Creating an efficient market for nursing home care.

This paper reviews the theoretical foundations of the common Medicaid nursing home reimbursement systems: Reasonable cost related, fixed rate and negotiated rate reimbursement. Each reimbursement system is examined in terms of the four reimbursement system design goals: allocative efficiency, appropriateness of care, quality of care and equity of economic rewards. None of the reimbursement approaches are found to be deficient on the theoretical level, but practical problems of implementation are shown to be very difficult. As an alternative, a competitive binding system is proposed which would bring competitive market efficiency to the allocation of Medicaid funds for nursing home care. A mathematical programming model is developed to process the bidding information and to allocate Medicaid funds to nursing homes.