Review of Industrial Organization 19: 279–294, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Effects of Acuity and Utilization on Nursing
DAVID I. ROSENBAUM, CHARLES F. LAMPHEAR and KEN REBECK
Department of Economics, University of Nebraska, Lincoln, NE 68588-0489, U.S.A.
Abstract. Recent proposals aim to relocate relatively healthy residents from nursing homes to lower-
cost assisted care facilities. Such a move would have impacts on nursing home costs for two main
reasons. It would decrease utilization rates and increase patient care needs, or acuity. A translog cost
model is used to examine the impact that acuity and utilization have on nursing home costs. Results
indicate that decreasing utilization will reduce total costs for nursing homes. However, increasing
acuity will increase total costs. The total effect on nursing home costs of the change in policy is to
decrease nursing home total costs but increase nursing home average costs per patient day.
Key words: Acuity, nursing home costs, translog cost function, utilization.
JEL Classiﬁcations: H51, H72, I11, J14, L80.
Expenditures for nursing home care in the U.S. have been composed of both
private payments, including out-of-pocket payments and private third-party pay-
ments such as private health insurance, and, since 1967, Medicaid and Medicare
reimbursements. From 1970 through 1980, the proportion of entire nursing home
expenditures attributed to Medicaid alone rose from 22% to 50% and has only
remained nearly steady with Medicaid paying for about 46% of nursing home
expenditures in 1998.
With nursing home expenditures consistently accounting
for 8% of continually growing personal health care expenditures, nursing home
reimbursements, and the underlying costs upon which they are based, have begun
to receive considerable attention.
Findings from a recent study by the Nebraska Department of Health and Human
Services (NHHS, 1997) found that of Nebraskans 65 years or older, 6.5% lived in
nursing homes, compared to 5.7% nationally. Further, 7.9% of Nebraskans access-
ing Medicaid services lived in nursing homes, compared to just 4.6% nationally.
The study argued that few alternatives to nursing homes were available for the
elderly and disabled in Nebraska. This prompted recommendations from NHHS
Health Care Financing Administration, Ofﬁce of the Actuary, National Health Statistics Group,
web site www.hcfa.gov/stats/nhe-oact/tables/t7.htm