Market Competition and the Quality of Nursing Home Care

U.S. nursing home policy has been somewhat divided in what role the market can play towards encouraging nursing home quality. On the one hand, the U.S. nursing home industry is among the most regulated sectors in our economy. On the other hand, many recent nursing home policies such as pay-for-performance and report cards try to encourage a greater market for quality. A large health economics literature has examined the relationship between market competition and nursing home quality, with many of these studies observing either no effect of competition or the counter-intuitive effect that greater competition leads to lower quality. A key issue with many of the existing studies is the failure to control for the potential endogeneity of market competition and nursing home quality. That is, higher quality facilities may ultimately change the degree of market competition. Using merged Medicare claims and Minimum Data Set (MDS) assessments and nursing home provider level data for year 2010, we address the endogeneity of competition using an instrumental variables approach. Specifically, we instrument for market competition using the interaction of the presence of a certificate-of-need (CON) policy and population density. CON policies create a regulated barrier to entry in the 34 states that have had these policies in place since the late 1990s. In high population density areas, the nursing home market is more competitive in non-CON states relative to CON states, while market structures are mostly the same across states in low population density areas. We argue that CON policy and population density of the market may have independent effects on the quality of care but the interaction of CON and population density will affect quality only through competition. We find a strong first stage suggestive of the strong effect of this instrument on competition. We are currently using this instrument to analyze the impact of competition on a range of facility outcomes such as staffing and survey deficiencies and also individual level outcomes such as hospitalizations and MDS-based quality indicators. The results of this analysis will provide the best evidence to date on the role of competition towards encouraging quality in the nursing home sector.