Medicare Reimbursement Policy and Capacity Constraints: Evidence from Nursing Homes

The U.S. nursing home market has experienced a substantial reduction in its utilization rate and at the same time a significant shift in focus from long-term care covered by Medicaid to short-term care covered by Medicare. This study analyzes the effects of Medicare reimbursement policy on these trends. In particular, it examines how an increase in Medicare’s fee crowds out Medicaid residents from nursing homes. I exploit variation in the number of certificate–of–need laws and moratorium laws that restrict the growth of long–term care services across states as well as variation in Medicare reimbursement policy over time to disentangle the causal effects of Medicare payment incentives on nursing home use by Medicaid beneficiaries. I use novel data collected at the provider–year level to measure the responses of nursing homes at the extensive and intensive margins. I find that an increase in Medicare fees reduces admissions of Medicaid beneficiaries to nursing homes in capacity–constrained states relative to what occurs in unconstrained states by 15.5%. Likewise, facilities in capacity–constrained states decrease the average length of stay of Medicaid residents by 12.5%. The findings support the presence of an important role played by Medicare reimbursement policy in healthcare use of Medicaid beneficiaries and enrich the ongoing debate over the allocation of resources under certificate–of–need laws by showing that Medicaid beneficiaries, who are low-profit residents, bear the burden of these prescriptive laws.