Ownership, Price Mark-ups and Demand Elasticities in the Nursing Home Market

Tuesday, June 12, 2018: 2:10 PM
1051 - First Floor (Rollins School of Public Health)

Presenter: Lacey Loomer

Discussant: Laura Keohane

Background: Economic theory provides a useful framework for analyzing nursing home (NH) ownership, competition and signals about quality to consumers. NHs serve both private pay and Medicaid consumers, but Medicaid rates are set by the state so Medicaid demand is perfectly elastic. However, NHs can set private pay rates over Medicaid rates depending on the market structure. For-profit and corporate chain-owned NHs aim to minimize costs and set prices in order to maximize profits, often signaling low quality. While nonprofit and independent NHs have other objectives, such as altruism, which signal high quality. Despite the conflicting profit motives for nonprofit chain NHs, about 13% of the market, no research has examined competition relative to independent nonprofit and for-profit NHs.

Objective: This study will examine competition in Connecticut’s NH market by estimating the association of ownership on price mark ups and private pay residual demand elasticity.

Data: Data include private pay rates from Cost of Long-Term Care in Connecticut reports, Medicaid rates from Connecticut Department of Social Services, facility characteristics from Online Survey and Certification Reporting System and quality ratings from Nursing Home Compare.

Methods: To assess market power, we calculate the percent private pay mark up over Medicaid rates. We estimate the association between ownership and price mark up at the NH-level using county-year fixed effects with robust standard errors, controlling for quality. Then we calculate residual demand elasticity using the inverse private pay mark up.

Results: The sample includes a balanced panel of 153 Connecticut NHs with at least 5% private pay residents from 2013-2015. 75% were for-profit, of which 60% belonged to a chain. 25% were nonprofit, of which 20% of belonged to a chain. On average, price mark ups were 90% ($200). Analysis revealed no difference in price markup between nonprofit and for-profit NHs. Chain ownership was associated with a 14 percentage point increase (0.6 s.d.) in price mark up compared to NHs that are independent, (p<0.05), controlling for quality and profit status. We estimated a residual demand elasticity (absolute value) of 1.13.

Conclusions/Implications: NHs that are part of a chain are setting private prices higher above Medicaid rates than independent NHs, regardless of profit status and quality ratings. Previous estimates of residual demand elasticity in the NH market in the 1990s ranged from 1.7 to 3.85. Our elasticity estimate of 1.13 suggests that competition in the NH market has decreased over time. This decrease in competition could be due to the growth of chain owned NHs. While our single state analysis limits generalizability, we utilized a novel dataset with NH-level private pay prices linked with survey data across multiple years. Policy makers should advocate for more price and ownership transparency to better understand price signals about chain owned NHs and direct them toward higher quality NHs.