Why Do Nursing Home Costs Vary?

Since the costs of nursing home care are a major component of the rapidly rising costs of health care, it is appropriate to base public policy discussions about cost containment on the determinants of nursing home costs. This article investigates the determinants of nursing home operating costs and reviews the results of 11 related econometric cost analyses conducted by the authors. Single-equation cost analyses are developed for nursing homes in three states and in the nation. The cost results of a multi-equation model of nursing home behavior are also reviewed. The analyses indicate that facility size and occupancy rate are minimally important in determining cost variation. Facility characteristics, particularly type of facility and ownership, are important variables. Nonprofit facilities consistently had higher costs than for-profit facilities, after controlling for patient mix and service differences, and, in one analysis, for a measure of quality.