licensed practical nurses (LPNs).24

Two state studies also examined the value of various resource inputs as indicators of quality. The Virginia Joint Legislative Audit and Review Commission (Virginia JLARC, 1978) identified facilities that state inspectors had found deficient in "meal menus, adequate food portions, or the quality of meals," and facilities that had "complaints about food." Raw food expenditure data were available for 9 of the 17 such nursing homes. JLARC found that

In all nine cases, the per day expenditure was below the state average. This supports the belief that low raw food costs and poor meal quality are related, and that food costs could serve as a measure of dietary. adequacy.

The Ohio Nursing Home Commission (1979) studied differences between facilities rated as "high quality" and "low quality." On the basis of agreement from three sources (a reputational survey of nursing home ombudsmen, hospital discharge planners, and state inspection staff; licensure and federal certification survey reports; and inspections of facilities by commission staff), 60 nursing homes were identified as providing either high or low quality. Of these, 27 low-quality homes and 28 high-quality homes had current Medicaid cost reports on file with the Ohio Department of Public Welfare. A comparison of facilities' allocation of funds (Table 6) shows that "high-quality'' homes have higher expenditures on direct patient care items, such as food, RNs, aides, medical and rehabilitative care, housekeeping, and laundry and linen.25

TABLE 6. Spending Differences per Patient Day Between a Sample of High-Quality and Low-Quality Nursing Homes Participating in the Ohio Medicaid Program.


Spending Differences per Patient Day Between a Sample of High-Quality and Low-Quality Nursing Homes Participating in the Ohio Medicaid Program.

While the validity of resource inputs as indicators of quality is not definitively established, such studies support the utilization of resource input as at least partial indicators of quality of care. Several studies of for-profit and nonprofit facilities use such measures, and they yield fairly consistent findings about ownership. Two studies of resource inputs found no significant differences between for-profit and nonprofit facilities. Holmberg and Anderson (1968) interviewed administrators in 118 of the 392 nursing homes in Minnesota in 1967 and found several structural differences between for-profit and nonprofit homes.26 Although average staffing patterns (RN hours per patient day, average number of patient care staff) were very similar, nonprofits had significantly more physician hours per patient per week than the proprietaries, and the for-profits had more administrative hours per week.

However, Holmberg and Anderson (1968) concluded that most quality. indicators were not significantly related to ownership type and that the differences between ownership types were less significant than the differences among facilities within each category. Levey et al. (1973) reached a similar conclusion. They studied 129 of 690 nursing homes in Massachusetts, using an index of nursing services, patient activities, and physical plant characteristics from survey and patient care reports. They found no significant differences in their quality index on the basis of facility. ownership.

Some observers argue that the findings of Holmberg and Anderson (1968) and Levey et al. (1973) are not typical because Minnesota and Massachusetts are thought to have more-stringent regulatory. policy and higher-quality nursing homes than is average and the quality proxies used were based on resource inputs regulated by the state. A study by Gottesman (1974) supports these findings. Gottesman gathered data on 40 nursing homes and on the social, physical, and mental characteristics of 1,144 residents in those facilities. He also observed the activities of nursing home residents and staff during two 12-hour periods. Gottesman found better psychosocial activities and staff involvement in nonprofit homes and that "church-related facilities seem to have a strong sense of 'family' in their sponsorship." However, he argues that other factors, such as facility size, patient characteristics, and the mix of public and private-pay patients, may have more significance for these differences in quality than does ownership. For instance, of the proprietary facilities with high levels of public-pay patients, Gottesman argues,

These homes have a high proportion of socially marginal residents, fewer financial resources, and a resident group with many social disabilities and little community involvement. It should not be surprising that they come off most poorly with regard to basic medical and psychosocial activities as well as staff involvement.27

Other studies of resource inputs consistently find differences between for-profit and nonprofit nursing homes. For example, the concern about profit-taking at the expense of patient care has been heightened by a study (Fottler et al., 1981) that examined the relationship between profits and four measures of quality of patient care.28 This study found that there is a consistently negative relationship between a nursing home's profitability and resource input measures of patient care quality. That is, the study found that quality decreases as profits increase. While reliance on structural/input measures of quality, like those employed in the Fottler study, may be subject to debate (O'Brien et al., 1983), few observers would argue that staffing is unrelated to quality. Most would agree that sufficient staffing is, at the least, a precondition to high quality of care. Moreover, the study's findings confirm the view of many long-time observers of the nursing home industry. As Vladeck (1980) observes,

The motivations, or actual behavior, of profit-seeking firms may run counter to the well-being of nursing home residents. Proprietary. facilities tend to be physically smaller than voluntary ones, especially in the provision of public space. They have incentives to discriminate against Medicaid recipients and against admission of sicker patients. They are more likely to cut corners on supplies and staffing. And there can be no denying that most of the really scandalous conditions found in nursing home investigations have been in proprietary facilities.

Other studies find substantial differences between for-profit and nonprofit homes on resource inputs. The 1973 National Nursing Home Survey demonstrated that nonprofit homes had significantly more staff than for-profit facilities, with twice as many clerical, food service, housekeeping, and maintenance staff. Proprietary facilities had more administrative hours, as well as medical and therapeutic (e. g., physical therapy) staff hours. In both the 1973 and 1977 surveys, nonprofits had more RN hours (U.S. Department of Health, Education, and Welfare, 1975b, 1979).

Winn (1974) found similar differences in a study of a matched sample of 24 proprietary and 24 nonprofit nursing homes in Washington state. Nursing hours per patient day were slightly higher in nonprofit homes, and total employee hours per patient day were significantly higher in nonprofit facilities. The New York State Moreland Act Commission (1975) found that nonprofit facilities spent an average of $16.02 per patient per day on nursing, while for-profits spent only $12.78 per patient day. When the analysts controlled for facility size and location, however, much of the cost difference between for-profit and nonprofits was eliminated. In general, "ownership variables added only minor explanatory power," but it did account for some of the variation in spending on nursing staff.

The Minnesota Senate/House Select Committee on Nursing Homes also examined the spending patterns of nursing homes and found significant ownership differences in the distribution of expenditures (Minnesota Senate and House, 1976). Proprietaries spent nearly twice as much as nonprofits on cost of capital (property and related expenses), while non-profits outspent the proprietaries on dietary, housekeeping, and plant operation (maintenance). In addition, the Minnesota study found

Proprietary SNFs incur 37. 7% of their costs for care-related items and 20.8% for property-related items. For nonprofit SNFs, the percentages were 41% for care-related costs and 11.1% for property-related items. The differentials for ICFs were about the same.

The Virginia study (Virginia JLARC, 1978) also found substantial differences in the spending patterns of for-profit and nonprofit facilities, including that "profit status was found to have an effect on the distribution of nursing home expenditures but not on overall cost." Using data from facilities with the same average number of patient days, the Virginia study found striking differences, depicted in Table 7.

TABLE 7. Spending Patterns in Virginia Nursing Homes, 1977.


Spending Patterns in Virginia Nursing Homes, 1977.

Caswell and Cleverley (1978) also found significant differences in both the costs and distribution of expenditures by different nursing home ownership types. They found that while for-profit facilities had lower overall costs, the savings were primarily in areas that may have direct or indirect effects on the quality of patient care: housekeeping, maintenance, nursing, and dietary. The for-profits, however, reported higher costs of property (interest, depreciation, and rent or lease payments). Caswell and Cleverley concluded that many proprietary facilities were probably staffed at lower levels than minimum health and safety, standards required.

The Ohio Nursing Home Commission's analysis of 1977 costs reported by nursing homes to the state Medicaid agency revealed a similar pattern. On average, nonprofit facilities out-spent proprietaries on raw food and dietary, supplies ($4.67 per patient day versus $3.01), as well as on a composite of direct patient care items that includes nursing salaries, medical supplies and expenses, social services, and medical and rehabilitative salaries (Ohio Nursing Home Commission, 1979).29

Data from Texas (Moden, 1982) reveal similar differences in the distribution of spending. For instance, in 1978 the average for-profit facility had total net revenues 16.5 percent less than the average nonprofit. But the for-profits, on the average, spent 37 percent less on patient care (e.g., nursing staff) and 31 percent less on dietary than nonprofits. In 1980, the pattern was similar. Proprietary facilities had total net revenues (on the average) that were only 7.5 percent less than the average for nonprofit facilities, and spent 29 percent less on patient care items (e.g. nursing, medical, and rehabilitative care) and 27 percent less on food than the average nonprofit nursing home. Table 8 displays data on per diem expenditures broken out by cost category for 1981.

TABLE 8. Data on Revenues, Expenditures, and Spending Patterns in Texas Nursing Homes, 1981.


Data on Revenues, Expenditures, and Spending Patterns in Texas Nursing Homes, 1981.

Elwell (1984) studied 424 skilled nursing homes in New York State. His quality measures were "multiple scales of staffing and resource distribution" among the facilities. The distribution of resources was measured in terms of per diem expenditures on administration, medical, nursing, rehabilitation, social services, activities, nutrition, housekeeping, and other professional services. Staffing measures included RN, LPN, and aide hours per patient day, physician hours per patient week, and other professional staff hours per patient day. In addition, as a measure of quality, of life (privacy and personal space), Elwell included the proportion of patients in multiple-bed rooms.

The proportion of Medicaid patients per facility, the proportion functionally impaired, and the size and location of facilities were included to help isolate the effect of ownership on the measures of quality. Even when controlling for these, in each patient service area Elwell measured, nonprofits spent more than the proprietaries.30 He concludes that "the differences among ownership types were consistent with the hypothesis that... voluntary institutions are superior medical and personal care facilities" (Elwell, 1984). When controlling for location, Elwell found that

In each of the six regions, proprietary facilities spent significantly less than the regional mean for administration, nursing, nutrition, and housekeeping services. Proprietary facilities spent significantly less for medical services in five of the regions, for social and rehabilitation services in four of the regions .... In no region did proprietary facilities spend significantly more than the regional mean for any of the service areas measured.

He concluded,

The results of this analysis provide considerable confirmation for the hypothesis that government and voluntary facilities offer superior medical and personal care to their patients. The allocation of financial resources as well as the number of staff hours per patient day were all consistent with the hypothesis.

Data on the impact of for-profit nursing home chain ownership on quality, of patient care are even more scant than that focusing on differences between for-profit and nonprofit facilities. Greene and Monahan (1981) analyzed data from 24 SNFs in the greater metropolitan area of Phoenix, Arizona. They felt that in the relatively unregulated market of Arizona, which at the time had no state Medicaid program (and thus no federal health and safety standards or inspections), might make the orientation of nursing home owners more apparent. As a measure of quality, Greene and Monahan used a composite of facility spending on such items as RN hours, expenditures on RNs, and dietary expenditures. Greene and Monahan examined the behavior of nonprofit homes, individually owned or locally headquartered proprietaries, and for-profit nursing home chains. They found that "for-profit institutions give significantly lower levels of care, even with charges and other factors controlled," and that "distantly headquartered chain operations tend to provide lower levels of care than locally-owned facilities." However, since the number of homes in the Greene and Monahan study is small and the unregulated market of Arizona may not be typical, their findings cannot safely be generalized.

Data on Texas nursing home expenditures in fiscal year 1983, displayed in Table 9, further illuminate the relationship between ownership and allocation of funds to resources thought to affect quality of patient care. The nonprofit facilities outspend the for-profit facilities, on the average, in every, category, including facility (property) and administrative costs. The differences in spending, however, are most notable in the patient care and dietary categories. Data on variations among the four largest nursing home chains operating in Texas are shown in Table 10. In general, the differences are consistent with earlier findings. The statewide mean for spending on the patient care category is 44 percent of total expenditures. For proprietaries it averages 43 percent, while for chain-owned facilities, spending on patient care is 42 percent of total expenditures. The two largest chains in Texas both spend less than 39 percent of the total on patient care cost items. Nonprofit facilities spend an average of 47 percent of their total expenditures in the patient care category.

TABLE 9. Revenues, Expenditures, and Spending Patterns in Texas Nursing Homes, 1983.


Revenues, Expenditures, and Spending Patterns in Texas Nursing Homes, 1983.

TABLE 10. Revenues, Expenditures, and Spending Patterns in Nursing Home Chains, Texas, 1983.


Revenues, Expenditures, and Spending Patterns in Nursing Home Chains, Texas, 1983.

Variations in Licensure and Certification Deficiencies and Complaints

Another source of data that can be used to evaluate the performance of different nursing homes is information on state licensure and federal certification reports regarding violations of minimum health and safety standards. These reports have often been justifiably criticized in terms of failing to reveal an accurate, multidimensional picture of the quality of care provided to patients in nursing homes, much less quality of life (e.g., Hawes, 1983; Ohio Nursing Home Commission, 1979; New Jersey State Nursing Home Commission, 1978; Missouri State Senate, 1978). Because inspections are usually announced or regularly scheduled, owners and administrators can anticipate the approximate date of inspections. In addition, the survey forms focus almost entirely on structural and input characteristics—on the capacity of the facility to provide care rather than on the condition and satisfaction of patients. For these reasons, critics argue that the inspection system—and the violation citations that emerge from this process—yields insufficient information about quality. On the other hand, there is no reason to expect that the deficiencies/violations do not accurately reflect failures by the facility to meet existing standards, nor to expect that the citation system is biased in favor of any particular ownership type. Thus, while they do not fully measure quality, licensure and certification deficiencies may capture important aspects of quality of care.

Complaints reported by patients, family members, or others familiar with the facilities are another potential source of data about the performance of nursing homes. Many argue that complaints are especially valuable since they may reveal patients' and families' perceptions of quality. and may reveal more than regulatory reports about quality of life, augmenting inspection reports (Weisbrod and Schlesinger, 1983). There is some concern that complaint data may be biased against higher quality facilities, since in these homes patients and families may feel less fear of reprisal and less reluctance to complain. In addition, individuals may be more willing to lodge complaints when they feel most confident that corrective action will occur.

Existing studies and available data on regulatory violations and complaints indicate that nonprofit facilities offer higher quality of care and quality of life than proprietary ones. There are too few systematic data on the performance of nursing home chains—and too much apparent variation among different chains—to permit definitive conclusions.

The Minnesota Joint House/Senate Select Committee on Nursing Homes analyzed differences in complaints about poor quality of care (Minnesota Senate and House, 1976). The data from 1974 revealed that while only 39.1 percent of the licensed nursing homes in Minnesota were proprietary, 78.2 percent of the complaints filed with the state health department were lodged against for-profit homes. Of the 41 nursing homes that were the subject of three or more complaints during 1974, 39 (95 percent) were proprietary facilities.

The Ohio Nursing Home Commission (1979) analyzed characteristics of all (45) nursing homes that had such serious violations of health and safety standards that the Ohio Department of Health began proceedings to revoke their licenses in 1976. Only one (2 percent of the total) was a nonprofit facility, although nonprofit nursing homes constitute more than 20 percent of Ohio facilities.31

Koetting's study (1980) is perhaps the best-designed empirical study to date. Koetting selected a sample of 136 Illinois facilities divided into five ownership categories: (1) private non-profits; (2) government-owned nonprofits; (3) proprietaries with working owners; (4) chain-owned proprietaries; and (5) other proprietaries. Quality-of-care measures were derived from licensure surveys and inspection-of-care reports. Using regression analysis to isolate the impact of ownership on these measures, and controlling for facility size, patient mix, and occupancy rate, Koetting concluded that nonprofit homes had superior quality.32

Riportella-Muller and Slesinger (1982) studied quality of care in 462 of 533 Wisconsin nursing homes. Measures of quality included numbers of code violations and complaints. On the basis of the complaint data, the nonprofit homes provided better quality, but the data on violations yielded more complex findings. Small nonprofit homes had fewer violations than small proprietary homes, but large non-profits (150 + beds) had more violations than similar proprietaries. Riportella-Muller and Slesinger concluded that although nonprofits performed somewhat better than proprietary nursing homes, the size and certification status of the facility were important mitigating factors and that simply eliminating for-profit entities would not necessarily significantly improve quality.

Weisbrod and Schlesinger (1983) also studied code violations and complaints filed against nursing homes in Wisconsin; however, their findings in favor of the nonprofits were much stronger than those of Riportella-Muller and Slesinger. Based on analysis of 431 nursing homes and data for 1976, Weisbrod and Schlesinger found that nonprofit homes had significantly fewer complaints than did proprietary firms. The picture for differences in ownership performance as measured by code violations was more complex. Nonprofit homes that were not church owned had significantly more regulatory violations than their for-profit counterparts of similar size. Church-owned nonprofits performed better on each measure (complaints and regulatory violations) than did for-profits.

States generally do not systematically report data on violations of state licensure and federal certification standards in a form that is useful to researchers. California, however, does assemble such data. The California Health Facilities Commission (1982) examined licensure citations to nursing homes that failed to meet minimum standard for the period 1977-1979. Proprietary firms generally performed worse than nonprofits. The average number of licensure citations per facility was 0.46 among church-related homes, 0.49 for other non-profits, and 1.8 for proprietary homes33 (see also AFL-CIO, 1983a, b).

Texas also systematically records serious violations on which the Department of Human Resources has taken action. We analyzed three types of increasingly severe punitive actions imposed by the department on long-term care facilities in Texas between January 1 and April 29, 1983. During that time, 181 compliance letters were issued, 35 vendor holds on Medicaid payments were imposed, and 42 facilities were terminated from the Medicaid program. Punitive actions were almost exclusively taken against proprietary facilities. For-profit homes (840 or 88 percent of facilities in the Medicaid program) received 169 (93.4 percent) of the compliance letters, 100 percent of the vendor hold actions, and between 90 and 100 percent of the 42 contract terminations.34 Nonprofit nursing homes (115, or 12 percent of facilities in the Medicaid program) received 12 (6.6 percent) of the compliance letters, none of the vendor hold actions, and between 0 and 10 percent of the contract terminations.

In sum, in terms of code violations, nonprofit nursing homes perform much better than proprietaries. The relative performance of nursing home chains is more difficult to evaluate, although there are indications that chains may differ significantly from one another and that some chains do well in terms of violations of structural health and safety, standards while others do quite poorly. For example, when we analyzed the 1983 Texas data on punitive actions, we found that


Beverly Enterprises owns/operates 121 or 12.7 percent of the facilities participating in the Texas Medicaid program; however, Beverly received 18.2 percent of all compliance letters, 17 percent of the vendor holds, and 14.3 percent of the contract terminations (decertification).


ARA owns 114 or 11.9 percent of the facilities and received 7.2 percent of the compliance letters, 14.3 percent of the vendor holds, and 2 percent of the contract terminations (de-certification).


Hillhaven owns/operates 16 facilities (1.6 percent) and received 1.6 percent of the compliance letters and none of the vendor hold or decertification actions.

Thus, the chains varied in terms of violations cited and serious punitive actions instituted by the state. This suggests that nursing home chains are not a "monolith"—that is, each chain may have a slightly different orientation or organizational structure that affects its performance more than the mere structural characteristic of being a multifacility operation.

Variations in Process and Outcome Measures of Quality

Only a few studies have attempted to measure variations in quality using process and outcome measures (Kane, 1983; Schlenker et al., 1983; Schlenker, 1984). One that directly addresses the impact of ownership on quality focused on nursing homes in Iowa where the state licensure agency developed an "outcome oriented" licensure survey for use in the annual inspection of nursing homes (Lee, 1984). The survey focuses not only on resource inputs but also on resident satisfaction (e.g., feelings of safety and security, enjoyment of food); professional health care (e.g., health care planning for individual residents); implementing the medication, treatment, and diet plans as prescribed by physicians; the quality of the living environment (e.g., cleanliness of rooms); room conditions; and food service (e.g., whether the food provides basic nutritional requirements and whether residents like the food). In analyzing the differences in Iowa facilities, Lee (1984) found not only that proprietary facilities had significantly fewer staff than similar non-profits but also that nonprofits performed better on every outcome category: care planning, quarterly review of patients, room conditions, and quality of living environment.35 The introduction of a "size" variable did not compromise the findings of the superiority of nonprofit facilities. Lee concluded that their findings are consistent with the Greene and Monahan study (1981) that ''nonprofit(s) appear to provide consistently better quality of care when compared with the for-profit facilities" (Lee, 1984).

Summary and Conclusions Regarding Quality

The preponderance of evidence from the relatively few studies that systematically address quality of care and ownership differences suggests the superiority of nonprofits—particularly of the church-related nonprofits. The data from the state surveys strongly support this finding. Studies using a variety of quality measures—resource inputs, licensure violations, complaints, and outcome-oriented measures of quality—are fairly uniform in finding nonprofit facilities superior in quality to for-profit nursing homes. The findings on the relative performance of the chains are less conclusive.

Because few studies have adequately controlled for the possible effects of differences in patient case mix, it is difficult to interpret data on resource inputs. Higher levels of staffing, for instance, may be a sign of higher quality of patient care, of a more intense case mix, or of inefficiency. Most studies have flaws, particularly in terms of the measures of quality (e.g., O'Brien et al., 1983). The nature and strength of the relationship between the proxies for quality and a patient-focused, multidimensional concept of quality have not been conclusively established. At best, such proxies as resource inputs are preconditions to, or partial indicators of, high quality of care. Until better measures are developed, tested, and used in studies, "knowledge" about the impact of ownership and other variables such as size is provisional.

Finally, researchers must use richer models of ownership. Lumping government-owned facilities with church-related homes and private nonprofits (that may be nonprofit in name only) into the same ownership category, may obscure significant differences in performance. The same is true of the for-profits. A multibillion dollar multistate chain of 800 nursing homes, whose stock is publicly traded, is hardly the same organization as a 40-bed facility owned and operated by a practical nurse and her family. Yet, both are for-profits. Finally, there may be significant differences among various multifacility nursing home systems, and understanding the performance of chains may require analyses that distinguish among them.

The Impact of Ownership on Cost

In general, empirical studies indicate that nonprofits report higher per patient per day costs than for-profit facilities. However, this finding requires qualification. First, most studies have employed inadequate measures of the severity of patient case mix and of quality of care. Thus, variations in cost may be due to differences in the facilities' mix of patients served or in the quality of patient care. Second, one of the most significant differences in costs is in the distribution of expenditures by different facilities, that is, in the way they allocate funds to various cost centers or items. This may have significant implications for quality and efficiency. Third, there is some indication that although certain types of facilities have lower costs, the actual price charged to patients varies relatively little.

Cost Function Studies and Behavioral and Market Models

There have been a variety of studies that focus on nursing home costs. Many of the most useful studies utilize secondary data from one or more states and relate differences in costs to such factors as type of ownership, location, bed size, occupancy rate, mix by payee, and measures intended to capture differences in patient case mix and quality of care. Most studies have found the costs reported by nonprofit facilities to be higher than those of similar proprietary homes; however, proxies for such key factors as patient case mix and quality have varied and generally been inadequate. Thus, the results must be interpreted carefully.

Two studies found no significant variations in costs associated with ownership. The New York State Moreland Act Commission (1975) found that voluntary facilities reported significantly higher costs per patient day ($16.02) on the average in 1974 than proprietary facilities ($14.12). However, when the analysts controlled for the size of the facility and regional wage differences, "very little difference in cost was explained by the ownership factor alone."

The Virginia Joint Legislative Audit and Review Commission's (1978) analysis of reported nursing home costs also found little difference between nonprofit and proprietary facilities, although, as discussed earlier, the study found significant differences in the allocation of expenditures, among various cost centers, with "nonprofit facilities . . . [having] lower facility costs (interest, rent, and depreciation) and administrative expenses but . . . [spending] more for nursing care and dietary services."

A few other studies found only slight differences in costs between proprietary and nonprofit nursing homes. Levey et al. (1973) found that higher costs were associated with nonprofit ownership, but the difference was not statistically significant. Winn (1974), on the basis of data gathered from nursing home administrators, found per diem costs to be slightly higher among nonprofits—but not significantly so.

Two other studies reveal significant cost differences. Both Holmberg and Anderson (1968) and Koetting (1980) found that the costs reported by nonprofit facilities were, on average, significantly higher than those of for-profits. Koetting found that for-profit facilities could achieve the same level of quality (as measured by licensure code violations and deficiencies in individual patient medical reviews) at a lower cost than nonprofit nursing homes. Both studies, however, found little difference between the two types of facilities in actual charges to patients. Holmberg and Anderson found, in fact, that once the analysis of the proprietaries included their profit factor, then charges by nonprofit facilities were lower.

Other studies have consistently found non-profits to have higher reported costs. Ruchlin and Levey (1972) studied 4 years of cost data (1965-1969) for 175 Massachusetts nursing homes and found nonprofit ownership generally had higher costs. Caswell and Cleverley (1978) in analyzing costs reported by Ohio nursing homes found that "proprietary homes do appear to be less costly than (nonprofit) . . . homes." Both noted that the allocation of expenditures within total spending differs, with the for-profits spending significantly more on property costs.

Birnbaum et al. (1981) analyzed data from several different data sets, including the National Nursing Home Survey and data on facilities participating in the Medicaid programs in New York, Massachusetts, and Indiana. They found nonprofit facilities (private and government-owned were both included) have higher costs than for-profit nursing homes. The analysis of each data set had some controls for variations in patient mix among the facilities, and in analyzing the New York data, Birnbaum et al. used inspection rating data as a proxy, for quality. Even when these types of case mix and quality measures were taken into account, the cost differentials between for-profit and nonprofit facilities persisted.

In her review of 12 major cost studies, Bishop (1980) concludes that for-profit facilities have lower per diem costs than nonprofit facilities, even when other factors associated with higher costs (such as location and the provision of skilled nursing care services) are held constant. Meiners (1982) also found that proprietary facilities had average costs that were significantly lower than nonprofit nursing homes, even when controlling for some measures of case mix, the range of therapeutic services available, and the type of staff coverage on daily shifts. Meiners also argued that whether a facility was part of a nursing home chain was not statistically significant in explaining variations in cost. Finally, Lee and Birnbaum (1983), Schlenker and Shaughnessy (1984), and Schlenker (1984) all report that nonprofit ownership is consistently related to higher costs.

Few available studies (e.g., Koetting, 1980; Lee et al., 1983; Meiners, 1982) directly address the impact of multistate chains on costs, and their data were from facility costs reported in the early 1970s. Further, we desired a more refined analysis of various ownership types. Thus, we undertook a new analysis of nursing home costs in Ohio. It examined variations among private nonprofit facilities (government-owned were excluded) and three types of proprietary facilities: (1) for-profit facilities owned by individuals who own and/or operate three or fewer facilities in Ohio; (2) intrastate chains, usually consisting of between four and ten facilities (all in Ohio) and owned by an individual, family, or partnership; and (3) multistate publicly held nursing home chains.36

Consistent with much previous research, our analysis found substantial cost differences between nonprofit facilities and those operating under the three proprietary forms. The average total costs per patient day in nonprofit homes were approximately $6.00 to $8.00 higher than average total costs in various proprietary facilities. The average total costs for individually owned homes and for those that are part of intrastate chains were almost identical, while the total costs for homes operated by multistate chains were approximately $1.50 higher than the other two proprietary forms. The same pattern holds for average operating costs per patient day. However, in our analysis we also examined differences in the allocation of expenditures and, using multiple regression techniques, were able to gain a clearer picture of cost differences and the factors that affect them.

Our new Ohio analysis shows expenditures on patient care to be much higher in nonprofit homes than proprietary ones. Nonprofits spent approximately 27 percent more per patient day on raw food than for-profit homes, from 30 to 100 percent more on medical and rehabilitative services, from 250 to 1300 percent more on social services, and from 25 to 32 percent more than the proprietaries on total nursing (which includes RNs, LPNs, and nurse's aides and orderlies). Individually owned and intrastate facilities spent more than the nonprofits on LPNs, in effect substituting one kind of professional nurse for another.

If, as we argue, these measures of resource inputs and service availability are valid proxies for quality of care, Ohio nonprofit facilities offer higher quality of care on the average than do the proprietary facilities. The findings, some of which are displayed in Table 11, also suggest that in Ohio, the multistate chains perform somewhat better than the other two proprietary categories. The intrastate chains commit the fewest resources to direct patient care and thus may provide the lowest quality of care.37

TABLE 11. Comparison of Average Expenditures in Major Cost Centers, Ohio, 1977.


Comparison of Average Expenditures in Major Cost Centers, Ohio, 1977.

As noted, we found that the difference in costs between the nonprofit and the for-profit categories was between $6.00 and $8.00 per patient day. The regression analysis made it clear, however, that much of that difference derives from differential spending on patient care (quality) and from differences in facility characteristics other than ownership (i.e., occupancy, admissions, patient mix by payer type, facility size, certification status, and location). The analysis also shows, however, that not all of the variation in costs between for-profit and nonprofit owners is related to these factors. The results indicate that controlling for different levels of patient care expenditures (our quality proxies) and different facility characteristics significantly reduced the cost difference; nevertheless, all three forms of proprietary facilities have total and operating costs that are still significantly lower than those found in the nonprofit facilities. For-profit facilities report costs per patient day that are approximately $2.50 lower than the nonprofits.

The analysis displayed in this section leads to several conclusions. First, nonprofit (non-government) facilities, on the average, report higher costs than the average for-profit facility. When we take into account factors other than ownership that might account for cost variations, the difference in costs between nonprofit and for-profit facilities is reduced, but even with these factors taken into account, there is still a significant cost difference between for-profit and nonprofit nursing homes in Ohio. Second, the differences between the various types of for-profits are quite interesting and may be missed by most analyses. When we used total or operating costs as the dependent variable, the three types of for-profit homes displayed little difference. Their behavior appeared quite similar. However, when we examine the for-profits' individual cost functions, their behavior differs; that is, the factors that are related to cost variations differ among the different ownership types. This is especially significant since it may indicate different responses among the various ownership types to regulatory and reimbursement policies. This issue deserves further study to determine whether it is more broadly generalizable. Finally, the variations between the different ownership types in relation to the quality, proxies are provocative. Like most other studies, our analysis shows significant differences between for-profit and nonprofit nursing homes in their expenditures on direct patient care and dietary items.

The Impact of Chains and Chain Acquisition of Facilities

The best way to study the impact of multifacility chains may be to analyze facilities' performance before and after being acquired by a chain, and no empirical studies have systematically attempted this. Some evidence, however, suggests that chain acquisition may lead to higher costs, even when no improvement in the quality, or level of services can be identified.

The facet of chain acquisition that has attracted the most attention is the impact on capital or property, costs. The real estate advantages of nursing home investment have been discussed by several observers (e.g., Shulman and Galanter, 1976) and earlier in this paper. The Ohio Nursing Home Commission (1979) found that there were ownership changes in 20 to 25 percent of for-profit facilities annually—usually to take advantage of various tax and property, cost reimbursement benefits. The result was that the private-pay patients and Medicaid program paid higher and higher costs for the same facility, to provide essentially the same services it had before the ownership change. Vladeck (1980) argues that such turnover causes "a disproportionately high share of industry, revenues . . . to [go to] depreciation, . . . interest premiums and personal profits" and may harm patient care. He argues

The high degree of leveraging also creates a kind of perpetual instability in the nursing home industry as a whole and within the life of any given institution. Nursing homes are always changing hands or changing financial structure; skimping and comer-cutting fluctuate with financing cycles . . . . The one economic certainty in the typical nursing home is that the monthly mortgage payment must be met. Expenditures on staff and supplies can wait, if necessary, but capital financing costs must be covered.

GAO (1983a, b) found that the acquisition of a hospital chain led to significantly higher property, costs being charged to the Medicare program. This also occurs in nursing homes. The Kansas Division of Post Audits found that acquisitions and mergers led to higher property costs. The audit division estimated the takeover of 58 ICFs by a large, multistate chain after March 1982 added $650,000 to the Medicaid program's costs in 1983 alone (Levinson, 1984). Another example is Beverly Enterprises' acquisition of Provincial House nursing homes in Michigan. According to one analysis of Medicaid cost reports, the pre-sale interest expenses reported by Provincial House nursing homes in 1981 totaled $1,814,296. After the acquisition by Beverly, these same facilities reported an interest expense of $4,280,212 as a result of the debt financing of the purchase, a 1-year increase in interest expenses alone of 136 percent (AFL-CIO, 1983a).

Also troublesome is the possibility—suggested by the distribution of spending by the chains—that such increased costs may be covered by chains' reducing expenditures on patient care. The analysis of 1983 nursing home spending patterns in Texas demonstrates that the chains' total expenditures were almost identical to the statewide mean. However, they spend 9 percent more than the statewide mean on property costs and 8.2 percent more on administrative expenses, while spending 4.4 percent less on patient care and 7.4 percent less on dietary services (Texas Department of Human Resources, 1984; see also Table 10). Other data showing similar patterns (e.g., in Virginia) were reviewed earlier.

The large, multifacility chains have argued that their higher administrative costs contribute to improved administration and that their lower patient care costs and dietary expenditures are due to management and purchasing efficiencies. This is not supported by a variety of data discussed earlier, including the records of two chains operating in Texas that spend more than the statewide mean on administration, substantially less on patient care and dietary costs (Texas Department of Human Resources, 1984; see Table 10), and have received a high proportion of punitive actions for violations of minimum health and safety standards.

Two other studies also suggest that higher administrative costs among multifacility chains do not lead to greater operating efficiencies. A Virginia study (Virginia JLARC, 1978) found that homes that are subsidiaries of chains generally paid the home office management fees, which averaged $50,266 per facility in 1976 and added about $400 per year to the cost of each bed. However, these fees did not reduce overall administrative costs or produce savings in other cost categories. The study concluded, "It appears that chain ownership offers no substantial cost savings to either the patient or the Medicaid program." Similarly, the Ohio Nursing Home Commission (1979) found that facilities with management fees had higher "other" administrative costs.38

Although there may be circumstances in which acquisition activity does not lead to higher costs—for example, if payers will not pay for property costs following any sale—available evidence of such cost increases is persuasive. Whether the increased facility costs that result from the chains' acquisition and merger activities are justified by improved quality or more equitable access is difficult to determine since empirical studies have not adequately addressed this issue. Further, since it appears that chains vary among themselves in their total costs, the distribution of their expenditures, their performance in terms of regulatory standards, and their admission policies, more sophisticated analyses are required to address these issues.

Summary and Conclusions Regarding Cost

Most studies find nonprofit homes to have higher reported costs than for-profit homes. Although controls for other factors that lead to higher costs reduce the magnitude of this difference in costs, they do not eliminate them. Even when proxies for quality are introduced, as well as measures of patient case mix intensity, the differences remain. Thus, some analysts, like Koetting (1980), argue that proprietaries are more efficient—that is, they can attain a given level of quality at lower cost than the nonprofits. Indeed, our analysis of the Ohio nursing homes could be seen as supporting this proposition.

This conclusion may be premature. Many studies use inadequate measures of variations in patient case mix intensity. This is critical, since case mix differences between facilities have been found to be the best predictor of variations in costs (Schlenker, 1984) and since some evidence suggests nonprofit facilities typically have a more intense case mix. Thus, case mix may account for some of the cost differences between nonprofit and for-profit facilities (Stassen and Bishop, 1983b; Schlenker et al., 1983; Schlenker and Shaughnessy, 1984). Also nonprofit facilities tend to have a higher proportion of private-pay patients, who tend to be more functionally dependent than Medicaid patients (Liu and Mossey, 1980; Schlenker and Shaughnessy, 1984). Thus, to the extent that prior studies have not captured all relevant dimensions of case mix variation, they may overestimate the cost differential associated with ownership per se.

In addition, the proxies for quality used in cost studies are at best only partial measures of quality and, at worst, are unrelated to either quality of care or quality of life. Host studies use resource inputs as proxies for quality, although studies have found a weak relationship between inputs and process and outcome measures of quality. Even code violations, the majority of which are reflections of deficiencies in structural and input standards, are inadequate measures of quality. Thus, some variation in costs may be associated with unmeasured differences in quality.

Finally, the few analyses that focused on "charges" by facilities—rather than only their reported costs—found little or no differences between for-profit and nonprofit nursing homes. Once the analysis included the proprietary firms' profit factor and total charges, the differences between ownership types diminished. While these results may be an artifact of the states studied or the time period, they raise interesting issues that should be addressed in future research before firm conclusions are reached about the economic efficiency of different ownership forms.39

The Problem of Access to Care

Much of the impetus for Medicare and Medicaid came from a growing commitment among policymakers to equality of access to health care. In this spirit, the Presidential Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research concluded in 1983 that society has an ethical obligation to assure access to an "adequate level" of health care. Further, federal regulations make it clear that the Department of Health and Human Services and the state Medicaid agencies have an obligation to ensure that program beneficiaries have equitable access to care. Nevertheless, access remains a serious problem for many people who are eligible for Medicare and Medicaid and need nursing home case.

Discriminatory Practices: Patient "Creaming"

Discrimination takes many forms. Many nursing homes maintain separate waiting lists for individuals seeking admission—one for private-paying patients and another for Medicaid recipients.40 Other homes require as a condition of admission that the patient and/or his or her family sign a contract promising to pay the facility, privately (at whatever rate the facility determines) for periods ranging from 6 months to 3 years before the facility will accept Medicaid as payment.41 For instance, a New Jersey task force estimated that 80 percent of the state nursing homes require fixed periods of private pay for up to 3 years (U.S. Senate Special Committee on Aging, 1984). Other facilities "discharge" or evict individuals when they exhaust their private resources and become eligible for Medicaid. Nursing homes have also evicted Medicaid recipients when a private-paying patient has sought admission (Ohio Nursing Home Commission, 1979; U.S. Senate Special Committee on Aging, 1984). Finally, ombudsmen charge that nursing homes also discriminate against Medicaid recipients in room assignments and services (U.S. Senate Special Committee on Aging, 1984).

Access to nursing home services is a particular problem for two groups: Medicaid patients and those individuals with "heavy care needs" (Greenless et al., 1982; Schlenker, 1984; Scanlon, 1980a,b; Feder and Scanlon, 1980, 1982; Cotterill, 1983; Institute of Medicine, 1981; U.S. Senate Special Committee on Aging, 1984). The National Summary of State Nursing Home Ombudsman Reports for the United States reported in fiscal year 1982 that discrimination against Medicaid recipients or potential Medicaid recipients was identified as a major problem in 21 states and was the fourth most frequently mentioned problem out of 74 problems cited by the ombudsman programs.

In addition to discrimination based on payment source, nursing homes often discriminate against those individuals most in need of nursing home care. The GAO (1983b) summarized 11 studies conducted since 1979 and concluded that severe access problems and discrimination were occurring on the basis of patient "handicap." Individuals who required especially heavy care or substantial "hands-on" care, such as those persons suffering from Alzheimer's Disease and other related disorders, were "backed-up" in hospitals awaiting nursing home placement—even when there were empty nursing home beds in the community.

Access problems axe particularly severe for individuals with dementia. Because such individuals are often defined as not requiring rehabilitative therapies or daily care from an RN, they generally do not qualify for Medicare or for "skilled care," which is reimbursed at a higher level in many states. They do, however, require substantial care and assistance with activities of daily living. This hands-on care and frequent supervision is costly for nursing homes even if provided by aides. As a result, nursing homes have an incentive to select from their waiting lists individuals with the fewest functional disabilities and with the least mental impairment. This incentive is particularly strong under reimbursement systems that provide the same Medicaid rate for every patient—regardless of the degree of physical and mental impairment.

Access problems of Medicaid recipients and heavy-care patients may become quality of care problems after they find nursing home placement. On the basis of an analysis of national data for 1969 and 1973, Scanlon (1980b) posits a "dual" market in which private-pay patients receive desired care (at the market price) while public-pay patients will receive care only after the private demand has been satisfied. The result is not only a dual market in terms of demand but also a dual market in terms of supply, with Medicaid patients having access to those homes least able to compete successfully for private-pay patients. Thus, it is not surprising that, as Schlenker (1984) notes: "Several . . . studies found higher quality . . . associated with a lower Medicaid share and lower overall occupancy rate, both of which suggest access barriers for Medicaid recipients."

The finding that Medicaid utilization rates are associated with lower quality of care is fairly consistent (Bishop, 1980). The Ohio Nursing Home Commission (1979) found that 75 percent of the "low quality" homes had very high percentages (80 to 100 percent) of Medicaid patients, while only one (4 percent) of the "high quality" homes had such a high percentage of Medicaid patients. The commission reported that

Both the Commission and the Ombudsman have received many complaints from relatives, hospital social workers, county (welfare) personnel, etc., about the difficulty of placing Medicaid patients in homes offering high quality care. Sadly, the Commission's study of a sample of homes providing either very good or very. poor care confirmed this testimony . . . . The Commission concludes that Ohio is facing the development of a two-class system of long-term health care, with Medicaid recipients having ready access to care in only a few of the best homes and thus being forced to become patients in the state's worst homes.

In effect, discrimination makes the operation of substandard homes financially viable. With severely limited choice, such patients often have no option but to enter whatever nursing home will accept them, even though it may provide undesirable quality of care, for as Beverly Enterprises noted in an annual report to the SEC, "There is little, if any, competition in price, services, or quality with respect to Medicare and Medicaid patients" (Beverly Enterprises, 1980).

Reasons for Discrimination

Private-pay patients are much more lucrative for nursing home owners because of Medicare and Medicaid payment limits. Some limits have to do with whether particular costs are allowable. In other cases, some states set "ceilings" on reimbursable costs or employ prospective or flat-rate systems to pay homes a set amount per patient day. Often that rate is based on some percentage of the average reported costs of similar facilities and is independent of any one facility's costs of providing care. A "reasonable" payment rate may be set, as in some states, at the 60th percentile or lower of average costs for all facilities in a "class." Thus, Medicare and Medicaid provide nursing homes with relatively little price flexibility, while nursing homes are able to charge much higher rates to private-pay patients (Montgomery Securities, 1983).

Health planning limitations and moratoria on new nursing home bed construction may also facilitate discrimination by contributing to very high occupancy rates in nursing homes in most parts of the country. Occupancy rates of better than 95 percent are the norm. In addition, there are few alternatives to nursing home care for those people who need long-term care on a daily basis. This combination of tight supply and a relatively inelastic demand gives nursing homes much flexibility in setting charges to private-pay patients and, for good quality homes, the ability to discriminate and still maintain high occupancy rates.

Price data for private-pay patients, as compared to Medicaid and Medicare patients, is difficult to determine (Lane, 1984). If charges reported on Medicare cost reports are indicative of private-pay rates, the differential may be between 13 and 18 percent, although some estimates of the differential are as high as 20 percent (Lane, 1984). Montgomery, Securities, using more current data, estimates that private-pay rates, on average, range up to 30 percent above Medicaid and Medicare rates. Based on its survey of nursing homes, Montgomery Securities (1983) reports the 1982 rates as shown in Table 12.

TABLE 12. Nursing Home Rates by Payee for 1982.


Nursing Home Rates by Payee for 1982.

The analysts conclude private-pay patients are central to a nursing home's profitability. Thus, nursing homes have a strong financial incentive to discriminate against Medicaid patients in favor of private-pay patients. The Montgomery Securities analysts comment The higher the percentage load of private pay patients in the home's mix, the greater the nursing home's ability to cost and price shift, and the greater the prospects of increased profits (Montgomery Securities, 1983).

Ownership and Discrimination

Evidence suggests that all nursing homes that can attract private-pay patients discriminate in their favor and against Medicaid patients. Nonprofit homes and facilities that are part of some of the major proprietary nursing home chains seem most successful in achieving a relatively high percentage of private-pay patients. Most empirical analyses have found that nonprofit facilities have a lower than average Medicaid utilization rate. While Winn (1974) found no significant relationship between type of ownership and rate of public assistance patients in Washington state nursing homes, most other analyses have found an association between nonprofit status and a lower Medicaid share. Gottesman (1974) found that proprietary facilities were more likely to serve Medicaid patients. Brooks and Hoffman (1978) found no difference in Medicaid utilization rates in SNFs based on ownership, but there was a significant difference in ICFs. Among the nonprofit ICFs in this study, the Medicaid utilization rate was 57 percent while in the proprietary homes the rate was 71 percent. Studies in Ohio (Ohio Nursing Home Commission, 1979) and California (Vladeck, 1980) show the proportion of Medicaid patients to be higher in for-profit than in nonprofit facilities. In Texas the pattern was the same, as Table 13 indicates.

TABLE 13. Average Percentage of Medicaid Days of Service by Owner Type, Texas (percentage).


Average Percentage of Medicaid Days of Service by Owner Type, Texas (percentage).

Several of the major nursing home chains also have relatively low percentages of Medicaid recipients. For some, this is the product of a deliberate strategy. Care Enterprises (1984), for example, notes in its report to the SEC that

Care believes that rehabilitative services at its SNFs are relatively more profitable than other nursing services and have enhanced its ability to attract private and Medicare patients.

This chain reported that in 1982 the company was able to increase its revenues quite substantially over the prior year via increases in billing rates and changes in the mix of private, Medicare, and Medicaid patients. In 1982, Care Enterprises had an average Medicaid utilization rate of 60 percent, with 22 percent private pay and 16 percent Medicare.42

Care Enterprises is not alone in seeking to increase its private-pay patient load and decrease Medicaid utilization. Hillhaven/National Medical Enterprises is also concentrating on keeping a "favorable" mix of private-pay patients (Punch, 1984). However, the most aggressive large chain in this regard is Manor Care. In Ohio, Manor Care attempted to evict individuals whose care was paid for by Medicaid during the late 1970s (Ohio Nursing Home Commission, 1979). More recently Manor Care has "targeted" its acquisitions, purchasing facilities that already have high private-pay utilization rates and selling off homes with too many Medicaid patients. In 1982, for instance, Manor Care sold 14 facilities because they did not have sufficiently high ratios of private to Medicaid patients. As Manor Care (1981) noted in its report to the SEC, "As a general rule, the margin of profits is higher with private patients." The report continued,

Manor Care attempts to locate and operate its nursing centers in a manner designed to attract patients who pay directly to the facilities for services without benefit of any government assistance program.

Evidence of its success in attracting private-pay patients and the greater price flexibility they have with these patients can be seen in the data displayed in Table 14.

TABLE 14. Proportion of Inpatient Days to Revenues by Payee—Manor Care (percentage).


Proportion of Inpatient Days to Revenues by Payee—Manor Care (percentage).

Summary and Conclusions Regarding Access

There is substantial evidence that Medicaid recipients—some two-thirds of all long-stay nursing home patients—and those with heavy care needs experience discrimination in access to nursing homes and that such discrimination places Medicaid patients disproportionately in homes that provide the lowest quality of care. The evidence is also clear that nonprofit homes provide the fewest beds on the average to Medicaid patients and that some nursing home chains systematically seek to reduce the proportion of Medicaid patients in their facilities.

Further, there is evidence that suggests discrimination and that a facility's patient mix has quality implications. Caswell and Cleverley (1978, 1983) argue that there is a differential effect of ownership control status on the relationship of Medicaid utilization to cost and quality. They found that, in general, increasing Medicaid utilization in a facility is associated with lower costs, particularly in patient care expenses. However, they found that for-profit facilities react more strongly than non-profits to increasing Medicaid utilization. The nonprofits appear to reduce patient care expenditures far less than do for-profits as the proportion of Medicaid patients in the facility increases. Thus, while the evident discrimination is a matter of concern in terms of freedom of choice for consumers, it may also negatively affect the health, well-being, and quality of life of vast numbers of the aged and disabled.

Summary and Conclusions

The nursing home industry's growth has resulted from a multiplicity of factors. The infusion of public dollars, a growth in need, and the interplay of policies aimed at other institutions have aided that growth. In the process of growing, the industry has also fundamentally changed. Some of the most profound changes include an increasingly medically oriented setting, a shift from smaller to larger facilities, a move away from government-owned and voluntary (not-for-profit) homes to proprietary ones, and a growing concentration of ownership in multifacility chains that are diversifying vertically and horizontally. Most recently, we see diversification of nursing homes into other areas of long-term care (e.g., retirement or life care community home health, durable medical equipment) and increasing participation of hospitals in the direct provision of long-term care (''swing beds" and certification of hospital wings as nursing homes). In many ways, these changes in the nursing home industry simply mirror developments in the wider health care sector. Throughout the American health care system, there is an increasing trend toward corporatization. The emergence of the large, multisystem corporate health care providers seems to herald a new era in American health care. These developments are altering not only the structure of decision making and locus of power, but perhaps the structure and performance of the health care system as well.

Summary of the Findings on Quality, Cost, and Access

Perhaps the most consistent finding of empirical studies and analyses of state level data is that, on the average, nonprofit nursing homes provide better quality of care and quality of life to residents than do the for-profits. Certainly there are some qualifications to this conclusion. The size and patient composition of a nursing home, for instance, may influence the performance of the facility, independent of its ownership, in ways that affect quality. Further, the indicators most commonly used are generally viewed as inadequate measures of quality of care and life, although they do appear to capture some important dimensions of variations in quality. In addition, it is clearly true that many proprietary, nursing homes provide excellent care, and that some nonprofit facilities provide poor care. Despite such qualifications, however, the evidence for the superiority of nonprofit owners seems conclusive.

The scant evidence about the relative performance of the nursing home chains, however, is more mixed. Studies using a national sample of facilities have generally found no differences between the chains' performance and that of other nursing homes. Data that allow us to disaggregate the chains into large, multistate chains and individually owned, single state chains suggest that the multistate chains, at least in Ohio, perform more acceptably than either nonchain proprietaries or individually owned proprietary chains. Analysis of data from Texas, however, suggests that there may be significant differences in performance among the major multistate nursing home chains. Some large chains may provide very poor care, while others seem to provide acceptable, even very good care. This suggests that all nursing home chains do not pursue identical organizational goals and exhibit similar behaviors. Thus, the use of national or state level data that do not disaggregate the chains into more precise ownership forms, and even possibly individual corporate identities, may not yield useful information on the relative performance of various types of owners.

The evidence we do have about some of the nursing home chains—particularly the largest ones—does raise some serious concerns about cost, quality, and access. The evident ability and willingness of some major nursing home chains to finance their growth by increased allocation of funds to property, costs and reduced expenditures on food, staffing, and social services is a cause for concern. The consistent pattern among many of the most rapidly expanding chains of spending proportionately less than the average (and less than nonprofits) on direct patient care and more on property and administration/home office fees raises the specter of growth and increased profitability occurring at the expense of the public purse and patient welfare. Further, the general pattern of differences among non-profits and proprietary nursing homes, with the nonprofits consistently spending proportionately more on patient care and the for-profits spending more on property and administration, suggests that the cost of for-profit health care may be quite high, particularly for the most vulnerable members of our society—the infirm and disabled elderly.

While the findings about the impact of ownership on quality seem relatively clear, data about variations in cost and "efficiency" are more difficult to interpret. In general, empirical studies find that nonprofits are more costly. Controlling for other factors known to affect costs, such as size, location, and so on, reduces the magnitude of the difference in costs between nonprofits and proprietary nursing homes, but these other variables do not eliminate this difference. Even when proxies for quality and the patient case mix are introduced, some difference remains. Thus, some analysts argue that proprietary nursing homes are more efficient—that is, they can attain a given level of "quality" at a lower cost than the nonprofits.

These findings are subject to serious qualification. First, most of the studies use inadequate measures of patient case mix. In addition, the proxies for quality that have been used in these cost studies are at best only partial measures. Thus, some portion of the variation in costs between nonprofit facilities and for-profit nursing homes may be associated with unmeasured variations in case mix and quality. Finally, studies tend to focus on reported costs without including the profit factor or the charges to private-pay patients. Thus, the magnitude of the differences between the two ownership types is difficult to gauge accurately. These issues should be addressed in future research before firm conclusions are reached about the economic efficiency of different ownership forms.

The findings about accessibility for public-pay (Medicaid) and "heavy care" patients are uniformly disheartening. Available evidence suggests active discrimination by nearly all homes having a queue of individuals desiring admittance. Those homes that seem to practice discrimination most consistently are the nonprofits and some of the major proprietary corporate chains. Further, achieving a higher proportion of private-pay patients is the announced policy of most of the large, publicly held nursing home chains. To the degree that this is implemented and these chains expand their holdings, equity of access will become an even greater problem. What the nation faces is the entrenchment of a two-class system of long-term care, with the elderly who need the most care and those have become impoverished in paying for health care having ready access only to those facilities that provide the lowest quality of care.

Implications for the Hospital Sector

The data presented in this paper suggest that the development of for-profit nursing homes and their dominance in this sector has gone far to meet demand that would not otherwise have been met. But, this emergence and expansion has had significant costs, particularly in terms of the quality of long-term care. In an arena of frequently low levels of payment, proprietary nursing homes have been profitable, but quality and access problems have been persistent.

In general, observers have felt that the problems of quality assurance and cost control in the nursing home sector were significantly different from those seen in the hospital sector. Quality control mechanisms that are thought to be effective in other health care sectors are largely absent in long-term care. First, long-term care patients are largely ineffective as consumers. They are disadvantaged in making informed initial choices, switching to other providers when dissatisfied, or using medical malpractice or consumer protection statutes to secure high quality, of care. Moreover, most lack family who could serve as effective advocates in their stead.

Second, the usual professional checks on quality that are thought to exist in hospitals do not exist in nursing homes. Physicians are largely an absent or impotent force for quality control (U.S. Senate Special Committee on Aging, 1975a; N. Rango, personal communication, 1985). In addition, nursing homes have lower staff-to-patient ratios for direct-care staff than hospitals and place greater reliance on untrained aides and orderlies who provide 80 to 90 percent of all patient care. Many nursing homes do not have an RN on staff, and most have a single RN for only 40 hours per week (B. Cornelius, Office of Research and Demonstrations, Health Care Financing Review, U.S. Department of Health and Human Services, personal communication, 1985). Thus, trained and experienced health care professionals play a much less significant role in the control and daily operation of nursing homes than in hospitals. This difference in resource inputs has significant implications both for the provision of care and for the ability of nursing homes to develop and implement quality monitoring and assurance programs.

Third, there are significant structural differences between hospitals and nursing homes. Hospitals are still largely not-for-profit institutions and are presumed to operate under a set of professional and ethical norms that constrain their behavior to the benefit of patients. Nursing homes, however, are largely proprietary. As businesses, they must calculate the scope and quality, of the services they provide with an eye constantly turned toward profitability goals.

Fourth, state and federal policies designed to contain long-term care costs may contain powerful incentives inimical to the provision of high quality care. These are primarily cost containment measures adopted in the last few years, such as prospective payment systems, reimbursement ceilings, and moratoria on new nursing home bed construction. For nursing homes with sizable populations of patients supported by Medicaid, such reimbursement policies contain incentives that tend to inhibit admission of those most in need of care and that may encourage reductions in staffing and food. Under prospective reimbursement systems that have been instituted in a number of states, payment rates are set in advance and homes are allowed to retain the difference between the rate and what they actually spend. Operating at the same level of quality but more efficiently is clearly the most socially desirable way of achieving profits in such a system; however, shifting to a less-costly-to-care-for patient mix is another way for facilities to achieve profits under such a system.43 Reducing the scope and quality of services is a third way for homes to achieve profits. Reducing variable expenditures—such as staffing, activities, and food—is the simplest way for homes to hold their expenditures below prospective rates. Thus, discrimination and reductions in the level and quality of services are two ways in which homes may respond to these cost containment initiatives. The evidence on discrimination is clear, and there is some evidence that many nursing homes, the proprietaries in particular, may be reducing quality in response to severe reimbursement constraints (Schlenker, 1984; Birnbaum et al., 1979, 1981; Caswell and Cleverley, 1978; Holahan, 1984).

Finally, restrictive health planning and more stringent reimbursement policies have resulted in slowed construction of new nursing homes. In addition, there are few community-based services that can substitute for nursing home care. Because demand for long-term care exceeds supply, homes have little incentive to compete for Medicaid patients by offering higher quality. The only competition along quality lines occurs among homes that seek to maintain a high percentage of the more profitable private-paying patients. Thus, competition among providers is an unreliable mechanism for assuring quality in nursing homes.

Given changes in the structure of hospital ownership and in payment mechanisms, some of the apparent differences between the hospital and nursing home sectors may diminish. The emergence of a strong proprietary sector and of hospital chains that are growing vertically and horizontally represents a striking similarity to developments in the nursing home industry. Further, increasing concern with escalating hospital costs and the development of Medicare's prospective payment system are very similar to prior developments in the long-term care sector. This convergence of an emerging proprietary sector and tightened reimbursement policies could produce some of the negative consequences associated with the long-term care sector.

To a large extent, three factors are likely to determine the ultimate outcome of such developments: (1) the response of health professionals to a changing environment; (2) the response of patients and their willingness and ability to become more effective consumers; and (3) the ability of regulatory and peer review agencies to exert a strong influence for quality assurance. At the least, such developments suggest the need for more sophisticated and substantial quality assurance activities by public and private agencies to monitor accurately the effects on quality and access and to ensure that unacceptable reductions in quality and access do not occur.

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1. Both Medicare- and Medicaid-eligible patients pay for part of their nursing home care; these individuals must make copayments (Medicare) or devote nearly all of their income for care before Medicaid pays for the additional nursing home charges. In addition, private-pay patients tend to pay somewhat higher rates than Medicare and Medicaid patients. These two factors explain why half the dollars but a larger proportion of the patients are accounted for under government plans.

2. This phrase is so apt that I've stolen it directly from Vladeck (1980).

3. Indeed, these homes for the aged, dominated by immigrant and religious groups, are the forebears of the large, voluntary homes of today.

4. Even in the 1930s, there was widespread concern and dissatisfaction with conditions in many proprietary nursing homes. The facilities were often aged and dilapidated houses, farms, or small motels that had been converted to use as a nursing home. Nursing and medical care were minimal at best, and reports of patient abuse were widespread. These prompted calls for re-form—for state licensing and inspection. But the dilemma that still plagues the regulatory system arose then—with a shortage of facilities, the imposition of stricter standards would mean closing some, perhaps many, facilities, aggravating the bed shortage. Like modern regulatory officials, most states chose education and exhortation in an attempt to improve the facilities rather than development and enforcement of stricter standards of care (Vladeck, 1980; McClure, 1968; Thomas, 1969).

5. One of the major forces contributing to the growth of nursing homes is the dramatic increase in the number and proportion of the population that is aged. The proportion of the U.S. population 65 years of age and older has increased from 4.4 percent in 1900 to 11.7 percent in 1983. Moreover, the projections are that by the end of the century, between 35 million and 37 million people, at least 13.1 percent of the population, will be aged. Moreover, the fastest growing cohort of the population is the very old—those most at risk in terms of needing long-term care services (Manton, 1984; Torrey, 1984; U.S. Bureau of the Census, 1983). Only with the availability of financial assistance, however, is this need translated into demand for nursing home care, since the majority of the aged who actually need long-term care cannot afford to pay for the care they require.

6. Growth in bed supply has leveled off for a variety of reasons since the mid-1970s.

7. For 1984, only 49 publicly held nursing home chains are listed with the SEC. An additional number of multifacility nursing home chains are owned and operated as subsidiaries of hospital chains.

8. There are basically two types of nursing home residents—the "short-stay" patients whose average length of stay is less than 3 months, and the "long-stay" residents whose average LOS is more than 2.5 years (Liu and Mossey, 1980). While the short-stay residents constitute a sizeable proportion of admissions, on any given day the "long-stayers" are the majority of nursing home patients.

9. In addition, ongoing debate and shifts in policy about whether public programs will reimburse higher capital or property costs that result from sales/purchases of nursing homes is also likely to affect the rate of chain growth.

10. Active imposition of the LSC was delayed for several years in order to give facilities ample opportunity to come into compliance with what is fundamentally a federal fire safety code.

11. HEW was renamed the U.S. Department of Health and Human Services (HHS) in 1981.

12. During the early years of a mortgage, most of the payment is for interest on the loan; relatively little is applied to the principal. Depreciation payments by the state, however, are usually calculated on a 20- to 30-year life expectancy for a new nursing home and made on a straight-line basis. Thus, under most of the 1970s' cost-related systems, in the early years of a mortgage, the depreciation payment from the state to the facility exceeds the amount the facility actually has to pay the mortgage holder as the principal payment. (Interest is a direct pass-through.) The result is a positive cash flow to the facility during those years and an incentive to sell the facility as a depreciation payment from the state approaches the amount of the mortgage that is payment toward the principal (see Baldwin, 1980). Many states found nursing homes responding to this incentive, with proprietary facilities being sold as often as every, three to four years, providing indirect profits to the facilities and increased costs (but not services) to the states (Ohio Nursing Home Commission, 1979; Washington Senate, 1978). This made many individual owners willing, even eager, to sell. Often owners would sell the facility to a chain and then lease it back to operate (see also Shulman and Galanter, 1976). For instance, in 1983, Beverly, the largest chain, leased more than half its facilities, and this is fairly common (Beverly Enterprises, 10K report filed with the SEC, 1983).

13. One of the prevailing myths about long-term care is that the elderly are in nursing homes because their families have abandoned them. This is simply untrue—unless dying is viewed as abandonment. Long-term care is predominantly an issue involving widowed or single elderly women. Half of all nursing home residents have no immediate relatives living in close proximity. Those patients who do have relatives tend to be very functionally dependent (in terms of needing assistance in the activities of daily living, such as dressing, eating, walking, and toileting) and also mentally impaired (Barney, 1974; Liu and Mossey, 1980).

14. For example, Beverly Enterprises' operation of 13 percent of the facilities in Texas (a low-rate, prospective reimbursement state) has average net revenues per patient day that are 2 percent lower than the average for all Texas facilities but net income that is 22 percent higher.

15. Some observers, such as Scanlon and Feder (1980) cite "inadequacy" of return as a potentially more important cause of declining growth. Data on the profitability of nursing homes, particularly the "chains" call this into question (U. S. Senate Special Committee on Aging, 1984).

16. Many reimbursement systems exclude nonprofit owners from return on equity—a "profit" factor. Thus, nonprofit providers may receive less from Medicaid (and Medicare) programs than for-profit entities with comparable costs.

17. The Tax Equity, and Financial Responsibility Act of 1982 (TEFRA) eliminated some of the future benefits of ERTA.

18. For instance, CENCO, one of the larger chains in 1979-1980, was the target of a major Wall Street battle and was eventually acquired by Manor Care. National Health Enterprises, the sixth largest nursing home chain in 1981 and Flagg Industries (number 20) were acquired by Hillhaven/National Medical Enterprises. Meiplex (number 8), Commercial Management (number 11), and Beacon Hill (number 21) have been acquired by or merged with Beverly Enterprises, which also acquired other small-to-medium size chains (e.g., P&H Enterprises, Inc.; Consolidated Liberty; PMG, Inc.).

19. Demand is a function of need and ability and willingness to pay.

20. Two-thirds of all middle-income patients in nursing homes spend their life savings within 2 years of admission and become Medicaid patients (U.S. Senate Special Committee on Aging, 1984).

21. It is well to note, as Vladeck (1980) does, that these institutions do labor under some incentives that are similar to those of the for-profits. "The voluntaries may not be profit-maximizers, but they invariably operate under the constraint of trying at least to break even" (Vladeck, 1980). They may, however, select different methods than the for-profits to break even.

22. Two such chains report (in their filings with the SEC) that the decision to expend funds upgrading newly purchased facilities is part of a corporate strategy aimed at attracting more private-pay and Medicare patients—who are more lucrative for the nursing home.

23. Again, this may vary by chain. In addition, the record of Beverly Enterprises in Texas indicates that it has a disproportionate number of significant violations. Indeed, there is some evidence that Beverly does not promptly correct deficiencies when cited, since it has received a disproportionate share of punitive actions for failure to correct violations.

24. Schlenker (1984), in reviewing studies on the relationship between costs, reimbursement policies and quality of care, argues that RN hours and dietary costs may be good indicators of quality. "A more intense case mix and/or higher quality care should require some combination of more nursing hours per patient day, a greater ratio . . . RN or . . . LPN hours to aide hours, and possibly higher wage rates to reflect higher skill levels. . . . (Higher dietary costs may also be related) since nutritional adequacy is important to patients' overall health."

25. While the high-quality homes outspent the low-quality homes on these items, the low-quality facilities had higher expenditures on administrator salaries, legal and accounting fees, and motor vehicles; they also seem to substitute LPNs for RNs.

26. Nonprofits tended to have more beds, more buildings, and more floors in the building; they also tended to have more single rooms, more ward rooms (with five or more patients per room), and more bathrooms.

27. An alternative explanation is that these facilities offer such low quality of care that they can attract only those individuals with no other choices, such as the elderly poor and disabled without family or other social supports (see Greene and Monahan, 1981; Ohio Nursing Home Commission, 1979).

28. The Fottler et al. (1981) study used multiple regression analysis to study the relationship between profits per patient day (ppd) and four measures of quality: (1) skilled nursing hours ppd; (2) nonnursing hours ppd; (3) total nursing and nonnursing hours ppd, and (4) staffing ratios. They argue that these are useful surrogates for the quality of patient care and found that "profitability increases as the service intensity (quantity and quality of labor inputs) decreases." The study focused on 43 nursing homes in California.

29. The commission also reported a strong correlation between the level of profitability and lower expenditures on food, dietary salaries, medical supplies, nurse's aides, medical and rehabilitative care, electricity, and housekeeping.

30. Elwell notes that although some of the spending differences do not appear large, the figures represent per patient per day expenditures. He observes that reductions in such spending, even relatively small ones, can result in substantial savings for the facility. For instance, "by spending 35¢ less ppd for nursing, the average SNF (which in New York had 44,867 inpatient days in 1976) could save over $15,700 per year" (Elwell, 1984).

31. Of those 45 facilities, 37 were earning profits on the Medicaid rate alone.

32. Koetting also concluded that proprietary homes were more efficient—that is, they were able to attain a given level of quality at a lower cost than the nonprofit facilities. In addition, he found that cost and quality of care were only weakly related (Koetting, 1980).

33. The performance of Beverly Enterprises, one of the major chains operating facilities in California, was particularly poor. According to an analysis of the California Health Facilities Commission data by the AFLCIO (1983a), "Beverly's . . . performance was abysmal. For 35 homes listed as belonging to Beverly, the average number of citations (per facility) came to 2.31, with 9 of the 35 exceeding the California standards . . . to rank among the worst homes in the state."

34. The department does not maintain a listing by type of owner; therefore, the listing of facilities receiving some form of punitive action has to be matched against a separate ownership file. The control (ownership) type of four facilities terminated from the program could not be determined from these files.

35. The study, however, did not find a relationship between staff ratios (resource inputs) and other quality of care measures. "The correlations are found all uniformly insignificant" (Lee, 1984).

36. In Ohio, the multistate chains were Manor Care, Hillhaven, HCF (now Health Care and Retirement Fund, Inc.), Medicenters, and Americare. The data are derived from cost reports submitted to the Ohio Department of Public Welfare by 579 (77 percent) of the nursing homes participating in the Ohio Medicaid program in 1977. Eighty-five percent were for-profit facilities. Of these, 78 percent were operated by individual owners; 16 percent were owned by small, intrastate chains; and 8.5 percent (32 facilities) were part of large multistate nursing home chains.

37. This seems to be borne out by anecdotal testimony and evidence presented to and gathered by the Ohio Nursing Home Commission. The major stockholder of the largest intrastate chain was indicted for Medicaid fraud and was the subject of several health department compliance actions. Two other intrastate chains had an unchallenged reputation for providing truly vile care.

38. Management fees are significantly positively correlated with increased spending on other administrative salaries; office supplies and printing; communication; travel and other motor vehicle; advertising and public relations; legal and accounting fees; and other administrative . . . services" (Ohio Nursing Home Commission, 1979).

39. Such studies should also take into account the variety of services that are provided under the daily rate and are incorporated in costs, as well as noting those services for which additional charges are billed to patients.

40. Since Medicare pays for only about 2 percent of all expenditures on nursing home care, problems Medicare beneficiaries experience have not been as well-documented; moreover, they may be a result of the unwillingness of many homes to meet the higher certification and audit standards associated with Medicare rather than a result of the payment rate or disability of patients.

41. ". . . two-thirds of all middle income patients in nursing homes spend their life savings within 2 years of admission and become Medicaid patients" (U. S. Senate Special Committee on Aging, 1984).

42. The data are far from precise, but the average Medicaid utilization nationwide appears to be between 64 and 70 percent. In some states, of course, it is much higher, as in North Carolina where 89 percent of the patients receive assistance from Medicaid.

43. One of the most common myths is that quality is low because profits are low or nonexistent. Research does not support this myth (Ohio Nursing Home Commission, 1979). Most for-profit homes earn healthy returns. It is the incentives inherent in reimbursment systems that seem to affect quality, not merely the rate, although clearly reimbursement rates must be sufficient to cover genuine, reasonable costs if quality of care is to be achieved (Schlenker, 1984).

Dr. Hawes is with the Research Triangle Institute, and Dr. Phillips is a member of the faculty of political science at the University of North Carolina at Chapel Hill.

Copyright © 1986 by the National Academy of Sciences.
Bookshelf ID: NBK217907


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