DO NONPROFIT AND GOVERNMENT NURSING HOMES ENTER UNPROFITABLE MARKETS

I. INTRODUCTION Nursing home care is provided in the United States by for-profit, private nonprofit, and government organizations. (1) These three organizational forms may compete directly in the same markets--with either differentiated or nondifferentiated output--or serve entirely separate markets. An understanding of which organizational forms will provide the most effective care in a given set of circumstances requires knowledge of in what ways and to what extent the nature of health care provision varies across organizational forms. In the context of a market economy in which profit-maximizing firms are the "default producers," the natural question from a welfare perspective is whether consumer surplus would decline if government and nonprofit providers were replaced with for-profit providers. This study examines whether nonprofit and government nursing facilities expand access to nursing home care through an examination of patterns of nursing home entry in the rural United States. I employ methods due to Bresnahan and Reiss (1990) to identify markets that are unlikely to be profitable for for-profits to enter and then ask whether nonprofits and government nursing homes--as a consequence of policies that lower their costs relative to for-profits--locate in these "unprofitable markets." Equivalently, if government and nonprofit nursing homes were to exit isolated markets, could one reasonably expect that for-profits would enter to replace them? Any evidence suggesting that they would not supports the argument that government and nonprofit nursing home care providers contribute positively to social welfare by expanding access to care. In assessing potential differences in care provided by the different organizational forms, the literature has focused largely on access and quality differentials. Two questions of interest naturally arise when studying access to care: first, is any care available in the market--that is, is there a nursing home? Second, if care is available to some in the market, is it available to all--that is, are nursing homes full, or do they discriminate at the point of admission on the basis of wealth, health status, or other observable measures? The second question has received more attention in the literature. Most studies of access to nursing home care--for example, Reschovsky (1996), Ettner (1993), and Gertler (1992)--presume the presence of a facility and ask to what extent prospective residents have access to the facility, often focusing on individuals covered by Medicaid. Relatively fewer focus on issues of access in isolated markets; Yu and Bradford (1995) is an exception. While this study limits its focus to the first question by analyzing isolated rural markets in the United States, the methods used here in principle can be extended to focus on the second question as well. In focusing on the question of access, this analysis abstracts from potential differences in quality across organizational forms, deferring to existing studies on the subject, including Grabowski and Hirth (2003), Hirth (1999), Chou (2002), Holtmann and Ullmann (1991), and Weisbrod (1988). The question of whether nonprofits enter unprofitable geographic markets has not been previously addressed, in the nursing home industry or elsewhere. The study closest in spirit to the present one is the analysis of nonprofit and for-profit hospital location by Norton and Staiger (1994), in which the authors conclude that for-profits tend to locate in better-insured areas--that is, areas that are more likely to be more profitable--than nonprofits do. This study differs from Norton and Staiger in that it explicitly calculates market profitability for markets that for-profits have entered and projects it for markets that for-profits have not entered. This analysis also complements the work of Kapur and Weisbrod (2000) by assessing whether government nursing homes serve unprofitable markets, while their paper addressed the question of whether government nursing homes serve unprofitable patients. …