chapter 15 the long-term care industry (c) 2010 cengage learning. all rights reserved. may not be...

Chapter 15

The Long-Term Care Industry

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use


2

The Structure of the Long-Term Care Services Industry

• Long-term care:– Set of health care, personal care, and social

services • Delivered over a sustained period of time • To persons who have lost, or never acquired, some

degree of functional capacity, as measured by an index of functional ability

– Enhances quality of life– The need for long-term care is likely to be

permanent


3


• Demand for long-term care– Basic demand (not derived demand)

• Continuum of care– Occasional need for assistance to perform

various household chores– Need for around-the-clock nursing care– Rehabilitation program that involves physical,

occupational, and/or speech therapy


4


• Organizational settings– Informal - friends and family members – Formal, highly intensive setting

• Skilled nursing home

– Intermediate care • Home health care agency• Assisted living facility


5

The Need for Long-Term Care

• Measurement of the need for long-term care– Predetermined list of activities of daily living, ADL– Instrumental activities of daily living, IADL

• Centers for U.S. Disease Control and Prevention– 32.7% of the elderly population

• Limitation of activity caused by chronic conditions• May be in need of long-term care

– 7.3% of the population under age 18 and 5.5%of individuals aged 18 to 44

• Limitation of activity - chronic condition


6

Table 15-5a Measurement of the Need for Long-Term Care

Measurement Examples of Basic Functions

Activities of daily living (ADL) BathingDressingEatingGetting in and out of a chair or bed

Instrumental activities of daily living (IADL) Going outside the homePerforming household choresKeeping track of household financesCooking and preparing mealsUsing the telephoneTaking medicine


7

Structure of Informal Care Providers

• Informal care– Family members and friends– (Ho et al., 2005)

• 18 million informal caregivers, 2003, – 16 million, ages 19 and 64– 2 million, 65 or older

– Gibson & Houser (2007)• 30 - 38 million informal caregivers, 2006

– AARP (2001)• 65 million informal caregivers, 2000


8

Structure of Informal Care Providers

• NAC and AARP study (2005)– Representative informal caregiver

• Woman in her forties• Providing more than 20 hours of care per week• Employed full-time• Possesses at least a high school degree• Median household income -$38,000 per year• Related to the recipient, daughter and her mother• In more than 75% of the cases the caregiver does

not reside with the recipient of the long-term care


9

Structure of the Nursing Home Care Industry

• Number and Characteristics of Nursing Home Providers– 16,000 nursing homes– With 1.7 million beds

• Nursing homes– Mostly for-profit basis– 90% of nursing homes are Medicare and

Medicaid certified– 54% of nursing homes belong to a chain/ group


10

TABLE 15–2Characteristics of the Nursing Home Industry

1995 1999 2004

Nursing Homes For-profit Not-for-profit GovernmentNursing Home Beds (1,000) For-profit Not-for-profit GovernmentSize Distribution Fewer than 50 beds 50–99 beds 100–199 beds 200 beds or moreOccupancy

16,70066.1%25.7%8.2%1,77165.0%26.4%8.5%

16.8%35.6%40.1%7.5%

88.4%

18,00066.5%26.7%6.7%1,87965.7%26.6%7.7%

11.5%38.7%41.8%8.0%

86.6%

16,10061.5%30.8%7.7%1,73062.1%29.1%8.8%

13.9%37.3%42.5%6.2%

86.3%


11


• Buyers and Users of Nursing Home Services

• Nursing home expenditures– $124 billion in 2006– Medicaid program– Medicare program– Consumers– Private health insurers


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FIGURE 15–1Expenditure Shares for Nursing Home Services, 2006

Medicaid; 43.40%

Other ; 6.10%Out-of-pocket;

26.40%

Private In-surance;

7.40%

Medicare; 16.70%


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• Buyers and users of nursing home services– Private-pay patients

• 40% of all nursing home residents• Price elasticity of demand : –0.16 to –2.30• Income elasticity of demand: –0.38 to 2.27 • Price and income elasticities of demand

– More elastic for elderly individuals who are either married or less chronically ill

» Home care - viable alternative in these two cases

• Availability of informal care


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• Barriers to Entry– Scale economies - not a significant entry barrier– Sunk costs - do not seriously inhibit entry– Certificate of need (CON) programs

• Existing nursing homes may desire CON laws because of the resulting market power


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• Nursing home industry– Relatively large number of nursing homes

• With low market shares

– Barriers to entry are relatively low,– Typical nursing home

• Downward-sloping demand curve

– Individual nursing home• Very little control over price

– Highly price elastic demand of private buyers.

– Monopolistically competitive industry


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Structure of the Home Health Care and Hospice Industry

• Number and characteristics of home health care and hospice care providers

• Agencies may provide – Home health care services– Hospice care– Both


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• Home health care– Provided to individuals or families– In their place of residence– To promote, maintain, or restore health– To maximize the level of independence – While minimizing the effects of disability and

illness, including terminal illness.


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• Hospice care – Program of palliative care and supportive care

services – Provides physical, psychological, social, and

spiritual care – For dying persons, their families, and other

loved ones


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• Market for home health care & hospice– 13,500 home health and hospice care agencies – 2.5 million patients in 1996– Increase of 70% from 4 years earlier– Not-for-profit providers

• One-third of all agencies• Half of all patients


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• Of all home health & hospice care agencies – 92% are Medicare and Medicaid certified– 50% are affiliated with a group or chain– 25% are operated by a hospital– 37% are freestanding institutions


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• Buyers & users of home health care services– Costs = $53 billion in 2006– 56.4% of all purchases - the federal

government• The bulk of these funds - Medicare program

– 11.4% - private insurers– 11.2% - out-of-pocket expenses– 20.9% - other public and private sources


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• Medicaid program– Does not reimburse for long-term care

• Demand for home health care– Long-term custodial services, – Recovering from an illness / surgical procedure– Receiving hospice care.


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• Demand for home health care depends on– Out-of-pocket price for home health care– Out-of-pocket price for institutional care– Wealth of the individual– Availability of informal care– Demographic characteristics of the individual

• Barriers to Entry– Sunk costs – not a barrier to entry– Economies of scale and scope– no impact


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Conduct of Long-Term Care Industry

– Government regulations– Behavioral issues

• Price and quality of long-term care

– Price regulation effect of Medicaid reimbursement

– Type of ownership– Impact of market competition on the behavior of

nursing home care providers.


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The Dual Market Model of Nursing Home Pricing

• Payers for nursing home care– Private individuals who pay out of pocket– Medicaid program (Price – set by government)

• Individual nursing home must determine– How many private-pay patients to treat– How many Medicaid patients to treat– Price charged to private payers


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FIGURE 15–2The Dual Market Model of Nursing Home Behavior

Nursing home patients (Q)

Dollarsperunit

MC

QP

PP

QT

PM

MRP

A

B C

DP

Of the total patients, 0QP are private pay and the remaining portion, QPQT, represents the number of Medicaid patients. Private-pay patients pay PP for nursing home care. Because the horizontal distance QPQT, representing the number of Medicaid patients admitted, is less than the horizontal distance BC, showing the number eligible for Medicaid coverage, an excess demand for Medicaid nursing home care exists in the market area.

Lines AB and AMRP represent the demand and marginal revenue curves for private-pay patients. Line segment BC represents the Medicaid reimbursement rate of PM for the number of individuals eligible for Medicaid coverage in the market area. Line segment CDP identifies the remainder of the private demand curve.

The nursing home admits 0QT patients because the marginal revenue of PM = MC.


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• Excess demand for nursing home care• Government policies to reduce it

– Raise the Medicaid reimbursement rate– Directly subsidize the costs of providing nursing

home care


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• Higher Medicaid reimbursement rate– Nursing home – accept more Medicaid patients

• Depends on the slopes of the private demand and marginal cost curves

• Flatter curves - more Medicaid patients are admitted

– Private-pay patients are required to pay a higher price

– With a CON law (capacity constraint) - lower quality and raise the private-pay price


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• Higher Medicaid reimbursement rate– Costly public policy option

• Increase in taxes

– With barriers to entry• Nursing home - excess economic profits

– Without barriers to entry• Incentive for new firms to enter the nursing home

industry in the long run• Lower price paid by private-pay patients


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• Subsidy– Reduces the marginal costs of production– Incentive to admit more Medicaid-eligible

patients– Costly alternative

• Higher taxes

• Nyman (1993)– Limited or no evidence of excess demand


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Effect of Alternative Payment Methods

• Differences in payment methods– Influence how individual nursing homes behave

over time in terms of costs, quality of care, and patient case-mix

– Retrospective cost-based reimbursement• Less incentive to control costs• Pass on any cost increases to the state government• Greater tax burden on the general public• Less likely to compromise quality


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• Differences in payment methods– Flat rate independent of actual facility costs– Or prospective payment

• No allowance is made for actual costs incurred by the nursing facility

• Financial risk for any cost overruns• Incentive to control the costs of servicing patients• Lower nursing home costs - lower taxes for the

general public• Skimping on the quality of care• Cherry-picking behavior


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• Empirical evidence– Reimbursement method influences the

incentives of nursing homes with respect to costs, quality, and patient case-mix

– Pure cost reimbursement without ceilings was associated with the highest costs (Frech and Ginsburg, 1981)

– Prospective and flat-rate systems generally reduced cost growth more then retrospective payment (Holahan and Cohen, 1987)


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• Empirical evidence– Fixed rate and prospective systems led to fewer

RNs per resident and worse process quality when compared to retrospective reimbursement, Zinn (1994)

– Case-mix reimbursement was found to increase the number of RNs per resident and improve process quality relative to cost reimbursement, Zinn (1994)


35


• Empirical evidence– Fixed reimbursement - more lower-skilled and

fewer higher-skilled professional nurses, (Cohen and Spector,1996)

– Flat-rate systems - decrease the severity of ther case-mixes through admission discrimination; decrease staffing levels (Cohen and Dubay, 1990)


36

Scale Economies with Respect to Quality

• Nursing homes– May respond to changing external circumstances

by altering the quality of care– Trade-off: costs and quality of care. – Severity of the trade-off depends on whether

scale economies hold with respect to quality.– Empirical evidence, Gertler&Waldman (1992)

• Cost function - diseconomies of scale in quality– Policies aimed at improving quality will be very costly. – Policies aimed at cost savings, can be achieved with very

small reductions in quality.


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FIGURE 15–3The Cost Savings from Quality Reductions

Quality

C0

X0

Dollarsperunit

0

A

B

C1

X1AX1

B

The graphical model suggests that quality must be sacrificed a great deal to achieve a given cost savings of C0C1 when scale economies hold. Conversely, the model indicates that quality improvements come at a much larger cost when the quality/cost relation exhibits diseconomies of scale.

Curve 0B depicts scale economies with respect to quality whereas curve 0A shows diseconomies of scale with respect to quality.


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Ownership and Conduct

• Property rights theory– For-profit organizations

• Private ownership to any residual profits

– Public and not-for-profit institutions• Subject to a non-distribution constraint• Less of an incentive to operate with least-cost

methods of production

• Technical efficiency– A given amount of output is produced with the

fewest inputs.


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• Empirical evidence– Confirms property rights theory– For-profit nursing homes employed 4.5% fewer

inputs per patient-day than otherwise comparable not-for-profit nursing homes, (Nyman and Bricker, 1989)


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• Ownership status– Does affect the performance of nursing homes– Not-for-profit nursing homes provide higher

quality of care than do for-profits, Harrington et al. (2001)

– Not-for-profit nursing homes provide better quality than for-profits when asymmetric information exists (Chou, 2002)


41


• Empirical evidence– Competition from not-for-profits raises the

quality of nursing home care while competition from for-profits limits inefficiency and the exercise of market power. Grabowski and Hirth (2003)

– More quality of care might be obtained by attracting a greater percentage of not-for-profit nursing homes into many market areas(Santerre and Vernon, 2007)


42

Market Concentration and Nursing Home Conduct

• Market Concentration and the Price of Nursing Home Care– Pi = price charged by the individual nursing

home

– Ci = marginal cost of the individual nursing home

• Price markup function (Pi – Ci )/ Pi – Lerner index– Firm’s markup of price above marginal cost

expressed as a percentage of price


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• Market Concentration and the Price – |Em| = market demand elasticity

• Depends on the availability of other substitutes

– |Ei| = individual nursing home’s price elasticity of demand

– |Em| < |Ei| • Because of fewer alternatives


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• Market Concentration and the Price – α - reflects the conjectural variations held by

nursing homes in the market• Captures whether the typical nursing home facility

expects the others to match or offset its output decision

11

i i

i m i

P C

P E E


45


• Market Concentration and the Price – α=1, nursing homes collude

• Markup - depends on market elasticity alone

– α=0, firms compete• Markup - depends on product differentiation• less Differentiated product means

– Higher price elasticity of demand – Lower markup of price over the costs of production.

• The markup – The largest when firms perfectly collude


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• Empirical evidence, Nyman (1994)– Average markup over the Medicaid fee for a

skilled nursing home facility = 18.2%– Average HHI = 2,240

• A marginal change in level of market concentration - no appreciable impact on price markup

• Mukamel and Spector (2002)– Assume α=0– Relatively low elasticities

• Comparatively high price markups to private payers


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• Market Competition and Quality• Zinn (1994)

– Increased market concentration (higher HHI)• Better quality of care, particularly process quality.

– Better quality of care results when fewer nursing homes exist in a market

– More actual competition lowers quality– Greater potential competition (no entry barriers)

raises quality


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The Performance of the Long-Term Care Industry

• Long-term care– Associated with chronic care and care for those

with disabilities • Cost - spread out over a number of years

– Is informal in nature - provided by family and friends

• Indirect cost - forgone wages

– Number and type of formal health care providers – diverse:

• Skilled nursing home facilities; assisted living centers • Meals on wheels programs; senior centers


49

Expenditures on Long-Term Care

• Informal Expenditures• The Metropolitan Life study (1997)

– $11.4 billion a year= total cost of lost productivity because of caregiving (full-time workers)

• Recruitment and training costs• Absenteeism costs• Productivity diminishes• Cost of workday interruptions• Costs associated with an eldercare crisis• Increase in administration costs


50

Formal Expenditures on Long-Term Care

– Economic cost of long-term care – substantial• Informal caregivers pay for the bulk of the care

measured in terms of forgone wages

– Almost two-thirds of all long-term care provided in the United States is on an informal basis

– Expenditures for long-term care• Both informal and formal• Account for almost one quarter of all health care

expenditures in the united states• Second-largest spending category behind hospital

care


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TABLE 15–3Nursing Home and Home Health Care Expenditures, Selected Years, 1980–2006

1980 1990 1995 2000 2005 2006

National healthexpenditures(billions of dollars)Annual rate of increase

$253.4 15.2%

$714.0 11.8%

$1,016.5 5.6%

$1,353.0 7.0%

$1,973.3 6.5%

$2,105.5 6.7%

Nursing homeexpenditures(billions of dollars)Annual rate of increase

$18.4 17.3%

$52.6 15.5%

$74.0 9.0%

$95.3 5.2%

$120.7 4.8%

$124.9 3.5%

Home health careexpenditures(billions of dollars)Annual rate of increase

$2.425.2%

$12.6 22.7%

$30.5 17.1%

$30.5 -3.2%

$47.9 12.3%

$52.7 9.9%


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Private Insurance for Long-Term Care

• Relatively small number of long-term insurance policies purchased– Adverse selection,– Moral hazard, – Medicaid crowding out, – Intertemporal risk


53


• Adverse selection– Asymmetry of information concerning the health

status of potential consumers– High-risk individuals - incentive to withhold

information concerning their true health status • Purchase long-term care insurance at premiums

based on a pool of subscribers with better health

– Premiums are driven upward


54


• Adverse selection– Low-risk subscribers may elect not to renew

their long-term care policies– Potential new customers

• Self-insure & not purchase any long-term care insurance

– Difficult for insurance companies to accurately assess risk


55


• Moral hazard– The elderly - prefer to receive care from family

in their own homes• Lower demand for long-term insurance

– Desire to protect bequests to family and friends• Purchase long-term insurance

• Medicaid crowding out– Public support for long-term care - Medicaid

• Decrease the incentive to purchase private long-term care insurance


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• Intertemporal risk – Insurer - responsible for managing the financial

risk associated with establishing premiums• Estimates the expected medical costs for a given

population over a specified period of time• Insurance premium = expected benefits to be paid

out plus any marketing and administration costs, taxes, and profits

• Minimize overall risk through diversification


57


• Intertemporal risk -long-term care insurance– Assess risk over an extended period of time

• Average cost - likely to increase over time• Increasing price risk

– Difficult to predict medical payments well into the future

– Cannot diversify risk across policyholders • Everyone faces the same potential increase in costs

due to higher input prices

– Increase premiums in excess of the expected payout or offer an indemnity-type insurance policy


58

TABLE 15–4Average Monthly Charges for Nursing Home Care, Selected Years 1985–2004

1985 1995 1997 1999 2004

All FacilitiesOwnership For-Profit Not-for-Profit

$1,508

$1,436$1,659

$3,132

$3,044$3,293

$3,638

$3,530$3,634

$3,531

$3,266$4,013

$5,690

$5,356$6,214


59

Utilization of Long-Term Care Facilities

• Need for nursing home care– Concentrated among the elderly population– Increases rapidly with age among the elderly

population– Two thirds – females– Extent to which the elderly rely on nursing

homes for long-term care is diminishing


60

Table 15-5Distribution of Nursing Home Residents According to Age, 2004

Age Group Percent of Nursing Home Population

Under 65 Years65 Years and Older 65–74 Years 75–84 Years 85 Years and Older

11.7%88.3%11.7%31.4%45.2%

Age Group Nursing Home Residents per 10,000 Population

All residentsUnder 65 Years65 Years and Older 65–74 Years 75–84 Years 85 Years and Older

51.06.8

363.094.3

361.31,387.9


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TABLE 15–6Percentage Distribution of Nursing Home Residents: Gender, Functional Status, and Length of Stay, 2004

Percent of Nursing Home Population

Gender Male FemaleFunctional Status Received no help Received help with at least 1 ADLLength of Stay Since Admission Less than 3 months Between 3 and 12 months 1 year to less than 3 years 3 years or more

28.9%71.1%

1.6%97.3%

20.0%24.1%30.3%25.6%


62

Utilization of Long-Term Care Facilities

• Home Health Care and– 1.3 million patients in 2000– 2.4 million in 1996– Reflects the cost containment and utilization

controls• Balanced Budget Act of 1997 for home health care.

Only a tiny

• Hospice Care– 105,496 patients in 2000.


63

TABLE 15–7Home Health Care & Hospice Patient Characteristics, 2000

Home Health Care Providers Hospice Patients

Number of Patients 1,355,290 105,496

Percentage Distribution

Gender Male FemaleAge Group Under 65 65 and older 65–74 75–84 85 and older

35.2%64.8%

29.5%70.5%17.3%31.3%21.9%

42.6%57.4%

18.6%81.4%17.2%37.0%27.3%


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What Do the Demographics Tell Us about the Future of Long-Term Care?

• Substantial increase in the demand for long-term care services – Longer life expectancies– Aging baby boom generation

• 76 million baby boomers born between 1946 and 1964 - reaching retirement age by 2035

• Age 65 or older: – 12-13% of total population, 2000 to 20%, 2050

• Age 85 or older– 2%, 2000, to 5%, 2050


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• Demand – increase at a lower rate– Increased longevity

• No major impact on health expenditures

– Disability among the elderly - decreased– Improved health + increased life expectancy

• Affect the mix of formal and informal care provided• And total amount spent on formal long-term care. • Healthy elderly individual = informal supplier of long-

term care


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• Individual demand - affected by– Rising levels of obesity– Declining health of middle-aged people– Increased incomes– Enhanced quality of care– Changes in tastes and preferences – Increased prevalence of long-term care

insurance • Decreases out-of-pocket price of institutional care

chapter 15 the long-term care industry (c) 2010 cengage learning. all rights reserved. may not be...

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