Costs of quality regulations in nursing homes

Quality of nursing-home care is regulated by federal and state governments through the survey process. This study was designed to estimate the costs that quality regulations impose on nursing-homes. Data included information about 11,168 free standing nursing-homes nationally in 2004-2006 from the Medicare cost reports, the MDS, OSCAR and a survey of States' Certification and Licensing Offices conducted by the authors. We created variables measuring total annual expenditures, outputs (case-mix adjusted days), wages, competition, geographically adjusted deficiency citations, ownership, state fixed-effects, and an index of each state's regulatory stringency. We estimated hybrid cost functions that, in addition to the typical variables included in nursing home cost functions, included the regulatory stringency index and state fixed effects. The regulation stringency index averaged -0.21 with a standard deviation of 2.48. The stringency index was positively and significantly (p<0.01) associated with costs, indicating that nursing homes located in states with more stringent regulatory requirements face higher costs, ceteris paribus. The average incremental costs of a one standard deviation increase in the stringency index resulted in a 1.1% increase in costs, or $78,500 per year. These costs should be evaluated against the benefits they confer, i.e. the impact of regulations on quality of care.