The costs of Medicare patients in nursing homes in the United States: A multiple output analysis

Abstract

The reluctance of nursing homes to admit Medicare beneficiaries is well recognised. A possible explanation is that under the current Medicare reimbursement policy, nursing homes do not have adequate incentives to increase admissions. This paper examines that hypothesis. Using a national sample of nursing homes, Medicare-specific marginal costs were estimated from a flexible form of the cost function. In most cases, Medicare-specific marginal costs were well above Medicare reimbursement rates. From an investigation of economies of scale and economies of scope, it appears that reimbursements may be sufficient only in nursing homes that specialise in Medicare beneficiaries. Unless Medicare reimbursements are brought in line with costs, access of Medicare beneficiaries to the nursing homes will remain limited.