Much of the nursing home industry is up in arms about cuts in Medicare reimbursements, claiming the new payment system has caused nursing homes to curtail services and even file for bankruptcy.
But a new study indicates that at least by one measure, nursing homes weren't very efficient under the old system. Inefficiencies, the study found, were especially pronounced among not-for-profits, and to a lesser extent among nursing home chains.
The study, published in the Journal of Real Estate Portfolio Management, found that nursing homes overall could cut costs by more than a third and still maintain current productivity.
The authors used statistical models to estimate cost efficiency at 373 for-profit homes and 280 not-for-profit facilities across the country. Data for the study were taken from the 1995 National Nursing Home Survey, when nursing homes were still under a cost-based Medicare reimbursement system.
Though the study found inefficiencies among nursing homes, the authors want that finding taken in context.
The survey data included great detail on costs but little on productivity, they wrote. So the researchers used annual admissions as a proxy for nursing home output. Co-author Danielle Lewis, assistant professor of economics at Southeastern Louisiana University in Hammond, readily admits that admissions could be only a rough stand-in for nursing home output.
"We would like to use at least four to six outputs (such as occupancy or certain services) instead of a single output," she says. "(Even then) I'm not capturing the quality, and I'm not sure if I ever could capture the quality."
But Lewis says the study does raise questions about lack of competitiveness in a sector that has not been well-scrutinized for efficiency.
"This is one of the first rigorous studies that give some sort of fundamental numbers on how efficient this industry is," adds co-author Randy Anderson, professor of finance at Samford University, Birmingham, Ala. The third study co-author was James Webb, a finance professor at Cleveland (Ohio) State University.
"In competitive markets you are going to get firms operating as close as possible to what's called their efficiency frontier," Anderson says. On average, nursing homes in this study fell 37% short of that frontier. Compare that to the banking industry, where cost inefficiency runs around 10% to 20%.
But, he cautions, "how strong those results are depends on getting better data." Inefficiency at nursing homes could be as low as 15% or as high as 53%, the report showed, and there was a 10% chance that actual average inefficiency fell outside that range.
Better data could sharpen the picture, Lewis adds.
Efficiency is a key issue in the policy debate about how much nursing homes should be paid. An industry-sponsored study released earlier this year found that Medicare payments to nursing homes fell 15% in the first round of prospective payment system adjustments. The industry has used that figure to illustrate the severity of the cuts.
But if, as this study suggests, nursing homes are on average 37% inefficient, perhaps those cuts could be better justified.
The authors found that nursing homes affiliated with a chain were less efficient than independent operations. That finding controverted past research and industry claims that chains can save costs by capitalizing on economies of scale.
The authors found even stronger evidence that for-profits were more cost-efficient than not-for-profits. They attributed that difference to the competitive pressures that drive for-profits to minimize costs while maximizing output.
Robert Greenwood, spokesman for the American Association of Homes and Services for the Aging, which represents not-for-profit nursing homes, says he's neither surprised nor disturbed at that finding.
"We can live with the fact that studies show we are not as efficient," he says. "The importance of the not-for-profits is that the focus really is on providing quality of care instead of maximizing profits."