Improve Nursing Home


 Strategies for improving nursing home quality

January 5, 2023 | By Gerry Wedig


Roughly one in four adults will live in a nursing home, also known as a skilled nursing facility, at some point in their lives. For many of them, a nursing home will be their final place of residence.

Unfortunately, many nursing home residents will have negative experiences, such as falls, infections, medication errors, and delayed or inadequate personal care, that make a challenging season even more difficult. Families are understandably concerned that their loved ones will suffer, especially in light of the substantial variation in the quality of care across nursing homes. System wide, nursing homes are all over the map in their use of essential nursing staff, who are critical to providing timely attention to residents. Differences like these often come to light in deficiency citations identified in nursing home inspections.

What can be done to ensure that residents receive compassionate, high-quality care? For individuals whose families can’t afford higher-quality nursing homes, payment is provided by a third-party sponsor, such as their state’s Medicaid program. These programs fix payments in advance and do not grant access to higher-priced, higher-quality homes.

In light of the disparities that pervade the nursing home industry, it’s worth exploring how markets and public policy can be leveraged to ensure high nursing home quality for the entire population. In collaboration with other researchers at Simon Business School, I have addressed various facets of the problem in my research, gaining valuable insights into the economics of quality in the nursing home industry.

Here are three of our findings:

1)  Competitive markets do not necessarily ensure higher nursing home quality.

A competitive market is the first line of defense to protect the interests of consumers. Typically, market competition forces firms to lower prices and enhance quality to secure business.  

In a recent paper, Simon researchers found that nursing home quality does not always respond to normal market competition. Increases in the number of nursing home choices in a consumer’s locality were found to improve average nursing home quality, but only where the nursing home is almost totally reliant on Medicaid and other government sources of revenue. Where nursing homes earn a substantial share of their revenue from private-paying customers, competition may lead to lower prices, which paradoxically weakens the incentives of nursing homes to improve quality.

Why doesn’t market competition work as well in nursing home markets? Unfortunately, the market for long-term care lacks some of the features of the economist’s perfectly competitive ideal, most notably the feature of well-informed consumers. In this case, the consumer is the family paying for a loved one to reside in a nursing home. These family members can’t be sure of the quality of care that is actually received.

2)  Five-star ratings of nursing homes influence consumer choice and prompt nursing homes to retain better administrators.

In response to this lack of information, one strategy for improving market functioning is ensuring that consumers are better informed. Regulators began publishing data on nursing home quality on public websites in the early 2000s, but the multitude of measures that were reported were confusing to many people. To better organize their findings, regulators began aggregating their data into a more user-friendly five-star rating system (similar to Consumer Reports). 

It appears that consumers have responded favorably to this mode of presentation and are now more likely to base their nursing home selections on publicly disclosed quality measures. It is also worth noting that nursing homes have responded to public disclosure as well. Simon researchers have found that nursing homes that compete in markets in which five-star ratings are reported appear to select their managers more carefully, retaining those capable of achieving superior ratings.

Five-star ratings can be a helpful strategy for improving quality in nursing homes, but they are not a complete solution. They are, at best, an approximate measure of quality, and not every consumer references them before making a decision.

3)  Tort liability is a complementary way to improve nursing home quality, especially to the extent that it discourages large chain ownership in the industry.

In the absence of other market protections against poor-quality care, consumers may use the courts to redress instances of extreme negligence and wrongdoing in nursing homes.   

Simon researchers have found that the option to sue for substantial damages (“pain and suffering”) can induce some nursing homes to supply additional care for their residents. This is intrinsically valuable to residents and may lead to better outcomes. One limitation, however, is that this effect only appears in homes affiliated with large chains that manage scores of homes. These chains possess deep pockets consisting of billions of dollars in assets, making them especially wary of lawsuits. Unaffiliated homes, on the other hand, do not appear to be affected by the scale of lawsuits they may encounter.

But tort liability may also assist residents in an indirect way. Simon researchers have determined that states with more punitive tort laws discourage large chains from owning nursing homes at all. This is important, because in an upcoming paper, Simon researchers learned that transferring ownership away from large chains enhances nursing home quality. Presumably, this is because the cost-saving algorithms that these chains employ can reduce the quality of care. Discouraging large chain affiliation, therefore, is another way to promote quality.

The bottom line.

At some point in our lives, we or someone we know will depend on a nursing home to meet our basic needs. As a society, we owe it to people to protect them at their most vulnerable.  

Unfortunately, data reveals that free-market competition may not be enough to assure a high standard of care in every nursing home. Introducing user-friendly consumer reports to increase the amount of information available to consumers, along with giving consumers the option to sue for substantial damages, are helpful strategies for preserving the dignity and health of nursing home residents from all walks of life.

Gerard Wedig

Gerry Wedig is an associate professor of business administration at Simon Business School.

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