The Property Rights Theory of the Firm: Some Evidence from the U.S. Nursing Home
Industry
Author(s): H.E. Frech III
Reviewed work(s):
Source: Zeitschrift für die gesamte Staatswissenschaft / Journal of Institutional and
Theoretical Economics, Bd. 141, H. 1., 2nd Symposium on The New Institutional Economics
(März 1985), pp. 146-166
Published by: Mohr Siebeck GmbH & Co. KG
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fürdiegesamteStaatswissenschaft
Zeitschrift
(ZgS) 141(1985),146-166
Journal
ofInstitutional
andTheoretical
Economics
TheProperty
RightsTheoryoftheFirm:
SomeEvidencefromtheU.S. NursingHomeIndustry
by
H.E. Frech III*
/. Introduction
Oskar Lange is reportedto have said thattheincentives
facingthemanagers
of his socialistfirmswereso unimportant
thattheycould be leftto thesociologists.But,manyeconomistssinceLange have disagreedand have pursued
theincentiveproblem.Theymayproperlybe called new institutional
economists.
An important
economicsis theproperty
rights
partof thenewinstitutional
with
ArmenAlchianand Oliver
of
the
associated
most
firm,
theory
closely
Williamson.It analyzesthe externalconstraints
faced by the top decisionof the classical textbookfirm
makerof the firm.The top decision-maker
is regardedas havingfullprivatepropertyrights.The theorypredictsthat
if the propertyrightsof that decision-maker
are attenuated,theseweaker
to thetop decisionmaker.
the
on
amenities
reduce
rights
price nonpecuniary
In turn,thisleads to greaterconsumption
of amenitiesand lowerfirmwealth,
thusreducedmanagerialefficiency
(Alchian [1961],Furubotn and Pejovich
[1972],Frech [1980]).
Other,implicationsof the theorycan be developedwiththe additionof
auxiliaryhypotheses(Clarkson [1972], Borjas, Frech and Ginsburg
[1981a]).This theoryhas formedthebasis of numerousempiricalstudies(De
firmbehavior.
foundto be usefulaid in explaining
Alessi [1980])and generally
At the same time,thereis a greatdeal of policyinterestin the issues of
In particular,
someobof thehealthcare industry.
theinstitutional
structure
* Thanksforsupportare due to theNationalCenterforHealthServicesResearch
and Developement,U.S. Departmentof Health and Human Service,underGrant
of California,Santa Barbara,Committee
No. ROI HS02674-02and to theUniversity
on ResearchoftheAcademicSenate.Thispaperdrawson Frech and Ginsburg[1981],
Frech and Ginsburg[1982]and Borjas, Frech and Ginsburg[1983].The paperwas
and
Economicsat Mettlach/Saar
presentedat the Seminaron the New Institutional
at a seminarat the International
ManagementInstitutein Berlin.Helpfulcomments
fromGérardGäfgen
at both meetings,
werereceivedfromparticipants
particularly
and JanKmenta.
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S.Nursing
147
servershave suggestedthat the traditionalnonprofitformof ownershipin
U.S. hospitalsis inappropriate
and thattheprofit-seeking
formmightbe superior(Clark [1980]).Policymakershavealso beenconcernedwiththedesign
ofsystems
ofpaymentforhealthcareproviders(calledreimbursement
systems
in theU.S.). In thispaperI willshowthattheownershipand reimbursement
issuesarepartofthegenericproblemofproperty
rights.I willuse theproperty
of a largeempiricalstudy
rightstheoryof thefirmto guidetheinterpretation
of theAmericannursinghomeindustry.
2. TheProperty
RightsTheoryoftheFirm
The propertyrightstheoryof the firmapplies standardeconomicanalysis
to theincentive
effects
ofvariousconstraints
on thefirm.Originally,
thestress
was on the particularlaw of propertythat applies to the firm,hence the
name.Most of theworkon thetheoryhas stressedtheeffectof theproperty
on managerialefficiency
or cost. In thissection,I willsketch
rightsstructure
the theory,thenextendit to consideroutsideconstraintsarisingfromthe
reimbursement
government
systemand effectson both costs and on wages
paid.
Considerthetop decision-maker
of thefirmunderprivateproperty
rights.
The ownerwill maximizehis utilityby choosingthe optimalcombination
of nonpecuniary
benefitsand monetarywealthof the firm,as in point Op
in Figure1. Supposenowwe alterthelegalconstraints
on thefirmbyconvertfirm.Althoughthesetwo types
ing it to a nonprofit
privateor government
of attenuatedproperty
in degreeand in detail,theessential
rightsfirmsdiffer
natureof the constraintis the same. The top decision-maker
can no longer
keep the residualincomeof the firmas his own incomeand wealth.He is
limitedto, in wealthterms,thepresentvalue of a "reasonable"salary,which
I willdenoteas S. The additionof thisnewnonprofit
constraint
wouldcause
the decision-maker
to choose a new point to maximizeutility,point 0a in
Figure 1. At thispoint,he has reducedthe firm'swealthand increasedhis
consumptionof nonpecuniary
goods. As long as the firmearns enoughto
him
the
value
these
S,
pay
present
nonpecuniary
goodsare freeto thedecisionmaker.In choosingto increasehis consumptionof nonpecuniary
goods at
the expenseof firmwealth,the decision-maker
has loweredthe productive
ofthefirm.Thisis easyto seewhenone considersthatthenonpecunefficiency
iarygoods includeleisure,thequietlife,prestigein thecommunity,
pleasant
colleaguesand so on. Thus, the model predictsthat firmswithattenuated
thanpriproperty
rightswould have highercostsand produceless efficiency
vate propertyrightfirms.As I mentionedabove, thispredictionhas been
borneout in manystudies,ablyreportedby De Alessi [1980]and Furubotn
and Pejovich [1972].
10*
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148
H.E. FrechIII
ZgS
The Substitution
fromwealthtowardsnonpecuniary
goods by thetop decision-maker
has manyimplications
forthefirm'swage settingprocess,as well
as forcosts and efficiency.
to
First,the shiftwill lead the decision-maker
hireworkersand managerswithwhichhe feelsmorecomfortable
and towards
whichhe feelsmoresympathetic.
Thus,dependingon theowner'stastes,the
firmmay hire individualsof particularethnic,religiousand racial groups
and withparticular
physicalor mentalattributes
(Alchian and Kessel [1962]).
More generally,the ownerwill hireworkerswho are more cooperativein
pursuingthe nonpecuniary
goods that he favors.What I have said so far
ones, but
may indicatethatthe workershiredare not the cost minimizing
I have not yetdevelopedan argumentforwagesto be higherin non private
propertyfirms.However,such a conclusioncan be reachedby severallines
of argument.
First,George Borjas [1980]has arguedthatone way to purchaseworker
cooperationis simplyto pay themmore. Further,he has arguedthat this
occursin theU.S. federalgovernment.
This,of course,impliesthatworkers
in attenuatedproperty
be paid moreto securetheirgreater
firms
would
right
than
would
be
ordinarily sought.Second,MartinFeldsteinargues
cooperation
firmsare partly"spent"by overthattheeconomicrentsearnedbynonprofit
This is calledphilanthropic
workers
as
a
charitable
act
the
owners.
paying
by
wage setting.Finally,attenuatedpropertyrightswill lead the ownerto be
to thelabormarkets.Thus,he willmakemoreerrorsin offering
lessattentive
wagesthatare eithertoo highor too low, relativeto themarketwage. Even
thedistribuiftheoffers
too high,themarkettruncates
are notsystematically
tionofoffers
sinceonlyoffers
thatexceedthepotentialemployee'sreservation
wagewillbe accepted.Of course,thesehigherwagesforemployeesof governwithfullcompetitive
mentand nonprofitfirmsis inconsistent
equilibrium
in the labor market.There mustbe an implicitqueue or excess supplyof
workerswillingto workin thesehighwagefirms.
3. TheAmerican
NursingHomeIndustry
U.S. nursinghomesprovidehousing,nursingcare and low levelmedicalcare
to manyelderlypeople and a small numberof youngerpeople. About five
percentof the elderlypopulationlivesin nursinghomes,but thereis great
variationacrossAmericanstatesfromabouttwoto nineor tenpercent(Levit
homecareamountedto $ 27.3 billion,
on nursing
[1982]).In 1982,expenditures
Theseexpendiwhichwas about eightpercentof all healthcare expenditures.
tureshave been growingat about one and one halftimesthe growthrate
ofGrossNationalProductduringthepastdecade(Gibson,Waldo and Levit
Medimostlythroughthestateadministered
[1983]).Government
payments,
caid programforthepoor,accountedforabout 55 percentof totalexpendiThe
is large,it is dominatedby smallinstitutions.
tures.Thoughtheindustry
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141/1(1985)
HomeIndustry
SomeEvidence
fromtheU.S. Nursing
149
Wealth
s
__ΐ^Λ2*
'
ρ
Nonpecuniary
Benefits
Fig.1 Property
Rightsand Choice
averagenursinghome has only74 beds and onlyfivepercentof the homes
containover200 beds.
The nursinghomeindustry
has historically
beendominatedbyprivatenonprofitfirms,but recentgrowthhas been largelyin the ranksof the private
firmsso thatby 1976,69 percentof the homeswerein that
profit-seeking
group,21 percentwereprivatenonprofitand 10 percentwere government
owned. Most of the latterare owned by state and local government.
The
propertyrightstheorywould predictlower costs and lower wages for the
firms.
profit-seeking
the
Medicaid,
joint federal/state
programthat financesmedicalcare for
thepoor playsa majorrolein theindustry
throughitsmassivereimbursement
fornursinghome care. In particular,variationsacross statesin the method
Medicaid uses forreimbursement
createsdifferences
in the incentivesfacing
homes withingiven ownershipgroups. In this system,both the level and
methodofpaymentformedicalcareis setbythestate.Thishas led to substantial variation.In 1972,the yearof the data forthisstudy,some statespaid
a flatrate,regardlessof costs,whileat theotherextreme,
some statessimply
reimbursed
the home forcosts incurred.Betweentheseextremesare subtle
variationson themethodsand also theprospective
thatpaysan amount
system
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150
H.E. FrechIII
ZgS
on thepast costsof theindividualhomeor a groupof similarhomes.Table1
schemesfor
shows the distribution
across statesof nursingreimbursement
1972.Since 1972,partlyin responseto new federalrules,theuse of flatrate
exist
systemshas declined.Since the best incentivesfor cost minimization
in the flatrate states,the propertyrightstheorywould predictboth lower
costsand lowerwagesforhomesunderthatsystem.
4. EmpiricalResultson BehavioralDifferences
In thissectionI surveytheempiricalresultsfoundon the two main focuses
and wages. But, I also considerthe effects
of research,costs and efficiency
of servicesprovidedto conof theproperty
on theintensity
rightsstructure
is
of
interestbecause some have
and
selection.
The
latter
sumers
on patient
maintain
lowercoststhannonprofit
homes
assertedthatprofit-seeking
nursing
ones simplyby selectingthe healthiestconsumers,who are least likelyto
need costlyservices,as wellas simplyprovidingfewerservices.This is often
draws on
called "cream skimming".The materialon costs and efficiency
Frech and Ginsburg [1981],whilethaton wages drawson Borjas, Frech
and Ginsburg[1983].
4.1. Data
The data on nursinghomes,employeesand patientsare fromthe 1973-1974
and state
NationalNursingHome Survey1.Data on Medicaidreimbursement
regulationare takenfromunpublishedMedicaid documentsand an Urban
thesample
For thestudyof costsand efficiency,
Institute
surveyrespectively.
was limitedto thosenursinghomesthatprovidednursingcare, ratherthan
thatwerecertified
simplecustodialcare,to at least halfof theircustomers,
of theneeligibleforpaymentunderMedicaid,thathad completereporting
StatisticalAreas
cessarydata and thatwerelocatedin StandardMetropolitan
(SMSAs). For the wage survey,we includeemployeesof homes thatwere
not in SMSAs. This editingreducedthenumberof nursinghomesfromthe
totalsampleof 2100 to about 600. The numberof patientswas about 8000,
whilethe sampleof nonmanagerial
employeeswas about 11000. Since the
of
are
based
on
a
data
sample 10foreachhome,thereis somesampling
patient
errorin thesedata whenthe nursinghome,ratherthanthe patient,is used
as theobservation.
1 A discussionof thedata is containedin National Center for Health Statistics
variablesand data editing
of the reimbursement
[1979].Details on the construction
generallyare containedin Frech and Ginsburg[1981]and especiallyin Frech and
Ginsburg[1982]or fromtheauthor.
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S. Nursing
151
Table1
StateNursing
HomeReimbursement
SystemsUnderMedicaid,1972
(SkilledNursing
Homes)
TypeofSystem
Flat Rate
Flat Rate,VariesbyLevelofCare
Rate Setting,
no Ceiling
Prospective
Rate Setting,
withCeiling
Prospective
Rate Setting,Based on GroupPerformance
Prospectice
Cost Reimbursement,
withCeiling
Cost Reimbursement,
no Ceiling
NumberofStates
7
2
4
2
6
11
18
Source: Classifiedbyauthorson basisofunpublished
surveyconductedbytheSocial
and Rehabilitation
ofHealth,Educationand Welfare.
Service,U.S. Department
4.2. CostsandEfficiency
4.2.1. The EmpiricalModel
In thestudyofcostsand efficiency,
we useda translogcostfunction
to explain
the variationin total operationcosts,excludingcapital costs. Capital costs
are problematical
sincetheyare systematically
forgovernment
underreported
firmsand, underinflation,by profit-seeking
firmsin
and privatenonprofit
flatratestates.Resultsare not verysensitiveto thefocuson operatingcosts
alone,whichmakeup 80 percentof totalobservedcosts.
variablesincludefirmownership,
typeof MedicaidreimburseIndependent
ment,inputprices,outputand variablesto standardizetheserviceprovided.
These latterincludean indexforpatientdebility,forservicesavailable and
forservicesactuallyprovided.These serviceand debilityvariablesallow us
to controlfortypeof serviceand qualitymorecompletely
thanpast studies.
Variablesto capturethe interaction
betweenownershipand reimbursement
werealso included.All variablesare listedin Appendix1.
The functionalformis a hybridof translogand linear.It is translogin
outputand inputprices,includingall second orderterms,whilethe output
are simplylinear.
variables,mostlydichotomous,
standardizing
lnC=ao + a1lnr+XailnPi + ixZaolnPimP/+Zaiym/>im:r
l
i
i
j
+ Σ*Λ+ Σ^9ι + I^J >
Hißtet
i
i
i
i
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152
H.E. FrechIII
ZgS
where:
C=the totaloperatingexpenses,
Y= output,inpatient
days,
Pi= theithinputprice,
variable,
Prt= the/thproperty
rightstructure
=
the
ι
th
reimbursement
variable,
Ri
variable,
Rqi= theιthstateregulatory
=
the
ι
th
variable.
St
outputstandardizing
The value of the translog'sflexibility
was shownin our sensitivity
testing,
as thedata strongly
of theCobb-DouglasForm.
rejectedtherestrictions
The equationwas estimatedwithordinaryleastsquares(OLS). The treatmentof mostvariablesas exogenousis natural.However,the treatment
of
(Nerlove [1965]).Althoughquite
outputas exogenousis moreproblematical
due to location,medicaland
competitive,
nursinghomesare heterogeneous
Hence,each homehas a smallamountof marketpower.
amenitydifferences.
Marketconditions,
an optimalplannedoutputforeach home,
thus,determine
whichwe take as exogenous.In the regressionwe enterpatientdays, but
holdconstanttheoccupancyrate.Thus,patientdaysareequivalentto planned
output.
a moreseriousproblem.
Takingoccupancyrateas exogenousis potentially
and
Yett [1981] shows that
the
work
of
Marshall
However,
Greenlees,
thereis a largerandomcomponentto arrivalsat nursinghomes.Thus,even
if plannedoccupancyrate is endogenous,the measuredoccupancyrate includes a large random,exogenouscomponent.In any case, excludingthat
variablehinderedthe fitof the equation a bit, but did not alterthe main
on theownershipand reimbursement
variables.It would have been
findings
valuableto testthespecification.
However,thatrequiresa moregeneralmodel
(Krameret al. [forthcoming]).
functions
withOLS aredifTheassumptions
toestimate
necessary
production
ferent
(Zellner, Kmentaand Dreze [1966])and lessplausibleforthisindusa production
analysis,we performed
try.However,as a partof our sensitivity
functionanalysis.These resultsalso showedthe same qualitativeeffectsof
the propertyrightsvariables,but slightlysmallermagnitudes.This is what
of theattenuatedproperty
one wouldexpect,sincetheinefficiency
rightfirms
bundleof inputs.
is composedof two parts.First,theyselectan inefficient
Second, theyuse the inputsthat theyhave in suboptimalways. The cost
functionresultscapturethe total effecton costs of both sourcesof waste,
measuresonlythelattersourceon inefficiency.
whiletheproductionfunction
4.2.2. Results
The modeloverallexplainedabout 91 percentof thecrosssectionalvariation
theresultsprovidereasonably
in totaloperatingcosts.Much moreimportant,
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S. Nursing
153
Table2
HomeCostFunction:TheEffects
andReimbursement
Method
Nursing
ofOwnership
on Log TotalOperating
Expenses
Β
Standard
Independent
Variable
Value
Deviation
Variables*
NONPROF
ÕÕ5
ÕÕ4
Ownership
GOVT
034
0.07
TPMED2
Reimbursement
Variablesa
-0.02
0.09
TPMED3
0.56
0.32
TPMED4
0.06
0.13
TPMED5
0.03
0.12
TPMED6
0.04
0.10
TPMED7
041
0.14
NPMED
0.24
0.12
Ownership/Reimbursement
Interactions'»
GMED
027
0.16
a Reimbursement
variablesand ownership/reimbursement
interactions
are all interacted withPCAID, the percentageof patientssupportedprimarily
by Medicaid.To
obtaintheeffectof any thesevariablesforhomeswiththemean Medicaidpercentage
forhomesincludedin theregression,
thecoefficient
by0.615.
* Key to Variables: NONPROF multiply
=1 if nursinghome is nonprofit,
0 otherwise;
GOVT=1 if nursinghome is government
operated,0 otherwise;TPMEDi = l times
theproportionof patientsreimbursed
by Medicaidif nursinghomeis reimbursed
by
theithmethod,0 otherwise,
TPMED1 = flatrate,TPMED2 = flatrate,variesbypatient,
=
TPMED3 prospectiverates,base periodcosts,subjectto ceiling,TPMED4 = same
as TPMED3, exceptno ceiling,TPMED5 = prospective
rates,based on groupperformance, TPMED6 = cost reimbursement,
subjectto ceiling,TPMED7 = cost reimbursement,no ceiling;TPMED = interaction
amongNONPROF, PCAID (percentofpatients
supported
primarily
byMedicaid)and TPMED 1 or TPMED2 (flatratereimbursement);
GMED = sameas above,onlyforGOVT ratherthanNONPROF. The meanIn (operatingcosts)is 13.315.
of the effectsof ownershipand reimbursement
precisemeasurements
type.
The coefficient
estimates
forownership
and reimbursement
are shownin Table
2. The fullregression
is availablefromtheauthor.
a. Ownership
As one would expect,nonprofit
and government
firmshave generallyhigher
costs than privateproperty,
firms.
The most costlyfirmsare
profit-seeking
the government
owned homes.Further,the impactof ownershipis highest
in thestateswithflatratesreimbursement.
Privatenonprofit
firmsappear to be muchmorecostlythanprofit-seeking
firmsin flatrate environments.
Our point estimatefor this is 29 percent,
the sum of thecoefficient
on NONPROF and NPMED, thelatteran interaction on nonprofitstatusand locationin a flatrate state.In stateswith
thewasteful
costbased systems,
theefficiency
shortfall
oftheprivatenonprofit
firmsis less, witha point estimateof only fivepercentexcess costs. This
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H.E. FrechIII
154
ZgS
is significant
at about the 10 percentlevel on a one-tailedtest.This result
firmsto obtaindooccursin spiteof theabilityof some religiousnonprofit
natedlaborat lessthanmarketwages.
farworsethanevenprivatenonprofit
Government
ownedhomesperform
ones. Our estimatesshow thattheircosts are 51 percenthigherin flatrate
statesand fully34 percenthigherevenin thecostbasedstates.One explanation
forthismightbe thatwiththeiraccessto tax financedsubsidies,theincentives
forefficiency
ofthegovernment
homesmaybe muchweakerthanthenonprowe findlaterthatgovernment
homesoverpay
fitprivatefirms.
Further,
nursing
firmsdo.
theiremployeesbysubstantially
morethantheprivatenonprofit
the
reimbursement
variables
are
deflated
the
by
percentageof the
(All
home's patientswho are financedby Medicaid. This variablehas a mean
mustbe interpreted
thecoefficients
of0.615in oursample.Therefore,
reported
as theeffectof thereimbursement
schemeon a homewith100 percentMedicaid residents.
To gettheeffect
on a homewiththesampleaverageproportion
of Medicaidresidents,
thecoefficient
by0.615.)
multiply
In theninestudies
withtheempiricalliterature.
Our resultsare consistent
firmswere
wellsurveyedby ChristineBishop[1979],all foundthatnonprofit
more costlythan profit-seeking
homes. Some of the studiescontrolledfor
outputby includingvariousqualityand serviceproxies,but none were as
completein thisrespectthanours.Anotherweaknessofthesepreviousstudies
As we see by
is that theydid not controlfor the typeof reimbursement.
interacon NPMED and GMED, thereareimportant
theestimatecoefficients
We now turnto thereimbursetionsbetweenownership
and reimbursement.
mentvariables.
b. Reimbursement
are assoThe purecostreimbursement
systems
(withoutceilingson payments)
with
the
when
For
ciatedwiththe highestcosts.
simple
compared
example,
leads to costs thatare
flatratesystem(TPMED1) purecost reimbursement
or 25 percenthighercomparing
41 percenthigherforan all Medicaidfacility
home withthe mean proportionof Medicaid residents.This is the easiest
to interpret,
sincetheincentives
reimbursement
coefficient
generatedare the
clearest.Also,thisresultis quiteprecise.
withceilingson theamountpaid by thestate
Note thatcostbased systems
forMedicaid patients(TPMED6) lead to muchlowercosts than the open
ended cost systems.In fact,costs are onlyfourpercentabove the flatrate
systems.This indicatesthat the stateshave set the ceilingslow enoughto
formanyof the nursinghomes.Thus, mostnursing
be bindingconstraints
homesfacea de factoflatratesystemin thesestates.
We findmixedresultsforthe prospectivesystems.Two of themlead to
costswithina fewpercentof thosefortheflatratesystem,whileTPMED3
leads to veryhighcosts,more like the cost based systems.This anomaly
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S.Nursing
155
is probablyconnectedto the factthat New York is one of the few states
withthe TPMED3 systemand it has a historyof cost reimbursement
and
costs.
high
flatratesystemswheretheratedependson
Lastly,themoresophisticated
thetypeof patient(TPMED2) resultedin costssimilarto thoseof thesimple
sincetheincentives
forcostminimizaflatratesystem.This is not surprising,
thenursinghomecan affectitspayment
tionare identical.Unterthissystem,
of the resident,not by allowingcosts to
onlyby changingthe classification
rise.
Interactions
c. Ownership/Reimbursement
The resultson theinteraction
termsNPMED and GMED are veryinteresting.
I interpret
theresultsas follows.In flatratestates,thereimbursement
system
market.That is, if the decision-maker
allows costs
emulatesthecompetitive
willnotpay
to riseby consumingmorenonpecuniary
goods,thegovernment
any part of the highercosts. At the otherextreme,in a cost based state,
in effect,
thegovernment,
pays forall or partof anycost increasesby higher
reimbursement
payments.
firmin a cost based state
of a profit-seeking
Thus,thetop decision-maker
would findthat he faces a similarconstraintto that of a nonprofitfirm.
The Medicaidsystemwould,in effect,
pay forhimto consumemorenonpecuThe
constraints
of
all
the
firmsin thecost reimbursement
states
niarygoods.
would be describedas attenuated.The constraintsfor the nonprofitfirms
wouldbe twiceattenuated.
The data tellsus thatnonprofit
and profit-seeking
firmsbehave similarly.Thus, giventhatincentiveshave been dulledby the
costreimbursement
thefurther
attenuation
ofproperty
system,
rightsinherent
in privatenonprofitownershiphas littleeffecton raisingcosts (estimated
at onlyfivepercent).It may be thatthe limitedmonitoring
of costs by the
state reimbursement
agencyis all that constrainsthe costs of any firmin
theseareas, so that the ownershipvariableshave no role. The same story
is true for the comparisonof governmental
and profit-seeking
firms,but
ownedfirmsare so costlythatevenin costreimbursement
government
states,
theircostsare still34 percentabove thoseofprofit-seekers.
It is in the flatrate states,wherethereis no outsidemonitoring
of the
firms'coststo complicatethepicture,thattheownershipvariablesplay such
a powerfuland obvious role. In theseareas, privatenonprofitfirms'costs
are 29 percenthigherthan the profit-seekers,
while governmental
nursing
homes'costsare estimatedat 51 percenthigher.
d. Sensitivity
Testing
Withinthelimitsof our data themajorresultson theownership
and reimbursementvariableswerenot sensitiveto the specification
used. First,reported
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H.E. FrechIII
156
ZgS
totalexpensewas substituted
foroperating
variable.
expensesas thedependent
The qualitativeresultswerenot altered.As expected,the magnitudeof the
effectwas reduced.Also as expected,thereimbursement
variables
ownership
had a greatereffect.
Second,variousblocksof variablesweredroppedfromtheequation.With
theownership
variablesexcluded,thereimbursement
variablesshowedalmost
the identicalcoefficients.
When the reimbursement
variableswere leftout,
theownershipvariableswereestimateda bitless preciselyand thepointestimatesfellsomewhat.Droppingtheoccupancyrateslightly
enhancedtherelativeperformance
oftheprivatenonprofit
butdid notalterthecomparifirms,
son betweenthegovernment
and profit-seeking
firms.Surprisingly,
dropping
the outputstandardizing
variablesblock by block and in toto harmedthe
fitof theequation,but led to almostno changein thecoefficients
of either
the ownershipor the reimbursement
coefficients.
This indicatesthatall the
firmsprovidecomparablecareto comparableconsumers.
e. Is it Inefficiency?
The measuredexcesscostsforfirmswithproperty
rightsthatare attenuated
or reimbursement
are large.The theoryleads us to predictthat
by ownership
thedifferences
in managerialefficienwouldreflect,
at leastin part,differences
thereare at leasttwocounterdifferences,
cy.Butespeciallyfortheownership
thatcompeteforour belief.The firstis thatthecost differences
hypotheses
in patientdebilityor thequalityof care (The
reflectunmeasureddifferences
firms.No one would
qualityargumentwould be only made for nonprofit
assertthequalityis above averagein government
homes).This possiblycan
neverbe ruledout completely
because one can alwaysimaginesome subtle,
in output.However,the patientdebilityand
difficult
to measuredifference
servicevariablesused hereas proxiesforqualityand typeof outputare quite
variableshad littleeffect
extensive.
And droppingtheseoutputstandardizing
of patientand quality
on the ownershipvariables.Thus, forthe hypothesis
to hold,thesedifferences
mustnotonlybe unmeasured,
differences
theymust
be uncorrelated
withthe measuredoutputvariables.This strainscredulity.
firmsselect
Further,otherworkreportedbelowindicatesthatprofit-seeking
than
and
more
debilitated
government
nursing
patients
nonprofit
slightly
homesand thattheyprovideserviceof slightlygreaterintensity,
giventhe
debilitystatusof the resident.Also, recentworkby Burton Weisbrodand
Mark Schlesinger [1983],based on regulatory
violationsfindsthat,at least
ones.
forsomeoutputs,profit-seeking
nonprofit
outperform
holdsthatthehighercostssimply
The othercompeting
counter-hypothesis
fromnursinghomepatientsto employeesof attenuatedproreflect
a transfer
pertyrightnursinghomes.As discussedabove, thereare severalreasonsto
firmswouldindeedoverpaytheiremployees.
suspectthatnonprivate
property
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S.Nursing
157
We havefoundthatnonprofit
and government
nursinghomesindeeddo this.
is not nearlyenoughto explain
However,themagnitudeof thisoverpayment
theentiremeasuredcostdifference.
firms
Government
overpaytheiremployees
an averageofsevenpercent,
buttheirexcesscostsrangefrom34 to 51 percent.
On average,privatenonprofit
firmsactuallyunderpay
theiremployeesrelative
to profit-seeking
homesbecauseoftheavailability
ofdonatedlaborto religious
nursinghomes. Theirestimatedexcesscosts rangefromfivepercentto 29
observedin thisdata are mostly
percent.I believethatthe costs differences
reflective
ofinefficient
productionbytheattenuatedproperty
rightfirms.
4.3. Wages
4.3.1. The EmpiricalModel
To developan empirically
usefulmethodformeasuringtheeffectof thepropertyrightsvariableson wage setting,assume that the naturallog of the
wage rate of the individualcan be decomposedinto an individual-specific
If we approximate
fixedeffect
and a firm-specific
fixedeffect2.
theindividuala
of
socioeconomic
effect
vector
individual
variables,the wage
specific
by
to
be
estimated
can
be
written
as
determining
equation
(3)
=
'nwij XijB^Ij + ei
whereetis a statistical
residualuncorrelated
withthesocioeconomicvariables
effectIjmThe model containsboth individual
Xij nor withthe firm-specific
and firmcharacteristics.
The individualcharacteristics
includea greatdeal
of detailon experienceand schooling,as well as demographicinformation.
The firmspecificvariablewas eitherownershipor reimbursement,
depending
on theequation.Earlyexperimentation
showeda surprisingly
negativeeffect
of privatenonprofit
relativeto profit-seeking.
This led to our disownership,
church
related
homes
that
below
market
tinguishing
nursing
pay
wagesfrom
othernonprofit
firmsthatpaytheabovemarketwagespredicted
bythetheory.
Location variableswere includedto controlfor regionalwage differences.
The equationwas estimatedusingOLS. The dependentvariableis thenatural
semiskilled
log of thewage forall employeesin threeoccupationalcategories,
licensedpracticalnurses,skilledregistered
nursesand unskilledaides and orderlies.Managerialpersonnelare excludedforfearofconfounding
ownership
returns
withwages.
2 The
formis motivatedby theoretical
considerations
fromthe
semilogfunctional
humancapitalliterature
(Mincer [1974]).
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H.E. FrechIII
158
ZgS
4.3.2. Results
a. Ownershipand Wages
The resultson the effectof ownershipon wages are reportedin Table 3.
The equationexplains44 percentof thevariationacrossemployees.The socioeconomiccoefficients
are generallyreasonableand indicatea highvalue
to nursing
educationand experience.
is in theownership
But,themaininterest
variables.Generally,the data show thatattenuatedpropertyrightfirmsdo
firmsdo. The greatestexcess
pay theirworkersmorethantheprofit-seeking
pay comesfromgovernment
nursinghomes.Theypay about6.6 percentmore
to theirworkersthando privateprofit-seeking
firms,
accordingto thecoefficienton GOVT. This is estimatedwithgood precision,as thestandarderror
is lessthanone fifth
withthegeneraloverpay
oftheestimate.Thisis consistent
Smith[1977].As
of stateand local government
found
Sharon
employees
by
as
this
it
is
not
is,
nearlylargeenoughto account
large
wage overpayment
forthe27 to 51 percentexcesscostsof thegovernment
firms.
In analyzingnonprofit
we
found
it
between
firms,
necessaryto distinguish
ones
because
their
church-related
homes
and
secular
wage setting
nursing
on ONONPROF showsthatsecubehavioris clearlydifferent.
The coefficient
lar nonprofit
homespay theiremployeesmorethantheprofit-seeking
firms,
at
but the pointestimateis only 1.6 percent.This is statistically
significant
onlyabout the 10 percentlevel,based on a one-tailedtest.Needlessto say,
thiscannotaccountforthe nonprofit
firms'costs beingfiveto 29 percent
homes'.The coefficient
on CHURCH indihigherthantheprivateproperty
cates that the church-related
nonprofitnursinghomes underpaytheir
employeesby an averageof 3.9 percent.We believethat labor is donated
motivatedworkers.This
to thereligioushomesby spiritually
and charitably
Since the secularnursing
can be consideredan earlyresultin Theometrics.
homesoutnumber
thereligiousonesbyonlya factorof about 1.7,theconclufirmslightly
sion is thattheaveragenonprofit
underpaysits workers.Thus,
firmscannotbe attributed
thefiveto 29 percentexcesscostsof thenonprofit
to employees,
notevenin part.We also splitthesamplevarious
to a transfer
The equationsare reportedin
ways to providemore detailedinformation.
Frech
and
Ginsburg
Borjas,
[1982].
b. Occupationand Reimbursement
the
we disaggregated
As a controland also to providemore information,
data by occupationand ran separateequations.The resultsindicatedthat
firmsoverpaidtheiremployeesin everycategory,but with
the government
a decidedegalitariantwist- aids and orderlieswerepaid 16 percentmore
thanmarket,licensedpracticalnursessevenpercentin excessand registered
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S. Nursing
159
Table3
on WageRates
Effects
of TypeofOwnership
= In ( WageRate)
Dependent
Pooled Sample
Variable*
Constant
ED
NED
EXP
EXP2
FEXP
NEXP
HEXP
TRCS
WMALE
NMALE
NFMALE
NEAST
NCENT
SOUTH
SMSA
CHURCH
ONONPROF
GOVT
R2
No. ofObservations
Õ)
χ
11.84
1.71
22.23
669.04
2.08
.78
1.12
.47
.07
.01
.14
.28
.33
.23
.64
.07
.12
.15
.441
11542
(2)
Coeff.
-.0355
.0552
.1736
.0128
-.0002
.0070
.0046
.0076
.0767
.4139
.1282
-.0148
.0728
-.0222
.0831
.1187
-.0392
.0160
.0661
(3)
f-ratio
(-.40)
(7.46)
(61.25)
(11.77)
("8.55)
(4.99)
(1.59)
(5.23)
(9.46)
(26.28)
(3.21)
("1.23)
(5.76)
(-1-79)
(-6.37)
(14.02)
(-2.52)
(1.29)
(5.68)
*
Key to Variables: ED = yearsof completededucation;NED = yearsof nursing
education;EXP = Age-Education -6; FEXP = yearsof experiencein firm;NEXP =
yearsof nursingexperience;HEXP = yearsof hospitalexperience;RCS= nondegree
coursewithinthepastyear;WMALE = 1 ifwhitemale,0 otherwise;
NMALE =
training
1 if black male,0 otherwise;NFMALE = 1 if black female,0 otherwise;NEAST = 1
ifresidesinNortheast,
0 otherwise;
NCENT = 1 ifresidesinNorth-Central,
0 otherwise;
SOUTH = 1 if residesin South,0 otherwise;SMSA= 1 if nursinghomeis locatedin
an SMSA, 0 otherwise;
CHURCH = 1 ifnursinghomeis church-affiliated,
0 otherwise;
ONONPROF = 1 ifnursing
homeis secularnonprofit,
0 otherwise;
GOVT = 1 ifnursing
homeis government
The mean In (wage) in thepooled sample
operated,0 otherwise.
is 1.241.
nursesonly2.5 percentmorethanprofit-seeking
firms.These estimateswere
all quite precise,with/ values of 9.1, 4.1 and 1.8 respectively.
A charitable
calculus may be behindthis pattern.A
impulseand/ora vote-maximizing
similar,but weaker,patternwas observedforthesecularand church-related
nonprofits.
To examinetheimpactoftheotherproperty
rightsvariables,thereimbursementvariables,wage equationswereestimatedforeach ownershipclass with
thereimbursement
variablesentered.The resultsforprofit-seeking
firmswere
Cost based reimbursement
led to wagesabout 10 percenthigherthan
striking.
flatratereimbursement.
These estimateswereprecise,witht statisticsof 3.4
and 4.2 forthe two typesof cost reimbursement.
For the otherownership
and wage rates.
types,therewas almostno relationbetweenreimbursement
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H.E. FrechIII
160
ZgS
Coefficient
pointestimatesweremostlylower,some signswerenegativeand
thisas indicatingthatfirmswith
We interpret
estimateswereveryimprecise.
attenuatedproperty
rightsin legal ownershipare less responsiveto thereimthatthereimbursement
withour finding
bursement
system.This is consistent
in costsforprofit-seeking
firmsthan
systemmade a muchgreaterdifference
firms.The reimbursement
fornonprofit
and government
systemalso makes
firms.
in wagesfortheprofit-seeking
a greaterand morepredictable
difference
disOnly theprofit-seeking
subsamplehad enoughobservationsforfurther
agregation.
thesampleshowthe same egalitariantwist
The resultsof further
splitting
as theresultsof ownershipin the different
occupations.Aides and orderlies
in
the
cost
reimbursement
are overpaidby about 10 percent
states,but the
nursesare onlyoverpaidby about two
moreskilledand educatedregistered
percent.
4.4. ServiceIntensity
The issueofqualityand ofproperly
holdingconstantthenatureoftheoutput
in
in
is alwayslurking thesidelines anyempiricalanalysisof costs.This study
laid theissue to rest,but we do have data thatallow
maynot have entirely
The cost regressions
us to narrowthe scope of disagreement
substantially.
hold constantpatientdebility,and the servicesofferedand used. However,
firmssimplyprovide
one mayobjectthatperhapsthelowercostprofit-seeking
to theirpatients,thusachievinglowercosts without
lowerserviceintensity
In thispart of the analysis,we model and estimatethe
greaterefficiency.
in service
We findonlyverysmalldifferences
ofserviceintensity.
determinants
notless,
more
firms
the
services,
provide
intensity.
Surprisingly, profit-seeking
ones.
thanthenonprofit
4.1.1. EmpiricalModel
We studythe serviceintensity
problemwitha two-stageprocedure.First,
we createa hedonicindexforservicesthatgiveus theimplicitpricesof the
servicesreceived.That is, it givesus an expectedcost of providingeach of
the 20 serviceson whichwe have data. To get as close as possibleto true
theindexis estimatedfortheprivateresidents
marketweightson theservices,
homesonly,butcalprograms)ofprofit-seeking
(notreimbursed
government
culatedforall residents.The equationis reportedin Frech and Ginsburg
[1982ch.3, p. 3a]. The indexallowsus to aggregateservicesusingtheimplicit
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S.Nursing
161
marketweightsto get a sealermeasureof the totalservicessuppliedto each
resident.
4.4.2. Results
In the finalstage,we regressthe measureof total servicesHEDEX1 on the
forpatientdebilityand mentalstate,reimburvariables,controlling
ownership
sementand many otherstandardizing
variables.The resultsare shownin
Table4
ServiceIntensity
Regression:
DependentVariableis an IndexofServiceIntensity
Parameter
Standard
Variable*
DF
Estimate
Error
tratio
Prob>|t|
- 79.083339"
Î
INTERCEPT
76.944625
-1.0278
0.3041
NPMED
Ï
-1.822803
4.258421
-0.4280
0.6686
1
GMED
3.543425
4.350992
0.8144
0.4155
NONPROF
1
-3.365793
1.316036
-2.5575
0.0106
1
GOVT
-0.147356
2.053820
-0.0717
0.9428
1
FAMINC
0.0006555807 0.0007614285
0.8610
0.3893
1
ELG
-1.035013
1.967233
-0.5261
0.5988
MALE
1
-0.885631
0.954120
-0.9282
0.3533
WHITE
1
0.229295
1.636940
0.1401
0.8886
Ï
LCONSDEX
-3.015082
4.176162
-0.7220
0.4703
LRNEARN
1
22.953074
12.822421
1.7901
0.0735
LLPEARN
Î
-21.812325
9.745216
-2.2383
0.0252
LNAEARN
1
38.298062
7.664554
4.9968
0.0001
1
LCSEARN
-29.726516
7.709798
-3.8557
0.0001
TR1C
1
0.414457
5.293541
0.0783
0.9376
1
TR3C
-27.500397
5.190387
-5.2983
0.0001
TR4F
1
-5.562038
20.463671
1
TR6F
9.370556
3.512063
2.6681
0.0076
TR7F
1
-1.526452
3.055132
-0.4996
0.6174
- 3.928936
TPREM2
1
2.014008
-1.9508
0.0511
Ï
TPREM3
10.047451
4.541629
2.2123
0.0270
TPREM5
1
5.404015
1.970902
2.7419
0.0061
- 5.662692
TPREM6
1
1.896633
-2.9857
0.0028
TPREM7
1
2.944037
2.423492
1.2148
0.2245
KATZ1
1
1273.88
154.790527
8.2297
0.0001
KATZ2
1
1420.05
176.280595
8.0556
0.0001
KATZ3
1
1222.906
214.947224
5.6893
0.0001
KATZ4
1
2091.349
145.995638
14.3247
0.0001
1
KATZ5
3089.556
147.127266
20.9992
0.0001
KATZ6
Ï
4403.239
149.072497
29.5376
0.0001
KATZ7
1
1671.788
186.839355
8.9477
0.0001
MENTAL1
1
4.212444
0.910502
4.6265
0.0001
MENTAL2
1
1.041522
0.941107
1.1067
0.2685
11 ZgS 141/1
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162
H.E. FrechIII
Table4 (Continued)
Standard
Parameter
Error
Estimate
DF
Variable*
1.188605
-2.017055
Í
MENTAL3
0.922596
1
-5.833174
MENTAL4
1.158320
1
5.754409
MENTAL5
5.683980
4.838800
1
ADMP
6.057627
Ï
-7.972128
ADMS
5.829492
-1.508673
1
ADMB
2.941528
-6.974891
1
EPROXY
0.854583
-2.935799
1
STF
1.753249
2.047153
1
STFO
F ratio
6156999
SSE
Prob> F
5877
DFE
1047.643
MSE
R-square
Ν
38.08
MEANDEPVAR
ZgS
tratio
-1.6970
-6.3226
4.9679
0.8513
-1.3160
-0.2588
-2.3712
-3.4354
1.1676
36.90
0.0001
0.2047
5919
Prob>|t|
0.0898
0.0001
0.0001
0.3946
0.1882
0.7958
0.0178
0.0006
0.2430
* Key to Variables:NPMED = interaction
amongNONPROF, PCAID (percentof
by Medicaid)and TPMED1 or TPMED2 (flatratereimpatientssupportedprimarily
GMED = sameas above,onlyforGOVT ratherthanNONPROF; NONbursement);
0 otherwise;GOVT=1 if nursinghome is
PROF =1 if nursinghome is nonprofit,
= medianfamilyincomein SMSA, 1969;
FAMINC
0
otherwise;
operated;
government
in thatstate; MALE = 1 if patientis
Medicaid
for
ELG = medicallyindigent,
eligible
=
=
is
1
if
WHITE
0
male, otherwise;
patient white,0 otherwise;LCONSDEX natural
log of Dodge BuildingCost Index for U.S. and Canadian cities,September1972;
nursesfor
LRNEARN = naturallog of medianearningsof female,fulltime
registered
the SMSA, 1969; LLPEARN = same as above for licensed practical nurses;
LNAEARN = same as above fornursesaides,orderliesand attendants;LCSEARN =
same as above forcleaningservicepersonnel;TriC= 1 timesPCAID if thereimbursementsystemwas recentlychangedfromcost based to the ith system,0 otherwise;
TRiF = 1 timesPCAID if the reimbursement
changedfromflat
systemwas recently
rate to the ith system,0 otherwise;TPREMi 1 if nursinghome is reimbursed
by
TPREMI = flatrate,TPREM2 = flatrate,variesbypatient,
theithmethod,0 otherwise,
TPREM 3 = prospectiverates,base periodcosts,subjectto ceiling,TPREM4 = same
as TPREM3, exceptno ceiling,TPREM5 = prospective
rates,based on groupperforreimbursesubjectto ceiling,TPREM7 = cost
mance,TPREM6 = cost reimbursement,
=
ment,no ceiling;Κ ATZi= versionof the Katz debilityindex,Κ ΑΤΖ0 independent
KATZ1 throughKATZ7 increasingdependenceon help
in all dailylivingactivities,
behaviors,0 otherfordailyliving;MENTALi= 1 ifthepatientexhibitsthefollowing
=
wise,MENTAL 1= depressed,MENTAL2 ==agitated,MENTAL3 abusive,aggressive,
MENTAL4 = confused,senile,MENTAL5 disturbedsleep; ADMP=1 ifpatientadmittedforphysicalreasons,0 otherwise;ADMS = 1 ifpatientadmittedforsocial reasons,0 otherwise;ADMB = 1 ifpatientadmittedforbehavioralreasons,0 otherwise;
EPROXY = 1 if earningsfroma nearbySMSA was used fora smallSMSA; STF =
nursingstaffrequirement,
nursinghoursperbed day; STFO = 1 ifstatehas a minimum
0 otherwise.
Table 4. The equationexplains20 percentof thevariationin serviceintensity
measures
thatthisis microdata withimperfect
acrossindividuals.
Considering
of the patient'shealthstatus,thisfitis surprisingly
good. One can see that
variableshave onlyverysmalleffects.
But,thepointestimates
theownership
levelof serviceintensity
a
lower
is associatedwith
is thatnonprofit
ownership
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S.Nursing
163
than profit-seeking
nursinghomes. What is more important,the standard
erroris smallenoughthatone can say witha greatdeal of confidencethat
theeffectof ownershipis verysmall.The effectof reimbursement
is likewise
sinceexperience
withhospitalinsurancewould
quitesmall.This is surprising,
lead one to expectgenerousreimbursement
to lead to manymore services.
The majordeterminants
of theserviceintensity
are,as one wouldexpectand
hope,thedebilityof thepatients.Clearly,one cannotexplainthehighercosts
ofnonprofit
and government
firmsby serviceintensity.
4.5. PatientSelection
Anotherpossiblenon-effiqency
explanationforthehighercostsof theattenis
uatedproperty
firms
that
theprofit-seeking
firmssystematically
select
rights
healthier
who
will
be
less
for.
to
care
This
kind
of
selection
patients
expensive
is oftencalled"creamskimming"
in theAmericanliterature.
Greenlees,Marshall and Yett [1982]have shownthatnursinghomesexercisein selection
patientsand thatwhenoccupancyratesare high,theyavoid Medicaidpatients
where Medicaid patientsare poorly reimbursed.Doubtlessly,all nursing
homesselectthepatientsthattheypreferforwhateverreason.The question
is, does this selectionfavorthe location of relativelyhealthypatientsinto
the profit-seeking
firmsso that thisexplainsthe apparentlylowercosts of
thesefirms.
The factthattheprofit-seeking
firms
havelowercostswhenpatient
debilityis controlledforgivesone pieceofevidencethatthisis notthecase.
But directlyexaminingpatient selection provides another approach.
in its own right.It rounds
Further,theissueof patientselectionis interesting
out ourunderstanding
ofthedifferences
in behavioramongthenursinghomes
withdifferent
legalownership.
Examinationof the simplecorrelationsbetweenthe debilitylevel of the
or notthepatientwas selectedbya profit-seeking
patientand whether
nursing
home,Table 5, showsthatforall of themoredisabledcategories,theprofitnotless thantheattenuatedproperty
seekingfirmshad moreresidents,
rights
firms.The privateproperty
rightsfirmshave fewerof thosewithno disability
and of thosewiththe lowestlevel of disability.This is exactlycontraryto
theconventional
wisdomof "creamskimming"
and providesadditionalsupfor
an
of
the
observation
thatcosts are much
port
efficiency
interpretation
lowerforprofit-seeking
firms.Given thatwe know of selectionby nursing
homesfromthe Marshall,Yett and Greenlees,how can we explainthis?I
believethattheanswerlies not in the selectionof patientsby profit-seeking
firms,but in the selectionof theirnursinghomesby consumers.Those who
choosea nursinghomeforsocial,ratherthanmedical,reasonsare mostlikely
to choosea religiousone. Othernonprofit
homesalso caterto naturalaffinity
groups.Anotherclass ofconsumerswho are notill,butmaychoosea nursing
11*
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164
H.E. FrechIII
ZgS
Table5
Selectionbya Profit-SeekingFirmandPatientDebilityLevel
SimpleCorrelations:
DebilityLevel*
KATZ1
KATZ2
KATZ3
KATZ4
KATZ5
KATZ6
KATZ7
Ν = 7,992
Correlation
-0.00133
0.01466
0.01124
0.01164
0.05389
0.00519
0.01294
* Key to Variables:Κ ATZi= versionof theKatz
debilityindex,Κ ΑΤΖ0 = independentin all dailylivingactivities,
KATZ1 throughKATZ7 increasingdependenceon
helpfordailylivingactivities.
home are thosewho are destituteand have nowhereelse to go. These consumers,I suspect,are mostlikelyto choosea government
nursinghome.
5. Conclusion
the
The property
rightstheoryof thefirmhas provedusefulin illuminating
economicbehaviorof the nursinghome industry.Its predictionof higher
costs forthe attenuatedpropertyrights,privatenonprofit
and government
firmsis borneout. Government
nursinghomescost from34 to 51 percent
firms'costs are fromfive
more than profit-seeking
ones. Privatenonprofit
to 29 percenthigher.These differences
seemverylikelyto reflectefficiency
not variationsin output,as manydimensionsof patientdebility
differences,
and servicesprovided,proxiesforqualityand typeof output,are held conis not necessary,as profit-seeking
stant.Further,a regression
interpretation
moreservicesto a moredisabledpopulation
firmsactuallyprovideslightly
firms.Partof thecostdifference
of residents
thando thenonprivateproperty
reflects
a transfer
to the employeesof the attenuatedpropertyrightsfirms.
Government
firms,in particular,overpaytheiremployeesby sevenpercent,
but thiscannotcome close to accountingforthelargeobservedcost differences.
programsforthe
Turningto the effectof the stateMedicaid government
leads to 41 percenthigher
poor, we see thatunlimitedcost reimbursement
marketincentives
costs than the flatrate systemthatemulatescompetitive
withownership.
thereimbursement
forcostcontrol.Further,
systeminteracts
makesmuchmoredifference
Wheretheflatratesystemis used,theownership
forall nursinghomeshave alreadybeendulled
thanin stateswhereincentive
This content downloaded on Wed, 2 Jan 2013 12:57:52 PM
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141/1(1985)
SomeEvidence
HomeIndustry
fromtheU.S.Nursing
165
OskarLangewas wrong.The issueofincentives
should
bycostreimbursement.
notbe leftto thesociologists.
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