Counter-Cyclical Nursing Home Quality

During recessions, rising unemployment rates and deteriorating labor markets may surprisingly improve nursing home quality. I develop an analytic model to theorize why nursing home quality is counter-cyclical. Robust and consistent empirical evidence is provided to support the theoretical predictions. I also demonstrate that the magnitudes of counter-cyclicality are larger in states with lower barriers to entry. To conclude, I examine whether wage pass-through subsidies may be an effective mechanism to smooth quality fluctuation.  

The theoretical model starts with a two-period Hotelling duopolistic world, with the presence of regulated prices, incomplete quality information, and consumer learning. Business cycles exogenously affect labor costs and nursing homes choose profit-maximizing quality accordingly. Comparative statics analysis leads to the following testable hypotheses: (1) nursing home quality is counter-cyclical (2) competition may amplify the cyclical fluctuation (3) wage pass-through subsidies smooth cyclical quality fluctuation.

The empirical analysis is based on 127,250 nursing home-years and two business cycles from 2001-2010.  To obtain comprehensive quality measures, I merge several datasets including Long-term care Focus (LTCfocus) data maintained by Brown University, Nursing Home Quality Initiative (NHQI) data maintained by Center of Medicare and Medicaid Services, and administrative datasets maintained by state governments. County-level unemployment rates are the primary measure of local business cycles. I also use Metropolitan Statistical Area (MSA)-level GDP growth rates as the alternative identification

I find strong and statistically significant results that nursing home quality is counter-cyclical. The magnitudes are stronger among labor-input measures. Higher unemployment rates lead to higher registered nurse (RN), licensed vocational nurse (LVN), and certificated nurses aide (CAN) hours per patient day (p<0.01). One percentage point increase in unemployment rates increases CAN hours by 0.01 hours (mean=2.30 hours) and reduces the use of restrain by 0.8 percentage point (mean=6.09%). Higher unemployment rates also lead to significantly fewer health deficiencies and lower prevalence of pressure sores. A sub-sample analysis on staffing turnover suggests that during recessions, nursing homes are more able to retain employees, an indicator for better workforce.

I further examine whether the observed counter-cyclical quality is dependent on specific facility- or market-level characteristics. Consistent with theoretical predictions, this counter-cyclical quality is most profound among nursing homes that are for-profit (more sensitive to labor costs) and focus on Medicaid residents (fixed reimbursement rates). More interestingly, I find that cyclical fluctuation is more volatile in the markets with lower barriers to entry (measured by CON laws). The competitive pressure may force nursing homes to adjust its quality when labor costs vary along business cycles. The wage pass-through subsidies may smooth the quality fluctuation because they hedge the variations of labor costs. Analysis shows that wage subsidies do reduce the cyclical fluctuation of staffing hours and.

To sum up, I provide robust theoretical and empirical evidence that explains the counter-cyclicality of nursing home quality. I further show that this counter-cyclicality interacts with product market structures. Last but no least, state Medicaid wage pass-through subsidies might be an effective tool to smooth cyclical quality fluctuations.