Does nursing home quality regulation lead to better quality?

Prior studies found that nursing homes located in states with more stringent regulations experience higher costs. This study investigates the complementary hypothesis that more stringent regulation is associated with better quality by examining all 15,511 Medicare and Medicaid certified nursing homes nationally using Medicare cost reports and the MDS. We estimated eight, two-stage least square regression models, in which the dependent variables were risk adjusted quality measures, nursing staffing level per case-mix-adjusted days (RNs, LPNs, and CNAs), and hotel expenditures. The independent variables included the Harrington Index of regulation stringency and controls for competition, market income, wage index, beds, ownership, and chain affiliation. To account for endogeneity of regulation and quality, the stringency index was instrumented by the Economic Freedom Index of North America, Area 2 - “Takings and Discriminatory Taxation.” The incremental F-statistic for the test of weak IV was 17.64, exceeding the critical value of 10, leading to the rejection of the weak IV hypothesis. The R2 of the estimated models ranged from a low of 0.01 for the risk-adjusted urinary incontinence model to a high of 0.55 for the hotel expenditures model. Risk-adjusted ADL decline and urinary incontinence, CNA, and LPN hours were significantly better in states with more stringent regulations. An increase of 1 standard deviation in stringency resulted in improvement ranging between 4.4% and 7.5% of the mean quality measures. This study quantifies the quality improvement associated with costs imposed by regulations.