Value and nursing home profitability

Abstract

Background

Nursing homes in the United States are being challenged to demonstrate the value of the care they deliver. While quality and financial benefits of increasing the value of specific services accrue to nursing home residents and payers, an important unanswered question is whether producing high-value services produces financial benefits for the nursing home.

Aim

This paper examines whether offering high-value services to self-pay long-term care residents is associated with the nursing home’s profitability. Self-pay residents are an important market for nursing homes (29% of revenues) and one where nursing homes have pricing discretion.

Methodology

A multivariate regression model is estimated. Data for the study come from a unique database of per diem prices for self-pay long-term care services for Virginia nursing homes in 2011 combined with five star quality ratings from the Centers for Medicare and Medicaid Services Nursing Home Compare website.

Results

Offering high-value long-term care services is unrelated to operating or total margin of nursing homes.

Conclusions

Nursing homes can offer services to long-term care self-pay residents that are of higher quality and/or have a lower price for than other nursing homes without putting profitability at risk.

Keywords

financial management market forces nursing homes quality

Introduction

Nursing homes, like most providers of healthcare services in the United States (US), are currently being challenged to demonstrate the value of the care they deliver.¹ Improving value is particularly relevant to nursing homes given their historically low level of quality of care.² Although value, defined as quality relative to payment, may be evaluated for the population as a whole, such as with health status indicators relative to total national healthcare expenditures, currently, for most healthcare providers, value assessments are less global and tied to the specific services they deliver.

It is easy to see how quality and financial benefits of increasing the value of specific services would accrue to nursing home residents and payers. Although managers of nursing homes may expect benefits such as an enhanced reputation and more success in meeting residents’ needs, an important and largely unanswered question is whether producing high-value services yields financial benefits for the care provider—that is, whether there is a business case for value. In defining the business case for quality for healthcare providers, Leatherman et al.³ say, “A business case… exists if the entity that invests in the intervention realizes a financial return … in a reasonable time frame.”

There are currently two especially notable external forces in the US working to increase provider focus on value. First, third party payers—government programs and commercial insurance, which pay for the majority of personal healthcare services in the US—are including specific provisions in their contracts to increase quality, decrease their payments or both.^4,5 If payment to the service provider does not increase correspondingly as quality increases, or if quality does not decrease more than payment decreases, greater value is created.

A second important driver for value in US healthcare is the increasing transparency of information about a provider’s quality of services, information that is often presented on publicly available websites. Transparent quality information is expected to provide incentives to healthcare providers to improve quality. When coupled with price transparency, consumers may be more able to make value-driven healthcare decisions by choosing providers with better payment–quality combinations.⁶ However, price transparency has generally lagged behind the increasing quality transparency.⁶

Nursing homes stand in stark contrast to most other healthcare providers in the US. Prices are available to potential long-term care (LTC) self-pay nursing home residents or their caregivers from a telephone call or meeting with an admissions staff member. There is very little commercial LTC insurance.⁷ This means that, unlike for other services with significant commercial insurance coverage, the list price is the relevant payment for self-pay residents. For nursing homes, quality information is available for those that participate in Medicare or Medicaid on the Centers for Medicare and Medicaid Services (CMS) Nursing Home Compare (NHC) website (https://www.medicare.gov/nursinghomecompare/search.html), which began posting clinical quality measures in late 2002.

There is little empirical evidence concerning financial returns to nursing homes from value oriented activities. In a review of nursing home pay for performance programs implemented by several states, Briesacher et al.⁴ report modest or no quality improvement, increased or no change in costs, and no evidence on profitability from the four of 13 programs with an evaluation. There was limited improvement in quality but no evidence on profitability from the recent Centers for Medicare and Medicaid Nursing Home Value Based Purchasing Demonstration.⁸ Park et al.⁹ found that nursing homes that showed improved quality on the NHC website increased their operating margins. Their study did not assess value. To our knowledge, there is no empirical research to date regarding nursing home service value and profitability to guide management decisions.

This paper directly examines the relationship between service value and profitability in in a quality and price transparent market. We examine whether offering high value to self-pay LTC residents is associated with the nursing home’s profitability using per diem prices for LTC services and publicly available quality metrics. The service unit for LTC services in a nursing home is a day that includes the services most likely to be used by a resident such as general nursing care, room and board, and recreation services. The self-pay market is important for nursing homes comprising 29% of payments for nursing home care in 2013.¹⁰

With an average total facility margin of only 2.1% in 2012, it is important for nursing home managers to understand the relationship of value to profitability.¹¹ Self-pay residents are also interested in receiving value for their spending because the financial burden for long-term nursing home care is large. The median per diem rate for a semi-private room in 2014 in the US was $212, or $77,380 per year.¹²

Conceptual framework

Most nursing homes in the US offer both short-term post-acute and long-term custodial care. Post-acute care is largely paid for by the federal government’s Medicare Program; long-term custodial care is paid for by the combined federal-state Medicaid Program or with out-of-pocket (self-pay) expenditures from residents. The government programs determine payments for care in nursing homes, but nursing homes can set their own prices for self-pay residents. Medicaid is the both the largest source of revenue and least generous payer for LTC services delivered in nursing homes. Many nursing homes complain that Medicaid payments do not cover the cost of care.¹³ Thus, the flexibility of pricing for self-pay residents makes this revenue source important to the finances of nursing homes. The transparency of quality and price information to consumers, lack of commercial insurance contracts, and the flexibility of self-pay pricing for LTC residents means that US nursing homes can formulate a strategy with regard to quality and price for self-pay residents to help meet their financial requirements.

The majority of nursing homes in the US (69%) are organized as for-profit (FP) firms.¹³ As such, their primary financial goal is to maximize profits. Not-for-profit (NFP) nursing homes also maximize profits, but many researchers have suggested alternative goals for NFP healthcare providers such as quality and quantity maximization.¹⁴ Whatever goals NFPs pursue, they need to produce profits to survive to pursue these goals.¹⁵ The difference in primary financial goals is considered in our empirical work with a control for ownership type.

A firm’s profits are determined by subtracting its expenses from its revenues. Both revenues and expenses may be linked to a nursing home’s value strategy. The highest value for residents would be created when a nursing home sets both a low price and delivers high quality of care. At face value, this strategy appears likely to be at odds with the profit maximization goal, leading, instead, to low profitability. Setting a low price would act to depress total revenues. However, if more residents are attracted by the low price and/or high quality, total revenues and, possibly, profits, would be expected to increase.

On the expense side, there is an important uncertainty concerning this low price–high quality strategy—whether high quality is more expensive to produce than low quality of care. If high quality is more expensive to produce, there would be pressure on profits of nursing homes. Empirical evidence regarding the expense-quality question in healthcare is mixed.¹⁶ Expenses may be lower if complications or patient safety errors are avoided. On the other hand, some research has found higher nursing home expenses with higher quality, especially with regard to staffing.^9,17 However, other research indicates that additional nurse staffing only increases quality in nursing homes with the lowest staffing meaning that the highest quality nursing homes may not have the highest expenses.¹⁷ Given the various possibilities, it is difficult to formulate expectations about how following a low price–high quality value strategy will be related to nursing home profitability.

Further compounding the difficulty in predicting the relationship between a nursing home’s value strategy and its profitability is that value in healthcare is typically determined relative to other providers of the same service. As a result, it may be possible for a nursing home to produce a better price/quality combination than competitor nursing homes by focusing on either low price for a given level of quality or high quality for a given price, or to moderate their choices of both price and quality rather than to choose both a low price and high quality. As before, predicting the revenue, expense and profitability of nursing homes offering high-value services in this manner is not straightforward.

Methods

Data

Data for this study are derived from publicly available sources. Although potential residents can obtain self-pay per diem LTC prices from individual nursing homes, these prices are not available in a national database for all nursing homes. This study uses a unique database of prices for nursing homes in Virginia. Price data were posted on the Virginia Health Information (VHI) website for the 2011 fiscal year but were not available for other years. Nursing home quality data are obtained from the CMS NHC website, which began by posting clinical quality measures in late 2002 for Medicare and Medicaid certified nursing homes.

The few available studies regarding the profitability of nursing homes in the US have identified market and organizational factors that may be related to profitability.^9,18 For this study, market conditions data come from the US Department of Commerce Bureau of Economic Analysis, US Census Bureau, and the Long-term Care Focus (LTCF) Project at Brown University (www.ltcf.org).¹⁹ Data for organizational characteristics are drawn from the VHI and LTCF data.

Specialty facilities such as training centers and acute LTC facilities, nursing homes in operation for a year or less, and those with no self-pay revenues are excluded from the study. Hospital-based facilities and those that are members of continuing care retirement communities are also excluded because they did not supply price data. Only eight observations are deleted due to lack of data.

Variables

Definitions and sources for the study variables are shown in Table 1. Two measures for profitability are used in the study. Operating margin reflects the profitability of the nursing home from its main business, patient care. Total margin includes revenues from non-operating sources including investment income.

Table 1.

Variables, data sources, and descriptive statistics.

		Mean or N	Standard deviation or %	Source
Variables
Dependent
% operating margin	(2011 operating income/net patient revenue) × 100	4.24	5.6317	VHI^a
% total margin	(2011 operating + non-operating income)/ (operating + non-operating revenue) × 100	4.42	5.2870	VHI
Explanatory variables
High-value strategy (binary—1/0)
Local market	NH in best 2011 quality and lowest 2011 semi-private self-pay per diem price^b quartile in local market	60	34%^c	VHI, NHC^d
State terciles	NH in both best 2011 quality and lowest 2011 semi-private room self-pay per diem price^b terciles in state	26	12%	VHI, NHC
State price/quality ratio	NH in lowest quartile of 2011 self-pay per diem price^b/quality ratios in state	55	26%	VHI, NHC
Market characteristics (2010)^e
Per capita income	Per capita income/1000	39.10	11.27	BEA^f
% older population	(Population age 65 years or older/total population) × 100	14.59	4.06	US Census^g
Nursing home Herfindahl index	∑ (Nursing home bed share)^2b	.40	.28	LTCF^h
High home health agency presence	Nursing home in tercile of markets with highest ratio of number of home health agencies in the county for every 1000 persons age 65 or older	69	32%	LTCF^h
Low home health agency	Nursing home in tercile of markets with lowest ratio of number of home health agencies in the county for every 1000 persons age 65 or older	73	34%	LTCF^h
Nursing home organizational characteristics (2011)
Total beds	Total beds in nursing home	123.79	56.06	VHI
Member of multifacility system	1 if NH is member of multifacility system; 0, otherwise	161	75%	VHI
For-profit owned	1 if NH has for-profit ownership in 2011; 0, otherwise	170	80%	VHI
Occupancy rate	Average occupancy	.89	.07	VHI
% Medicare residents	(Medicare patient days/total patient days) × 100	19.71	13.02	VHI
% non-Medicare or Medicaid residents	(Non-Medicare or Medicaid patient days/total patient days) × 100	17.82	11.60	VHI
Any special care unit in the nursing home	1, if any special care unit (Alzheimer’s or other) in nursing home; 0, otherwise	31	14%	LTCF
Case mix	Resource utilization group total patient case mix index	1.0564	.0364	VHI
n		213

VHI is Virginia Health Information (www.vhi.org).

Semi-private self-pay per diem adjusted for differences in geographic cost of living by Centers for Medicare and Medicaid Services Resource Utilization Group Wage Index for 2011 (http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/SNFPPS/WageIndex.html).

Percent using nursing homes in markets with more than one nursing home.

Centers for Medicare and Medicaid Services Nursing Home Compare website (http://www.medicare.gov/nursinghomecompare)

^eVariables measured for market of nursing home. Market is county or city/county combination as defined by the US Bureau of Economic Analysis.

US Bureau of Economic Analysis.

US Census Bureau.

Shaping Long Term Care in America Project at Brown University funded in part by the National Institute on Aging (1P01AG027296). http://www.ltcfocus.org/

The key explanatory variable is whether the nursing home produces high-value services. There are two components to evaluate in classifying the nursing home’s value strategy—price and quality. For price, the study uses the nursing home self-pay price for a semi-private room, the most common room type in a nursing home. The majority of the LTC services used are bundled into a per diem price making it the largest as well as most visible and predictable cost. This price is adjusted for differences in geographic cost of living by CMS Resource Utilization Group Wage Index for 2011.²⁰

The second component, quality, comes from the CMS NHC five star rating system for nursing homes participating in the Medicare and Medicaid programs, which is designed to “provide residents and their families with an easy way to understand assessment of nursing home quality, making meaningful distinctions between high and low performing nursing homes” (see Abt Associates Inc.,²¹ p. 1). The ratings are easily accessible on the NHC website and range from a low of 1 to a high of 5 (best quality). The overall nursing home quality rating is constructed using three separate five star ratings for health inspection (survey), staffing and quality measure domains. For the study, the monthly overall five star ratings for nursing homes with available ratings for at least six months of the calendar year are averaged to create an annual average overall five star rating.

Whether a nursing home was high value in 2011 is determined in three different ways. The first method uses local nursing home markets in Virginia and, specifically, markets with more than one nursing home (51 of 91), to identify high-value nursing homes. Similar to most research on nursing homes, the county is the market area.²³ However, in Virginia, because cities are not included in counties, no matter how small they are, we follow the US Bureau of Economic Analysis practice of combining small independent cities into their surrounding counties.²⁴ There were nursing homes having both the highest quality rating and the lowest price in 22 of the 51 markets. However, in 19 of the remaining markets, nursing homes with the highest quality also had the highest price and in 10 markets, nursing homes with the highest quality had a mid-range price in the market. As a result, in these 29 markets, the ratio of price/average annual overall five star rating is used to determine high-value nursing homes in the market. Nursing homes in the lowest quartile of price/quality rating are coded as high value. In markets with fewer than four nursing homes, the nursing home with the lowest ratio is coded as high value.

The other two methods compare all nursing homes with price and quality data across the state, which does not require eliminating any markets. For the first of these, nursing homes are classified separately on quality and low price. Then, nursing homes that are both high quality and low price are classified as high value. Using the best quartile performance on both price and quality yields only five high-value nursing homes. Therefore, the 26 nursing homes are in the best tercile for both price and quality are classified as high value. The last method of determining high value, classifies nursing homes in the quartile with the lowest price/quality ratio in the state as high value (n = 55).

Drawing upon previous research, controls for market characteristics that reflect demand and supply as well as organizational characteristics are also included in the empirical model. Market variables related to demand include population over age 65 and per capita income. Nursing home competition is measured with a nursing home Herfindahl index, which indicates nursing home market share concentration of beds.²³ It is defined as the sum of the squares of the market share of nursing home beds. A value of one indicates that there is no market competition, that is, there is one nursing home in the market. Lower values indicate higher competition. Home healthcare may serve as alternatives to nursing home care for some elderly. Because of the non-normality, similar to Gruneir et al., the number of home health agencies per 1000 persons aged 65 and older is broken into terciles for estimating the model.²⁵ Similar to other studies of nursing home profitability, controls for organizational characteristics include size, chain membership, ownership, occupancy, payer mix, and case mix.^9,18 These variables along with their definitions and descriptive statistics are presented in Table 1.

Analysis

The empirical model is

Profit = a + b_{1} Strategy + b_{2} MKT + b_{3} ORG + e

where Profit refers to operating or total margin, Strategy refers to value strategy, MKT refer to a vector of market variables, ORG refers to a vector of organizational variables and e is the error term. We estimated linear regression models using STATA Version 13, adjusting the standard errors for clustering of nursing homes within markets.

Results

Table 1 displays the descriptive statistics for the study variables. The average operating and total margin for the nursing homes were 4.2 and 4.4%, respectively. In the local market determination of high value, 60 nursing homes were classified as high value. Only 26 nursing homes were in both the highest quality and lowest self-pay price terciles in the state, but 55 nursing homes were classified as high value using the ratio of the price to quality for all nursing homes in the state. Also of note is that 80% of the nursing homes had FP ownership.

Results from the estimation of the multivariate regression models are shown in Table 2. The results from estimating the total margin regression models are omitted because they do not differ from those for the operating margin. As can be seen from the table, offering high-value LTC services is unrelated to profitability. Profitability is neither higher nor lower for high-value nursing homes than other nursing homes.

Table 2.

Nursing home profitability regression results for operating margin.^a

High-value classification determinations	Best price and quality in local market		Best price and quality terciles in state		Best price/quality ratios in state
High-value classification determinations	Parameter estimate	Standard error	Parameter estimate	Standard error	Parameter estimate	Standard error
Strategy
High-value nursing home	.387	1.090	.636	.991	1.039	.752
Market characteristics
Per capita income/1000	.003	.034	.005	.029	.009	.030
% population >65	−.110	.110	−.079	.095	−.077	.095
Nursing home Herfindahl index	.868	3.346	1.891	1.396	2.027	1.411
High home health agency presence	−1.110	.965	−1.548⁺	.895	−1.532⁺	.883
Low home health agency presence	−.787	.931	−1.302	.806	−1.406⁺	.817
Organizational characteristics
Total beds	.010	.007	.009	.006	.010	.007
Member of multifacility system	3.113*	1.463	3.259*	1.289	3.322**	1.276
For-profit nursing home	−4.356***	1.264	−3.652***	1.096	−3.567***	1.059
Occupancy rate	17.534⁺	8.843	14.712*	7.394	14.748*	7.333
% Medicare residents	.131**	.049	.133**	.045	.134**	.044
% Non-Medicare or Medicaid residents	.045	.039	.066⁺	.035	.061⁺	.034
Any special care unit	−1.299	.987	−.631	.781	−.655	.795
Case mix	−22.920	14.735	−13.969	12.847	−12.458	12.742
Constant	11.248	16.416	2.727	14.339	.527	14.187
F	4.51***		4.73 ***		4.78***
N	174		213		213

⁺p ≤ .10; *p ≤ .05; **p ≤ .01; ***p ≤ .001

Estimated with ordinary least squares with standard errors adjusted for clustering by nursing home market.

Although the market variables are not significantly related to profitability, organizational variables are. Being a member of a multifacility system, occupancy rate and percentage of Medicare residents are all positively associated with higher profitability. In contrast, FP-owned nursing homes have lower profitability than NFP owned nursing homes. This unexpected result is likely due to the lower ends of the margin distribution for FPs nursing homes. The lowest negative FP margin was lower but the highest FP margin was also lower than for other facilities.

To determine whether the results are sensitive to the definition of quality used, the models were also tested using the five star quality measure rating instead of the overall rating. In addition, to determine if nursing homes that relied upon self-pay residents more than other nursing homes and pursued a high-value strategy were more profitable, we interacted high value with a high reliance (highest quartile) on other payers. We did not find any differences in our results with these models. An examination of additional strategies using the state-wide data—specifically, high price–high quality, low price–low quality, and middle price–middle quality—showed that none of these strategies were more profitable than the others. Finally, to test whether a value strategy is related to efficiency, the models were estimated using total cost, labor expenses or paid hours per adjusted day. The value strategy was not related to greater efficiency.

Discussion

Despite the pressure on providers of healthcare services in the US to demonstrate value in the care they deliver, empirical study of the relationship of providing high-value services to financial viability, in essence, the business case for direct benefits to the provider, has been lacking, especially for nursing homes. This study examined whether nursing home profitability is related to offering high value for self-pay LTC services. Data for the study come from a unique database of prices for Virginia nursing homes in 2011 that is combined with five star quality ratings produced by the CMS for the same year.

Financial viability of nursing homes is important because they are essential for providing post-acute and LTC to the elderly, a population that is growing.²⁶ Because the likelihood of functional and cognitive disabilities increases with age, an increase in the demand for long-term services and supports is expected to accompany this demographic shift.²⁷ Although support for home and community care programs has increased, the elderly who cannot live independently must rely on institutional care provided by nursing homes.²⁸

The results of this study show that nursing homes classified as providing high-value services for self-pay residents are not less and not more profitable than other nursing homes. The results are the same when using three different means of identifying high-value nursing homes, one that uses a local market comparison and two that use state-wide comparison. Further, when the quality indicator used in the ranking is the five star annual quality measure rather than the five star overall rating, or we include high reliance on self-pay residents, the results are the same.

Managers, who must make decisions to protect the financial viability of nursing homes, may find the results reassuring in that they can provide value to residents with high quality, a low price or both without putting profitability at risk in this LTC setting characterized by transparent price and quality. Thus, the findings also provide some good news to policy makers as they search for ways to increase the value of healthcare services. Because policies encouraging price and quality transparency do not appear harmful to essential organizations, it is not unreasonable to expect providers to be able to offer high value to patients and payers.

However, there are two important cautions. First, without clear indication that creating high value leads to a positive financial return, there is not a clear business case for creating value in the self-pay market. This will be especially true if managers of nursing homes may not feel people use the NHC quality indicators in determining value. Instead, they may feel other aspects, such as amenities and geographic location are more important.²⁹ Second, value is typically defined as relative to other providers and the concept is measured this way in this study. Thus, it is likely that nursing homes balance quality and payment in making value decisions and may not select both the highest quality and the lowest price. Our data showing that only five nursing homes in the state fell in both the best quality and price quartiles.

Still, the study results do demonstrate that potential residents can find relatively better value services. They should use publicly available quality and price information to identify higher value nursing homes and combine it with their other criteria for choosing a nursing home. As nursing homes face pressure for price transparency, it will be important for managers to ensure that the unit of service for pricing, in this case, the bundled per diem, is standardized enough to permit comparison across organizations in making value assessments. Much effort has been exerted in developing quality indicators to permit reasonable comparisons across provider organizations. For price transparency to achieve its potential in increasing service value, similar effort may be needed.

Like all studies, this one is subject to a number of limitations. First, there are multiple dimensions of quality and multiple measures of each but not all dimensions of quality, such as resident satisfaction, could be included in this study. However, the study benefitted from the availability of an aggregated overall quality indicator that includes evaluation of the physical setting, staffing and quality measures that is posted on the CMS NHC website. It is designed to be easy for consumers to. The measure is also appropriate for a service that is, in itself, a bundle of services. As a result, the rating is highly visible to nursing homes as they make their pricing decisions. In addition, our results were consistent when a different aggregated rating focusing on quality measures was substituted.

Second, the generalizability of the study results to nursing homes in other states may be limited. This study used a unique database from one state, Virginia, which was necessary because, although nursing home prices are available upon request to potential residents, there is no national database of prices. Similarly, databases containing price information for all the nursing homes in a state are difficult to find. Since data were available only for a single year, the study is cross-sectional, and we could not study whether the relationship between value strategy and profitability was stable over time. Nor was it possible to identify changes following the adoption of a value strategy.

Nonetheless, the current study provides a foundation for future work. It identifies some empirical challenges in how to study value. For example, the Virginia nursing homes that produced the highest quality of services in 2011 sometimes also had the lowest per diem price, but not all the time. In addition, when examining nursing homes statewide, only five nursing homes in Virginia in 2011 fell into both the highest quality and lowest price quartiles. This finding may identify a difficulty in producing or an unwillingness to produce both high quality and set a low price. It certainly illuminates challenges in conceptualizing and measuring high value. Since value is a relative concept, this study relied upon price to quality ratings in local market and statewide comparisons to classify high-value nursing homes.

Clearly, more research concerning value and its multiple effects on providers of healthcare services is needed. Future research should continue to examine the value of healthcare services for the individual consumers of specific services as it examines whether and how healthcare services can provide value to the population as a whole.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

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