Quality Reporting and Private Prices: Evidence from the Nursing Home Industry

We use the rollout of five-star rating of nursing homes to study how private-pay prices response to quality reporting. We find that quality rating increase price differences. On average, prices of top-ranked facilities increased by 3.0 to 7.2 percent more than the prices of bottom-ranked facilities. The price increases are stronger for facilities located in states with CON laws or with higher occupancy rates. We also provide suggestive evidence that price responses are stronger in markets with lower provider-concentration and higher elderly-density. There is also evidence of a quantity response to the star ratings. Five-star facilities gained 7.2% (P<.01) private patient days relative to one-star facilities following the implementation of the star rating, again with stronger responses in low concentration (12.1%, p<.01) and in high elderly-density markets (13.1%, p<.01). Similar patterns were observed for changes in private revenues. The economic impacts are substantial, ranging from $2,122 to $2,843 for one private-pay resident annually.  The differential price response between more and less competitive markets suggests that public reporting and market competition are policy complements and not substitutes. Therefore, public reporting and entry regulation should be considered jointly. Compared to prior quality reporting, our results suggest that with proper design, consumers are responsive to public reporting and market efficiency can be enhanced.