Cost efficiency of nursing homes: do five-star quality ratings matter?

Nursing homes may respond to the pressure to reduce costs by reducing quality of care, so the two are related. This study examines the determinants of nursing home costs and cost efficiency, and investigates how various measures of nursing home care quality influence both of these. It applies a one-step stochastic frontier approach to a large panel of California nursing homes surveyed between 2009 and 2013. Quality is measured by three different ratings available on the Nursing Home Compare website: rating on quality measures, rating on the health inspection, and rating on staffing levels. Results show that the rating on quality measures, an outcome-based measure of quality, is inversely related to costs but unrelated to mean cost efficiency. In other words, a better rating on quality measures is associated with lower nursing home costs. The health inspection rating is not associated with either costs or mean cost efficiency. The rating for staffing levels, a structural measure of quality, is negatively associated with cost efficiency. These findings reveal that different measures of quality have different relationships with costs and cost efficiency. The findings suggest that better quality outcomes in nursing homes may be achievable with fewer resources and/or improved care procedures, which in turn should reduce nursing home costs.