Nursing Home Discharges and Exhaustion of Medicare Benefits

By Garber, Alan M.; MaCurdy, Thomas E. | Journal of the American Statistical Association, September 1993 | Go to article overview

Nursing Home Discharges and Exhaustion of Medicare Benefits


Garber, Alan M., MaCurdy, Thomas E., Journal of the American Statistical Association


The price sensitivity of nursing home utilization is a topic of great concern to potential private insurers of long-term care and to the officials responsible for the government programs that finance nursing home stays. These programs offer implicit subsidies to nursing home care. Typically the form of the subsidy is a fixed amount contributed by the insurer each day; the payer places limits on the amount of the daily subsidy and, sometimes, on either the total number of days covered or the total dollar contribution for nursing home care. Medicaid, the largest government insurer of nursing home care, does not limit the total expenditures or the duration of nursing home benefits. But only the poor and persons with catastrophic medical expenses are eligible for Medicaid. Medicare, in contrast, offers limited nursing home benefits for nearly every elderly American. Medicare fully reimburses nursing home care for the first 20 days of care in a benefit period, then imposes a copayment (the patient pays a fraction of the cost), and finally ends coverage altogether after 100 days of nursing home care. Thus the value of the Medicare benefit is a function of the time an individual spends in a nursing home. As financing long-term care has become a prominent issue, a key question arises: How would changes in the payment schedule influence utilization?

When a major change in nursing home financing was proposed as part of the Medicare Catastrophic Coverage Act, it took the form of changing eligibility requirements and increasing the limit on the number of days of nursing home care. Other reforms that have been contemplated include shifting the time interval over which copayments are required. The most common measure of price sensitivity, the price elasticity of demand, offers little basis for predicting the consequences of these and similar modifications of the Medicare rules. The price elasticity, which measures the percentage change in utilization resulting from a uniform change in the per diem price, is appropriate for assessing the impact of a change in the daily charges that nursing home patients pay. It does not offer an estimate of the impact of changing the duration of the subsidy.

Changes in the timing of the subsidy will have no effect, of course, if utilization is insensitive to the price of care. The policy debate reflects two views about price sensitivity. According to one view, the demand for nursing home care is likely to be at least as responsive to price changes as the demand for conventional health care. The contrary view, also widely held, is that a change in the price subsidy would have little impact on utilization. According to the latter view, institutionalization is so unpleasant that the disabled elderly use nursing homes only when absolutely unable to live at home or with a relative. Thus more complete coverage of nursing home care would redistribute resources to such persons at a modest incremental cost. For two crucial reasons, existing empirical work (Chiswick 1976; Nyman 1989) does not conclusively establish which of these views is correct. First, it is inherently difficult to establish whether an observed relationship between the price of care and utilization is a demand phenomenon; nursing homes may initiate many discharges, not only patients. Second, data limitations stymie efforts to assess price sensitivity. Because the data sets used are cross-sectional and lack direct quality measures, much of the observed variation in prices or costs simultaneously reflects differences in the quality and/or variety of the services delivered.

In this article we estimate the impact of a regime change--a change in the length of time that Medicare covers all or part of the costs of nursing home care--by developing a novel measure of price sensitivity. Our estimation procedure, applied to Medicare-financed nursing home stays, exploits the temporal price shifts implicit in the Medicare payment schedule for nursing home care. …

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