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Xorox University Microfilms 300 Worth Z*>b Road Ann Arbor, Mlchlgon 4S100 I I 73-29,662 RATR I^p Allen 1944TOE EFFECT OF *TOE INTRODUCTION OF MEDICAL ASSISTANCE AND MEDICARE ON TOE STRUCTURE OF TOE MICHIGAN NURSING H M E INDUSTRY. Michigan State University, Ph.D., 1973 Economics, general U niversity M icrofilm s, A XEROX C o m p an y , A n n A rbor, M ich ig an THE EFFECT OF THE INTRODUCTION O F MEDICAL AS S IS T AN C E AND MEDICARE ON THE STRUCTURE OF THE MI C HI G A N N URSING HOME INDUSTRY By Lee Allen Bair A THESIS Su bmitted to M ichigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1973 ABSTRACT THE EFFECT OF THE INTRODUCTION OF M ED I CA L ASSISTANCE AND M E DICARE ON THE STRUCTURE OF THE MICHIGAN NURSING HOME INDUSTRY By Leo Allen Bair In 1960, the M ic h i g a n nursing home industry was characterized b y small, proprietary homes constructed for other uses and pr oviding terminal care for the aged. A decade later the ma jority of nursing home care w as provided in large, mo de rn structures built exclusively as nursing facilities. Not only was terminal care available to the aged in 1969, b u t convale scent and rehabilitative care wa s also pr ovided to those capable of return ing to a uninstitutional setting. One of the major reasons for the transformation of the nursing home industry was the pa ss age of the Social Security Amendments of 1965, providing for long-term care under the M e dicare and M e dical As s is t an c e programs. These two programs c au s ed major changes in the industry's operating environment. One institutional change w a s a sharp shift in the source of funds which financed nursing Lee Allen Bair hone services. Whereas nursing home services were usually paid from private sources before the introduction of these two p r o g r a m s , M ed icare and Medical Assista nce resulted in the majority of care being reimbursed by the p u blic sector. Another change was the tightening of operating regulations by the public sector to assure that adequate care was being provided by qu alified personnel in suitable surroundings. A third change was that the demand for nursing care services increased sharply. These three changes caused a fourth, the rapid expansion of corporate owne rship as a type of facility ownership. effect, The purpose of this study is to determine wh a t if any, the changes resulting from the in t ro d uc ­ tion of Medical Assistance and M ed i c a r e have had on the Michigan nursing home market structure, and therefore, ceteris paribus, o n the competitiveness of that industry. Cross-sectional data for the years 1960 to 1969 were utilized in the analysis. name, location, On an annual basis, type of ownership, available for each facility. the and total beds were The analysis was two-fold including both a descriptive comparative static analysis and a regression analysis of the data, employing a least squares technique. The descriptive analysis indicated that the market structure of the M i c h i g a n nursing home industry changed gradually during the early 1960's, shifted sharply in 1964 to 1966, and again changed more slowly after 1966. Lee Allen Bair Es pecially wi th respect to concentration as measured by the four-# eight-, and twenty-firm con centration ratios, it appears that the long-term trend throughout the decade was toward decreased concentration. This long-t erm decline was not continuous wi th sharp decreases in the middle of the decade, followed by constant or increased concentra­ tion in several markets in the late 1960's. Since the M ic h ig a n Medical Assistance p ro gram and the long-term care portion of Medi care became operational o n October 1, 1966 and January 1, 1967, of changes resulting respectively, the net effect from the two programs' introduction appears to have been to cause concentration to increase. This conclusion was confirmed by the regression analysis. Two theories were posed, regarding changes in nursing home industry structure during the 1 9 6 0 's. nizing only long-term changes in structure, Recog­ the first theory stated the d ifferences in c o ncentration between regions and over time can best be explained by changes in the de mographic characteristics of the market. Three independent variables were included in the analysis: the percentage of aged persons to total population, po pulation density, and p er capita income. A second theory included the same independent variables, but included a dummy variable to account for the introduction of Medical Assistance and Medicare. Best fits we re attained by using the four- and eight-firm concentration ratios as Le e Allen Bair dependent variables. Equations were estimated for bo t h theories for each dependent variable. conducted to determine, A n F-test was then if the second theory was a s i g ­ nificantly better predictor of concent ration than the first. For both four- and eight-firm concentration ratios, the second theory was a significantly better predictor than the first, indicating that the two programs did alter concentration. In bo th cases, the sign of the d ummy variable for the introduction of Medical Assistance and Medicare was positive, showing that the two programs caused concentration to increase, and therefore, ceteris paribus, market competition to decrease. Thus, the effect of the shift in funding sources and the tightening of operating regulations outweighed that of the increased demand for nursing care services. To my wife, ii Sandra ACKNOWLEDGMENTS I wish to thank Dr. Bruce A l l e n and Dr. Paul Ginsburg for their constructive comments on the drafts of this thesis. Special thanks go to Dr. J o hn Henderson, not only for his consideration of this thesis, but also for his kindness and efforts o n my behalf as a graduate student. I wish also to thank Mrs. Carol Sharp for typing the many drafts of this thesis and Mrs. Ann Brown for typing the thesis itself. wife, Finally, I wish to thank my Sandra, without whose encouragement and understanding this thesis would not have b e e n completed. iii TABLE OF CONTENTS 9 Pago D E D I C A T I O N ..................... ACKNOWLEDGMENTS . . . . . ii . iii LIST OF T A B L E S .......................................... vii C hapter I. II. INTRODUCTION ................................... 1 Study O u t l i n e ................................... 8 REVIEW OF LI T ER A TU R E AND EXPERIENCE . . . Industry De finition . . . . . . . . . Nursing Home Literature and Experience . . Personnel and Licensing Standards . . . Quality and A b u s e s ........................ Investment Opportunities ................. Reimbursement ............................... Economic Literature ............................ Economic Analyses ............................ Evolution of Market S t r u c t u r e .............. III. MEDICARE AND M E D I C A L ASSISTANCE LONG-TERM CARE P R O G R A M S ................................... Medicare L on g -T e rm Program ................. What are Extended Care Facilities? . . . Extended C ar e Eligibility and Benefits . . Extended Care Reimbursement Rationale . Cer tification of Extended Care Facilities . Scope of the Extended Care Program . . . Medical Assist a nc e Long-Term Ca re Program . Long-Term Care Eligibility and Benefits . Long-Term Care Reimbursement Rationale . . Long-Term Care Fac ility Certification . . Extent of L o n g - T er m Care Program . . . . iv 11 11 15 15 21 26 30 38 38 44 47 48 49 50 53 54 55 59 60 64 70 71 Chapter IV. V. VI. VII. Page THEORY OF MARKET STRUCTURE DETERMINATION . . 87 Market Structure and Competition . . . . Elements of Market Structure ................. Concen tration . . . . . Product Differentiation ..................... Barriers to E n t r y ............................ Impact of Medical Assistance and Medicare . The State as Principal Purchaser . . . . Trade A s s o c i a t i o n s ........................ Ne gotiated Rates and Procedures . . . . Market Stru cture Over T i m e ................. ............................... Demand Growth Institutional Changes ..................... S u m m a r y ...................................... 87 89 90 91 93 95 103 105 107 109 109 110 Ill STRUCTURE OF THE MICHIGAN NURSING HOME INDUSTRY, 1960-1969 ............................ 112 Definition of Market ........................ Data S o u r c e ................................... Changes in Market Structure ................. Number of Facilities and B e d s .............. Type of O w n e r s h i p ............................ Size D i s t r i b u t i o n ............................ Expan sion and Contraction New Facilities and Facilities Closed . . ................. Measures of C o nc entration Summary of Overall Changes ................. Impact of Medical Assistance and Medicare . 114 116 118 119 12 3 131 139 143 14 8 16 2 16 5 PUBLIC PURCHASE AND MARKET STRUCTURE: TEST OF AN H Y P O T H E S I S ............................... 16 8 Model Results 168 174 ................................... . SUMMARY AND POLICY IMPLICATIONS .............. 18 3 S u m m a r y .......................................... Policy Implications ............................ 183 188 A P P E N D I C E S ................................................ A. 19 3 SOCIAL SECURITY ACT - TITLE XVIII - SECTION 1861 ( j ) ...................................... 194 Extended Care Facility 194 ........................ v Appendices B. Page GEOGRAPHICAL BOUNDARIES OF GOVERNOR'S PLANNING REGIONS AND HEALTH FACILITY SERVICE A R E A S .......................................... 196 Governor's Planning Regions .................... ................. Health Facility Service Areas 196 198 BIBLIOGRAPHY .......................................... vi 207 LIST OF TABLES Table 1. 2 . Page Number of Patient Days Provided in Michig an N ursing Homes Under the Medical Assistance P rogram in 19 70 by Governor's Planning R e g i o n ................................................. 75 Number of Patient Days Provided Basic Nursing Homes Under the Assistance Program in 1970 b y (Number of Beds) of F a c i l i t in Michigan's Medical Size y ...................... 77 3. Nu mb er of Patient Days Provided in Michiga n 's Skilled Nursing Homes Under the Medical Assistance Program in 1970 by Size (Number of Beds) of F a c i l i t y ...................... 78 4. Total Cost of Providing Care in Michigan Nu r si n g Homes Under the Medical Assistance Pr o gr a m in 19 70 by Governor's Planning Region . . . . 79 5. N u m be r of Patient Days Provided in Michigan Long-Term Care Facilities Under the Me dical Assistance Program in 1970 by Type of F a c i l i t y ................................... 81 6. Total Cost of Providing Care in M i chigan LongTe rm Care Facilities Under the Medical Assistance Program in 1970 b y Type of F a c i l i t y .............................................. 82 7. Number of Patient Days Provided in M ic h ig a n County M C F 's and Hospital C C U 's Under the Medical Ass istance Program in 1970 by Size (Number of Beds) of Facility) .................. 84 8. Total Cost of Care Provided in Michigan's County MCF's and Hospital CCU's Under the Medical Assistance P r o g r a m in 19 70 b y Size (Number of Beds) of F a c i l i t y ................................ 85 9. Number of Lo n g- T er m Care Facilities in Michigan b y Governor's Planning Region, 1960-69 . . vii . 120 N um b er of Lo n g- T er m Care Beds in Michigan by Governor's Planning Region, 1960-69 . 121 Mean N um b er of Beds in Lo n g- T e r m Care Facilities in Michigan by Governor's Planning Region, 1960-69 .......................................... 122 Numb er of Long-Term Care Facilities and Beds in Mi c higan by Type of Ownership, 1960-69 124 N um b er of Corpo rate-Owned Long-Term Care Facilities in Michigan b y Governor's Planning Region, 19 60-69 ................................... 127 N um b er of Corporate-Owned Long-Term Care Beds in Michigan b y Governor's Plann ing Region, 1960-69.............................................. 128 Numb er of Long-Term Care Facilities Owned by Proprietors and Partnerships in Mic higan by Governor's Pl anning Region, 1960-69 . 129 Number of Long-Term Care Beds Owned by Proprietors and Partnerships in Michigan by Govern or's Plan ning Region, 1960-69 . 130 Size Distribution of Lo n g-Term Care Facilities and Beds (by Number of Beds) in Michigan, 1960-69.............................................. 132 Percentage Distribution of Long-Term Care Facilities and Beds (by Number of Beds) by Size in Michigan 1,960-69 . • ..................... 133 Size Distribution of Corpo r at e -O w ne d Long-Term Care F acilities and Beds (by Number of Beds) in Michigan, 1960-69 . . . . . . . . . 136 Size Distri b ut i on of L o n g - T e r m Care Facilities and Beds (by Number of Beds) Owned by Propri e t or s and Pa rtnerships in Michigan, 1960-69 .......................................... 137 Size D i s tribution of M i ch ig a n' s Long-Term Care Facilities Expanding from Previous Years and the A m o u n t of their Expansion, 1961-69 140 Size Dis tribution of M i ch i ga n 's Lo n g-Term Care Facilit i es Contracting from Previous Year and the A m o u n t of their Contraction, 1961-69 142 viii Page Table 2 3. 24. 23. 26. 27. 25. 29. Size Distribution of New Long- T er m Care Facilities in Michigan, 1961-69 144 Size Distribution of L o n g - T e r m Care Fadilities Closed in Michigan, 1961-69 ..................... 147 Four-Firm Concentration Ratios of Long-Term Care Facilities in Mi c higan b y Governor's Planning Region, 1960-69 ................................... 149 Eight-Firm Concentration Rati os of Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69 ................................... 153 Twenty-Firm Concentration Ratios of Long-Term Care Facilities in M i c h i g a n b y Governor's Planning Region, 1960-69 ........................ 155 Herfindahl Indexes for L o n g - T e r m Care Facilities in Michigan by Governo r 's Planning Region, 1960-69 . 158 Gini Coefficients for L o n g - T e r m Care Facilities in Michigan by Go v e r n o r ' s Planning Region, 1960-69 160 ix CHAPTER I I NTRODUCTION The nursing home industry# unlike other industries providing medical care# w a s almost completely transformed during the decade of the 1960's. decade# At the beginning of the the industry was characterized by small, p r o p r i ­ etary homes, typically c o n s t ru c te d for other uses and providing terminal care for the aged. care facilities in M i c h i g a n in 1960# Of 4 97 nursing 259 were proprietary homes with an average size of 19.4 beds. A t the same time there were only 79 c o rp o r a t e - o w n e d facilities with an average size of 49.5 beds. A deca de later the majority of nursing home care was pr ov i d e d in large# modern struc­ tures built exclusively as nursing facilities. intermediate care facilities# While providing a lesser intensity of nursing care services than skilled homes, we re still usually proprietary hom es in 1969, skilled homes had largely become corporate entiti e s w i t h professional a d minis­ trators. 1969# beds. Of the 475 n ur s i n g care facilities in Michigan in 179 were c o r p o r a t e - o w n e d and had an average of 87.4 The number of p r o p r i e t a r y homes had declined to 168 1 2 with an a verage size of 42.0 beds.^ Not only w a s terminal care a va i lable to the aged in 1969, but convalescent and re habil itative care w as also provided to those ca p a b l e of returning to a noninstit utional setting. One of the major reasons for the transf ormation of the nursing home industry was the passage of the So c ia l Security A m en d me n ts of 1965, providing for l on g -t e rm care under the Medic ar e and Medical Assistance programs. These two pr o grams caused major changes in the industry's operating environment. One institutional change was a sharp shift in the source of funds which financed nursing home services. Whereas nursing home services w e r e usually paid from pr ivate sources before the introduction of these two programs, Medic ar e and Medical Assistance re s ulted in the m aj o r i t y of care being reimbursed by the p ublic sector. An o th e r change was the tightening of o p e r a t i n g regulations by the pu bl ic sector to assure that adequate care was being provided by qualified personnel in suitable surroundings. A third change was that the demand for nursing care services increased sharply. changes caused a fourth, TheBe three the rapid expansion of corporate ownership as a type of facility ownership. Th e pu r p o s e of this study is to deter mi n e what effect, if any, the ^“M i c h i g a n Department of Public Health, Bu r ea u of Health Facilities, M i c h i g a n State Plan for Hospital and Medical Facilities Co n s t r u c t i o n Fiscal Year 1961-1562 to Fiscal Year 1970-1971 (Lansing, Michigan; Michigan Depart­ ment of Pu b li c Health, 1962-71). 3 changes resulting from the introduction of Medical A s s i s ­ tance and M ed i ca r e have had on the M i c h i g a n nursing home market structure, and therefore, ce teris paribus, on the competitiveness of that industry. One basic assumption of this study is that increased competition is preferable to decreased competition. this is the assumption usually adopted in m o s t industrial organization studies, apply. there are cases w h e r e While it does not One such set of cases are natural monopolies, i.e., instances where economies of scale are sufficiently large to prec lude the efficient operation of m o re in a g iv e n market. monopolies. than one firm Public utilities ar e e x a m p l e s of natural A second set of cases are those instances where consumer know ledge is lacking and the purchase is of sufficient importance to the consumer to w a r r a n t regulation of the industry's output. An example of t h i s might be short-t erm general hospitals, particularly emergencies. for medical The question that mus t b e e x a m i n e d before undertaking the study is how appropriate is the assumption that increased competition is preferable to decreased competition for the Michigan nursing home industry. As the discuss ion of the nursing c a r e industry suggests, there ar e economies of scale in n u r s i n g care facilities and these were operative in the industry during the 1960's. However, economies of scale w e r e limited and the m i n i m u m efficient size firm contained a relatively 4 small portion of industry capacity in most markets. Both the study conducted by Kottke and Trainor and this study show the existence of significant economies of scale in a facility until facility size reaches 50 to 60 beds. the size of the facility increases beyo nd that, economies were found. As few A limitation of bo th studies is that economies of scale were estimated using the survivor 2 technique and not measured directly. Th e p r o b l e m with this is that any estimating technique must u t i l i z e data from actual operations, and these are set legally, a result of possible cost minimization. not as Specif ically, a chief explanation for economies of scale is that some resources, including personnel resources, In Michigan, bec ratios, are indivisible. state licensing requirements sp ecify staffthe ratios varying according to the time of the work shift and the number of total beds in the facility."* This introduces an artificial d i v i s i bi l it y which would not be present if o pe r ators w e re minimize per-unit costs. free to If it is p os s i b l e to o perate a nursing home with a lower than required st aff-bed ratio, or if the staff-bed ratio varies w i t h the scale of o p e r a ­ tions under optimal conditions, any o b s e r v a b l e m in i m u m 2 Frank J. Kottke and John F. Trainer, The Nursing Home Industry in the State of W a s h i n g t o n (Pullman, W a s h i n g ­ ton : Frank J. Kottke, 1968), p. 31 and C h a p t e r V, p p . 156-158. ^Michigan Department of P u bl i c Health, D iv ision of Health Facility Standards and Licensing, Rules for Nursing H o m e s , Draft Number 17, September 27, 1968. 5 efficient scale will understate the size of the firm. The issue then becomes whether the true m i ni m um efficient scale occurs only under conditions of monopoly. An acceptance of the p reference for competition then is based upon a finding that the true mi nimum efficient scale would give a market structure that w o ul d lie between the present market structure and one of very high concentration. the large number of beds in most markets, Given relative to the average size of both new and existi ng facilities, it is unlikely that the nursing home industry fits the case of a natural monopoly. While the nursing home industry has similarities to those cases where consumer knowledge is lacking and thu purcha se is of suffici ent importance to w a rr a n t regu­ lation of the industry's output, differences also exist. One similarity arises from the majority of nursing care services being p ur c ha s ed under the Medical Assistance program. These purch ases are made at one of two flat rates, which are based on pa t ient service needs. means that, This from the consumer's viewpoint, price co m p e t i ­ tion has been removed from the purchase division. However, even though pri ce competition is not a factor in the purchase d ec ision of a person receiving Medical Assistance, it is for a pri vate pay pat ient or a Medicare patient, who will need nursing care beyond the period covered by Medicare. Price is important to such 6 Medicare patients, since they are more likely to remain in the facility first entered than to transfer to another after using their long-term care benefits. This portion of the industry's product, which is not reimbursed by Medical Assistance, represents a substantial maj ority of all persons in nursing care facilities. A second similarity is tha t since nursing care facilities in many cases regard m inimum licensing and certification requirements as the ma x im u m levels to be attained, there is a tendency for the industry to produce a fairly homogeneous output. That is, since the nursing home reimbursement rate is relatively low and m in imum licensing and certification requirements are m an d a t e d by the state, there is little incentive for nursing homes to compete on a nonprice basis. case, This is especially the if the Medical A ssistance payment rate is sufficiently low to create an excess demand for publicly financed nursing home care. Despite this, there are areas wh e re co mpetition with respect to the quality of care can and does exist. The failure to strictly enforce licensing and certification standards, w hi c h results in less than full compliance to those standards, or the meeting of more than min i m u m requirements will result in nonprice differences among nursing care facilities. Also, since standards do not completely specify the operating environment of facilities, 7 there is leeway for nonprice competition. Nonpri ce competition will exist if vacancies exist for Medical Assistance patients or if private pay patients are more profitable than publicly subsidized patients. will occur, The latter if the cost of the additional quantity and quality of care provided pr i vate pay patients is less than the added revenue from their higher rates. Possible sources of additional care for private pay patients include better rooms, better food, and more attention by staff. These can be made effective by placing private pay patients in one section or wing of the facility. A third similarity is that consumer knowledge of the quality of nursing care services is largely absent. Also, the purchase of nursing care services is of prime importance to the consumer, since it often determines where he will spend the rest of his life, not to mention where his life's savings will b e spent. in his and his children's interests, du e to conscience, are explored. As such, it is the latter possibly that the alternatives available to him Consumer knowledge, lacking and uniformed, does exist, to various nursing care facilities, even though largely either through visits talks with patients, or talks w i t h former patients or their children. The purchase decision is also important to the public as s is ­ tance recipient, at least for nonprice factors, has a free choice of since he facilities to be admitted to. Thus, despite similarities to cases w h ic h warrant regulation of industry output, there are differences that allow for both price and nonprice competition. Therefore, the basic assumption of this study is that increased c o mp e ti t io n is prefer ab l e to decrea sed competition, at least in those markets sufficiently large to allow two or more firms to realize economies of scale. In those markets in the upper peninsula or the upper half of Michigan's lower peninsula the co ncent ration of industry capacity into one or a few firms is probably justified from an efficiency standpoint. Little would be gai ned by increasing the number of alternatives to consumers in those markets, w h i l e significantly increasing the cost per patient day of nursing care services. In markets in the lower half of M i ch i ga n 's lower peninsula, the demand is large enough to support more than one nursing care facility in each market. exist, As long as are as of co mpetition consumers should be allowed as m a ny a lternative facilities as feasible from which to purchase nursing care services. In that way, consumers will ma ke the best purchase decision pos sible and facilities will have the least opportunity to c om b in e to set the conditions of selling nursing care services. Study Outline Chapter II will be a re view of the relevant liter­ ature and experience. A f te r defining the nursing home 9 industry the remainder of the chapter will be divided two parts. into In the first part the literature and experience of nursing home operations will be reviewed. This will include sections on personnel and licensing standards, quality and abuses, bursement. investment opportunities, and r e i m ­ The second part w i l l review economic analyses of the nursing home industry and industrial organization literature on the evolution of market structure. Chapter III will examine the scope and extent of the Medicare and Medic a id programs. First, this will involve a consid eration of the types of services provided and the eligibility requirements for those services. Next, reimbursement rationales imployed by the federal and state government and their conditions for facility participation in the programs will be discussed. served, Finally, the quantity of services utilized, the people and the cost of these services are surveyed for each program. Chapter IV presents a theory of market structure determination. After discussing the major changes wh i ch occurred as a result of the introduction of Medicare and Medicaid and their effect on nursing home m arket structure, the state's role as the principle pur chaser of these services is examined. Next, structure are discussed. the major elements of market Finally, two theories of evolution of the Michigan nursing home industry's market structure during the 1960's are posed. 10 Chapter V examines the changes which occurred in the nursing home industry market structure during the 1 9 6 0 's. The market for nursing home services is first defined. Then an analysis of changes in the structure of each market, including changes m ea sured by industrial o r g a n i ­ zation concepts, is presented. Ch apter VI develops a model, containing the two theories of evolution of the industry's market structure. This is then tested to determine the extent to which changes in market structure were attributable to Medicare and Medicaid and we re not part of long-term trends in the growth of the industry. Chapter VII summarizes the argument and then d i s ­ cusses the policy implications arising from it. These include not only the effect upon nursing home industry competitiveness of future policy changes but also the implications for similar expansions of public through these programs. support CHAPTER T1 REVIEW OF LITERATURE A N D EXPERIENCE In this chapter, defined. Then, the nursing hone industry will be a review of the literature and experience concerning nursing hones and the services they provide will be presented. Finally, economic analyses of the nursing home industry wil l be discussed and industrial organization literature dealing wi t h market structure evolution will be reviewed. Industry Definition What is a "nursing home" and wh at types of are included is this definition? facilities The American College of Nursing Home Administrators defines a "nursing home" as follows: A Nu rsing Home or its equivalent is a facility, institution, or an identifiable unit of an acute hospital or ot her care service facility or i ns t i­ tution licensed for: 1. C ar e for persons w h o because of physical or mental conditions, or both, require or desire living a cc o mmodations and care w h i c h as a practi cal matter, can b e s t be made available to them through institut ional facilities, other than acute care units of hospitals, providing a protective and/or s up e rv i se d environment, and 2. Care of persons and patients who require a co m­ b i n a t i o n of h e al t h care services and personal 11 12 care services which are in addition to the above and may include, but are not necessarily restricted to one or more of the following care services: a. b. c. d. e. f. g. h. i. j. Therapeutic diets, Regular observation of the patient's physical and mental condition, Personal assistance including bathing, dressing, grooming, ambulation, transportation, h o u s e ­ keeping (such as bed making, dusting, etc.) of living q u a r t e r s , A p r og r am of social and recreational activities, Assistance with self-administered medications, Emergency-medical care including bedside nursing during temporary periods of illness, Professional nursing supervision, Skilled nursing care, Medical care and services by a licensed practitioner, Other special medical and social care services for diagnos tic and treatment purposes of rehabilitation, restorative, or maintenance nature, designed to restore and/or maintain the person in the most normal physical and social condition attainable.^ The above definition refers to two separate and distinct types of facilities. tion refers The first part of the d e f i n i ­ to personal care and residential care facilities. These include homes permit homes. for the aged, permit nursing homes, and The second part of the definition refers to extended care facilities, skilled nurs ing homes, and i n t e r ­ mediate care facilities. Separating the two types of facilities is the distinguishing characteristic of the provision of nursing care services. The first group is not licensed to p e rf o rm nursing care services, whereas Ameri ca n Nursing Home Association, Nursing Home Fact Book 1970-71 (Washington, D . C . : American Nursing Home Association, 1970), p. 1. 13 the second group must do so to retain its license. the second group wi th which It is this study is concerned. Extended care facilities (ECF's) have their legal basis in Title XVIII of the Social Security Act (Medicare). Care in ECF's is designed to be an extension of hospital care, albeit a loss intensive and extensive one. Services are provided 24 hours a day but are rehabilitative and convalescent only, w hi c h results in a relatively short length of stay. Skilled nursing homes arc recognized under Title XIX of the Social Security Act ance, also called Medicaid). (Medical A s s i s t ­ Services are essentially the same as those of ECF's, except that the degree of nursing supervision may be less in some states. licensed All ECF's automatically qualify as skilled nursing homes but not 2 vice versa. The principal difference between the two types of facilities is in the length of patient stay. Since skilled n u rsing homes provide terminal care as well as rehabilitative and convalescent care, their length of stay is considerably longer than that of ECF's. mediate care facilities (ICF's) Inter­ or basic nursing homes were funded under Ti t le XI of the Social Security Act until 1972, The Social Security Amendments of 1972 changed the name of "extended care facilities" and "skilled nur sing homes" to "skilled nursing facilities" and pr ovided for the same level of care requirements in those facilities under both Med icaid and Medicare. U.S. Congress, Public Law 92603, 92nd Congress, U.R. 1, Oc tober 30, 1972, Section 247 and 27B. During the time period and for the purposes of this study, the two types of facilities were and will be considered similar, but distinct. 14 when they beco me part of the M e di c a i d Program. 3 Care provided in these institutiois is less intensive, at least from the s t an d po i nt of the utili zation of licensed nursing resources, and usually does not require 24 hour a day licensed nursing supervision. Since the vast majority of care in ICF's is terminal care for the aged, the average length of stay is relatively long. ECF's are federally adminis t er e d under the Medicare program, even though certification may actually be through a state agency. other hand, S ki l l e d and b a s i c nur sing homes, on the are both administered under state programs. In nursing homes p r ov i d i n g b a s i c care, the State of Michigan requires that "the home shall employ sufficient nursing personnel to provide continuous 24 hour nursing care and services sufficient to meet the nursing needs of each 4 pa tient in the h o m e . ” Minimum sufficient licensed personnel for basic homes has been defi ned as one licensed practical nurse (LPN) working 40 hours per week and serving as director of nurses. nursing homes include Additional requirements for skilled "at least one registered nurse or licensed practical nurse shall be on duty at all times during a shift in cha rge of nursing personnel providing 3 H.R. U.S. Congress, Public Law 92-223, 10604, December 28, 1971, Sec. 4. 92nd Congress, ^Michigan Departm ent of Public Health, Division of Health Facility Standards and Licensing, Rules for Nursing Homes, Draft N umber 17, September 27, 1968, [R. 325, 1961 (B) ]. 15 care to patients in the home." 5 must include one registered nurse In addition, staff personnel (RN) wo r ki n g 40 hours per we ek and serving as director of nursing. For homes with 30 or more beds the director of nursing cannot also be a licensed supervisor. Finally, one LPN or RN must serve 24 hours a day as a supervisor for each seven nursing employees. Nu rsing Home Literature and Experience This part of the chapter will review literature concerning the operation of nursing homes. While a large portion has only appeared in the popular press, there is a limited body that has b e e n published in journals or in pamphlet or book form. discussed herein. Primarily the latter will be Even though most literature overlaps several areas of study w i t h respect to nursing homes, it has been divided into four sections for ease of p r e s e n t a ­ tion. Th ese are personnel and licensing standards, quality and abuses, investment opportunities, and reim­ bursement. Personnel and Licensing Standards The definitive w o r k in this area is Jordan B r a v e r m a n 's Nursing Home Standards: 5 I b i d . , [R. 325, A Tragic Dilemma in American Health.^ 1963 (3)]. ^Jordan Braverman, Nursing Home Standards: A Tragic Dilemma in American Health (Washington, D .C . : American Pharmaceutical Association, 1970). 16 It analyzes the licensing regulations of all 50 states and the District of Columbia. four areas: He divides his analysis into administrative management regulations, care regulations, environmental health regulations, fire safety and construction regulations. methodology is to sum the various states' ponents. patient and Braverman's licensure com­ His conclusions are di s heartening w h e n the increase in industry capacity and dollar volume of business are c o n ­ sidered as they occurred in the 1960's. bered throughout this discussion It must be r emem­ that licensure requirements are minimums and that many homes w i l l provide more than the minimum in many cases. Also, in their regulations w h i c h provide many states have clauses for care above the minimum re quirements— "Additional nursing personnel shall be provided for each shift, over and above the minimums specified in these rules, as is necessary to care adequately for and meet the nursing needs of each patient in the home." Unfortunately, these are vague and not strictly interpreted. One effect of licensing regulations is that many homes view the m i n i m u m requirements as the ma x im u m to be attained, largely be c au s e of limited reimbursement rates under state Medicaid Assist ance programs. Where this ^State of Michigan, Department of Public Health, Bureau of H e al t h Facility Standards and Licensing. Rules for Nursing H o m e s , Draft Number 17, September 28, 1968 TLansing, Michigan: Department of Public Health, 1968), {R 325, 1962 (4)]. 7 17 occurs it tends to s tandardize the q u al i ty of nursing care services and, therefore, to reduce p ro d uc t competition. With respect to nu r si ng home administrators' qualifications, Braverman found that "9 States require that the administrator have the m in i m u m of a high school e d u ­ cation while the U.S. Department of Health, Education and g W el f ar e recommends rather than requires this qualification." Even the House Committee on Ways and M e a n s ’ version of the Social Security Amendments of 19 71 d i d not recommend any formal educational require me n ts for n ursing home a d m i n i s ­ trators. T h e i r reasoning was, that persons w h o have d e m o n st r at e d their capability as nursing home administrators ov er a period of time should n o t be p r e c l u d e d from serving in this ca pacity because they fail to meet certain formal requirements imposed for purposes of the medicaid program. Your committee bill would, therefore, p ermit the States to establish a p er m a n e n t wa iv e r from such r e quire­ ments for those persons w h o served as nursing h o m e administrators for the three-year pe r io d preceding the year the State esta blished a p r o g r a m for the licensing of nu rsing home a d m i n is t ra t or s .9 W h i l e it m i g h t appear that three years' experience w o u l d q ua l if y a p e rs o n to be a n u rsing ho me administrator, this is n o t necessarily the case in each area of expertise required. F o r example, it probably w o u l d qualify the p er s on with respect to the financial h ealth of the home, D Braverman, N u rs i ng Home S t a n d a r d s , p. 5. g U.S. Congress, House of Representatives, S o ci a l Security Amendments of 1971, Report of the Committee on Ways and M e a n s on H . R . l , 9 2 n d Congress, 1st Session ^Washington, D.(?. : 0T5". G overnment P r i n t i n g Office, May 26, 1971), p. 120. 18 but there is no guarantee that the same w o u l d be true wit h respect to pa t ie n t care. Because of self administrators have more incentive finances, interest, to be come capable in since about one half have a direct financial interest in the home they a d m i n i s t e r .^ Obviously, even those who do not have a financial interest in the home are concerned with finances, since their employ ment depends upon it. In other areas of administrative management r eg u la ­ tions, Braverman found, 26 states require that current employee records be maintained, hours for the patients, 26 States require vi siting 9 States require that p a tient transfer agreements or arrang e me n ts w i th other institutions such as hos pitals must be available or in effect, 39 States require that therapeutic diets be prepared and served as prescribed by the attending physician, and 49 States require that sanitary laundry /linen services be provided. With respect to p a t i e n t care, Br averman states, it appears that only those services w h i c h may be considered very minimal and b a s i c to patient care are re quired b y most jurisdictions. On the other hand, those w h i c h may b e regarded as be ing relatively recent innovations for nu rsing home operation are still in the e m b r y o n i c stage of de velopment in so far as their b eing r eq uired b y State authorities for licensure. An ex ample of the former mi nimal ^ " A v e r a g e Nursing Home Admini st r at o r Earns 510,000 to $15,000 a Year, Cornell University Study shows," Nursing H o m e s , 19 (March, 19 70), p. 31, ^Braverman, Nu r s i n g Home Standards, pp. 5-6. 19 and bas i c standards required for extended care facility certification and State licensure includes the fact that 42 to 50 States include for licensure . . . a patient ha v in g a physician to care for him; an emergency physician be ing available to the facility; a registered or licensed pra ctical nurse be i ng the n urse in charge. . . . There is a very marked decline in the number of States wh i c h require those medical care services which are necessary in order to keep abreast w i t h the demands of prov iding health care in all its c omplex forms. For example, States w h i c h require the provision of physical therapy, dental, social and laboratory/x-ray services range from 3-14 in number. When it comes to discerning those aspects of the b as i c services wh i ch may be c o n ­ sidered innovative . . . the findings are equally b l e a k .1 2 When environm ental health regulations were c o n ­ sidered, Braverman found most of the states followed those regulations set forth for the certification of extended care facilities under Medicare. While this accoun ted for 80-90 percent of all states for most categories, were still lapses in the requirements. there For example, only "22 States specify the ma x i m u m number of patients per be droom while the Federal extended care facility standards suggest the maximum number w hi c h a be dr o om ordina rily contains. ..13 The aspect of nursing home licensure w h i c h has come under the greatest amount of attack are the fire safety and construction requirements and their enforcement. Since nursing home patie n ts are by definition unable to take care of themselves, 12I b i d . , p. 11. 13I b i d . , p. 14. a fire can quickly b e co m e a 20 major disaster. When this is added to the fact that many, although not a majority, of nursing homes are located in older converted buildings, becomes evident. the need for strict regulations The failure to adopt and enforce strong such regulations became a political issue in 19 70, when the Harmar House Nursing Home in Marietta, Ohio burned taking the lives of 32 of the 46 patients in the home. This issue was raised before Congress by Representative David Pryor of Arkansas, who had become an advocate for the aged, especially those in nursing homes and related facilities. Harmar House was an extended care facility certified for Medicare. In pointing up the inadequacies of the regulations Pryor cited the preamble to Medicare's Conditions of Partic ipation— Physical Environment: The following standards are guidelines to help State agencies to evaluate existing structures which do not meet Hill-Burton construction regulations in effect at the time of the survey, and to evaluate in all facilities those aspects of the physical environment which are not covered by Hill-Burton regulations. They are to be applied to existing construction wit h discretion and in light of community need for s e r v i c e . ^ He then concluded, "The inspector now is armed with vague and subjective standards which he is instructed to apply with d i s c r e t i o n . " ^ 14 David Pryor, "Commercialization of Our Aged, Part II, The Nursing Home Patient," Congressional R e c o r d , 91st Congress, 2nd Session (March 26^ 19 7CT), pp. 112 576-112581. 15Ib i d . , pp. 112576-112581. 21 In surveying tions, fire safety and construction regula­ Braverman concluded that these requirements were not as comprehensive as they should he. lie found that only 22 States require fire alarm systems and 23 States require sprinkler systems. In addition only 25 States specify that nu rsing homes ha ve a wr itten evacuation plan wh i ch is to be followed in case of d i s a s t e r . ^ The result of these ineffective regulations is a lessening of incentive for the nu rsing home industry to provide adequate qual ity patient care. in the next section, As will be seen most nursing homes prov ide adequate care for their patients. Unfortunately, there is a small minority w h o do not and are allowed to remain in operation be cause of no n e xi s te n t or lenient regulations or an inability by inspectors to enforce e x isting regulations. Quality and Abuses Probably the issue concerning the nursing home industry that has c aused the most attention is quality of care. In the late 1 9 6 0 's and very early 19 70's reports we re forthcoming that cited cases of patient neglect and abuse. 17 It was generally concluded, ^Braverman, however, Nursing Home S t a n d a r d s , p. that most 16. ^ I n addition to presenting the aged's case before Congress, Cong ressman Pryor held hearings which pointed up cases of patient ne g le c t and abuse. See Howard K o h n , "Nursing Home Negligence Told," Detroit Free Press (May 8, 1971) , p. A — 3 and Mary Lou B u t c h e r , "Mistreatment is Charged at N ursing Home Hearing," Detroit News (May 8, 1971), p. A-2. 22 nursing homes did an adequate job in providing services and that only a small minority of homes did not. This section will review three studies of nursing home patient care to determine the extent to which nursing homes are providing adequate nursing care services. One study, the Nursing Home Research Project, is a three year study to examine the determinants of services to nursing home patients and to discover the processes through which services in nursing homes are innovated. Chosen for the study were a sample of nursing homes in the Detroit Standard Metropolitan Statistical Area. the study is still underway as of this writing, initial reports have been published to date. to publicly supported patients, Since only With respect the Project's first report stated: Contrary to the general expectations of Medicare legislation, however, few patients in Michigan now come to nursing homes for 'extended care facility' benefits. The reason for this is that when application for 'extended care facility' services is made, it is generally denied; often the basis is that the Medicare provision of rehabilitation potential will not be met. Today, half of the nursing home patients in Michigan go first to a general hospital under Medicare and then are transferred to a nursing home where they are supported under provision of Medicaid. . . . 'Our impression is that for most patients Medicare and Medicaid have added a new costly step before nursing home admission, but have not changed the need for nor the utilization of long term c a r e . 18 18 Leonard Gottesman, Nursing Home Research Project: The Study of Ag e d Patients ancf Nursing Home S e r v i c e s , Report to Respondents (Prepared by Philadelphia G e r i a t r i c s C e n t e r , Philadelphia, Fall, 1971), p. 6. 23 A second study, Office, conducted by the General Accounting addressed itself to two questions. Are skilled nursing homes providing proper care to patients? Are patients being provided with levels of care more intensive than needed? The study examined patient care and needs of persons in 30 nursing homes in each state for M i c h i g a n , New York, and Oklahoma. It concluded, Many of the skilled nursing homes GAO visited may not have provided proper care and treatment for their Medicaid and Medicare patients. Many patients in the nursing homes GAO visited may not have needed skilled care and should have been provided with less intensivo— and less c o s t ly - -c a re . The study implicitly defined proper care as being provided when the nursing home met the state's licensing or program-ccrtification requirements, whichever was more stringent. Thus the GAO was looking for failure to provide required levels of services. It found G3 nursing-servicc deficiencies in 4B of the 90 nursing homes surveyed. Of these deficiencies half were found in Oklahoma nursing homes, with the principal deficiency being failure to have a qualified nurse in charge of each 8-hour shift. Michigan and New York, In two-thirds of the deficiencies were failure to meet state nurse-patient ratios. The GAO also found that in 47 of the 90 nursing homes physician visits 19 U.S. General Accounting Office, Comptroller General, Problems in Providing Proper Care to Medicaid and Medicare Patients in Skilled Nursing Homes (Washington, D .C .: U.S. Government Printing Office, 1371), p. 2. 24 were not always made every 30 days, although this is a requirement under both Medicare and Medicaid. In Michigan, for example, physician visits in 12 homes were made irregularly, ranging from 35 to 210 days apart. 20 Michigan was the only one of the three states to have delineated objective criteria for skilled care. State and county medical personnel who normally evaluate patient needs accompanied us to 15 of the 30 homes reviewed. . . . these personnel made determinations as to the level of care needed. They concluded that about 297 (79 percent) of the 378 patients whose needs were evaluated did not require skilled care as defined by M i c h i g a n ’s criteria. . . . recent studies in New York showed that about 25 to 35 percent of the patients in skilled nursing homes were inappropriately placed. In addition, in a limited test, we were advised by the evaluators that, if the medical and nursing care characteristics required by New York and Oklahoma were measured against the Michigan criteria, a similar high percentage of patients probably would not require skilled-nursing home care. To assure that patients in nursing homes we r e receiving proper care, the homes, as a condition for par­ ticipating in the Medicare program, were required to establish utilization review procedures. Under Medicare the overall objectives of these procedures were, "The maintenance of high quality patient care, more effective utilization of extended care services . . . , the encourage­ ment of appropriate utilization and the assurance of 20Ib i d. , pp. 2 ^I bid., p. 10-12. 26. 25 continuity of care upon discharge. . . . 22 Similar p r o ­ visions were made for utilization review procedures for Medicaid under Title XIX of the Social Security Act. 23 Dressier has analyzed the utilization review procedures of 101 extended care facilities in Connecticut w it h a total licensed capacity of 9,467 beds. At the time of his survey the homes had 7,655 patients of which 7 p e r ­ cent were Medicare beneficiaries and 51 percent were Medicaid recipients. Some of the facilities assess the care administered to various categories of their total patient p op u ­ lations, but the majority of the E.C.F.'s have designed their review processes primarily to meet the minimum requirements of the law. There appears to be more concern w ithin the surveyed population with claims benefit determination than with patient care monitoring. Nor is this concern confined with in the individual E.C.F.'s; it appears 22 U.S. Department of Health, Education, and Welfare, Social Security Administration, Conditions of Participation; Extended Care Facilitiesi Regulations, Code of Fe d e r a Y R egulations, Title 20, Chapter III, Part 405 (Washington, D.C.: U.S. Government Printing Office, 1970). 23Section 1902 (a)(30) states, "A State plan for medical assistance must provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments . . . are not in excess of reasonable charges consistent with efficiency, economy, and quality of care." U.S. Congress, House of Representatives, Compilation of the Social Security L a w s , Vol. 1 (Washington, D . C . : U.S. Government Printing oT£Tce, 1968). 26 to filter up and down the administrative channels through the state agency and fiscal intermediaries to the Social Security A dm i ni s tr a ti o n.24 One additional question needs to be answered. is, does the That type of ownership affect the quality of care? This has be en addressed by Holmberg and Anderson in a survey of 118 proprietary and nonproprietary nursing homes in Minnesota. when They found very few significant differences the two kinds of homes were compared on quality-of- care measures involving facilities, staff, and activity. One significant difference that wa s found w as that the no nproprietary homes reported more physician time per week in the h o m c . ^ Investment Opportunities The history of the nursing home industry as an investment opportunity is simple. It has only two phases, a rise and a fall, and they are quite distinct. The groundwork for the spectacular rise in nursing homes, particularly extended care facilities under Medicare, was laid in the program. first four months of Medicare's extended care In a survey of 255 E.C.F.'s, conducted by the Social Security Administration and covering the first two 24 Forrest G. Dressier, Jr. , Patient Care Assessment in Extended Health Care Facilities (New H a v e n , C o n n .: The Connecticut Health Services Research Series, 1971), p. 81. 25 Hopkins R. Holmberg and Nancy Anderson, "Implica­ tions of Ownership for Nursing Home Care," Medical C a r e , VI, No. 4 (July-August, 1968), pp. 300-307. 27 to three months of the program, had increased occupancy levels. it was found that Medicare "Half of the E.C.F.'s surveyed reported that they were unable to accommodate all of the patients who sought admission, a lack of available beds. usually because of About one-third of those surveyed reported they wore moving rapidly to provide additional skilled nursing beds." 26 a reasonable cost basis. Medicare reimbursement was on Since actual costs were not known interim rates were set, so that extended care facilities did not have to wait until final audit for reimbursement. In the early months of the program, the Social Security Administration was reimbursing almost everything and the belief existed that the final audits would be similar to those for hospitals, i.e., almost all expenses w o u l d be allowed. With available this optimistic future, and limited funds from private sources to build the expensive facilities, it did not take long for entrepreneurs to enter the stock market for the necessary capital to build ana expand facilities. rations, At the same time, existing corpo­ usually with no experience in providing nursing home services, entered the industry. This optimism purveyed much of the investment world, and when stock offerings w e re made, 26 they were met with enthusiastic Leon Bernstein, "E.C.F.'s Report on Impact of Medicare," Modern Nursing Home, 21, No. 6 (November/December, 1967), p. 83. 28 acceptance. In the spring of 1969, "More significantly for investors, Richard Elliott wrote, nursing home operators have been selling shares to the public at a dizzying rate. . . . Almost without exception, these nursing home stocks come to market at high price-earnings multiples-and move straight up from there." 27 For example. Four Seasons Nursing Center of America was selling in early 1969 for $112 per share on earnings of $.61 per share, price-earnings ratio of 184. a Price-earnings ratios under 50 were uncommon and in a few cases they exceeded 400. Elliott recognized, however, that not everyone was certain to win. . . . the sure-thing prognosis is hardly mor e applicable to nursing homes than to any other enterprise, par­ ticularly one so new-in terms of basic economics w ro ught directly and indirectly by Medicare, and the overnight competition for capital. For one thing, few firms as yet show anything approaching a fair return on equity (or the kind of profit margin or revenues usually considered a d e q u a t e ) , much less a sustained record of profitability; they are, of course, too new. Furthermore, a number of companies now public . . . actually have suffered earnings rel a p s e s .28 He went on to continue caution by stating that bot h Medicare and Medicaid w o u l d be more tightly regulated in the future. By early summer in 1969 expansion in nursing home beds still continued. "Four Seasons Nursing Center of Richard J. Elliott, Jr., "Unhealthy Growth? The Nursing Homes Industry is Expanding at a Feverish Pace," B a r r o n s , 49 (February 10, 1969), p. 3. 28Ibid. 29 America, a 40-home Oklahoma chain that grossed more than “ ♦ $6,000,000 in fiscal 1968, is negotiating to borrow $45 million to promote a home franchising program." this, the picture had started to darken. 29 Despite "Some of the largest chains net only 5 p ercent or 6 percent yearly on investment v. an average of 10 percent for all of U.S. industry last year. The stocks of several big chains have dropped sharply."**0 In addition, the Social Security Administration had not completed its final audits and several of the chains had not set aside reserves to cover possible rebates. Throughout the rest of 1969, optimism continued to wane. "Nursing homes are unhappy with welfare programs and with what they feel is unjust, arbitrary treatment by the Government. Many have begun to evict or turn away Medicare and Medicaid patients. Federal and state officials are unhappy over spiraling costs and flagrant abuses in . .. not rendered." overbilling . . . and charges for services 31 Finally, by mid-1970, investment in the nursing home industry had lost its glamour. The final Medicare audits were completed and it had become obvious that in many cases reserves we re not sufficient to cover rebates. 29 "Gold in Geriatrics," Time (June 6, 1969), p. 10 3. 30Ibid. 31 Sandra Blakeslee, "Booming Homes for Aged Face Rising Discontent," New York Times, 119 (February 16, 1970). 30 Nursing homos, unlike hospitals, were not allowed to include almost any expense in their charges under Medicare. At the same time Medicare enrollees were finding it dif­ ficult to cash in on extended care benefits, as benefit eligibility requirements were being tightened. In addi­ tion, Congress was attempting to pare Medicaid spending. "So heavily did nursing homes rely on public money last year (1969) that three out of every four patients were non-private. Some 60 percent were supported by a combination of Medicaid and welfare money, and 15 percent on Medicare." Four Seasons Nursing Centers of America, 32 the most glamorous of the nursing home chains, had had the trading of its stock halted and was on the verge of its subsequent b a n k ­ ruptcy . Reimbursement The last area of nursing home literature to be reviewed is reimbursement. nursing home care, Along with the quality of reimbursement for nursing home services has attracted considerable attention to the nursing home industry. Whereas the former was largely published in the popular press, the latter appeared in journals and as proposals before the various state legislatures. The reason for the focus of the controversy being at the 32 Week "Nursing Homes Show Disturbing Symptoms," Business (June 27, 1970). p. 110. 31 state level is that the Federally-sponsored Medicare prog ram p ur c h a s e d only a small portion of the industry's services, wh i le the state-administered Medical Assistance programs were the largest single purchasers of those services. services, Since the state was such a large purchaser of it was of prime importance to the industry to have adopted a reimbursement formula favorable to it. The 1968 Nursing Home Survey, National Center for Health Statistics, conducted by the reported charges for all nursing homes in the United States. It reported, In 1968 the charges for care of 743,29 3 nursing home residents ranged from no charge to over $500 per month. These extreme charges were the exception, however. . . . More typically a home charged about $253 per resident per month; this was the average most frequent charge . . . made by all homes. The average lowest charge was $220, and the average hi gh est charge was $310. In 6 8 per cent of all homes . . . the most frequent charge ranged from $139 to $367. The lowest charge, wh i ch ranged from $116 to $324, had the least variability. The highest charge, w h i c h ranged from $150 to $470, had the greatest v a r i a b i l i t y .33 When compared w i th a similar study for 196 3, it was that the most frequent charge had $170 to $253. 34 found increased 49 percent, from It was also found that homes with Medicare recipients av eraged $135 higher per mo n th than charges in homes not ce r ti f ie d for program participation. 33 35 This was U.S. Department of Health, Education, and Welfare, Public Health Service, Vital and Health Statistics Data from the Nati onal Health Survey" National C e nt e r for Health Statistics Report, Series 12, No. 14, C h arges for Care in Nursing Homes; United S t a t e s — April-September, 19 68 (Washing­ ton , D . C . : U.S. Govt. Printing Office, May, I5T3T7~p. 2. 3^Ibid. , p. 2. 35 I b i d . , p. 8. 32 probably due to the more stringent requirements which must be met to qualify for certification. residents in nursing homes, "Of the 743,293 45 percent received benefits from public or medical assistance programs, . . . [In addition,J Five percent of all residents were receiving Medicare benefits, Medicare benefit." and 7 percent had exhausted their 36 The percentage of persons in nursing homes and receiving public assistance increased from 1968 to the early 1970's. This increase resulted from the increase in costs of nursing home services, cutbacks in the Medicare extended care benefit program, and the expansion of the Medical Assistance program to all but two states. LaVance has summarized the various ways states reimbursed nursing homes for services provided. His 1970 survey of 33 states concluded, The spectrum of rationales for distribution of appro­ priated monies ranges from an apparently arbitrary uniform payment per recipient, with apparent disregard of the recipient's level of need for service other than a medical determination of need for nursing home care, to rather sophisticated rationales w h i c h include numerical ratings of participating nursing homes and detailed evaluation of recipient requirements. The most realistic rationale from the standpoint of costs of service and administration of payments is the distribution of appropriated monies on the basis of audited costs of the nursing homes combined with an arbitrary maximum reasonable cost limitation. This rationale has the effect of forcing the nursing homes with audited costs in excess of the maximum reasonable 36I b i d . , p. 9. 33 cost to withdraw from participation in caring for welfare recipients or to participate presumably at a loss. The rationale assures payment of audited costs to nursing homes w i t h costs b e l o w the ma ximum reasonable costs l im i ta t io n .37 Of the 33 states responding, only 13 required that nursing homes submit costs periodically. 38 Twenty-two states had established maximum, maximum reasonable, or maximum budgeted payments. all 39 Finally, LaVance declared that 33 states were considered to be receiving appropriations which were inadequate to pay the costs of the nursing home care for their welfare recipients. are significant, 40 These three findings since they indicate that most rates were set without the knowledge of cost and w e r e insufficient to reimburse nursing homes completely for services provided. This forced most states to make the difficult decision as to the maximum quality of care that w o u l d be reimbursed by the state. Usually, this decision has been ma de by the availability of appropriations, as viewed by state legis­ latures . One issue that continually arises in the reimburse­ ment of public assistance clients in nursing homes is how to reimburse the homes in such a way that they w i l l provide 3^Willis H. LaVance, "The Ideal Nursing Home Payment Program" (Presented to the State Welfare Finance Officers Conference, Hartford, Connecticut, August 18, 1970), pp. 1-2. 38I b i d . , p. 12. 39I b i d . , p. 13. 40I b id . , p. 14. a desired level of services. structure adequate That is, how can the state the reimbursement m ec ha n is m so as to provide incentives for the provision of adequate care at an acceptable cost. No reimbur sement mechanism yet devised has successfully addressed itself to both of these matters. In an attempt to ov e rcome this dilemma, Breinholt has analyzed the concept ual framework of a nursing home. He concludes, . . . it is important to anticipate and explicitly design a reimbursement system around the desired incentive effects because every m e t h o d will have incentive effects of some kind. . . . while it is difficult to ba se incentives on final outcomes because the outcomes [of providing care] are often diffic ult to measure, it may be even more risky to aim incentives toward specific attributes of the manage me n t process in the absence of a comprehensive nor mative model of that process. Included in the m an a ge m en t process are such items as staff, organization, and technology; all items that traditionally have b e e n regulated to insure proper performance. example, For those reimbursement rationales which are b a s e d on available services (staffing, etc.) assume that care is directly related to the availability of those services, although such is not always the case. In Michigan, as in other states, the search for the ideal nursing ho me reimbursement rationale was a frustrating search as late as 1971. 41 Attempts to determine Robert H. Breinholt, "Reimbursement Incentives and the Management of Nu rsing Home Care" (Presented at the Annual M eeting of the Ame rican Public Health Association, Philadelphia, Pennsylvania, November, 1969). 35 costs of providing nursing home services met with limited success. Responses to a cost survey sent out for the Governor's Committee on Nursing Home Rates were limited to such an extent that no assurance could be given as to the randomness of the sample. Also, it was not possible to determine the extent or direction of the bias in the responses. This limited response resulted from nursing homes simply refusing to report costs. 42 In an attempt to get cost data the Michigan State Legislature included in the Department of Social Services appropriation's bill for Fiscal 1971 a provision that 75 percent of the nursing homes participating in the Michigan Medical Assistance program had to submit cost data to the legislative Auditor General, and that within 60 days of receipt thereof the Department woul d adjust the daily reimbursement rate upward a maximum of $.50 per day. 43 The data was collected and rates were adjusted, but the study itself was not released as the data w as considered confidential and intended for rate setting only. Following a ruling by the Supreme Judicial Court of Massachusetts, which declared that it was within the power of the state to require nursing homes receiving reimbursement for publicly aided patients 42 Ernst and Ernst, Study of Nursing Home Costs in the State of Michigan (Lansing, M i c h i g a n : Ernst 6 fernst, J u n e , 1969). 43 State of Michigan, Public Acts of 19 70, No. 99, 75th Legislature, H. 4076, July 20, 1970, Sec. 14. 36 to supply cost data for rate setting, it should now be easier to obtain costs of providing nursing services. 44 During this same period the State of Michigan was attempting to develop a reimbursement rationale that provided more incentives to the nursing home industry to assure adequate care than the then employed flat-rate rationale. The method employed by the Governor's Nursing Home Study was to analyze the various proposed reimbursement rationales and available data about the industry, to present to the decision makers the knowledge upon which a rational decision could be made. The Study's reports did not themselves recommend any reimbursement rationale over all others. Instead they attempted to point out the incentives created and costs of each rationale so that decision njakers would be aware of the consequences of their choosing a particular rationale. 45 Two other issues deserve mention with respect to reimbursement. The first is the dissatisfaction of the nursing home industry with the reimbursement mechanisms and rates of bo t h Medicare and Medicaid. In hearings held by the American Nursing Home Association in 1969, it was 44 Lexington Nursing Home, Inc. v. Rate Setting Commission^ 266 N,E. (Massachusetts) 317 (19^1^. 45 Management Sciences Group, "Governor's Nursing Home Study: First Wo rk ing Progress Report," Executive Office of the Governor, State of Michigan (Lansing, Michigan, June 8, 1971). (Mimeographed.) 37 reported that many nursing homes already had discontinued or limited their participation in the two programs, and that many more seemed ready to follow suit unless equitable reimbursement formulas were developed. 46 During this same period Medicare extended care benefits we r e being cut back, often by disallowing claims after the patient had already spent several days in an extended care facility. This meant that either the patients themselves had to pay for services utilized or the facility had to shoulder the loss. The latter did little to enamor the Medicare program to the nursing home industry. 47 A second issue is the granting of public utility status to the nursing home industry as a means of regulating it. Leahmae McCoy, w ho formalized the issue in 19 71, defines public utilities on the basis of decisions. She states, It appears, therefore that public utility regulation comprises (1) permission from a designated authority to enter the business; (2) regulation of service, including the inability of the enterprise to alter or discontinue such service or to deny it to p a r ­ ticular £\istomers without showing good cause; and (3) determination of rate structures based on long run average cost, which necessarily includes an adequate return on investment. . . . Using this definition of public utility regulation, the nursing 46 "Medicare, Medicaid Problems Aired at A N H A Hearings," Nursing H o m e s , 18 (June, 1969), p. 9. 47 "Medicare Woes; Elderly Patients Find Nursing Benefits Hard to Get," Wall Street Journal (April 18, 1970), p. 26. 38 home has characteristics which appear to make such regulation essential. Economic Literature in this part, economic analyses concerning the nursing home industry are reviewed. Then, the industrial organization literature on the evaluation of market s tr u c­ ture is presented. Economic Ana There have been very nursing home industry. few economic analyses of the The only recent economic study of the nursing home industry appeared in 196 8. This was an industrial organization study of The N ursing Home Industry in the State of Washington b y Frank J. Kottke and John F. Trainor. 49 Kottke and Trainor relied primarily upon interviews with nursing home operators and administrators as their data source. This was combined with licensing standards and records of the state government of Washington. Their statistical data for the analysis of the structure of the nursing home industry came from Washington's annual Directory of Licensed H o m e s . These data w e r e reported 48 Leahmae McCoy, "The Nursing Home as a Public Utility," Journal of Economic Issues, V. No. 1 (March, 1971), p. ss*: 49 Frank J. Kottke and John F. Trainor, The N ursing Home Industry in the State of Washington (Pullman, W a s h i n g ­ ton : Frank J. K o t t k e , li>6&) . 39 for the year 1951 to 1967, with the latter date being circa July 1, 1967. It is therefore doubtful whether the full extent of the changes brought about by Medicare and Medicaid are reflected in this data, since Medicare's extended care benefits had only been in effect for six months and the state's Medical Assistance program had been operative for one year. Washington has four classifications for those nursing homes which accept public assistance patients. Thus the minimum staffing requirements for skilled nurses in homes of 50 beds or less are as follows: Group I: One registered nurse on day shift, evening shift and relief duty, and a licensed practical nurse on night shift. Group II: One registered nurse 40 hours a week, and a licensed practical nurse on all other shifts. Group III homes with over 25 beds: One licensed practical nurse on day shift, seven days a week. Group III homes with less than 25 beds and Group IV homes: One licensed practical nurse 40 hours a week. Homes are allowed to accept patients certified for a home with less stringent staffing requirements, but are paid the correspondingly lower rate. for each level of care, Payment is the same irrespective of the geographical location of the home. The authors were able to identify five types of markets for general nursing home care: (a) convalescent and restorative care for private 50 I b i d . , pp. 8-9. 40 patients, includiny those eligible for extended care under the Medicare program, (b) heavy care of private patients who are chronically ill, most of them of advanced age, (c) light care of patients in similar circumstances, (d) heavy c a r e and (e) light care of public assistance patients, almost all of advanced age and chronically ill.51 With respect to the scope or e x t e n t of the market they state, The distance b e tw e en nursing homes may be as much as 30 miles in thinly populated areas, but normally it is much less. The breadth of each market a nursing home confronts depends on the density of homes off ering the p articular type of care, a n d of course ultimately depends on the density of population. With rare exceptions, each nursing h o m e operator senses that a small portion of his clientele consider homes at some distan ce to be feasible alternatives to his own home. Yet by far the g r eatest part of the competition of which he is aware comes from a relatively few nearby homes, and his competitive policies are framed in light of the rivalry of these few h o m o B . 5 2 In discussing the structure of the Washington State nursing home industry, they conclude, "Without exception, the number of competitors for pr ivate patients in each nursing home market of the State each firm, is sufficiently small aside from the very smallest, that does not s i g n i f i ­ cantly im prove its o f fe r wi t h o u t considering the effect of rivals' countermoves which are Implicitly, likely to follow." 53 the authors define the market by stating: The fewness of substantial rivals is m o s t easily per c eived outside the larger cities. Private patients and the relatives and friends who s elect nursing homes for p ri v at e patients rarely consider any locations at distances ex ceeding 10 miles if homes they deem comparable are w i t h i n that range. . . .54 5 1 I b i d . , pp. 5 3 I b i d . , p. 12-13. 54. 5 2 I b i d . , p. 14. 5 4 I b i d . , p. 57. 41 Even in metropolitan areas, where homes are all homes do not compete with each other. fairly numerous, This results in oligopoly in the Seattle metropolitan areas despite its 40 homes. Such is not necessarily the case in the much more populous metropolitan area of Detroit, where monopolistic conpetition might exist. As w i th Michigan, the Washington State Department of Public Assistance is the major consumer of nursing home services, accounting for the purchase of over 60 percent of all nursing home services. With each bienni um there has be en a significant increase in the amount of State funds required by the Department of Public Assistance. In consequence the Department has been under continuous pressure from the Legislature to hold down its expenditures, and to justify among other things the size of its payments for nursing home care of patients on public a s s i s t a n c e .55 In actions similar to those of the Michigan Nursing Home Association, the Washington State Health Facilities Association attempted to present a unified front during collective bargaining w i t h the State over changes in the rate structure for the 1967-69 biennium. Not only did the Association threaten to cancel contracts w i t h the state, but it also had legislation introduced which was advantageous to it. In any set of negotiations between the state and the nursing home industry two points are crucial: 55I b i d . , p. 78. What 42 is an acceptable level of patient care? and How much w i ll the state reimburse the nursing home industry for pr oviding that care? Doth have a direct impact upon the economic health of the industry. The former is determined by the licensing standards adopted by the state, wh ereas the latter is set by the welfare department. In the State of W a s h i n g ­ ton, the Department of Public Assistance reimbursed homes according to the following rates, effective July, Class I— $8.78, Class II— $6.92, Class 1967: III--$5.52, and C II Class IV— $4.62. T h es e rates arc quite low, when the increase from $11.50 to nearly for the few patients of considered. $17.00 enacted by Congress the Veter a ns Administration is They were also low w he n the rates for public assistance recipients w e r e compared with private paying patients. In July 1968, when the Washington State De p a r t ­ ment of Public Assis tance was pa ying $224 for the care of a public assistance recipient in a Class I home, rates "The min imum for private pa t ients requiring comparable care varied from $235 to $480 in met ropolitan areas and from $234 to $325 in non-metropolitan areas." 57 In considering economics of scale Kottke and Trainor examined the size distribution of firms wh i c h had withdrawn from the industry from 1952 to 1967. since the beginning of licensing, 56I b i d . , pp. 82-83. "Of 167 witharav/als all but eight have had a 5 7 I b i d . , p. 87. 43 capacity of less than 50 beds, capacity of less than 30 beds." and all bu t 11 have had a 58 They also found that horr.es with more than 60 beds had a com petitive advantage over those with fewer beds. support this was One piece of evidence to that of 19 structures origina lly licensed for under 60 beds, 10 homes had expanded, homes with over 60 beds in each case, resulting in and there wer e obvious reasons w h y seven of the remaining nine had not expanded. There appeared to be slight economics of scale until capacity reached 90 beds after which increased size did not lead to reduced cost per patient day. Because of the small number of homes with more than 90 beds, it was unclear whether di seconomies of scale appe ared as capacity rose. With respect to ease of entry, found that, except in larger cities, Kottke and Tr ainor the opportunity to buy an existing structure only arose occasionally. larger cities, however, restricted entry. ment is needed, In the greater extent of competition This means that a larger capital invest­ not only for the erection of the building, but also to maintain it until it breaks even. entry was restricte d for several years after In addition 1958, due to adoption of h igher standards for new structures, with grandfather clauses for existing ones. 58I b i d . , p. 31. 44 A second economic analysis of nursing homes appeared in 19 70. Conducted by Louis Henry, it exa mined the impact of Medicare and Medicaid on the supply and demand conditions of nursing homes. 59 Using the number of beds per state in 1967 for his supply analysis, Henry found that poor qual ity conditions were so important that the data do not reveal the true level of service. Overall he found that the two programs have been beneficial to the industry, but patient care had only slightly improved. At the same time, long­ term care needs have largely been ignored. Evolution of M arket Structure There are several theories conce r ni n g the ev olution of market structure. One theory is that in its initial stage of development, the industry relatively small firms. is composed of many As the industry matures, con­ centration increases to a very high or moderately high peak before declining to a relatively stable lower level. A variation of this theory is that concentration is not lessened as the industry matures, but remains at a relatively stable hi gh level. An example of an industry whose c on ­ centration pattern is described by the first theory is the steel industry, w he r ea s the automobile industry's c o n ­ centration pattern is desc ribed by its variant. 59 In the Louis H. Henry, "The Impact of Medicare and Medicaid on the Supply and Demand Conditions of Nursing Homes" (Unpublished Ph.D. Dissertation, University of Notre Dame, 19 70) . 45 former case LJ.S. Steel gained dominance in the early 1 9 6 0 's, but has had its market positi on gradually reduced by the growth of the rest of the industry. This decrease in c o n ­ centration has not occurred in the automobile industry, where concentration has remained virtually un changed since the exit of Studebaker from the industry. A second theory is that a monopolistic or dominant firm emerges in the early stages of an i n d u s t r y ’s d e v e l o p ­ ment and controls almost all of output through the industry's maturity stage. A variation of this is that the monopoly gives way to a highly or moderately concentrated oligopoly. Public utilities are described by the theory, while the aluminum industry is an example of an industry w ho s e co n c e n ­ tration pattern fits the variation. In many industries the level of concentration attained in the initial stages of development has been moderate and concentration has either increased or decreased as the industry matures. Other industries have never been even m oderately concentrated.®® Weston has suggested that industries go through a four stage life cycle. In the introduction stage, growth is slow b ec ause product acceptance has not be en achieved. Consumer acceptance of the product and rapid expansion to meet d emand are c ha r acteristic of the growth stage. The ®®Joe S. Bain, Industrial O r g a n i z a t i o n , 2nd ed. (New York, N.Y.: John Wiley & Sons, I n c . , 1968), pp. 159161. 46 growth rate during the maturity stage depends on the usages for the industry's products. Finally, the decline stage is marked with a rise in availability of substitute products and industry output finally declines absolutely. Both Nelson and Shepherd have 61 found that co n c e n ­ tration is likely to decline in rapidly growing industries and increase in sh rinking or slowly growing ones. Shepherd has also found that there is a w e a k b u t significant negative relationship between initial concentration and subsequent growth. 62 The former finding explains concentration throughout Weston's industry life cycle. level Concentration would decline during the growth stage and increase during the decline stage. If concentration were initially high, the growth stage would generally be limited and if con ­ centration w e r e low during the introduction stage, the growth stage w o u l d generally be greater. Econo mi c Concentration, Part I, Overall and Conglomerate Aspects^ Hearings befo re the Subcommittee on Antitrust and Mon opoly of the Committee on the Judiciary, United States Senate, 88th Congress, 2nd Session (Washington, D.C.: U.S. G o ve r nm e nt Pr i nting Office, 1965), Statement of J. Fred Weston, pp. 138-139. ^ Ibid. , Statement of Ralph L. Nelson, pp. 263-272 and W il l ia m Shepherd, "Trends of Concent ration in American Manufacturing Industries, 1947-1958," Review of Economics and Statistics, XLIV, 2 (May, 1964), pp^ 200-212. CHAPTER III MEDICARE A N D ME D ICAL ASSIS TANCE LONG- TE R M CARE PROGRAMS In 1965, Assistance, exp enditures $1,324 million, tures. the last year before Medicare and Medical for nursing home care amounted to or 3.3 pe rcent of national health e x p e n d i ­ Of this 61.5 pe r c e n t were derived sources and 38.5 percent from private from publ ic funds.^ By 1968 most states had implemented a Medical A s si s ta n ce program and the long-term care p o rtion of Medicare was in its second year of operation. In that year 4.0 percent, million, of national h ea l t h expenditures w o n t home care. Only 28.9 p e rcent of this came $2,282 for nursing from private funds, while 70.1 percent came from public sources. Prom 1965 to 1968 the public sector mo re than tripled its expenditures for nursing home care $1,622 million. from $510 million to During the same period private e x p e n d i ­ tures de clined by over one 2 $660 million. fifth, from $914 million to ^Ruth S. Hanft, "National Health Expenditures, 1950-65," S o ci a l Security Bulletin, XXX, No. 2 (February, 1967), 5-9. 2 D orothy P. Rice and Barbara S. Cooper, "National Health Expenditures, 1929-68," Social S ec urity B u l l e t i n , XXXIII, No. 1 (January, 1970), 6. 47 48 This change from private to public sources of expenditures for nursing home care from 1965 to 1968 was due to the introduction of the Medica re and Medical Assistance (Medicaid) long-term care programs. cussing these programs in this chapter, In dis­ each of them will be examined with respect to the following: eligibility and benefits, and extent of reimbursement, certification, the program. Medicare Long-Term Program The Social Security Amendments of 1965, adding two new titles to the Social Security Act, were signed into law on July 30, 1965. Title XVIII (Medicare) provides for hospital and supplementary medical insurance for persons 65 and over. Part A (Hospital Insurance) vision for extend e d care benefits. con tains a pro­ The extended care c o n ­ cept was developed to provide benefits for those aged persons in need of convalescent or rehabilitative services and to reduce the cost of providing such services. The Senate Finance Committee Report of 1965 states, Care in an extended care facility will frequently represent the next appropriate step after the intensive care furnished in a hospital and will m ak e unnecessary what might otherwise p o ss i bl y be the continued occupancy of a high-cost hospital be d which is more appropriately used by acutely ill patients.^ ^U.S. Congress, Senate Comm ittee on Finance, Social Securi Amendments of 1965 (Washington, D.C.: Government Printing Office, 1565) , pT 30. 49 Alternately stated by the Social Se c urity Administration, The term "extended" refers not to the provision of care o v e r an exten de d period, but to provision of active treatment as an ex t en s i o n of inpati ent hospital care. The overall g u i d e is to provide an alternative to hospital care for patient s who still re quire general medical manage me n t and skilled nursing care on a continuing basis, but who do not require the constant a va ilability of physician services ordinarily found only in the hospital s e tt i n g . 4 Thus, Medicare provides benefits for short-term stays in extended care facilities for the p u r p o s e of convalescence or rehabilitation so that more c o s t l y hospital bed s can be used for acutely ill persons. What are Ex t ended Care F a c iTi t ie s ? A d et a il e d de f in i ti o n of an extended c a r e can be found in Title XVIII, Social Security Act. Section 1861 (j) of facility the For present purposes it can be defined as an institution, such as a sk i ll ed nursing home or rehabilitation center, which has a transfer agreement in effect w i t h one o r more p a r t i c i p a t ­ ing hospitals and w h i c h is p ri m a r i l y e n g a g e d in providing skilled nursing care and related services for patients who re q uire medical or nursing care or in providing se r vices for the rehabilitation of injured, disabled, or sick p e r s o n s .5 4 U.S. De partment of Health, Education, and Welfare, Social Security Administration, B u r e a u of He a lt h Insur­ ance, Intermediary Le t te r No. 370 (Washington, D.C.: Government Printing Office, April, 1969), p. 2. 5 D avid Allen, "Health Insurance for the Ageds Participating Extend ed - Ca r e Facilities," Social Security 50 Extended Care El ig ibility and Benefits The hospital insurance portion of Medicare, therefore extended care benefits, is available and for all persons 65 and over who are entitled to monthly retirement benefits under the Social Security or Railroad Retirement Acts. In addition, persons not entitled to retirement benefits were allowed to enroll under a transitional eli­ gibility provision after the adoption of the program. The largest group prevented from enrolling wer e those covered under the Federal Employees Health Benefits Act of 1959, who did not me et Social Security or Railroad Retirement requirements for ben efits under emplo yment separate from their federal e m p l o y m e n t . 6 Extend ed care benefi ts provide payment for up 7 to 100 days per benefit period in a ce r ti f ie d extended B u l l e t i n , XXX, No. 6 (June, 1967), 3. Title XVIII, Section 1861 TJT of the Social Security Act is presented in Appendix A. The Social Security Amendments of 19 72 changed the name of "extended care facilities" and "skilled nursing hones" to "skilled nursing facilities" and provided for the same level of care requirements in those facilities under both M e di c a i d and Medicare. U.S. Congress, Public Law 92-603, 92nd Congress, H.R. 1, Octo ber 30, 1972, S ec ­ tions 247 and 278. ^Margaret Greenfield, M ed i ca r e and Medicaid; The 1965 and 1967 Social Security A m en d me nt s (Berke l ey , Cali­ fornia: U niversity of California, 1968), pp. 2-3. 7 A benefit period or "spell of illness" is a period of consecutive days that b e g i n s with the first day (not included in a previous spell of illness) on w h i c h a patient is furnished inpatient hospital or ext ended care services by 51 care facility. The benefi ci a ry need not pay any d e d u c t ­ ible for these benefits as this is met under a p r e ­ hospitalization condition of eligibility. services are reimbursable that, for the first 20 days. all covered services are reimbursable tional 80 days, per day. except All covered After for an a d d i ­ for a co-insurance payment of $8.50 This co-insurance is paid by the Medicare g enrollee himself. To be eligible for payment for a stay in an extended care facility, a M e di c ar e enrollee must meet the following conditions: a qualified provider in a month for which the patient is entitled to hospital insurance benefits. . . . The spell of illness ends with the close of a period of 60 consecutive days during which the patient was neither an inpatient of a hospital nor an inpatient of an extended care facility . . . An individual may be discharged from and readmitted to a hospital or ext ended care facil­ ity several times during a spell of illness and still be in the same spell if 60 day s have not elapsed between discha rge and readmission. Commerce Clearing House, Inc., A Complete Guide to M e d i ­ care as of January 1968 (Chicago! Commerce Clearing H o u s e , 1968), pp. 109-110. Q Originally the M ed i c a r e enrollee was required to pay only $5.00 per day for days 21-100. This was increased to $5.50 per day as of January 1, 1969; $6.50 per day as of January 1, 1970; $7.50 per day as of January 1, 1971; and $8.50 per day as of January 1, 1972. After 1970 this coinsurance is to be a dj u s t e d to reflect changes in the inpatient hos pital d e du c ti b le and coinsurance. Specifi­ cally, it will equal 25 percent of the inpatient hospital initial deductible. See Robert J. Myers, Medicare (Home­ wood, 111.: Richard D. Irwin, Inc., 1970), p p . TT3-114. 52 - A mi nimum of 3 consecutive days of hospital care is required. - Admittance, on a doctor's order, to the extend ed-care facility is m a d e within 14 days from the date of hospital discharge. - Admittance to the ex tended-care facility is for further treatment of the condition for which patient was hospit alized.^ Covered services in an ex t e n d e d care facility include: (1) nursing care, provided by or under the super­ vision of a registered profes sional nurse, (2) bed and board in connection w i t h the furnishing of nursing care, (3) physical, occupational, or speech therapy furnished by the facility or by others under arrangements with the facility, (4) medical social services, (5) drugs, biologicals, supplies, applicances, and equipment, for use in the facility, ordinarily furnished by the facility for the care and tr eatment of inpatients, (6)medical services of interns and residents-intraining under an approved teaching pr o gr a m of a hospital with which the facility has in effect a transfer agreement, and other d iagnostic or thera­ peutic services provided by a hospital w i t h which the facility has in effect a transfer agreement, and (7) such other health services as are g e n e r ­ ally provided by extended-care f a c i l i t i e s .1® q Allen, "Participating Ext ended-Care Facilities," p. 3. The Social Security Amendments of 1972 broadened admittance "within 28 days after such [hospital] d i s ­ charge, in the case of an individual who was unable to be admitted to a skilled nursing facility w it h in 14 days because of a shortage of appropriate bed space in the geographic area in which he resides, or w i th i n such time as it would be m ed i cally appropriate to begin an active course of treatment, in the case of an individual whose condition is such that skilled n ur s i n g facility care would not be m ed i ca l ly appropriate w it h in 14 days after discharge from a hospital." U.S. Congress, Public Law 92-603, 92nd Congress, H.R.l, Sec. 248. ^ C o m m e r c e Clearing House, Guide to Medicare, p. 33. Inc., A Complete 53 Extended Care Reimbursement Rationale Reimbursement to e xt e n d e d care facilities must be made on the bas is of "reasonable cost." The determination of reasonable costs under M e d i c a r e is m a d e vidual home. Second, for each in d i­ First, allowable costs are determined. the share of allowable costs, as it relates to the services furnished be neficiaries of the program c o m­ pared to all p ersons receiving care in the facility, determined. This second step is crucial is since the determi nation of the share of costs allowable to Medicare must (A) take into account both direct and indirect costs of provi ders of services in o r de r that, under the me t ho d s of dete rmining costs, the costs with respect to individuals covered by the insurance pr o grams e s ta b li sh e d by th is title will not be borne by ind ividuals not so covered, and the costs w i t h respect to individuals not so covered wi ll not be b orne by such insurance programs, and (B) provide for the m ak i ng of suitable retroactive corrective adjustments where, for a provider of services for any fiscal period, the aggregate re i mbursement produced by the methods of determining costs p ro v es to be either inadequate or e x c e s s i v e . ^ Following ce rtification as an extended care facility, interim rate is established. an This interim rate is subject to audit and retroactive adjustm e nt of costs. 12 U.S. Congress, House of Representatives, C o m p i l ­ ation of the Social Security L a w s , Vol. 1, section 1961 Tv) (1) (Washington, D .C .: G o v e r n m e n t Printing Office, 1968), p. 320. 12 A d i s c us s io n of the re asonable cost reimburse­ ment method un d er Medicare can be found in Commerce C l e a r ­ ing House, Inc., A Complete G u id e to Medicare, section 554, pp. 132-143. 54 Co rtifi cation of Kxtonded Care Facilities When Medicare was enacted, uni form standards for ex t ended care there were no nationally facilities. To p r o­ vide the Social Security Administration time to develop facility standards that would insure a high qual ity of care, lon g-term care b e nefits did not become operational until January 1, 1967, In an attempt to provide an a d e ­ quate number of extended care beds by that date, the Social Se curity Ad ministration certified a large number of facilities that did not fully comply with the c o n d i ­ tions of participation. compliance" Michigan, What was required was and progress toward "substantial full compliance. there were 125 ce rtified extended care ties with 11,035 beds by July 1, 1967. average. 13 facili­ This represented 15.1 beds per 1,000 hospital insurance enrollees, the national In about By July 1, 1968, Mi c higan had 139 certified extended care facilities with 12,641 beds, or 17.0 per 1,000 enrollees, slightly higher than the *. * i average. 14 national 13 U.S. Congress, House of Representatives, 1st A nnual Report on M e d i c a r e , 90th Congress, 2nd session, House Do cument No. 331 (Washington, D.C.: Go vernment Printing Office, June 24, 1968), p. 70. 14 U.S. Congress, House of Representatives, 2nd Annual Report on M e d i c a r e — Operation of Medic a re P r o g r a m , 91st Congress, 1st Session, House Document No. 91-57 (Washington, D.C.: G o v e r n m e n t Printing Office, January 20, 1969), p. 102. 55 Scope of the Extended Care Program As a result of the certification of large numbers of extended care facilities, utilization of benefits exceeded actuarial esti mates in 1967. far Whereas the program, as proposed by the Administration to Congress in 1965, assumed that hospital insurance enrollees would spend 0.16 days per benefi ci a ry 1967, in extended care facilities during they actually did spend 0.80 days per beneficiary in that year. 15 That is, utilization was five times greater than estimated. This resulted in actual costs being correspondingly five times greater than es timated costs, about $250 m i ll i on during 1967. Cost and ut iliza­ tion estimates were origina l ly based on a narrow d e f i n i ­ tion of e x tended care benefits but this was not the d e f i ­ nition employed during operations. 16 the early months of pr og ram It is interesting to note that the upper 15 . There wer e 19,358,000 hospital insurance enrollees as of July 1, 1967. Of these 354,000 had covered stays in extended-care facilities wi th an average duration of 44 days. See U.S. Department of Health, E d u­ cation, and Welfare, Social Security Administration, Office of Research and Statistics, "Health Insurance for the Aged U n d e r Social Security: Number of Per sons Insured, July 1, 1967," HI-11 and "Utilization of Extended-Care Facilities, 1967," HI-25, Health Insurance Statistics (Washington, D . C . : Government Printing Office, 1969 and 1 9 7 1 ) j and Myers, M e d i c a r e , p. 234. U.S. Congress, Senate Finance Committee, Medicare and Medicaid; Problems, Issues, and A l t e r n a t i v e s , 91st C o n g r e s s , 1st session, Committee Print (Was hington, D.C.: Government Printing Office, 1970), pp. 91-96. 56 bound of the actuarial estimate, $50 million, was the amount reimbursed facilities in full compliance. The remaining $200 million was paid to homes only in s u b ­ stantial compliance. During the first six months of 1967 admissions to extended care facilities totaled 198,600 nationally, annual rate of 21.2 per 1,000 persons covered. 1968 admissions rose to 448,000, resulting an In fiscal in a slight increase in the annual rate to 23.0 per 1,000 enrollees. The cost of providing these covered services was $330 million in fiscal 1968. Average reimbursement was $321 per recorded extended care claim and the average number of covered days per admission was approximately 4 5 d a y s . ^ In an attempt to reduce utilization under the extended care program, and thus costs, the Social Security Administration applied a stricter definit i on of el igibility for extended care benefits and employed utilization review to limit the length of stay per case. More direct means used included cost auditing of homes and a more r e stric­ tive interpretation of allowable costs and share of all ow­ able costs borne by M ed i ca r e beneficiaries. These limitations have posed major problems for extended care facilities and have re s ulted in m an y facili­ ties refusing to admit Medicare patients. 17 One problem U.S. Congress, House of Representatives, Annual Report on M e d i c a r e , pp. 26-27. 2nd 57 has been the ret roactive denial of payment for patients admitted under the program. operation, U n d e r the current method of authorization for reimbursement is giv en only after the patient has been ad m itted to an ex t e n d e d care facility. If the patient is later found to be ineligible for extended care benefits, then the patient, or the home is faced with a substantial bill. attempt to correct this, his family, In an the Social Security Amendments of 1972 contain a provision for prior au thorization of extended care benefits for a m i n i m u m number of days, the number depending upon the ben eficiary's m e d i c a l condition. 18 This should remove one of the stumbling blocks to homes participating in the program. Another problem, and one that is not likely to be solved in the near future, has been the Me d ic a re cost audit. After the e s t a b li s hm e nt of their interim rates, many homes set aside a portion of their Medica r e payments in a separate account pending final audit. In a large percentage of cases this was not sufficient to cover repayment to the Social Sec urity Administration following the Medicare audit, as the a ud i t usually resulted in d i s ­ allowed costs and therefore lowe red rates. This was due to the restrictive definition of allowable costs adopted by the program co m bi n ed with the tendency of the homes to 1A U.S. Congress, Public Law 92-603, H.R.l, Oc tober 30, 1972, Sec. 228. 92nd Congress, 58 believe that a larger portion of costs would be allowed, as in the traditional case of hospital auditing. These retroactive denials of allowable costs posed hardships for homes, since the homes were never certain what their receipts would be until they were audited, much later point in time. with an attempt often at a Both of these problems, along to move homes from substantial to full compliance of the regulations, caused downward pressure on the number of participating extended care facilities. During fiscal 1967, a large number of homes were certified n ationally as extended care facilities. By Ja nuary 1, 1967, when the extende d-care b e n e ­ fit provisions we nt into effect, approximately 2,800 facilities were in substantial compliance with the conditions of participation. . . . By July 1, 1967, as a result of the assistance p r o ­ vided by the State agencies, an additional 1,400 facilities had been approved for participation. This b rought the total number of E C F 's to 4,160.^® At the end of fiscal 1968 there were 4,702 certified extended care facilities with 329,621 beds, an increase of 542 facilities and 36,314 beds. problems d is c u s s e d above, 4,656 by July, beds of 33,630. 20 Faced with the the number of E C F 's declined to 1970, despite an increase in the number of It should be pointed out, however, that not all of these facilities continued to accept Medicare 19 U.S. Congress, House of Representatives, Annual Report on M e d i c a r e , p. 35. 20 U. S. Congress, House of Representatives, Annual Rep ort on M e d i c a r e , p. 94. 1st 2nd 59 patients. In Michigan, for example, there were few pro­ prietary or corporate h om e s still accepting Medicare patients in 1970, even though the official num ber of participating • facilities was 156, representing 15,199 21 beds. Medical Assist a nc e Long-Term Care Program Title XIX of the Social Security Act m a k e s provi­ sion for states to enact state med ical assistance programs (Medicaid). Section 109 (c) of P.A. 1966, No. 321, Michigan's Medical Assistance Act, makes provision for reimbursement of long-term care: For a person 18 years of age or older, nursing home service in a state licensed nursing home and care in a medical care facility, certified by the State Department of Public Health may be provided to the extent found necessary by the attending physician, dentist, or certified Christian Science p r a c t i t i o n e r .22 As of December, 1970 the State of M ic higan through its Medical Assistance p ro g ra m was reimbursing nursing home care services for 24,093 Department of Social Services clients in some 459 ce r tified nursing care facilities. 21 U.S. Department of Health, Education, and W el ­ fare, Social Security Administration, Office of Research and Statistics, "Health Insurance for the Aged: Pa r ti c i­ pating Health Facilities, July 1970," HI-23, Health Insurance S ta tistics (Washington, D.C.: Go vernment Printing O f f i c e , 1 9 7 1 ) , p. 18. State of Michigan, Public Acts of 1966, No. 321, 73rd Legislature, H. 4003, July 19, 1966, Sec. 109 (c) . 60 Those included skil led and basic facilities of three d i f ­ ferent types: ties, n u rsing homes, and hospital county medical long-term care units. 66.8 percent of the capacity of these beds. 23 In terms of facili ­ This represented facilities, financial support, $117,420,000 in fiscal 1971, care 36.088 the state spent $136,450,000 in fiscal and had appropriated $154,260,000 in fiscal 1973 1972, for the provision of nursing home care services under Me dical A s s i s t a n c e .24 • Long-Term Care Eligibility and Benefits Two groups of people may be di s tinguished for purposes of el igibility u n de r the M ic h i g a n Medicaid p r o ­ gram. The first group is those in financial need, as defined by the state's categorical assistance standards. That is, that g r o u p of persons en t itled to receive a cash grant from the state. A second group of persons consists of the medically indigent. The m aj or distinguishing c h a r ­ acteristic b e tween the two groups is that the latter has income and/or pr o p e r t y valued above the assistance level, but otherwise m e e t s categorical assistance standards. 23 State of Michigan, Department of Public Health, Bureau of Health Facilities, Divisi on of Licensing and Standards (unpublished d a t a ) . 24 State of Michigan, (unpublished d a t a ) . Dep artment of Social Services 61 Financial eligibility for the medic al l y indigent is determined on the basis of a flexible in relation to medical expenses. test of income The M e dicaid program recognizes that a family or individual may have enough income for normal living expenses, have m e d i ­ but may also cal expenses beyond its aoility to pay for them. A certain amount of property and income are protected to meet m a i n ­ tenance living needs. As of June, 1969, family with a net income not exceeding valued at less than $2,400 a four-person $3,450 and property (excluding a homestead) have been eligible to receive Me d i c a i d benefits, it met categorical assistance standards. gibility purposes ments made provided Income for e l i ­ is defined as cash received by, or p a y ­ to, or on beh alf of, tinuing basis. would If the assistance a family m em b er family has any income or property in excess of the protected amount, must be utilized to pay on ac o n ­ the excess for medical expens es before any medical assistance is provided. 25 Once the eligibility criteria are m e t payments for skilled nursing home and medical care facility services are made on beh alf of eligible Group 1 (categorically needs) and Group 2 (medically needy) clients age 18 or older in certified facilities on the basis of the intensity or level of nursing care and 25 State of Michigan, Department of Social S e r ­ vices, Ann ual Report. Fiscal 1969 (Lansing: De partment of Social Services, 1969). 62 services w h i c h the p a t i e n t requires and receives and the capabilities of the facility to provide that c a r e . 26 As this policy statement w a s adopted b e f o r e the i m p l e m e n ­ tation of an intermediate c a r e care) program in Michigan, (also r e ferred to as basic all nursing care services under the Medical Assistance program w e r e considered to be skilled care, regardless of the level of care provided. The situation was ch anged under the Social Security Amendments of 1967, which permitted s t a t e s with approved public assistance programs to include benefits under those prog rams. intermediary care Section 1121(b) states . . . be n ef i ts in the form of institutional services in intermediate care facil ities will be provided only to individuals who: (1) are entitled (or wo u ld , if not receiving institutional se r vi c es in in te rmediate care facilities, b e entitled) to receive aid or assistance, under the S t a t e plan, in the form of m o n e y payments; (2) because of their physical or m e n t a l condi­ tion (or b o t h ) , r eq u ir e living accommoda­ tions and care wh i ch , as a p r a c t i c a l matter, can be made a va i lable to them o n l y through institutional facilities, and (3) do not have such illness, di s ease, injury or o t h e r condition as to r e q u i r e the degree of care and treatment w h i c h a h ospital or s killed nursing h o m e . . . is d es i g n e d to provide. 26 State of Michigan, Department of Social S e r ­ vices , Manual of Policies a n d Procedures for the A d m i n i s ­ tration of M e d i c a l A ss i st a n c e (MA) (Lansing; De partment of Social Services, July, 1^69), Item 224. 27 . U.S. Congress, House of Representatives, C o m p i l a tion of' the Social Security Laws, Vol. I, Sec. 1121 (b), —- 63 This program was designed to provide states with a less expensive alternative to skilled nursing hone care. In Michigan an intermediary care program w e nt into effect July 1, 1969, as part of the Medical Assistance program. 28 The daily rate reimbursed n ursing care facilities is a comprehensi ve rate wh i ch includes payment for all services normally required by patients in such facilities. The only exceptions are the charges for physician's services, proscribed drugs for Group 2 patients, certain p h y s i c i a n -p r es c ri b ed services therapy). Services d e fined as being and (e.g., physical required by l o n g ­ term care patients include such items as room and board, general nursing services, records, and recreationa l activities. n o n - p re s cr i pt i on drugs, These are to be provid ed the patient under the basic daily re imbursement rate and the nursing care facility m a y make no ex tra charges to the patient, his relatives, or the p u b l i c for any services or supplies included in this rate. Deductions may be made from an institutional code by nu rsing homes 29 for 28 W hi l e the intermediary care program was o r i g i ­ nally part of the Medical Assist ance program, its funding source was the categorical assistance programs. Se ction 4 of Public Law 92-223 provid e s for the funding of care in intermediate care facilities under M e d i c a i d (Title XIX) . U.S. Congress, Public Law 92-223, 92nd Congress, H.R. 10604, De c e m b e r 28, 1971, Sec. 4. 29 C ounty medical care facilities and hospital long­ term care units are not permitted to ma ke deductions from the institutions! code. Since these facilities are r e i m ­ bursed on a cost basis, their rate is assumed to be c o m ­ prehensive for all care. 64 non-covered medical expenses unavailable through Medicare or other insurance, only if these services are provided by registered or licensed personnel etc.) (nurses, therapists, upon the w r i t t e n order of the pa tient's physician. 30 The institutional code is defined as that mon thly income which the patient has available to me et his medical needs less $20 for pers onal expenses. When determining the monthly payment to a nursing home for a patient, code, this less charges against it for no n-covered medical expenses, is subtracted from the payment that would o t h e r ­ wise have been ma de by the state. Long-Term Care R e i m b u r s e ­ ment Rationale The ma j ority of long-term care reimbursed under the Medical A ssistance program is provid ed in nursing homes, county medical care facilities, term care units. and hospital long­ T he s e facilities are reimbursed in two distinct ways, depending on the type of facility. Nursing ho me reimbursement, as of December 31, 1972, was made on the basis of a flat-rate rationale. Before the adoption of the Medical Assist a nc e program in Michigan in 1966, nursing home reimbursement rates were negotiated by individual counties. 30 Thereafter, . State of Michigan, Department of Social Services. MA M a n u a l , Item 224, Section G and State of Michigan, Department of Social Services, "Letter No. 102," September 21, 1967 which clarifies the M A M a n u a l . 65 reimbursement was made at different rates for four levels of care. Basic care $10.00 per day; (lowest level) standard care, care, at $14.00 per day; (highest level) was reimbursed at at $12.00 per day; intensive and finally, comprehensive care at $16.00 per day. It soon became apparent that the persons responsible for placing pat ients were often not capable of distinguishing between the levels of care. two. As a result the number of levels was reduced to Standard care was renamed basic care and intensive care became skilled c a r e , ^ $12.00 and $14.00 per day, Reimbursement continued at respectively. have been increased periodically. effective April Since then rates The latest increase, 1, 1972, was to $14.00 and $18.00 per day for basic and skilled care. In addition, the reimburse­ ment rate for basic care provided in a d is tinct part of a skilled care facility was set at $15.00 per day. The rationale for paying an extra $1.00 for basic care in a distinct part of a skilled facility is that it will encourage skilled facilities to establish distinct parts, if the difference between the normal basic and skilled rates accurately reflects the cost difference in providing the two types of service. This is desirable from the state's viewpoint for two reasons. movement of patients, First, the due to ch anges in care requirements, ■^Nursing staff requirements adopted for skilled care were equal to those for the comprehensive level of care. 66 would be reduced. This is preferable, since the movement of aged and infirm patients to a new environment is often a traumatic experience for them. Second, an increase in the portion of patient days provided in basic homes or parts to total patient days of nursing care reimbursed by the state w o u l d reduce the state's cost of providing nursing care services. In calendar 1970, only about on e-fourth of all nursing home pat ient days reimbursed un d er Michigan's Medical Assistance program w e re provided in basic homes or parts. Nationally, however, nearly two-thirds of all state-reimbursed nursing home patient days were provided in the less costly basic care facilities. One e x p l a n a ­ tion for this is that in Mi c higan rate differences for the two types of care do not accurately reflect cost di f f e r ­ ences. giving That is, rate dif ferences exceed cost differences, facilities an incentive to be certified to provide skilled nursing care services. Since the rate d i f f e r e n ­ tial has incre ased from $2.00 in early 1969 to $4.00 in 1972, either this explanation is not correct or the rate differential is bas ed on o t he r than cost differences. In February, 1969 there were 168 nursing homes and county m e d i c a l care facilities (including dist inct parts) with 15,662 beds certified as skilled and 263 such facilities wi th 10,887 beds certif ied as basic. By March, 1970 comparable figures were 266 facilities 67 with 25,652 c er t i f i e d skilled beds and 198 facilities with 6,906 ce r ti f ie d basic beds. skilled homes (including distinct parts) with a c o rr e sp o nd i ng beds. The number of certified increased by 98 increase of 9,990 certified skilled During the same period, the number of certified basic care homes decrea s ed by 65 and the number of c e r t i ­ fied basic beds d ec lined by 3,981. In 1969, the d i f f e r ­ ential between the b a s i c and skilled rates increased from $2.00 to $2.23. While this does not prove that this was the cause of the ce r ti f ic a ti o n shifts, it does indicate that it was to the advantage of a substantial portion of the industry to become certified to provide skilled rather than basic care. In 1971, the Governor's Nursing Home Study examined the $2.23 rate di fferential to determine whether it was justified on the basis of cost differences. The Study found that there were three major cost differences, all relating to st affing requirements. homes, but not b a s i c homes, consulting d i e t i c i a n First, skilled require the services of a for 16 hours per mo nth at a cost of approximately $2,000 per year. Second, skilled homes must employ a d i r e c t o r of nursing, who in homes wi th 30 or more c er t ified beds cannot be c ounted toward meeting the staff-patient requirements. Third, for sk illed homes at least one r e g i s t e r e d nurse or licensed practical nurse shall be on duty on a shift for each seven nurses aides 68 or other unlicensed nursing personnel. these cost differences, Taking account of the Study calculated the size needed at various rate differentials and occupancy rates to offset the additional cost of providing skilled over basic care. Assuming a 90 percent occupancy rate and the cost of a licensed supervisor being $1.40 per hour more than that of a nurses aide, rate differential then $2.23 was an accurate (i.e., reflected cost differences) a home with 21 beds. for Forty-five beds were needed if the rate differential was $1.00 and 60 beds were needed if it was $0.75 per patient day. The Study concluded that the size of the rate differential could not be justified on the basis of cost differences. 32 It would appear unlikely that cost differences would have increased since June 1971 to such an extent that the current $3.00 or $4.00 differential between the basic and skilled rates is warranted. The conclusion which must be reached is that the rate di fferential is based on o th e r than cost differences. Assuming that nursing homes only take into account cost differences, it is doubtful that the state will be successful in encouraging a shift in certification from skilled to basic beds under the existing rate structure. 32 Ma nagement Sciences Group, "Governor's Nursing Home Study: First Working Progress Report," Executive Office of the Governor, State of Michigan (Lansing: June 8, 1971), Ch. III. (Mimeographed.) 69 County medical care facilities and hospital l o n g ­ term care units are reimbursed on a cost plus a percentage of cost basis. All reasonable costs arc reimbursed to a predetermined level as are a percentage of costs above that level. For both types of facilities this level has been set at $18.00 plus 40 percent of additional costs per patient day for basic care and $21.00 plus 40 percent of additional costs per patient day for skilled care. The legal basis for the rationales in effect in 1972 is found in the M ic higan Department of Social S e r v ­ ices' appropriations bill Public Act No. for fiscal 1973. Section 14 206 of 1972 reads Sec. 14. The funds approp r ia te d in this act for nursing home services are to be expen de d for 2 types of care classified as follows: skilled nursing home care and intermediate, also known as basic nursing home care. . . . The director of the departm e nt shall establish daily reimbursement rates for nursing care f a c i l ­ ities. From the appropriations ma de in section 1 of this act, the state shall pay for nursing care in chronic care units of general hospitals and county m ed i ca l care facilities a daily rate as determined by the dir ector of social services plus 40% of the difference between that rate and the total cost audited for the institution in those facilities where the total daily costs exceed the determined r a t e . 33 Actual rates are set by the Michigan Department of Public Health under contract with the Department of Social Services. 206, ■^State of Michigan, Public Acts of 1972, No. 76 Legislature, H. 5877, June 8, 1972, Sec. 14. 70 An additional rate which m u s t be no ted is that for services which are provided to M ic higan residents out-of-state. In this case the rate of reimbursement is the lower of two rates: the rate for Mi c higan or the rate for the state in which the service is provided. a person received care in another state, Thus, if the provider of that care would receive either the prevailing rate in his own state or the M i chigan rate for a comparable level of care, whichever is less. Long-Term Care Facility Certification The M ic h i g a n Department of Social Services has also contracted with the Department of Public Health to inspect nursing homes and long-term care units of hospitals for the purpose of M e dical Assistance certification. County me dical care facilities are inspected by the Department of Social Services as required by state law. 34 Vir­ tually all lo ng-term facilities in the state are cer ti­ fied to accept Me di cal Assistance patients, the rare exceptions being very small proprietary homes which can fill their few bed s with private patients. 34 Infirmary or medical care facility; inspection, appeal to social we lfare commission. The state department [Social Services] shall approve the medical ca re facilities by paper notice to the county department. Subsequent to its approval, the state department shall inspect such facility as frequently as it deems necessary, but at least one annual inspe ction shall be made. . . . State of Michigan, Public Acts of 1957, No. 170, Legislature, S. 1218, Ma y 29, 1957, Sec. 1. 69th 71 W hi l e long-term care facility standards comprise every facet of operation, major violations usually fall into two categories: standards, cations; buildings which do not meet state often with respect to fire resistive spec ifi­ and inadequate nursing personnel, sufficient number of trained nurses. usually not a Wh en violations are discovered state law requires that facilities only need move in the direction of full compliance. This is usually easy to do since each home w hi c h has a major violation also is likely to have minor violations. The facility need only correct minor violations to show good intentions and to retain its certification. It is therefore not improbable that ma jor violations will take several years to be corrected. Gross v i o l a t i o n s — ov e r a period of time--will result in a facility losing its Medical A s si s t­ ance certification, but it can continue to operate for up to two years before the Department of Public Health's decision to close a facility goes through the due process of law and is made effective. Extent of Long-Term Care Program M ic h i ga n 's Medical Assistance pro gram became opera tional O c t o b e r 1, 1966. Assistance to the Aged It replaced the state's Medical (MAA) program and me dical services provided under categorical assistance programs. In 72 addition, it expanded coverage to include a larger segment of the medic a ll y indigent. Virtually all skilled nursing care provided by the county welfare departments prior to Medicaid was provided under the M A A program. also known as the Kerr-Mills program, October of 1960. In fiscal 1962, data are available, This program, had been enacted in the first year for which it provided skilled nursing care s er v ­ ices to 663 welfare recipients at a cost of $256,526. This increased to 1,772 clients at a cost of $812,400 in fiscal 1965. During the next fiscal year and after the Social Security Ame ndments of 1965 had been enacted, Michigan provided $13,761,600 worth of services to 11,413 recipients under its MAA program. for the transitional year, half of 1967, Data are not available fiscal 1967. During the last the new Medicaid program provided services to 34,020 recipients at a cost of $39,446,619. In calendar 1968 the cost increased to $89,691,433 with the number of recipients increasing to 49,320. More important, 35 for this study, are the number of welfare recipients receiving care at a point in time and the portion of industry capacity devoted to providing that 35 Michigan Dep artment of Social Services, Annual Report Fiscal 1969, Fifteenth Biennial Report July 19(5<6June 1 9 6 8 , Fourteenth Biennial Report July 1964-June 19*66 (Lansing: Department of Social S e r v i c e s , 1966-1969); Michigan Social Welfare Commission, Twelfth Biennial Report Ju ly 1960-June 1962 (Lansing: Department of Social Welfare, 1962T* 73 care. Patient data are limited before the middle of 1969, since the state did not act as its own until that date. Consequently, only two points in time: In O c t o b e r 1969, fiscal intermediary data are avai lable for October 1969 and December 1970, nursing care services were reimbursed for 15,601 skilled Medicaid patients and 4,857 Medical Assistance recipients receiving basic care throughout the state. 36 At the same time there were 24,585 skilled and 6,639 basic long-term care beds. Thus, Medical Assist a nc e recipients accounted for 63.5 percent of skilled beds and 73.2 percent of basic beds and 65.5 p e r ­ cent of overall industry capacity. By December 1970, these percentages had only changed slightly. Assistance patients in skilled nursing care Medical facilities accounted for 65,7 percent of all skilled beds; basic nursing care facilities, those in 70.4 percent of capacity; and all welfare recipients accounted for 66.7 percent of total industry capacity. Recipients accounted for 65.6 percent of skilled and 71.2 percent of basic beds in nursing homes. 37 Tables 1 through 4 present the number of patient days and total cost of care provided in nursing homes ^ T h i s does not include those in the long-term care unit of Wayne C o un t y General Hospital, for w h i c h data are not available. ^ S t a t e of Mi chigan, Department of Pu bl ic Health, Bureau of Health Facilities, Division of Licensing and Standards (unpublished d a t a ) . 74 under the Me dical Assistance calendar 1970. long-term care program for These figures differ from publ ished data, since that data reports on reimbursement for care p r o ­ vided. That is, the figures herein are for actual care provided in 1970, while published data report care r e i m ­ bursed during the year. The two figures will be equal only if the amount and time lag in the submission of bills remains constant. There are two additional sources of possible differences, although these are quite small. First, in compiling the nearest dollar. the data, all bills were rounded to The m ag nitude of any error from this source is not significant, since bills are usually s u b ­ mitted only every 15 or 30 days by nursing homes and, therefore, are relatively few compared to the number of patient days. Second, all bills for cal endar 1970 m i g h t not have been submitted when the data were compiled. The error from this source is small as most nursing homes are quick to submit bills to the state, due to the small number of bills and simplicity of fee schedules. Table 1 presents the number of patient days p r o ­ vided by M i ch i ga n 's nursing homes under the Medical Assistance p r ogram in 1970 by Governor's Planning Region. 38 As w o u l d be expected, over half of each type of care was pr o vi d ed in the Detroit Region. 38 Somewhat See A p pendix B for a complete list of the counties included in each Planning Region. 75 TABLE 1.--Number of patient days provided in Michigan nursing homes un d er the Medical Assistance Program in 1970 by G o v e r n o r ’s Planning Region. Region Basic Skilled Both 1. Detroit 1 ,016,867 3,168,112 4 ,184 ,979 2. Jackson 46,157 114,148 160 ,305 3. Kalamazoo-Battle Creek 85,480 264,544 350,024 4. Benton Harbor-St, Joseph 48,660 100 ,277 148,937 116,536 255,624 372,160 49,306 175 ,244 224 ,550 Flint 6. Lansing 7. Saginaw Bay 105,908 309 ,524 415,432 8. Grand-Rapids-Muskegon 234,489 480,135 714 ,624 9. Alpena 33,292 9,781 43,073 0 90,155 90,155 10,563 0 10 ,563 • o rH 5. Traverse Bay 11. Sault Ste. Marie 12. Marqu et t e- I ro n M ou n ta i n-Escanaba 107,909 59 ,408 167,317 Houghton-Ironwood 36 ,723 53 ,745 90 ,468 1 ,891,890 5 ,080,697 6,972,587 13. State Total Source: Michigan Department of Social Services, Medicaid Fiscal Management, ECF Ut ilization Files (unpub­ lished d a t a ) . 76 more surprising is the percentage of total patient days whrch were skilled days of care. Skilled care accounted for 7 3 percent of total patient days, while basic care accounted for only 27 percent. The same data are pre­ sented in Tables 2 and 3 for basic and skilled care, this time categorized by the number of beds in the facility providing care and the facility's type of ownership. will be noticed that the majority of basic care, less of the type of ownership, less than 60 beds. It regard­ is provided in homes with Of the three types of ownership, a larger percentage of care in corporate-owned homes is pro­ vided in homes with 40 or more beds, the other two types. than is the case for Overall three-fourths of all basic care is provided in homes with fewer than 60 beds. When we look at where skilled care is provided, we notice that only one-fifth is provided in homes wit h fewer than 60 beds. Also, almost one-third of the care provided by each type of ownership is provided in homes with 150 or more beds. Whereas a larger portion of basic care was provided in proprietary homes than in corporate homes, proprietary skilled homes provided only one-fifth as many patient days as w e r e provided by corporate-owned homes. The total cost of providing care in Michigan's nursing homes under the Medical Assistance program in 1970 is presented in Table 4 for each of the Governor's 77 TAdLE 2 .--Number of patient days provided ir. Michigan's basic nursing homes under the M edical Assistance program in 1970 by size (number of beds) of facility. Type of Ownership Size of Facility P ro p r i ­ etary Corporate Cumulati' Percent of Tota Total NonProfit 0- 19 165,765 21,488 18,075 205 ,328 10.85 20- 24 92,010 33 ,956 9 ,601 135 ,567 18.02 25- 29 200,760 31,226 13,661 245 ,647 31.00 30- 34 90,020 61,123 14,180 165 ,323 39.74 35- 39 09,152 63 ,896 5,015 158 ,063 48.10 40- 49 65 ,367 150,795 42,165 258 ,327 61.75 50- 59 99,292 149,987 7 ,990 257,272 75.35 60- 69 0 66 ,647 12 ,289 78 ,936 79.52 70- 79 0 10,566 57,235 67,801 83.11 80- 89 18,349 62,126 0 80,475 87.36 90- 99 0 46,988 27 ,324 74 ,312 91.29 100-109 0 0 0 0 91.29 110-119 38,325 5,643 0 43,968 93.61 120-129 0 0 0 0 93.61 130-149 0 688 40,461 41,149 95.79 150 + 0 79,722 0 79,722 100.00 859,043 784,851 247,996 1,891,890 All Facili­ ties Source: M ic higan Department of Social Services, Med icaid Fiscal Management, ECF U t i l iz a ti o n Files (unpub­ lished d a t a ) . 78 TABLE 3.--Number of patient days provided in Mic higan's skilled nursing homes under the Medical A s s i s t ­ ance Program in 1970 by size (number of beds) of facility. Type of Ownership Sice of Facility Total Cumulative Percent of Total Pr o p r i ­ etary Corporate 0- 19 0 1,720 3,300 5,020 .10 20- 24 7,756 7,864 22,059 37,679 .84 25- 29 7,424 53,225 0 61,649 2.05 30- 34 20,034 12,704 0 32,738 2.70 35- 39 0 15,488 0 15 ,488 3.00 40- 49 40,095 100 ,443 38,212 178,750 6. 52 50- 59 124,389 239,357 24 ,516 388,262 14.16 60- 69 47,647 263,720 35,343 346,710 20.99 70- 79 58,627 179,890 52,170 290,687 26.71 80- 89 0 238,253 33,612 271,865 32.06 74 ,002 481,934 20 ,668 576 ,604 43.41 100-109 31,832 481,408 20,246 533,486 53.91 110-119 87,892 290,814 32,092 410,798 61.99 120-129 0 225,239 20,465 245,704 66. 83 130-149 25,357 168 ,331 0 193,688 70.64 150+ 246,437 1 ,076,977 168,155 1,491,569 100.00 All Fac i l­ ities 771,492 3 ,838,367 470,838 5,080,697 90 - 99 Source: NonProfit M ic higan D epartment of Social Services, Medicaid Fiscal Management, ECF U tilization Files (unpub­ lished d a t a ) . 79 TABLE 4.— Total cost of providing care in Michigan n u r s ­ ing homes under the Medical Assist a nc e Program in 1970 by Governo r' s Planning Region. Region Basic Skilled Both 1. Detroit $10 #802,059 $41,187,659 $51,989,718 2, Jackson 484,310 1,460,785 1 ,945,095 3. Kalamazoo-Battle Creek 894,808 3,424,648 4,319,456 Benton HarborSt. Joseph 513 #078 1,301,980 1,815 ,058 1,214 ,664 3,351,957 4,566,621 524 ,142 2,292,834 2,816,976 4. 5. Flint 6. Lansing 7. Saginaw Bay 1,114,329 4,070,215 5,184,544 8. Grand RapidsM us kegon 2 ,484 ,052 6,192,209 8,676,261 360,372 127,663 488,035 0 1,263,239 1,263,239 109,874 0 109,874 1,135,203 763,533 1,898,736 374,256 665,291 1,039,547 $20,011,147 $66,102,013 $86,113,160 9. Alpe na 10. T ra verse Bay 11. Sault Ste. Marie 12. Ma rquette-Iron MountainEscanaba 13. HoughtonIronwood State Total Source: M i c h i g a n Department of Social Services# Medic ai d Fiscal Management# ECF Utilization Files (unpub­ lished d a t a ) . 80 planning regions. As should be obvious, when the state pays a constant fee per patient day regardless of loca­ tion, size, or ownership, there is little difference in the distribution of patient days and the total cost of care. What difference there is arises from the fact that Medicaid recipients are called upon to utilize their own resources to purchase care for themselves. Since these resources are quite small relative to their medical expenses, or the state would not be reimbursing care p r o ­ vided to them, there will be only minor differences. In addition to nursing homes Medical Assistance provides for care in county medical care facilities and long-term care units of hospitals. The state under M e d i ­ caid also pays for services provided those patients in mental health hospitals who meet either the public assistance or medical assistance category eligibility requirements. This program began in June 1970 and has a daily patient rate of $21.60. established for these services, Only one rate has been since all care provided by mental health hospitals is assumed to be skilled care. Tables 5 and 6 present a breakdown of the number of patient days and total cost of care provided for the various types of facilities and type of assistance the recipient receives. Nursing homes are the dominant type of provider, particularly with respect to the provision of basic care. They provide 78 percent of all patient 81 T/vl-LE 5.--Number of patient days provided in Michigan long-term care facilities under the Medical Assistance Program in 1970 by type of facility. Basic Skilled Both 1,510,204 4,312 ,987 5,823 ,191 MCF 24 ,522 1,069,804 1,094 ,326 Hospital CCU 50,058 469,178 519,236 Outstate 214 10,625 10 ,839 Total MA 1 ,584 ,998 5,862 ,594 7 ,447 ,592 381,686 767 ,710 1,149,396 MCF 2 ,875 125,881 128,756 Hospital CCU 9 ,062 164,988 174 ,050 Outsta te 0 2,023 2,023 Total PA 393,623 1,060,602 1 ,454 ,225 1,891,890 5 ,080,697 6 ,972,587 MCF 27 ,397 1,195,685 1,223,082 Hospital CCU 59,120 634,166 693,286 214 12,648 12 ,862 1,978,621 6,923,196 8,901,817 Medical Assistance Nursing Home Public Assistance Nursing Home Both Nursing Home O utstate State Total Source: M ic higan Department of Social Services, Med icaid Fiscal Management, ECF Utilization Files (unpub­ lished d a t a ) . 82 TABLE 6 . --Total cost of providing care in Michigan long­ term care facilities under the Medical Assistance Program in 1970 by type of facility. Basic Skilled Both $15 ,241,983 $55,051,604 $70 ,293 ,587 MCF 301,973 16 ,997 ,758 17,299,731 Hospital CCU 645,755 7,889,911 8 ,535 ,666 Outstate 1,432 117 ,998 119 ,430 Total MA $16,191,143 $80,057,271 $96 ,248 ,414 $ 4,769,164 $11,050,409 $15 ,819,573 40,121 2,210,518 2,250,639 136 ,580 3,112,541 3 ,249 ,121 Outstate 0 23,224 23,224 Total PA $ 4 ,945 ,865 $16, 396 ,692 $21 ,342 ,557 $20,011,147 $66,102,013 $86,113,160 MCF 342,094 19,208,276 19,550,370 Hospit al CCU 782,335 11,002,452 11,784,787 1,432 141,222 142 ,654 $21,137,008 $96,453,963 $117,590,97 Medical Assistance Nursing Home Public Assistance Nursing Home MCF Hospital CCU Both Nursing Home Ou tstate State Total Source: Michigan Department of Social Services, Medicaid Fiscal Management, E CF Utilization Files (unpub­ lished d a t a ) . 83 days at 73 pe rcent of the total cost. care facilities and hospital County medi cal long-term care units both account for substantial po r tions of skilled care costs and p atient days. It should be noted, however, that included in the hospital c o mp o n e n t are reimbursements of $6,375,121 made to seven Stdte mental hospitals for 360,496 days of skilled p at i e n t care. The n um b er of patient days and total cost of care p r ovided in county m e d i c a l care facilities and hospital long-term care units are presented in Tab les 7 and 8. It will be noticed that less than five percent of the care pr o v i d e d in these two types of facilities is basic care and this is almost e n tirely provided in f ac i l­ ities w i t h less than 60 beds. Skil led long-term care units of h os p it a ls have e i t h e r less than 70 beds or 150 or more. Once again, the large totals for providing skilled care in hospital long-term care units with 150+ beds are pr i ma r il y due to the inclusion of state m ental health hospitals. Even if these were excluded, one-half of the skilled p at i e n t days, medical care facilities and hosp ital alm ost provided in county long-term care units, w e r e p ro v id e d in facilities w i t h 150 or more beds. After d e du c ti n g care provided in state mental hea lth hospitals, ho s pital long-term care units lose importance as a source of care under the M e dical Assistance p r o ­ gram. O n the ot h e r hand c o un t y m e dical care facilities TABLE 7.— Number of patient days provided in Michigan's county MCF's and hospital CCU's under the Medical Assistance Program in 1970 by size (number of beds) of facility. Basic Skilled Size of Facility Co-MCF Hospital CCU 0- 19 20- 24 25- 29 30- 34 35- 39 40- 49 50- 59 60- 69 70- 79 80- 89 90- 99 100-109 110-119 120-129 130-149 150+ 0 0 8,491 0 0 0 16,750 0 0 0 0 0 0 0 0 2,156 4,989 0 15,524 19,045 7,339 2,060 10,163 0 0 0 0 0 0 0 0 0 4,989 0 24,015 19,045 7,339 2,060 26,913 0 0 0 0 0 0 0 0 2,156 All Facili­ ties 27,397 59,120 86,517 Source: Total Hospital CCU Total 0 0 0 6,183 23,i84 31,177 41,021 53,626 114,929 53,521 42,037 84,555 68,041 43,494 55,758 578,159 21,244 3,245 58,160 0 14,312 8,821 29,774 1 ,921 0 0 0 0 0 0 0 496,689 21,244 3,245 58,160 6,183 37,496 39,998 70,795 55,547 114,929 53,521 42,037 84,555 68,041 43,494 55,758 1,074,848 1,195,685 634,166 1,829,851 Co-MCF Michigan Department of Social Services, Medicaid Fiscal Management, ECF Utilization Files (unpublished data). TABLF 8.— Tota] cost of care provided in Michigan's county MCF's and hospital CCU's under the Medical Assistance Program in 1970 by size (number of beds) of facility. Basic Skilled Size of Facility Co-MCF Hospital CCU Total Co-MCF 0- 19 20- 24 25- 29 30- 34 35- 39 40- 49 50- 59 60- 69 70- 79 80- 89 90- 99 100-109 110-119 120-129 130-149 150+ $0 0 87,681 0 0 0 225,155 0 0 0 0 0 0 0 0 29,258 $ 62,955 0 207,935 249,095 97,733 26,771 137,846 0 0 0 0 0 0 0 0 0 $ 62,955 0 295,616 249,095 97,733 26,771 363,001 0 0 0 0 0 0 0 0 29,258 $0 0 0 100,524 374,436 492,925 706,317 834,265 1,841,304 845,032 680,593 1,290,800 1,016,090 598,209 846,884 9,580,897 All Facili­ ties $342,094 $782,335 $1,124,429 $19,208,276 Source: Total Hospital CCU $ 318,337 54,142 1,071,844 0 231,060 117,696 606,487 29,823 0 0 0 0 0 0 0 8,573,063 318,337 54,142 1,071,844 100,524 605,496 610,621 1,312,804 864,088 1,841,304 845,032 680,593 1,290,800 1,016,090 598,209 846,884 18,153,960 $11,002,452 $30,210,728 $ Michigan Department of Social Services, Medicaid Fiscal Management, ECF Utilization Files (unpublished data). 86 arc still an important source, e specially when c o n s i d e r ­ ing the provision of skilled care. CH APTER IV THEORY OF MARKET STRUCTURE DETERMINATION The purpose of this study, is to determine what, as stated in Chapter I, if any, effect the availability of Medicare and Medicaid paymen ts for nursing care services has had on the nursing home mar ket structure in Michigan. This chapter will address itself to the question of the importance of changes in market structure. In addition, the questions of w h y changes in mark et structure should be expected and w h a t is their direction will be examined. Finally, two theories of the evolution of the nursing home industry market structure will be posed. Market Structure and Competition Market structure comprises those economic elements of a ma r ke t which significantly effect the behavi o r of firms in the industry supplying that market. It derives its importance from the effect upon the competitiveness of an industry. Changes in market structure tend to result in changes in industry competitiveness, because they alter the industry's performance. That is, w he r e one market structure will result in a competitive industry and the 87 88 efficient allocation of resources, another might result in a noncompet itive in d ustry and an inefficient allocation of r esources. It (market structure) is im p or t an t because it de t er ­ mines the behavior of the firms in the industry, and that beh avior in turn determines the quality of the industry's performance. . . . If we can uncover reliable links b et w e e n elements of structure and elemen ts of performance, we can, with relativ e ease and confidence, p re d ic t the performance of any industry in wh ic h w e are interested. Even more important, the e l ements of m a r k e t structure can be ^ changed in some cases as a result of pu b li c policy. Therefore, public p ol icies and programs should be examined to determine their e f fe c t upon m a r k e t structure. Given that a change in m a r k e t structure has resulted from a particular policy or program, it is likely that similar changes w i l l result if those po l icies are put into effect in other markets, or if analogous programs are adopted for other industries. While the impa ct upon indust ry competitiveness of the introduction of policies and programs, Medical Assistance and Medicare, public poli cy variable, including is often not an explicit its effect must be considered. For most industries a h i g h degree of competition is a desirable objective. TTiis re sults from the efficient utilization of resources w h i c h competition yields and which is an economic goal of society. A competitive industry produces the Richard Caves, American Industry: Structure, Conduct, Performance (Englewood Cliffs, N.J.: PrenticeHall, Inc. , rrSTTT- p. 16. 89 largest output at the lowest price, consistent with the earning of long-run normal profits, consumer preferences, and the alternative uses of resources involved. The nursing hom e industry is not unlike other industries in that industry competition is a desirable objective. One concern is that consumer knowledge is not adequate in the purchase of nursing care services. absence of adequate knowledge, a poor quality of care. In the competition will result in Traditional economic theory assumes that consumer knowledge of the market is adequate, and will cause each firm in a competitive industry to produce a relatively homogeneous product of acceptable quality. Given the absence of adequate consumer knowledge in nursing home markets, government has imposed licensing and cer tifi­ cation requirements designed to assure a minimal quality of care. Depending upon the effectiveness of these require­ ments, they can lead to the production of a relatively homogeneous product of acceptable quality. over quality of care is answered, Once the concern competition in the nursing home industry becomes a desirable objective, since it results in the efficient utilization of resources. Elements of Mar ket Structure There are several elements of market structure including the level of concentration, product d ifferentia­ tion, and barriers to entry. sidered in this section, industry. Each of these will be con­ as they relate to the nursing home 90 Concentration The level or degree of concen tration refers to both the number of firms in an industry and the size distribution of those firms, wh en the size of each is measured by the portion of the total industry it controls. If a few nursing homes contain almost all ot the industry's beds, then the industry w o u l d have a high degree of concentration. Con­ centration is an important element of m arket structure because of its effect on industry competitiveness. firms arc "Where few and large they can, wi thout overt collusion, establish and maintain a price that is generally satis2 factory to all partic ipants." That is, they can earn greater than normal profits, often for long periods of time. It should be expect e d that concentration in the nursing home industry w o u l d be relatively high, all industries, industry. compared to since the nursing home industry is a service Service industries tend to have smaller market areas than other industries because of the nature of their product. The nu r sing home industry is no exception as is indicated by a United States Depar tment of Housing and Urban Development survey of 400 FHA-assisted n u rsing homes. 2 This John Kenneth Galbriath, "A Seminar Discussion of the Question: Are Planning and Regulation Replacing C om p et i ­ tion in the New Industrial State?," Hearing be f or e the Sub­ committees of the Select Committee on Small B u s i n e s s , June 29, 1967, United States' Senate, 90th Congress, 1st Session (Washington, D.C.: U.S. Government Printi ng Office, 1967), p. 8. 91 survey showed that five-sixths of the patients in a nu rsing home typically came from a residence less than 25 miles from the home, Offsetting the limited extent of market areas in most service industries is the relative of economies of scale. nursing care fewness Economies of scale do exist in facilities and have been important during the 1960’s . 4 W it h geographic markets thus limited, it would be expected that the level of concentration w o u l d be higher in rural areas than in urban areas. This, of course, results from the greater demand for nursing care service s and the larger number of facilities and beds in more populous areas. Nursing care facilities in sparsely populated rural areas would exercise considerable control over the m a rk e t solution and in some cases monopolies. these facilities would enjoy local The level and changes in the level of con­ centration will be examined in Chapter V in detail, when data on the Michigan nursing home industry are presented. Product Differentiation Com petition be tween firms is sharper and more price oriented w h e n a uniform product is sold, than w h e n each firm's product is differentiable from those of other firms. 3 U.S. Department of Ho usxng and Urban Development, Survey of FHA-Assisted Nur sing Homes, 1969 (Washington, D . C . : U.S. Government Printing Office, 1569), p. 5. 4 See Chapter II, p. 43, and Chapter V, pp. 156-158. 92 Firms differentiate their product in an attempt to build a somewhat protected market. If successful, they can charge higher prices to customers w h o have developed a preference for their particular brand of product. The market for their product becomes more stable and each firm is better able to predict product demand. The result of product differentiation is a less elastic demand curve for each firm's product. Nursing care facilities are capable of differenti­ ating their products in several ways. of the types of services provided. might provide physical therapy, services to the patient. One is on the basis While one facility another might offer social A second means of product dif­ ferentiation is through the physical setting of the facility. Geographic location of the facility is important, since the majority of a nursing care facility's patients come from w i th a short distance of the home. The type of area within which a home is located greatly affects the types of patients it receives, to their economic status. particularly with respect That is, the type of patient admitted to an inner-city nursing home wil l be markedly different from that admitted to a suburban nursing care facility. The type of building utilized by the nursing care facility is also a means of differentiating its product. Some patients prefer a home-like setting, while others choose an institutional-appearing setting. 93 Nursing care facilities were also capable of dif­ ferentiating their product by creating differences in the perceived quality of care provided. care services, As with most health consumers are not generally knowledgeable of the quality of nursing care services before and after their purchase. Because of the large cost involved in purchasing nursing care services, most prospective customers consider several alternative however, facilities. These customers, are usually not competent to objectively judge the quality of care they or their relatives wil l receive. Their decision to purchase services from a particular facility wi l l be based on other factors and subjective judgments as to quality of care. chase services, After beginning to pur­ they will be reluctant to change facilities unless they definitely believe that they will receive better care elsewhere. Barriers to Entry Barriers to entry measure the influence potential entries into the industry will have on the present industry. One such barrier to entry is advertising. Formal advertis­ ing is almost nonexistent in the provision of nursing care services, as it is not thought to be completely ethical. What formal advertising does exist is in the form of brochures, which are given to potential customers. The major type of advertising relied upon is indirect adver­ tising, as represented by a facility's reputation for good 94 and/or long service in the community. Therefore, the effectiveness of advertising as a b a rr i e r to new facilities is dependent on the strength of established facilities' reputations in the local market. A second b a rrier to en t ry is economies of scale. Economies of scale determine the mi n im u m size a facility must reach before it is efficient. If this m i n i m u m size is a small percent age of industry output, there is roo m for several efficient firms and a large degree of c om p et i ­ tion. As this m i ni m u m size increases in proportion industry output, to fewer facilities are able to attain efficient levels of production and competition lessens. Kottke and Trainor have shown that econ omies exist in the nursing home industry until firm size reaches 50 to 5 60 beds. Thus, we w o u l d ex p ec t firms to expand to at least 50 bcdB where feasible. In addition, we w o u l d expect that new facilities w o u l d have 50 or mo re beds, ficient demand in the market area. g iv e n suf­ O v er time the number of facilities with less than 50 beds should decline, by expansion, firm. closure, either or m er g e r of the firm to another Before the introduction of Medicare and M e d i c a l Assistance, it is likely that economies of scale r e p r e ­ sented a significant barrier to the entry of new facilities in some sparsely popu lated ma r kets due to very limited demand. 5See Chapter II, p. 43. 95 Absolute costs re p re s en t a third b a r r i e r to entry and arise from three sources. First, es ta blished firms may possess valuable technology concern ing produ ction techniques. Second, there ma y be a limited supply of an especially significant input or factor of production. Third, costs of capital to a new firm may be prohibitive. It is unlikely that any of these have had a significant effect on the entry of new industry. firms into the nu r s i n g home While there has been a limited supply of nursing personnel w i l l i n g to work been wi l li n g to pay, for the wag es most owners have this probably did not hav e a s ig n i f i ­ cant effect on potential entrants because of ineffectively enforced licensing regulations. Impact of Medical Assistance and Medicare^ During the 1960's, the institutional setting w ithin whi c h the n u rsing home industry operated w as altered. It is important to examine the changes which oc c urred in the industry's op e rating e nv i ro n me n t to assess their impact on long-term trends in the industry's mar ket structure. The principal source of these changes during this period was the int roduction of the Medicare and Me d ic a i d programs, w hich w e re signed into law on July 30, 1965. The lo ng-term care portions of these tw o programs became op e ra t io n al on January 1, 1967 and O c t o b e r 1, 1966 tively. (in M i c h i g a n ) , respec­ M a jo r changes w h i c h o c curred as a result of these 96 two programs include a m a r k e d shift in the source of funds which financed nursing home services, a tightening of the regulations under which nursing care was provided, and a sharp increase in the de ma nd for nursing ho me services. One m a j o r institutional change was a marked shift in the source of funds which financed nursing home services. The largest expend i tu r es care are those for persons who accounted for nursing home 65 years of age and over, for 85.6 percent and 90 percent of total nursing home expenditures in fiscal 1966 and fiscal 1969. For those 65 and over w i t h nursing home ex p enditures fiscal 1969, the public sector paid in 76 p er cent of the bill, with the private sector paying only 24 percent. This rep resented a substantial sh i ft in the source of payments from pr e - M e d i c a r e - M e d i c a i d fiscal 1966, w h e n public sector acco unted for only the 37.5 p e r c e n t of nursing home expenditures for the nation's aged, w i t h the pr ivate g sector paying the remaining 62.5 percent. In Michigan, the state pr o v i d e d n ur s i n g care services for only 1,772 persons in fiscal 1965 at a cost of $812,400. By calendar 1968 this c o s t had in c re a se d to $89,691,433 with 49,320 persons ha v in g at least a port ion of th eir long-term care 7 paid by the state. By 19 70 the percen t ag e of funds coming ^U.S. Depart m en t of Health, Education, and Welfare, Social Security Administration, Barbara S. Cooper, "Medical Care Outlays for Aged and Nonaged Persons, 1966-69," Social Security Bulletin, Vol. 33, No. 7 (Washington, D.C.: U.S. Government P ri n t i n g Office, July, 1970), p. 7. 7 Mic h i g a n De p ar t me n t of Social Services, A n n u a l Report Fiscal 1969 , Fourt eenth Biennial Report July 1964-June T*Tt>6 TLansing, M i c h i g a n ’: Department of Social Services, 1^66 and 1QCQ \ 97 from the private sector h ad increased slightly, primarily due to bu d ge t ar y limitations on the growth of the Medicare and Medicaid programs. Even though an increased percentage of nurs ing home expend i tu r es we re b e i n g financed b y the private sector, the shift in funding sources Me dicare-Medicaid Assistance use was marked. that that po rtion as it was b efore from the preIt is unlikely financed privately wi l l ever be as large the adoption of M ed icaid and Medicare. Since the public sector was committing itself to reimbursing m o s t of the n u r s i n g care services p r ov i d e d in the country, it sought assurances, that the types of services it w a n t e d pro vided w e r e in fact provided, and that these servi ce s were p er f ormed by qu a lified personnel in suitable surroundings. The major addition to the types of care provid e d was c o nvalescent and re habil itative care. Certified homes h a d to p r o v i d e physical therapy, diets, and soci al services recovery of patients. special to aid the physical and mental To assure that this care w a s properly being p r ovided in viable programs the pu bl ic s ector ti ghtened the regulations wi t hi n w h i c h operated. graded. the n u rsing home industry Pe r so n n e l requir ements w e r e increased and up­ N u r s i n g homes had to both incr ease the nu m b e r of licensed nu r si n g personnel and nurses' aides and to purchase services from specialists, w h i c h p r ev i ou s ly had been performed by nurses* Dietitians, aides and other nonprofessionals. ph y s i c a l therapists, and social w o rkers were 98 employed to pr o vi d e specialized services. fessional administration of the homes# To assure p r o ­ a special licensing p rogram was set up to certify nursing home administrators. Building requirements were also tightened# with respect to fire resistivity. particularly Nurs ing homes are the most deadly place to live with respect to fire hazards# according to the National Fire Protective Association. Due to the age and infirmities of patients, n ur sing homes must take special care to assure that fires neither start# nor spread if started. The overall attempt of tightening regulations was to improve and guarantee the quality of nursing care services, w hi l e e x pa n di n g the scope of services provided. The d e m a n d for nursing home services increased sharply as a r e su l t of the introduction of Medic ar e and Medicaid for two major reasons. First# where care once had been p ro vided by the patient's family, provided as charity in a n u r s i n g home, by welfare, the or pr ovided on a limited scale federal and state governments now agreed to finance the care of those w h o could not afford it or who were elderly. matching federal The two programs had liberal rates for funds to state funds, which enabled states to e x pa n d their subsidization of n u rsing care services. Second, it became relatively less expensive to purchase n e ed e d nu rsing care services in nu rsing homes than from alter native sources of care. There are two alternatives 99 available to pe rsons in need of n u r s i n g care services, addition to the p u rchase of nursing home services. in One is the provision of those services in an independent living setting and the other is to purchase general hospital. them from a short-term When the first alternative is adopted, care is frequently inadequate. by untrained personnel, Ca re is usually provided since the co st of employing trained personnel is pr o hi b it i ve for most families* alternative is chosen, If the second the provision of care in a short­ term general hospital, the cost is two to three times that O of providing care in a nursing care facility. The ratio of hospital to nursin g home care costs has remained relatively constant over time. However, d ur i n g the latter part of the 1960's the dollar differential between the two costs increased markedly and more than the overall cost of living. One indication of the i n crease in d e m a n d comes from the growth in expenditures for n u r s i n g home services. 1965 these expend i tu r es were $1,324 million, of national health expenditures. In or 3.3 pe rcent By fiscal 19 70 they had more than doubled to $2,844 million, or 4.2 percent of Q In 19 70 the average per d i e m cost of providing nursing care in a Michigan county me dical care facility w a s $21.57. Average daily service cha rges for all U.S. Hospitals (all accommodations) was $50.36. Michigan Department of Social Services, "Medical Care F a c i l i t y Per D i e m Costs, 1970," and A me rican Hospital Association, Su r v e y of Hos pital Charges as of January 1, 19 71 (Chicago, I l l i n o i s : American Hospital Association, 19 7l). 100 national health expenditures. g A s ec o nd indication is the growth in nursing home beds, which increased from 512,000 in 1965 to 861,325 in 1970, an increase of 68.2 p e r c e n t . ^ These three changes had o ff s et t i n g e f f e c t s on the market structure of the Michigan n u r s i n g home industry. Both the shift f r o m private to p ub l i c sources o f funding and the tightening of regulations t en d ed to m a k e markets less competitive. As a result of the former, n u rs i ng homes w e r e held m o r e accountable for the services provided. This forced nursing homes indivisible resources, cratic process, to learn how they to hire specialized to cope w i t h a b u r e a u ­ and to acquire a tech nical k n o w l e d g e of government-run programs. It is likely that m a n y margina lly profita ble homes chose to close or me r ge with o t h e r homes in the face of t h es e requirements. had a similar affect, Tighter re gulations since many facilities p r o b a b l y could not or di d not find it profitable to m e e t the tighter r e g u ­ lations, partic ul a rl y the increased b u ilding regulations, and w e n t out of business. tended to decrease Therefore, both of these changes the n u mber of facilities and to increase concentration in the markets for n u r s i n g care services. Increased demand for nu rsing care services, on the other hand, g 1971), p. t e nd e d to alter market structure so that the Social Security Bulletin, 6. ^°ANHA, Vol. 34, No. N u rs i ng Home Fact B o o k , p. 5. 1 (January, 101 industry became more competitive. This increased demand could be met either by the opening of new facilities or the expansion of existing facilities. Given the limited economies of scale found by Kottke and Trainor in their study of the nursing home industry in the State of Washington, it is unlikely that the sharp increase in demand was me t by the expansion of existing f ac i li t ie s .^ The small n umber required to achieve minimum efficient size and the low level of other barriers to entry made it rela­ tively easy for new facilities to enter the market. Most likely increased demand was met by a combination of small homes expanding to achieve economies of scale and new facilities opening. While the expansion of existing facilities probably tended to perpetuate existing market structure, the increased number of facilities and the decreased the likelihood that a market would be dominated by a few large homes probably tended to alter market structure, especially in the form of concentration, so that the industry bec ame more competitive. The three major changes, resulting from the intro­ duction of Medical Assistance and Medicare, caused a fourth change which had offsetting effects on the competitiveness of the industry. This change was the rapid expansion of corporate ownership as a type of facility ownership. *^See Chapter II, p. 4 3. It 102 is probable that the growth of corporate ownership came from two sources, b o t h reacting to improved profit expecta­ tions for the industry. Because of increased demand and a lower risk of failure, capital flowed into the industry and new facilities were opened. The lower risk of failure resulted mainly from guaranteed payment for a large portion of the facilities output. W h e n private p a y patients could no longer pay for their care, the state government reimbursed the nursing home for services provided the patients. The opening of new facilities tended to cause competition to increase. At the same time, numerous small nursing homes were faced with either expan din g to achieve economies of scale and meeting competition closing. from new facilities or In addition, they oft en had to upgrade their physical p lan t and their professional staff. the needed capital to stay in operation, To raise it is likely that several proprie tor shi p/p art ner shi p-o wne d homes incorporated. This expansion of existing facilities w o u l d tend to cause competition to decrease, particularly if only a portion of the homes stayed in operation. It is unclear what the net eff ect of these four changes was on the market structure of the Michigan nursing home industry. The marked shift in funding sources and the tightening of operating regulations tended to make the industry less competitive. To the extent that increased demand was by the expansion of existing facilities, existing 103 market structure was probably perpetuated. However, n ew facilities w h i c h w e r e opened to meet the increased d e m a n d for nursing care services tended to cause competition increase. to The growth of corporate o w n e r s h i p of facilities tended to cause competition to increase w h e n those f a c i l i ­ ties were new, but to remain unchanged w h e n they we re expansions of already existing homes. Ch apter V w ill examine data on the Michi gan nursing home industry to determi ne the net effect these changes had on market structure. The State as Principal Purchaser The role of Michigan state go v e r n m e n t with re spe ct to the state's nursing home industry m u s t be considered, because it is the principal purchaser of nursing care services. As such, therefore, largely determine the rate of return to n u r s i n g care facilities. it can set re imb urs eme nt rates and, The rate of return w i l l determine the flow of ca pital into and out of the industry, which w i l l effect the competitiveness of the markets. It is the effect of the state's administration of the M e d i c a i d program on the reimbursement rate for n ursing care services that is considered in this section. Until the late 19 5 0 *s, financial support for the purchase of nur sing care services w a s amounts of local funds. limited to small Beginning w i t h Assistance for the A ged p r o g r a m in 1960, the Medical state funds could 104 be matched by federal funds to provide financial support for nursing care services. This support was greatly expanded wi th the introduction of Medical Assistance and Medicare, and resulted in increased demand for nursing home services. This w a s due to a reduction in the portion of money income which individuals were required to spend for these services. The expanded subsidization also d e ­ creased the price of these services relative to some alter­ native providers, namely, trained personnel employed in a noninstitutional setting. Services of this latter group of providers were not, except in very limited forms, reimbursed under either program. Finally, to assure that subsidizations were b ein g used to purchase care of an adequate quality, federal and state governments tightened operating regulations. This tended to increase the quality of care provided, w h i c h altered consumer's preferences in favor of the purchase of nursing care services. The role of price in the decision of a state government to purchase nursing care services is more complex. First, the state is a price setter rather than a price taker, albeit the nursing home industry does have an influence on the price that is set. The price that is set is a compromise among the cost of nursing care services, the willingness of legislators to commit funds, rate for federal funds w ith state funds, the matching and the expected number of public assistance recipients who will be served. 105 Second, the state is a regulator of the acceptable quality of care for both p r i v a t e-p ay and publicly-sup por ted patients, since it licenses the facilities and certifies them for pa rticipation in the Medical Assistance program. Third, the state is the principal purchaser of nursing home services. Thus, by varying the acceptable q ual ity of care level and the rate reimbursed for the maj o r i t y of the industry's output, the state indirectly regulates and largely determines the industry's rate of return. While direct regulation of the rate of return has not been undertaken, it has been proposed. 12 Trade Associations In response to the state's position as regulator, the nursing home industry in Michigan ations. formed trade associ­ The nonpublic sector of the nursing home industry is composed of approximately 350 nursing homes. advent of M edical A ssistance in Michigan, two trade associations gained p o w e r within the industry. emerged as spokesmen W i t h the They for their respective types of homes in dealing with the M edical Assistance fiscal intermediary, in its role of setting rates, and the cer tification group, in its function of d e t e r mi nin g the conditions of sale of nursing home services. These two associations w e r e the Michigan Nursing Home Association representing proprietary 12See Chapter II, p. 37-38. 106 hoir.es and the Mi chigan Non-Profit Homes A ssociation representing non-profit homes. 13 They w e r e confederations which organized to deal w i t h the state, the major purchaser of and licensing agent for nursing home services. As such they had attributes of cartels. In Public Policies Toward B u s i n e s s , W i l c o x states A cartel is an association of independent enterprises in the same or similar br anches of industry, formed for the purpose of increasing the profits of its members by subjecting their competitive activities to some form of common c o n t r o l . 14 He lists several types of cartels, associations noted above. The two of w h i c h apply to the first is a term-fixing cartel which regulates conditions of delivery. This type of cartel in the nursing home industry w o u l d regulate and protect the interests of its members in d eal ing with certification and utilization review procedures. A second type is one that attempts to set min imu m and u n i f o r m prices. attempts This cartel to regulate the min imu m price and pr o t e c t its m e m b e r s ’ interests w i t h respect to reimbursement of nursing care services for p ubl ic patients. 13 A third trade association, the Michi gan Council of Administrators of County M ed i c a l Care Facilities, represented the interests of the publicly supported county medical care facilities. 14 3rd ed. p. 743. Clair Wilcox, Public Policies Toward B u s i n e s s , (Homewood, 1 1 1 . : Richard 0. I r w i n , Inc. 1966), 107 Negotiated Rates and Procedures This combination of the state as the principal purchaser of nursing care services and the nursing hom es as trade associations, resulted in neg oti ate d rather than unilaterally set rates and procedures. half of the Du r i n g the second 1 9 6 0 's, it is likely that the nursing ho me trade associations w e r e stronger than the state in c o l ­ lective barganing situations. That is, the price nursing homes were reimbursed by the state was above the competitive equ il ibr ium price. The main reason for this was the state's unwillingness to exploit its position as the principal purchaser of nursing care services. In essence, it bec a m e a question of whether to m a k e nursing home reimbursement a politi­ cal issue. When the trade associations found resistance to their positions, they threatened to make re im b u r s e m e n t a political issue. Public officials were unwilling to do this and subsequently yielded. The relative strengths of the two sides came to the forefront in 19 70 when certain nursing homes, su ppo rte d by their trade associations, refused to allow Mi chigan De par t m e n t of Public He a l t h officials to reevaluate their p u b l i cly -su ppor ted pa tients with respect to the level of care they required. Pa tie nt evaluations must be conducted regularly under Title XIX, 1 9 0 2 ( a ) (26 )(A) of the Social Security Act. Section "A State plan for medical assistance m u s t provide for a regular pr og r a m of medical review (including medical e valuation of each 108 patient's need for skilled nu rsing home care). This condition must be for ma tc hin g federal programs. ..." 15 fulfilled for states to be eligible funds under their medical assistance Nevertheless, the patient evaluation program was suspended from September 19 70 to April resulting loss in federal fundB. 19 72, wit hou t a 16 The State of Michigan has been unwilling to exploit its position as the principal purcha ser of nursing care services. Despite this, it has been able to hold down the price of pub licly subsidized nursing care b y its reluctance to increase the per diem r eimbursement rate. From the beginning of the Medical Assistance pr ogram until May 31, 1971, a p e r i o d of 56 months, rates for nursing care services provided pub lic patients in nursing homos increased about seven percent. 17 At the same time the Consumer Price Index of all prices increased 23 percent and all medical prices increased 34 percent. 18 15 U.S. Congress, House of R e p r e s e n t a t i v e s , Compila­ tion of the Social Security Laws, Vol. 1, Section 19621a) T 2 6 H a ) ,'p. 340. --------- -----16 Governor W i l l i a m G. Millikin, Executive Office, Press Release, September 22, 1970. 17 During that period, the rate for basic nursing care inc reased from $12.00 to $12.25 per day, an increase of 6.3 percent. Reimbursement rates for skilled care increased 7.1 percent, from $14.00 to $14.48 per day. 18 U.S. Department of Labor, Bu reau of Labor Statistics, The C onsumer Price Index, October, 1966 and May. 1971 (Washington, D . C . : U.S. Gov ern men t Printing Office, 19 66 and 1971). 109 Ma rket Structure Over Time Earlier in this chapter several reasons w e r e p r e ­ sented why changes in ma rke t structure should be expected to have oc curred as a result of the introduction of Medicare and Medicaid. In this section, two theories of the evolution of the Michi gan nursing home industry's market structure during the 1960's will be presented. Demand Growth The first theory is that structural changes occurred due to a long-term growth in demand, which had resulted from changing d emo gra phi c characteristics. This theory fits one of the patterns of market structure ev olution presented by Bain. That pattern is that the industry in its 'youthful* stage . . . comes to be p opu lat ed by a fairly large number of relatively small firms? that in its early maturity, concentration increases to some peak level of from very high to mo der ate ly high seller concentration; and that t her e­ after concentration de clin es for a p eri od of time to a point somewhat lower than the peak and levels off,„ to remain relatively stable in the mature industry. During the 1960's, the nursing home industry w a s in the transitional period from early maturi ty to mat urity and concentration gradually decreased as the d ema nd for nursing care services exh ib i t e d a long-term growth pattern. There are several reasons for this increase in the demand for nursing care services. 19 Bain, The first is that Industrial O r g a n i z a t i o n , pp. 159-160. 110 the number of aged, both absolutely and as a percentage of total population, increased during the 1960's. An over­ whelming ma jority of persons in nu rsing homes are over 65 years of age. Therefore, have remained constant, would have increased. even if utilization rates would the dema nd for nursing care services A second reason is that urbanization increased during the decade. Since it is more costly to provide care in a non ins titutional setting in an urban area than in a rural area, the supply of n ursing care services would have increased. This cost difference b et w e e n urban and rural areas results smaller homes, from persons in urban areas having more e m p l o y m e n t opportunities for family members other than the head of the family, and a greater reliance upon the market for the pu rchase of commodities. A third reason is that per capita income increased during the 1 9 6 0 's and it was, therefore, more feasible to purchase nursing care services, particul arl y in light of the prices of alternative sources of care. Institutional Changes The second theory is that, although the long-term trend w a s toward gra dua lly decreasing c onc e n t r a t i o n in the Michigan nur sing home industry during the 19 60's, changes resulting from the i n t r o d uct ion of M e d i c a r e and Medicaid caused a shift in the m a r k e t structure. W h e t h e r co nce n t r a ­ tion inc reased or d ecr eas ed can be d ete rmi ned b y the direction and significance of the shift. Ill There is strong support for believing that the second theory is more appropriate. introduction of the two programs, payments As a result of the sources of funding for nursing care services shifted, operating regulations were tightened, industry demand increased sharply and corporate-owned homes replaced those owned by individuals as the principal type of ownership. Summary This chapter has addressed itself to three p r i n c i ­ pal questions. First, wh at is the importance of changes in market structure? their significance Changes in mar ket structure derive from their affect upon industry be hav ior and therefore industry performance. Second, w h y should changes in market structure be exp ected and, third, w hat is the direction of those changes? The introduction of Medical Assistance and Medicare w ere the cause for major shift in funding sources, a tightening of operating re g u l a ­ tions, a sharp increase in industry demand, and the rapid growth of corporate ownership of long-term care facilities. It is not clear wha t the direction of those changes is, wit h respect to the level of competition. Finally two theories of the evolution of the m arket structure of the Michigan nursing home industry are posed. CH APTER V STRUCTURE OF THE MICHI GAN NURSING HOM E I N D U S T R Y , 1960-1969 In this chapter the changes which o ccurred in the structure of the Michigan nursing home industry during the 19 60's w i l l be examined. Fro m the discussion above, it is unclear wha t the direction of the shift in concentration, if any, w a s as a result of changes due to the introduction of Medicare and Medical Assistance. A determination is made in this chapter and the next as to the direction and significance of shifts in concentration, ceteris paribus, competition. and therefore, Significant shifts can be attributed to the introduction of the two programs, while a failure to demonstrate significance means that those changes were part of long-term trends in mar ket structure. This study has been limited to the nursing home industry in the St ate of Michigan First, for several reasons. the definition of n ursing homes varies w ide ly from state to state. It is not feasible to develop a consistent definition that can be applied to all states, since w hat is referred to as a nursing home in one state might not be in another. Natio nal data are of limited value, because data reported by each state are aggregated w i t h no attempt 112 113 to adjust for differences in states' homes. Second, there is little a w i d e r geographic area. that range definitions of nursing to be gained by studying M ichigan is composed of areas from urban to suburban to rural. A third reason is that the Michi gan nursing home industry is large enough to be re pr ese nta tiv e of the nur sing home industry nationally. The final and m o s t practical reason for limiting the study to Mi ch i g a n is that data are mo re accessible and consistent for one state than for several states or the entire nation. One drawback to limiting this study to the Michigan nursing home industry is that a wider variation in types of institu­ tions could be inc luded by exp anding the scope of the study within Michigan or by including other states. The technical difficulties i nvolved in ei t h e r expansion appear to outweigh the advantages of an expanded study. Therefore, the industry to be studied is the nursing home industry in Michigan. It includes those facilities which primarily p rovide sk illed and/or b a s i c nu rsing care services. Specifically i ncl u d e d ore nursing homes, medical care facilities of hospitals and long-term care units (also referred to as chronic-care u n i t s ) . Excluded are homes permit homes. (MCF's), county for the aged, These permit nursing homes, and latter provide pe rsonal and residential care b u t not n u r s i n g care. Also, exc l u d e d from this study are state mental hospitals and other m e n t a l health facili­ ties. While these facilities provide long-term nursing care services, the pr odu cti on of nursing care services is not their primary function. 114 Definition of Market In any study of the structure of an i n d u s t r y ’s market the market definition employed is critical. concentration in any market, tiveness of the market, of the market. The and therefore the com p e t i ­ varies inversely with the scope In Michigan the markets for nu rs i n g care services have been defined by the Mi chigan Department of Public Health. They have been defined in conjunction w i t h acute care markets and called health facility service areas. These areas serve as a basis for developing the [Hill-Burton] constr uct ion program. They h a v e been set up in terms of normal trading areas, taking into consideration population distribution, transportation and trade patterns, travel distance and data indicating the residence o f patients served b y existi ng hospitals. In general, bou nda rie s of health facility service areas are so drawn that, with a few exceptions in the n o r t h e r n part of the state, no p ers on in Michigan is more than 30 min ute s travel time from an acute care facility. L o n g t e r m care facilities were in ventoried a n d their construction p r o g r a m m e d on the same health facility se r v i c e areas as general hospitals. This planning pr ovi d e s for the relationship of two categories of facilities to b e reflected within each area. Each A r e a m u s t have sufficient population to support both g e n e r a l hospital and longterm care services, appro­ p r i a t e l y pla nne d in one or more facilities. Titles XVIII a n d XIX of the Social Security Ac t and ot her third-party programs for p a y m e n t for longterm care allow for partic ipa nts to have a free choice of p h y s i c i a n and facilities. It can be generally assumed that patients w i l l utilize longterm care facilities in the same location that they utilize basic medical and hospital services.1 Michigan Department of Public Health, Bureau of Health Facilities, Michigan State Plan for Hospital and Medical Facilities C onstruction 1^^6-19 71 (Lansing7 M i c h i g a n : Michigan Department of Public Health, T 5 T l ) , pp. 59-61. 115 The boundaries of Michigan hea lth facility service areas are presented in Append ix B. While this definition of n u r s i n g care services markets appears to be accurate, it seems appropriate to compare it with another definition, if possible. The reason for doing this is that markets delineated for admin­ istrative purposes do not always coincide with actual markets. Unfortunately, patient origin data, distance from the patient's pre vious address to the nu rsing care facility, are not readily available for Michigan. One indication of market size can be gained from the United States Department of Hou sin g and Urban Development survey of 400 FHA assisted nursing homes referred to in Chapter IV, which showed that five-sixths of the patients in a nursing home typically came from a residence less than 25 miles 2 from the home. It, therefore, appears that the Michigan Department of Public Health's health facility service areas at least approximate the actual markets. Since it is difficult to accurately delineate markets b ecause of overlapping, h eal th facility service areas are probaV iy the b e s t attainable measure of nursing care services study. na ’ r-ts and are used for the purpose of this For ease of presentation, however, data w i l l be shown in this chapter for Governor's Planning Regions, 2 since U.S. Department of Housing and Urban Development, Survey of FHA-Assisted Nur sin g H o m e s , 1969, p. 5. 116 there are 13 planning regions and 77 service areas. The same general trends pre sen ted here are apparent in service areas and differences be tween the two designations will be noted. Data Source Data on the Michigan nursing home industry are quite limited. The only source of c ross-sectional data published for a series of years is the Mi chigan State Plan for Hospital 3 and Medical Facilities C o n s t r u c t i o n . This fortunately provides a sufficient, though limited, selection of data necessary to determine changes in the structure of the industry over time. Data available from the state plans include the following for each facility: a. b. c. d. e. f. g* h. i. j- Name City County , Hospital service area Type: hospital or non-hospital Type of ownership Total beds Beds conforming to state licensing regulations Pa tient days Oc cupancy rate. The years 1 9 6 0 , to 1969 were chosen as the period of study, since 1969 was the last year for whi ch data we re available and it was decided that 10 years w o u l d be su f­ ficient to measure any changes in industry structure. This 3 Michiga n Department of Public Health, Bureau of Health Facilities, Michigan State Plan for Hospital and Medical Facilities Constr uct ion l^isca 1 Year 1961-1962 to Fiscal Year 1970-1971 (Lansing, Michigan: Michigan D e p a r t ­ ment of P ubl ic Health, 1962-71). 117 would give a s ufficient pe rio d of time b efo re the i n t r o ­ duction of Med icare and Medical Assistance to determine long-run structural change trends. Also, it would give a sufficient pe rio d after the introduction of the two programs to m easure the ext ent of structural changes due to their introduction. Four considerations w i t h regard to the data must be kept in m i n d throughout the following analysis. this w i l l be a comparative static analysis, is meant December 31 of that year, 31, 1969. i.e. First, since by year 1969 means December This is done to simplify the analysis and is unlikely to greatly affect the results. Few facilities, for example, w i l l open and close wi thi n the same calendar year. By m e a s u r i n g the industry at year's end for each of several years, it is unlikely that any change that w o u l d significantly affect industry structure, w o u l d be missed. Second, in 1969. service area definitions are those in effect Se rvi ce areas change over time and are redefined each year. This has been the case es pec ial ly in Detroit, where p o p u l a t i o n centers shifted during the 1960's. assure a con sis te nt definition, To the definition employed in 1969 was used for all years. Third, the format for publishing data was changed from 1963 to 1964. Before 1964, published biennially. state plans were only The report pu bli she d in each inter­ vening year listed only changes in number of beds. 118 Beginning in 1964, a more complete state plan was p ubl ished in the intervening year. Also, a more simplified listing of service areas was employed b egi nning w i t h 1964. The result of this is that data from 1964 to 1969 are more complete than prior to 1964, exc ept with respect to the listing of homes and their total beds. Fourth, over a period of 10 years it is likely that several facilities will change names or will close only to reopen at a later date. merely changed its name, Where a facility has it is assumed to b e the same facility and that one did not close and another open. a facility closed, but r eopened later, new facility. If one kept the same name, name was detected, When it is treated as a facility merged w ith another and it is assumed that the facility, wh ose closed and the other expanded. case where a different name w a s used, In the it is assumed that the larger facility absorbed the smaller. Changes in M a r k e t Structure In this section the changes which occurred in the market structure of the Mi ch i g a n nursing home industry from 1960 to 1969 will be examined. First, general trends in the structure of nursing care services markets as defined by Governor's Planning Regions w i l l be presented. Then indus­ trial organization concepts w i l l be developed to measure structural change in markets. 119 Number of Facilities and Beds Tables 9 and 10 show the number of long-term nu rsing care facilities and beds in Michigan for each year from 19 60 to 1969 by G o v e r n o r ’s Planning Region. ingly, Not su rpr is­ the Detroit Planning Region had 37 percent of the facilities and 47 pe r c e n t of the beds in 1960. By 1969, this had increased to 42 per cent of the facilities and 50 percent of the long-term care beds. The prime reason for this is that this region had 53 p erc ent of the s t a t e ’s 4 population in both 1960 and 1970. What is surprising is that throughout the state, the total number of facilities declined b y 4 percent during the 1 9 6 0 's, w her e a s the number of beds increased 76 percent. This resulted from a marked increase in the average size of long-term nursing care facilities during the decade. Table 11 presen ts the mean size of long-term care facilities in Mi chigan by Governor's Plannin g Region from 1960 to 1969. For the entire state the m e a n size of facilities increased 84 percent, beds. In general, from 38,0 beds to 69.9 the mean size of facilities in Detroit was larger than in other regions in each of the years. One possible explanation for this is that there are economics of scale to be gained from increasing the size 4 U.S. Department of Commerce, B u r e a u of the Census, 1970 Census of Population; Fi nal Population Report: Michigan (Advance heport) (Washington, D.C.: U.S. Government Printing Office, 1971). TABLE 9.— Number of Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69. e^aaaj-r-j i 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1. Detroit 186 193 191 192 199 204 201 195 19 3 19 8 2. Jackson 30 30 28 27 28 29 27 26 27 23 3. Kalamazoo-Battle Creek 38 37 38 39 37 39 37 37 33 31 4. Benton HarborSt. Joseph 28 29 27 28 27 26 24 22 21 19 5. Flint 23 22 21 24 24 23 25 24 23 24 6. Lansing 28 29 28 27 23 24 21 19 18 15 7. Saginaw Bay 39 41 42 44 45 50 48 43 43 43 8. Grand Rapids-Muskegon 76 75 76 75 77 78 74 75 77 70 5 6 7 8 7 8 8 8 8 9 14 13 12 11 11 12 12 11 12 10 2 1 1 1 5 5 4 4 4 4 19 18 17 17 16 17 17 16 17 18 9 9 11 10 11 11 11 11 12 11 497 503 499 503 510 526 509 491 488 475 Planning Region 9. Alpena 10. Traverse Bay 11. Sault Ste. Marie 12. Marguette-Iron Mountain Escanaba 13. Houghton-Ironwood State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospitals and Medical Facilities Construction, Fiscal Year 1961-55 through Fiscal Year l9?0-^l (Lansing, Michigan: Michigan Department of Public Health, 1^62— 1971). TABLE 10.— Number of Long-Term Care Bede in Michigan by Governor's Planning Region, 1960-69. Planning Region 1962 1963 1964 1967 1960 1961 1. Detroit 6,844 9,507 2. Jackson 841 849 B22 802 1,031 1,049 1,051 1,179 1,172 1,156 3. Kalamazoo-Ba^tle Creek 1,444 1,376 1,416 1,444 1,536 1,627 1,605 1,750 1,853 1,958 1965 1966 1968 19 69 9,818 10,485 11,719 13,130 14,989 14,909 15,457 16,480 4. Benton HarborSt. Joseph 530 565 497 752 876 890 907 772 861 929 5. Flint 992 989 1,001 1,444 1,477 1,466 1,655 1,683 1,530 1,757 6. Lansing 714 785 826 876 1,006 1,107 1,079 1,044 1,137 1,084 7. Saginaw Bay 1,309 1,399 1,499 1,687 1,955 2,082 2,113 2,149 2,404 2,420 8. Grand Rapids-Muskegon 2,354 2,484 2,600 2,616 3,089 3,285 3,618 3,727 4,363 4,413 114 116 122 137 179 242 242 266 247 291 566 626 570 570 637 718 706 692 903 847 18 10 16 21 165 144 162 169 144 144 12. Marquette-Iron MountainEscanaba 699 716 687 709 680 760 661 729 839 946 13. Houghton-Ironvood 488 462 513 526 557 666 647 709 771 9. Alpena 10. Traverse Bay 11. Sault Ste. Marie State Total Source: 463 18,888 19,910 20,336 22,056 24,876 27,057 29,454 29,716 31,619 33,223 Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilitiea Conatructlon, Fiacal Year 1961-62 through Fiscal Year 1976-71 (Lansing, Michigan: Michigan Department of Public Health, 1962-197l7. TABLE 11.— Mean Number of Beds in Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69. - ^ — -■» '— Planning Region 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1. Detroit 47.5 49.3 57.4 54.6 58.9 64.4 74.6 76.5 80.1 83.2 2. Jackson 28.0 28.3 29.4 29.7 36.8 36.2 38.9 45.3 53.4 50. 3 3. Kalamazoo-Battle Creek 38.0 37.2 37.3 37.0 41.5 41.7 43.4 47.3 56.2 63.2 4. Benton HarborSt. Joseph IB.9 19.5 18.4 26.9 32.4 34.2 37.8 35.1 41.0 48.9 5. Flint 43.1 45.0 47.7 60.2 61.5 63.7 66.2 70.1 66.5 73.2 6. Lansing 25.5 27.1 29.5 32.4 43.7 46.1 51.4 54.9 63.2 72. 3 7. Saginaw Bay 33.6 34.1 35.7 38.3 43.4 41.6 44.0 50.0 55.9 56.3 8. Grand Rapids-Muskegon 31.0 33.1 34.2 34.9 40.1 42.1 48.9 49.7 56.7 63.0 9. Alpena 22.8 19.3 17.4 17.1 25.6 30.3 30.3 33.3 30.9 32.3 40.4 48.2 47.5 51.8 57.9 59.8 58.8 62.9 75.3 87.4 9.0 10.0 6.0 21.0 33.0 28.8 40.5 42.3 36.0 36.0 12. Marquette-Iron MountaintEscanaba 36.8 39.8 40.4 41.7 42.5 44.7 38.9 45.6 49.4 52.6 13. Houghton-Ironwood 51.4 54.2 42.0 51.3 47.8 50.6 60.5 58.8 59.1 70.1 38.0 39.6 40.8 43.8 48.8 51.4 57.9 60.5 64.8 69.9 10. Traverse Bay 11. Sault Ste. Marie State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1^61-6^ through Fiscal Year' 1^76-71 (Lansing, Michigan: Michigan Department of Public Health, 1962-1971). 123 of facility from small to medium. In the Detroit Region facilities faced stiff competition, which resulted in the failure of small facilities that could n o t meet it. economics of scale are significant in determining minimum firm size in the Detroit Region, While the they play a small role in other regions w h e r e competition is not intense. Thus, in those regions, small facilities might continue to operate, eve n though they have higher costs, be ca u s e they are not s u b j e c t e d to intense competition from rival faciliti es. The sharp increase in the average size of facility, combined with a dec rease in the number of facilities, might lead one to be l i e v e that the m ark et structure was more concent rat ed in 1969 than in 1960. below, As will b e seen this has not b e e n the case. Type of O w n e r s h i p The lon g- t e r m nursing care facilities and beds in Michigan are c l a s s i f i e d in Table 12 by type of own ers hip for 1960 to 1969. M o s t striking is the growth of corporate- owned facilities and beds and the decline owned by pr o p r i e t o r s and partnerships. in facilities One reason for this is the incorporation of many facilities ow ned by proprietors or partners to take advantage of limited liability and lower taxes at high income levels. A se con d reason is that those owned by pro pri eto rs and partnerships tend to be smaller than those o w n e d by corporations, and therefore f TABLE 12.— Hunter of Long-Term Care Facilities and Beds in Michigan by Type of Ownership, 1960-69. Type Ownership Corporate f Homes « Beds Proprietary and f Homes Partnership t Beds County « Homes • Beds Hospital « Homes 1 Beds 1 Homes and Church » Beds Other < Homes I Beds All 1 Homes 1 Beds Source: 1961 1962 1963 1964 1965 1966 1967 1968 1969 79 85 89 95 137 149 167 171 184 179 3,907 4,245 4,690 5,465 8,755 10,245 12,945 13,286 15,372 15,641 259 260 307 304 249 248 217 192 179 168 5,019 5,284 7,379 7,990 6,843 6,874 6,496 5,875 5,744 7,058 40 40 40 38 39 43 43 43 43 42 3,880 3,940 3,735 3,751 3,876 4,181 4,036 4,371 4,380 4,391 17 18 18 19 25 27 26 27 26 29 2,341 2,494 2,144 2,314 2,539 2,673 2,534 2,587 2,165 2,206 36 39 44 46 57 56 54 56 54 55 1,638 1,875 2,127 2,275 2,513 2,785 2,934 3,087 3,448 3,417 66 61 1 1 3 3 2 2 2 2 2,103 2,072 261 261 350 299 509 510 510 510 497 503 499 503 510 526 509 491 488 475 18,888 19,910 20,336 22,056 24,876 27,057 29,454 29,716 31,619 33,223 Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1951-6* through f’iscal Year 1970-71 (Lansing, Michigan: Michigan bepartment of Pttlic Health, 1962^15717^ 124 Hoo-Profit 1960 125 lees likely to remain competitive. That is, proprietors and pa rtnerships not only cannot meet stricter o per ating regulations, but they also cannot expand to take advantage of economies of scale. This latter is explained by the inability of individuals to generate sufficient capital, in many cases, to build and operate larger and, therefore, lower cost facilities. It w i l l be n oticed that the supply of corporateowned beds quadru ple d during of corporate the decade, wh ile the number facilities_ slightly more than doubled. This resulted in a 77 percent increase in the mean size of such facilities, in 19 69. from 49.5 beds in 1960 to 87.4 beds per facility During the same pe rio d the number of proprietor- and partnership-owned facilities fell by a third, w h i l e the number of beds in these facilities increased by two-fifths. The resultant increase in mean size wa s from 19.4 b e d s to 42.0 beds per facility during the decade. size of these facilities more than doubled, Even though the they still averaged less than half the size of corporate-owned facili­ ties. Co unt y medical care facilities showed little growth during the 1960's. Hospital chronic care units increased in number, b u t operated fewer b eds at the end of the decade than at its beginning. both number and beds. N on- pro fit facilities increased in Their growth p ara lle led the growth of the industry and r e p r ese nte d about 10 percent of industry capacity throughout the period under study. 126 Tables 13-16 show the n u m b e r of corporat e-o wne d and proprietorship- and par tne rs h i p - o w n e d facilities and beds for each of the G o v e r n o r ’s P lann ing Regions. seen, As is readily the m ajo rit y of co rpo rate -ow ned beds and facilities were in the Detroit region. In 19 60 this region had nine- tenths of the state's c orp ora te-o wne d beds and by 1969 still had an impressive s e v e n - t e n t h s . Tables 13 and 14 show that the distribution of corpora te- owne d facilities and beds outside of the Detroit Region w a s roughly c o r r e l a t e d with the distribution of the s t a t e ’s population. The mo st striking item in those two tables is the decrease in corporate-owned facilities and b e d s in the S aginaw Bay and Grand Rapids-Muskegon Planning Regions b etw een 1969. 1968 and In both cases this w a s o f f s e t for the m o s t part by increases in the number of beds in proprietary- and pa rtn ers hip -ow ned facilities. Tables 15 and 16 show the geographical distri but ion of individual- and partnershipowned facilities and beds. The distribution of these facilities and beds is not as w e l l c orrelated w i t h the state's po p u l a t i o n distribution as are corpor ate -ow ned facilities and beds. Flint, Large populat ion centers in Detroit, and Lansing had re lat ive ly few pr iva t e l y - o w n e d facilities. It appears that urban areas are m o r e likely to have cor por ate -ow ned facilities and rural areas to have proprie tor shi ps or partnerships c ontr oll ing their nursing care facilities. This is as expected, since the demand TABLE 13.— Number of Corporate-Owned Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69. 1960 1961 1962 1963 19 64 1965 1966 1967 1968 19 69 1. Detroit 67 71 72 72 96 103 108 110 116 121 2. Jackson 0 0 0 0 2 2 2 2 2 3 3. Kalamazoo-Battle Creek 0 0 0 0 0 0 1 2 2 2 4. Benton HarborSt. Joseph 1 1 1 2 3 3 3 3 4 4 5. Flint 1 0 0 3 4 4 7 8 8 11 6. Lansing 4 4 5 5 6 8 10 10 10 9 7. Saginaw Bay 1 3 3 3 7 10 12 12 12 8 8. Grand Rapids-Muskegon 1 1 2 2 8 8 11 11 14 6 9. Alpena 2 2 2 3 3 3 3 3 3 3 10. Traverse Bay 0 1 1 1 2 2 2 2 2 0 11. Sault Ste. Marie 0 0 0 0 0 0 0 0 0 0 12. Marquette-Iron Mountain Es can aba 0 0 0 0 2 2 3 3 4 5 13. Houghton-Ironwood 1 1 2 2 1 0 0 0 0 0 79 85 89 95 137 149 167 171 184 179 Planning Region State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-62 through Fiscal Year 1970-71 (Lansing, Michigan: Michigan bepartment of Public Health, 1962-1971). TABLE 14.— Nunber of Corporate-Owned Long-Term Care Beds in Michigan by Governor's Planning Region, 1960-69. 1960 1961 1962 1963 1964 1965 1966 1. Detroit 3,515 3,795 4,006 4,304 6,299 7,329 9,125 2. Jackson 0 0 0 0 275 275 275 275 221 318 3. Kalamazoo-Battle Creek 17 17 17 75 135 208 343 423 603 718 4. Benton HarborSt. Joseph 14 14 14 66 116 116 116 116 227 313 5. Flint 86 0 0 346 418 418 647 751 716 1,025 120 163 227 234 335 507 627 627 745 734 7. Saginaw Bay 32 97 162 162 375 518 687 678 807 500 8. Grand Rapids-Muskegon 12 12 72 71 425 487 688 787 1,302 638 9. Alpena 36 36 30 45 68 118 118 120 122 122 10. Traverse Bay 0 78 75 75 142 144 146 146 196 0 11. Sault Ste. Marie 0 0 0 0 0 0 0 0 0 0 12. Marquette-Iron Mountain Es can aba 0 0 0 0 125 125 173 173 277 334 75 33 87 87 42 0 0 0 0 0 3,907 4,245 4,690 5,465 Planning Region 6. Lansing 13. Houghton-Ironwood State Total Source: 1967 1968 1969 9,190 10,156 11,039 8,755 10,245 12,945 13,286 15,372 15,641 Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-6* through fiscal Year 1970-71 (Lansing. Michigan: Michigan CtparIment of Pufcllc Health, 1962-197lJ. TABLE 15.— Number of Long-Term Care Facilities Owned by Proprietors and Partnerships in Michigan by Governor's Planning Region, 1960-69. Planning Region 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1. Detroit 61 63 89 89 68 66 58 52 47 45 2. Jackson 18 19 24 23 19 20 18 16 17 12 3. Kalamazoo-Battle Creek 19 18 28 28 23 23 22 20 15 14 4. Benton HarborSt. Joseph 24 25 23 23 20 19 17 15 13 11 5. Flint 16 15 15 15 14 14 13 11 10 8 6. Lansing 21 22 21 20 15 13 9 7 6 4 7. Saginaw Bay 25 25 26 27 22 25 23 17 17 20 8. Grand Rapids-Muskegon 45 45 55 54 47 46 38 37 36 37 1 2 2 2 2 2 2 2 2 2 10. Traverse Bay 4 4 6 6 6 7 7 6 7 7 11. Sault Ste. Marie 2 1 1 1 2 2 1 1 1 1 13 13 13 13 9 9 8 6 6 6 4 4 5 5 5 6 5 5 6 5 259 260 307 304 249 248 217 192 179 168 9. Alpena 12. Marquette-Iron Mountain Escanaba 13. Houghton-Ironwood State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-62 through Fiscal Year 1960-71 (Lansing, Michigan: Michigan Department of Public Health, 1962-1971). TABLE 16.— Number of Long-Term Care Beds Owned by Proprietors and Partnerships in Michigan by Governor's Planning Region, 1960-69. Planning Region 1. Detroit 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1 ,310 1,483 2,732 3,069 2,373 2,399 2,445 2,201 2,105 2,351 282 303 481 533 336 354 396 484 532 448 3. Kalamazoo-Battle Creek 330 337 578 548 504 497 471 451 416 536 4. Benton HarborSt. Joseph 333 368 335 337 355 380 397 347 287 264 5. Flint 370 355 435 526 482 486 371 317 272 190 6. Lansing 351 366 374 417 446 276 169 134 95 153 7. Saginaw Bay 602 584 632 69 7 631 697 689 544 525 828 8. Grand Rapids-Muskegon 696 737 1,140 1,152 1,145 1,186 979 904 948 1,619 9. Alpena 28 32 32 32 60 60 60 59 59 59 178 160 111 102 102 102 102 98 95 254 18 10 16 21 40 39 31 31 31 31 12. Marquette-Iron Mountain Escanaba 423 451 418 461 272 259 228 147 159 159 98 95 95 97 139 158 158 220 166 10. Traverse Bay 11. Sault Ste. Marie 13. Houghton-Ironwood State Total Source: 98 5 ,019 5,284 7,379 7,990 6,843 6,874 6,496 5,875 5,744 7,058 Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1 ^ 1 - 6 2 through Fiscal Year 1970-71 (Lansing, Michigan: Michigan Department of Public Health, 1962-71). 130 2. Jackson 131 for nursing care services in rural areas is limited and privately-owned nursing care facilities tend to b e smaller than their corporate-owned c o u n t e r p a r t Size Distribution A third change that occurred in the nu rsing care services industry market structure d u r i n g the 19 60's was a significant change in the size distribution of both facilities and beds. This is important because the size distribution of facilities in a market is a major d e t e r ­ minant of the competitiveness within that market. There may be a large number of facilities w i t h i n the market, but if a few produce almost all the services provided, market will not be competitive. the This forms the b a s i s for most of the stock measures o f market competition used in an industrial organization analysis. Table 17 traces the change in size distribution of lo ng- ter m care facilities and beds in M ichigan during the 1960's. The percentage distribution of facilities and beds by size of facility is presented in Table 18. As can readily be seen, the number and percentage of facilities and beds in facilities with 25 beds or less steadily d e c l i n e d throughout the decade. Whereas one-fifth of the long-term carc beds in 1960 were in facilities w i t h fewer than 26 beds, by the end of the decade only one in twenty was. The n u m b e r and percentage of long-term care facilities with 26 to 50 beds declined slightly during the decade, as did the number of b e d s in TABLE 17.— Size Distribution of Long-Term Care Facilities and Beds {by Number of Beds) in Kichigan, 1960-69. Distribution of Facilities (beds) Year No. 0-25 26-50 51-100 101-150 151+ 1960 — 272 141 55 14 15 3,921 4,955 4,079 1,791 4,142 1961 — 262 147 61 19 14 3,884 5,154 4,560 2,332 3,980 1962 — 248 143 77 17 14 3,741 5,148 5,646 2,051 3,750 1963 — 238 139 86 22 18 3,593 5,017 6,271 2,698 4,477 1964 — 195 152 118 27 IB 3,101 5,494 8,484 3,328 4,469 1965 — 188 150 132 36 20 3,049 5,475 9,336 4,379 4,818 1966 — 157 140 141 43 28 2,541 5,170 9,956 5,003 6,784 1967 — 140 139 133 48 31 2,305 5,121 9,316 5,647 7,327 1968 — 130 127 135 56 40 2,178 4,690 9,407 6,543 8,801 1969 — 106 121 141 60 47 1,810 4,490 10,012 6,989 9,922 Source: 0-25 26-50 51-100 Distribution of Beds (beds) 101-150 151+ Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-62 through fiscal Year 1970-?1 {Lansing, Kichigan: Michigan Department of Public Health, 1962-1971). TABLE IB.— Percentage Distribution of Long-Term Care Facilities and Beds by Size in Michigan, 1960-69. Percentage Distribution of Facilities (beds) Year No. 0-25 26-50 51-100 101-150 1960 — 54.7 28.4 11.1 1961 — 52.1 29.2 1962 — 49.7 1963 — 1964 (by Number of Beds) Percentage Distribution of Beds 151+ 0-25 26-50 2.8 3.0 20.8 26.2 21.6 9.5 21.9 12.1 3.8 2. 8 13.5 25.9 22.9 11.7 20.0 28.7 15.4 3.4 2.8 18.4 25.3 27.8 10.1 18.4 47.3 27.6 17.1 4.4 3.6 16.3 22.8 28.4 12.2 20.3 — 38.3 29.8 23.1 5.3 3.5 12,5 22.1 34.1 13.4 17.9 1965 — 35.7 28.5 25.1 6.9 3.8 11.3 20.2 34.5 16.2 17. B 1966 — 30.8 27.5 27.7 8.5 5.5 8.6 17.6 33.8 17.0 2 3.0 1967 — 2B.5 28.3 27.1 9.8 6.3 7.8 17.2 31.4 19.0 24.6 1968 — 26.6 26.0 27.7 11.5 8.2 6.9 14.8 29.8 20.7 27.8 1969 — 22.3 25.5 29.7 12.6 9.9 5.4 13.5 30.2 21.0 29.9 Source: 51-100 (beds) 101-150 Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiacal Year 1^61-62 through Fiscal Year 1970-71 (Lansing, Kichigan: Michigan Department of Public Health, 1962-1971J. 151+ 134 those facilities. beds, This, combined w i t h the growth in total resulted in almost a fifty p e r c e n t decline in the percentage of b e d s in this category. On the other hand, the number of facilities and beds in facilities with more than 50 b e d s increased sharply throughout the 1960's. In 1960, only 17 percent of all long-term care facilities had over 50 beds. Still, these accounted for over half of all the b e d s in the nursing home industry. By the end of 1969 o ver half of the facili­ ties and four-fifths of the beds w e r e facilities wi th over 50 beds. under study, in long-term care As of the end of the period the largest nu m b e r of b e d s were in facilities with 51 to 100 beds. This w a s closely followed by those facilities with over 150 beds. Each of these two groups accounted for slightly less than one -th ird of all nursing care facility beds. The distribution of facilities and b e d s in the Detroit Planning Region is similar to that for the state as a whole. One difference is the dominance of beds in the largest group of facilities during the last two years of the decade. During 1968 and 1969 m o r e beds w e r e in facilities with over 150 b e d s than in any o the r group. 1969, In 39 pe rcent of all b e d s in the region w e r e in this group compared w i t h 30 p e r c e n t for the state as a whole. This is accounted for b y the presence of almost two-thirds of the largest facilities in the De t r o i t Plannin g Region. 135 Even during the first five years of the 1960's this region had almost half of the largest facilities in the state. Tables 19 and 20, respectively, present the size distribution of facilities and beds for corporate-owned and proprietor- and par tne rsh ip- owne d facilities throughout the state. Among c orporate-owned long-term care facilities, the dominant category is the 51 to 100 bed category. Only during the first three years of the period under study did another grouping have more facilities. other classification have more beds. by medium-sized facilities, At no time did any Despite this dominance the trend to large and away from smaller facilities is clearly visible. While the number of facilities with 50 bed s or fewer r emained about constant, the nu m b e r of facilities wi th ov er 50 beds almost quintupled. This same relationship holds among the number of beds. When the distributions of co rpo rate-owned facilities and b e d s are c ompared with similar distributions prietorships and partnerships, immediately noticeable. for p r o ­ three distinctions are First is the overwh elm ing dominance of facilities w i t h 25 beds or less owned by proprietors and partnerships. Even in 19 69 the largest group of these facilities was the 25 beds or less classification. is the capacity of large facilities, beds. Second those w i t h over 100 Of all facilities with over 100 beds, seven was a pro prietorship or partnership. only one in Third is the TABLE 19.— Size Distribution of Corporate-Owned Long-Tern Care Facilities and Beds (by Number of Beds) in Kichigan, 1960-69. Distribution of Facilities 0-25 51-100 (beds) 101-150 Distribution of Beds (beds) 0-25 26-50 51-100 101-150 151+ 2 358 1,204 1,536 351 45B 3 2 356 1,286 1,811 332 458 30 3 2 341 1,336 2,216 334 463 35 36 4 3 277 1,389 2,688 484 627 16 41 66 10 4 302 1,611 4,803 1,236 803 — 12 39 76 15 7 247 1,544 5,329 1,795 1,330 1966 — 11 35 64 23 14 234 1,407 5,812 2,587 2,905 1967 — 9 39 84 26 13 193 1,524 5,836 3,014 2,719 1966 — 12 40 78 36 16 237 1,578 5,497 4,192 3,868 1969 — 13 37 71 35 23 251 1,429 5,172 4,056 4,733 Year No. 1960 — 21 32 21 3 1961 — 21 34 25 1962 — 20 34 1963 — 17 1964 — 1965 Source: 26-50 151+ Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-62 through Fiscal Vear 19 70-71 (Lansing, Michigan: Michigan Department o£ Public Health, 1962-1971). TABLE 20.— Size Distribution of Long-Term Care Facilities and Beds (by Number of Beds) Owned by Proprietors and Partnerships in Michigan, 1960-69. Distribution of Facilities (beds) Distribution of Beds (beds) 0-25 26-50 51-100 101-150 151+ 0 2,732 1,955 332 0 0 0 0 2,767 2,085 432 0 0 20 2 0 3,063 2,814 1,269 233 0 78 25 3 2 2,968 2,696 1,626 332 363 148 76 20 4 1 2,333 2,624 1,236 471 179 — 146 79 17 5 1 2,322 2,758 1,069 573 152 1966 — 119 74 19 3 2 1,877 2,589 1,292 355 383 1967 — 105 63 18 5 1 1,704 2,198 1,167 575 231 1968 — 94 5B 22 3 2 1,563 2,001 1,398 344 438 1969 — 70 50 33 11 4 1,174 1,726 2,135 1,267 756 51-100 101-150 No. 1960 — 195 59 5 0 1961 — 191 63 6 1962 — 203 82 1963 — 196 1964 — 1965 Source: 0-25 26-50 Year 151+ Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1561-6* through Fiscal Year 71 (Lansing. Michigan: Michigan Department of Public Health, 1962-1971). 138 dominance of beds in the two smallest classifications. Until the last year under study, over one-half of noncorp ora teowned beds w e r e in facilities wi th 50 or fewer beds. the first two years under consideration, During there were more noncorporate-owned beds in facilities with less than 26 beds than in all the other groups combined. facilities, however, facilities. Among these one can ascertain a m o v e m e n t to larger There w e r e 134 fewer proprietor- and partnership- owned facilities w i t h 50 beds or less in 1969 At the same time, than in 1960. facilities of this type w i t h over 50 beds increased from 5 to 48. F r o m 1960 to 1969, the size distribution of all long­ term care facilities and beds s h i f t e d sharply. facilities, While small those w i t h 50 bedB or less, continu ed to dominate, particularly among proprietor- and par tne rship-owned f acili­ ties, the percentage of beds in this group declined from 47 percent of all beds in 19 60 to only 19 p e r c e n t of all b eds by the end of 19 69. The number of small facilities also declined sharply, w h i l e medium- and large-sized facilities increased by almost the same number. Detroit's size d i s t r i ­ bution w i t h respect to the number of beds a n d facilities is similar to the entire state's. The pr inc ipa l difference is that the region has more than its proporti ona te share of the largest facilities. Me di u m - s i z e d facilities dominate those w h i c h are corporate-owned. One possible explana tio n 139 for this is that small individually-owned facilities have incorporated and exp anded to b eco me medium-sized. Expansion and Contraction This section and the n e x t explore w h a t caused the change in size distribution of long-term care facilities and beds. That is, did the distributions in 1969 come about as a result of internal expansion a n d contraction w ithin existing facilities or did it r e s u l t primarily from new facilities replacing those that closed? expansion and contraction of nursing care examined. Here, the facilities are This has relevance in its e ffe ct on the turnover of firms in the market. growing demand, If facilities can expand to meet competition is less likely to be as severe as w h e n they cannot expand. Table 21 pr esents the distribution of facilities which e xpanded d uri ng each year. Also shown is the distri­ bution of expansion, by the number of b e d s facilities before they expanded. among the facilities expanding. in the respective No special pattern emerges The distribu tio n of facili­ ties expanding is v e r y similar to that of the size d i s t r i ­ bution of all lon g-t erm care facilities. During the 1960's the percentage of facilities expanding to all l ong -term care facilities r ang ed from a high of 14 p erce nt in 1966 to a low of 7 p e r c e n t in 196 7. This in dic ate s that there was considerable internal g r o w t h within the industry TABLE 21.— Si 2 e Distribution of Michigan's Long-Term Care Facilities Expanding from Previous Years and the Amount of their Expansion, 1961-69. Distribution of Facilities Year 26-50 51-100 (beds) 101-150 Distribution of Beds 151+ 0-25 26-50 51-100 (beds) No. 0-25 101-150 151+ 1961 47 31 8 5 0 3 39 6 2 0 0 1962 64 28 19 10 4 3 53 9 2 0 0 1963 56 18 25 10 3 0 44 4 7 0 1 1964 68 31 17 12 5 3 58 8 2 0 0 1965 43 14 14 12 2 1 33 8 2 0 0 1966 72 17 24 22 7 2 47 11 9 3 2 1967 34 5 6 14 6 3 23 4 4 2 1 1968 64 13 12 24 9 6 37 15 7 4 1 1969 43 7 11 14 9 2 33 4 4 2 0 1960 Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1^51-6* through fiscal Year 1970-71 (Lansing, Michigan: Michigan Department of Public Health, 1962-1971). 140 Source: 141 throughout the decade. As would b e expected, the m ajo rit y of facilities expanding did so in a limited way, w i t h w ell over half of the expansions in each year b e i n g 25 beds or less. Analogous data that contracted during for those long-term care facilities the decade are presented in Table 22. As with facilities expanding, the distribution of facilities contracting is by the number of beds in the respective facilities prior to the contraction. It w o u l d be expected that, be cause of the rapid growth in nursing care facility beds, few facilities w o u l d have contracted du rin g the decade. Two possible reasons for contraction might be the inability to earn an adequate rate of return on investment and the inability to meet stricter buil d i n g requirements. It is therefore surprising that the largest number of contractions occurred in 19 62, w h e n Medical Assistance for the Age d became operative. O n e possible reason is that there we re a large n umber of small, marginally profitable, long-term care licensing facilities, w h o could not m e e t the minimal requirement increases resulting from this program. for 1962, Except the number of facilities contracting remained low until 1967. In that year, the number of facilities contracting more than doubled from the previ ous year and continued at a high rate during the last two years of the decade. The high percentage of facilities contracting during each of the l a s t three years of the decade is TABLE 22.— Size Distribution of Michigan's Long-Term Care Facilities Contracting from Previous Year and the Amount of their Contraction, 1961-69. Distribution of Facilities Distribution of Beds 26-50 51-100 101-150 151+ 0-25 — — — — — 26-50 No. 1960 — 1961 29 12 11 2 1 3 27 1 1 0 0 1962 83 26 32 11 8 6 75 4 3 0 1 1963 22 10 7 2 2 1 20 1 1 0 0 1964 37 11 20 3 2 1 35 2 0 0 0 1965 26 6 12 6 2 0 25 0 1 0 0 1966 25 7 5 8 2 3 20 2 1 1 1 1967 62 10 15 21 8 8 52 7 3 0 0 1966 76 8 24 25 9 10 69 3 3 0 1 1969 BO 18 26 18 10 8 72 5 2 0 1 -- 51-100 (beds) Year Source: 0-25 (beds) — 101-150 151+ — — Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiacal Year 1961-6* through Fiscal Year 1970-71 (LansIrTgT Michigan: Michigan Department of Public Health, 1962-197l). 143 probably due to an inability to earn an adequate rate of return on investment, competition as older facilities were faced with from new and exp anded facilities in a m arket which w a s expanding, but expanding less rapidly than during the p rec eding few years. As should be expected, the distribution of facili­ ties that contracted is much more uniform than the di s t r i ­ bution of those expanding. of the smallest facilities This results from the tendency to close rather than contract. During the course of the decade, the distribution of facilities contracting shifted from heavily in favor of very small facilities to we ight ed heavily in favor of facilities w i t h 26 to 100 beds. W i t h respect to the d istri­ bution of the number of beds contracted, tractions in each year w e r e almost all con­ less than 25 beds. Facilities which w a n t e d to contract more than 25 beds w e r e likely to close entirely rather than contract. Also, the nu mbe r of facilities wh ich could contract more than 25 beds and still operate efficie ntl y was limited, since the mean size of facilities only reached 69.9 beds state-wide in 1969. New Facilities and Facilities C losed An alternative to expansion of existing facilities is the opening of new facilities. Table 2 3 presents the size distrib uti on of long-term care facilities in Michigan from 1961 to 1969. More facilities were opened during 144 TABLE 23.--Size Distribution of N e w Long-Term Care Facilities in Michigan, 1961-69. Distribution of Facilities Year No. 19 61 26 1962 rtvurdye Size (beds) 0-25 26-50 51-100 101-150 151+ 44.7 10 6 19 1 0 44 40 . 3 17 13 14 0 0 19 6 3 19 60. 8 5 6 4 2 2 1964 68 54 .4 17 17 29 5 0 1965 33 70. 5 7 6 10 7 3 1966 26 81.7 5 3 10 5 3 1967 17 66.9 3 8 3 1 2 1968 25 86.2 4 3 10 5 3 19 69 27 105.9 1 3 11 5 7 Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities C o n s t r u c ­ tion, Fiscal Year 1961-^62 through Fiscal Year 19707T (Lansing, M i c h i g a n : Richigan Department of Public Health, 1962-1971). 145 calendar 1964 than in any oth er year of the decade. The nursing home industry was aware of the imminent p assage of the Social Security Amendments and new facilities were opened to meet exp ec t e d increases in demand. This is not surprising since it w a s evident by 1964 that some of insurance against high hea lth costs form for the aged and indigent w o u l d be enacted by Congress w i t h i n a year or two.^ The smallest number of facilities was opened in 1967, after the large number of facilities which h a d been opened in the mid-19 60's. Altho ugh its growth was uneven, the mean size of new facilities more than doubled from 44.7 beds per new facility in 1961 to 105.9 beds in 1969. In e xam ini ng the size distribution of new facilities a definite move to larger new facilities is discernible. Whereas small facilities w ere p red ominately opened in the early 1960's, medium- and larger-sized facilities dominated thereafter. During 1969 more than mediu m-s ize d ones. large facilities w e r e opened Overall, the number of n ew ties wa s smaller than the n u m b e r which expanded. facili­ When the distribution of f a c i l i t i e s expandi ng is compared w i t h that for new facilities, of large facilities, the latter is much m o r e skewed in favor as should be expected. Thus, more beds w e r e involved in the opening of new facilities than £ A good description of the legislative struggle for enactment of Med ica re and Med i c a i d is presented in Robert B. Stevens, Statuatory History of the United States; Income Security (New York: Mc Graw-Hill Book C o . , 19 70). 146 in the ex pansion of e xisting ones. It m u s t be concluded that, in the expansion of the nursing home industry in Michigan during the 1960's, both expansion and new facili­ ties w ere important to meet increased demand. Of interest also is the distribution of those facilities which closed during the decade. Table 24 presents the size distribution of long-term facilities which closed from 1961 to 1969. More facilities closed in 19 64 than in any other year of the decade and the smallest number of facilities closed in 1963. to the average size of facility closed, variation throughout the decade. there was 1968, less. little The m e a n size of facili­ ties closing was quite small in each year, beds in 1963 to 35.6 beds in 1968. With respect ranging from 2 3.2 In each year except the m ajo r i t y of facilities closing had 25 beds or When those facilities with 26 to 50 beds are included, over t hre e-fourths of the facilities closing in each year were small facilities. The size of facilities closing is of interest, also, be cau se it gives an indication of the economies of scale in the industry. test, Bet ter known as Stigler's survival its b a s i c assumption is that that size class which survives is efficient. Table 24, When applied to the data in it shows that there are pro bably economies of scale in e x p a n d i n g a facility until it has 50 beds. After 147 TABLE 24.--Size Distribution of L ong -Term Care Facilities Closed in Michigan, 1961-69. Distribution of Facilities (beds) Year No. Average Size 19 61 20 28.6 13 4 2 1 0 1962 46 26.2 30 11 5 0 0 19 6 3 16 23.2 12 3 1 0 0 1964 61 25.0 46 10 3 2 0 1965 17 33.4 11 3 2 0 1 1966 42 35. 2 26 7 6 2 1 1967 36 27.4 22 11 2 0 1 19 6 8 27 35.6 13 11 1 2 0 1969 39 29. 8 29 4 4 1 1 Source: 0-25 26-50 51-100 101-150 151 + M ichigan Department of Public Health, Mic h i g a n State Plan for Hospital a nd Medical Facilities C o n s truc­ tion, Fiscal Year 1961-65 through Fiscal Yea r 19/07T (Lansing, Michigan: Ri chigan Department oJ Public Health, 1962-1971). 148 this there is little indication that a dditional expansion will r e su l t in added economies of scale. Measures of Concentration In the pre v i o u s sections, indirect measures of the competitiveness of the long-term nursing care markets have been presented. Here, measures of market concentration which me a s u r e competitiveness directly are developed. Ceteris paribus, the higher the market concentration less competitive is that market. the In each of the subsequent tables market concentration is measured for each year 1960 to 1969. from It is then pos si b l e to c o m p a r e m eas ure d for each year from 1960 to 1969. compare measures b e t w e e n m ar k e t s time in the same market. It is then possible to for the same year or over The advantage of these types of comparisons is that they are made relative to other nur s i n g care ma rkets and are relative to other industries only to the e x t e n t that an absolute standard is established. The first mea sur es w h i c h are d e v e l o p e d are the eight-, and t we n t y - f i r m concentration ratios. presented in Tables 25 to 27, respectively, four-, These are for long-term care facilities and b y Governor's Planning Regions. A concentration ratio is defined as the s u m of the sizes of the largest x firms divided b y the Bum of the sizes of all the industry's firms in the market. four, eight, or twenty. In this case x equals Size with respect to the nur s i n g TABLE 25.— Four-Firm Concentration Ratios of Long-Term Care Facilities in Michigan by Governor’s Planning Region, 1960-69. 1960 1961 1962 1963 1964 1965 19 66 1967 1968 19 69 1. Detroit .214 .199 .179 .168 .150 .135 .123 .124 .086 .078 2. Jackson .491 .487 .532 .534 .511 .502 .539 .509 .465 .472 3. Kalamazoo-Battle Creek .416 .378 .382 .375 .352 .333 .315 .297 .267 .284 4. Benton HarborSt. Joseph .425 .39 8 .380 .552 .499 .499 .491 .472 .534 .537 5. Flint .600 .59 3 .532 .456 .456 .459 .445 .479 .484 .408 6. Lansing .466 .470 .440 .443 .455 .438 .459 .474 .522 .554 7. Saginaw Bay .336 .341 .312 .307 .266 .221 .192 .266 .275 .247 8. Grand Rapids-Muskegon .392 .310 .280 .270 .230 .219 .262 .261 .230 .228 9. Alpena .939 .905 .828 .759 .732 .641 .641 .598 .640 .605 .686 .657 .579 .578 .534 .494 .504 .515 .558 .578 Planning Region 10. Traverse Bay 11. Sault Ste. Marie 1 .000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 12. Marguette-Iron Mountain Escanaba .422 .413 .482 .468 .503 .466 .377 .486 .493 .455 13. Houghton-Ironwood .726 .740 .652 .733 .703 .684 .628 .646 .590 .667 .105 .100 .086 .080 .071 .065 .070 .069 .048 .045 State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscar Year l91Tl-62 tJiFough Fiscal Year 1$Vo-71 (Lansing, Michigan: Michigan Department of Public Health, 19(52-1971). 150 care facilities is measured by beds, capacity. the common unit of In symbolic form, x Z b. i i= 1 i i=l C.R. x = x - firm concentration ratio, b^ - number of beds in the i t Vi facility, i = 1, . . . , n facilities arranged by size from the largest to the smallest. The range of concentration ratio is from 0.000 to 1.000, the closer to 1.000 the hig her the concentration in the market. F o u r - f i r m concentration ratios are presented in Table 25.6 T w o trends are immediately noticeable. One is the decline in concentration throughout the decade. In nine of thirteen regions the four-firm concentration was lower in 1969 than at the b e g i n n i n g of the decade. Benton Harbor-St. Joseph, Only in the Lansing, and Marquette-Iron Mo untain-Escanaba regions did concentration increase over the decade, w i t h the Sault Ste. Marie region remaining ^While concentration ratios for health facility service areas exhibit the same trends as do the concentra­ tion ratios for Governor's Planning Regions, they are necessarily much higher since the markets are smaller. Thus, competition is much less severe than is indicated by Tables 25 to 27. 151 constant. Despite this lower level of concentration from 1960 to 1969 in most regions, only the Detroit, Battle Creek, Kalamazoo- and Alpena regions exhibited a fairly continuous decline in the four-firm concentration ratio throughout the decade. Of all the regions whose co n c e n ­ tration ratios ch anged two-thirds, eight of twelve regions, had their highest concentration in 1960 or 1961. On the other hand, only one of these same regions had their lowest concentration ratio bef ore 1965. An overall indication of the w a y concentration decreased throughout the decade is given by the fou r-f irm concentration ratio for the entire state. The largest four nursing homes in the state had 10.5 percent of all long-term care beds 1960. in By 1969 this percentage had fallen to 4.5 percent. Another trend is for concentration to vary inversely with the size of the market. Thus the Detroit Region, which had half of the state's population in 19 70, had the lowest concentration ratio in each year of the I960's. The small percentage of beds in the four largest facilities indicates that that market is very competitive. Two other regions, Saginaw Bay and Grand R a p i d s - M u s k e g o n , also had four-firm concentration ratios b e l o w 1960 and .250 in 1969. .400 in Both represent concentrations of population and have fairly competitive n ursing care markets. At the oth er end of the spectrum are the geographic regions representing the upper half of 152 Michigan's lower Peninsula and its Upper Peninsula: Traverse Bay, S a u l t Ste. Escanaba, Alpena, Marie, Marquette-Iron Mountain- and H o u g h t o n - I r o n w o o d . All sparsely populated, four of these five regions had four-firm concentration ratios over In 1969, .675 in 1960 and were the highest in the state. and a gai n excluding the Mar quette-Iron Mountain- Escanaba Region, these regions still h a d the highest c o n ­ centration ratios in the state, each over .575. Because of the large distances inv olved and the high m arket c o n ­ centration, there appears to be little competition in these markets. Ei ght - f i r m concentration ratios for each of the Governor's Pl ann i n g Regions for each year of the 1 9 6 0 's are pre sen ted in Table 26. These exh ibi t similar c h a r ­ acteristics to the four-firm concentration ratios for the same areas. As before, m o s t of the regions had lower c o n ­ centration ratios at the e n d of the decade than at the beginning. Five regions w e r e more concentrated, however, and the Sault Ste. Marie region remained constant. addition to the three regions wh ose In four-firm concentration ratios had increased, Ben ton Harbor-St. Joseph, Lansing, and M a r q u e t t e - I r o n M o u n t a i n - E s c a n a b a ; the Jackson and Traverse Bay Regions also exhibited higher concentration ratios. Among those regions w hic h showed less competition at the end of the decade, none had a continuous decline in TABLE 26.— Eight-Firm Concentration Ratios of Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69. Planning Region 1961 1962 1963 1964 1965 1966 1967 1968 1969 1. Detroit .292 .275 .255 .237 .212 .193 .190 .187 .152 .140 2. Jackson .648 .644 .678 .685 .678 .666 .702 .718 .683 .714 3. Kalamazoo-Battle Creek .596 .567 .573 .570 .542 .516 .512 .49 7 .470 .490 4. Benton HarborSt. Joseph .587 .554 .551 .676 .663 .687 .692 .693 .742 .764 5. Flint .771 .763 .753 .682 .676 .681 .676 .693 .713 .651 6. Lansing .608 .622 .607 .622 .669 .663 .705 .'T29 .787 .858 7. Saginaw Bay .471 .470 .460 .468 .418 .354 .331 .402 .423 .403 8. Grand Rapids-Muskegon .465 .466 .428 .417 .357 .350 .385 .386 .354 .350 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 .9*73 9. Alpena 10. Traverse Bay 11. Sault Ste. Marie .883 .877 .860 .911 .876 .855 .857 .886 .885 : .923 1 .000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 12. Marquette-Iron Mountain Escanaba .650 .658 .731 .69 4 .722 .709 .663 .753 .756 .703 13. Houghton-Ironwood .959 .961 .900 .947 .913 .917 .904 .901 .876 .920 .154 .147 .135 .126 .112 .103 .106 .104 .082 .077 State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-62 through Fiscal Year 1970-7l (Lansing, Michigan: Michigan Department of Public Health, 1962-1971). 153 1960 154 concentration, as measured by the ei ght -fi rm concentration ratio, throughout the 19 60's. When comparisons are made be tween regions for the same year, concentration again varies greatly with the region's population. In the upper half of Michigan's Lower Peninsula and its U pper Peninsula, only the MarquetteIron Mountain-Escanaba region had an eight-firm concentration ratio below .850 in any year. On the other hand, only the Detroit Region had a concentration ratio which wa s below .300 in each year. By the end of 1969 only two other regions had eight-fi rm concentration ratios near or below .400. Bay, They w e r e Grand Rapids-Muskegon, .350, and Saginaw .403. Table 27 presents twenty-firm concentration ratios for each year, 1960 to 1969, and for each of the G o v e r n o r ’s Planning Regions. Only four regions showed decreased c on­ centration, w h e n twenty facilities w e r e included. were also the four most populous regions: Saginaw Bay, and Grand Rapids-Muskegon. Region showed a very small change. Detroit, They Flint, Of these the Flint The other four regions in the lower portion of Michigan's Lower Peninsula exhibited increased concentration, w i t h the B e n t o n - H a r b o r - S t . Joseph and Lansing Regions reaching a concentration ratio of 1.000 by the end of the decade. Those five regions in the upper half of Michigan 's Lower Peninsula and the Upper Peninsula all had concentration ratios of 1.000 for each ye ar of the TABLE 27.— Twenty-Firm Concentration Ratios of Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69. Planning Region 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1 . Detroit .427 .402 .377 .366 .337 .321 .322 .325 .313 .295 2. Jackson .89 4 .896 .914 .926 .916 .904 .931 .946 .935 .972 3. Kalamazoo-Battle Creek; .840 .830 .833 .826 .830 .811 .832 .829 .850 .875 4. Benton HarborSt. Joseph .885 .851 .873 .902 .918 .929 .956 .978 .992 1 . 0 0 0 5. Flint .987 .985 .990 .968 .967 .975 .970 .975 .980 .975 6. Lansing .894 .885 .896 .911 .964 .9 55 .990 1 . 0 0 0 1 . 0 0 0 1.000 7. Saginaw Bay .784 .768 .744 .736 .717 .653 .653 .711 .716 .719 8 . Grand Rapids-Muskegon .654 .658 .649 .651 .597 .588 .614 .616 .605 .603 9. Alpena 10. Traverse Bay 11. Sault Ste. Marie 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1. 000 1. 00 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1. 0 0 0 1. 0 00 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1. 00 0 1. 0 00 1 . 0 0 0 1. 0 0 0 1. 0 00 1 . 0 0 0 1. 000 1. 00 0 1 . 0 0 0 12. Marquette-Iron MountainEscanaba 1.000 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 13. Houghton-Xronwood State Total Source: 1. 00 0 1. 000 1 . 00 0 1 . 0 0 0 1. 00 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1. 000 1 . 0 0 0 1 . 0 0 0 1 . 0 0 0 1. 0 0 0 .257 .243 .226 .216 .191 .178 .188 .186 .167 .157 Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961—6^ through Fiscal Year 19 70-71 (Lansing, Michigan: Michigan Department of Publie Hearth, 1962-1971). 156 19 60‘s. By the end of the decade, nine of the regions had twenty-firm concentration ratios of .9 72 or more. Detroit Region had a ratio of .295. Rapids-Muskegon had ratios of .719 and Saginaw Bay and Grand .603, A second measure of concentration is the Herfindahl index. The respectively. to be developed While concentration ratios give an indication of the level of competitiveness as measured by a specific number of firms, they do n ot tell anything about the relative sizes of the firms included. firm concentration ratio of .800 might indicate A fourfour firms each w i t h one-fifth of the market's capacity and three firms which combined had five percent of market capacity. One means of getting a clear picture of mar ket concentration is to present tables for each possible concentration ratio, equal to the number of firms in the market. cumbersome exercise a second means, To avoid this the Herfindahl index, is available. The Herfindahl index presents in one number a description of market concentration, number of firms in the market. regardless of the It is defined as the sum of the beds in each facility divided by total beds the quantity squared. The symbolic terms, Herfindahl index = 157 w he r o = number th of beds in the i facility, B = total number of beds in the market, i = 1, . . . The range of the , n facilities in the market. Herfindahl index is from 0.000 to 1.000, the h igher the index the mo re concentrated the market. If there is only one firm in the market, index will be will be 1.000. then the Herfindahl If there are two of equal size, it .500. Herfindahl indexes are p res ented in Table 28 for each year under study and for each of the Governor's Planning Regions. As w i t h concentration ratios, apparent. two trends are First, nursing care services markets have become more competitive. Second, the competitiveness of markets varies directly w i t h the extent of the market, which is governed pri nci pal ly by population. Nine of the Governor's Planning Regions had lower indexes in 1969 than in 1960 and two we re essentially the same. Only the Benton Harbor- St. Joseph and Lansing Regions showed substantial increases. When comparisons are made between ma rkets for the same year, it is found that at the end of indexes of more than Joseph, Lansing, .100. 1969 six regions had These w e r e Benton Harbor-St. and four of the five regions not in the lower half of the Lower Peninsula; all areas wi th limited markets. While the first two measures of concentration measure competitiveness with respect to the capacity of TABLE 28.— Herfindahl Indexes for Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69. 1960 1961 1962 1963 1964 1965 19 66 1967 1968 1969 1. Detroit .024 .021 .017 .015 .013 .012 .011 .011 .009 .008 2. Jackson .081 .080 .091 .111 .083 .080 .092 .086 .077 .082 3. Kalamazoo-Battle Creek .061 .054 .055 .053 .050 .047 .047 .044 .043 .046 4. Benton HarborSt. Joseph .073 .067 .062 .146 .117 .116 .114 .101 .116 .111 5. Flint .148 .144 .112 .081 .080 .081 .075 .080 .082 .069 6. Lansing .098 .095 .082 .079 .079 .074 .080 .085 .099 .112 7. Saginaw Bay .047 .045 .041 .040 .035 .029 .028 .037 .037 .035 8, Grand Rapids-Muskegon .039 .038 .034 .033 .027 .026 .035 .035 .030 .030 9. Alpena .260 .240 .206 .175 .167 .147 .147 .138 .148 .134 10. Traverse Bay .164 .148 .113 .118 .109 .101 .102 .107 .114 .123 11. Sault Ste. Marie .506 1.000 1.000 1.000 .273 .239 .29 3 .305 .267 .267 Planning Region 12. Marquette-Iron Mountain Escanaba .079 .079 .102 .098 .105 .094 .070 .099 .094 .082 13. Houghton-Ironwood .170 .178 .133 .167 .155 .146 .125 .129 .115 .143 .008 .007 .006 .005 .005 .004 .004 .004 .004 .004 State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-62 through Fiscal Year 1970-71 (Lansing, Michigan: Michigan Department of Public Health, 19t>2-71). 159 the firms in the market, the Gini coefficient bases its indication of market competitiveness on the output of each of the facilities in the market. care facilities is pa t i e n t days. Output of nursing The Gini coefficient is defined w i t h respect to the Lorenz curve; which depicts the locus of points representing the percentage of output produced by facilities, ranked from the facility with the smallest output to the one with the largest output, plotted against the percentage of facilities in the market. The Gini coefficient "is the ratio of two areas in a Lorenz diagram: (1) the area of the polygon b etween the line of perfect equality (diagonal) linking the plotted points, and the bits of straight lines and 7 the line of perfect equality." ranges from 0.000 to 1.000, (2) the total area under Once again, the coefficient the closer to 1.000 the more concentrated and less competitive the market. Gini coefficients are presented in Table 29 for each of the Governor's Planning Regions for each year of the 1 9 6 0 's except 1961 apd 1966, when occupancy rates were not reported. Occupancy rates of determine patient days, facilities were used to since they were more readily available than patient days themselves. These were weighted b y the number of beds in each facility to arrive 7 H o r s t M e n d e r s h a u s e n , Changes in Income Distribution During the Great Depression (New York, W.Y.: National Bureau of Economic Research, Inc., 1946), p. 162. TABLE 29.— Gini Coefficients for Long-Term Care Facilities in Michigan by Governor's Planning Region, 1960-69. Planning Region 1960 1. Detroit .503 2. Jackson .502 3. Kalamazoo-Battle Creek .490 1962 1963 1964 1965 .472 .471 .491 .452 — .473 .522 .536 .509 — .497 .483 .466 1961 _a 1967 1968 19 69 .452 .429 .433 — .528 .516 .495 .465 — .422 .364 .370 1966 _a 4. Benton HarborSt. Joseph .405 — .341 .360 .413 .495 — .492 .481 .475 5. Flint .559 — .497 .476 .615 .471 — .471 .466 .434 6 . Lansing .444 — .437 .437 .466 .462 — .419 .419 .427 7. Saginaw Bay .415 — .399 .411 .449 .413 — .338 .359 .342 8. Grand Rapids-Muskegon .521 — .499 .496 .474 .479 — .437 .439 .453 9. Alpena .298 — .368 .351 .302 .261 — .196 .223 .276 10. Traverse Bay .422 — .318 .294 .332 .290 — .241 .285 .223 11. Sault Ste. Marie .056 — .000 .000 .109 .239 — .153 .151 .166 12. Marquette-Iron Mountain .347 Escanaba — .343 .302 .335 .320 — .371 .384 .378 13. Houghton-Ironwood .304 — .375 .382 .448 .463 — .375 .367 . 356 .502 — .482 .486 .501 .472 — .442 .445 .440 State Total Source: Michigan Department of Public Health, Michigan State Plan for Hospital and Medical Facilities Construction, Fiscal Year 1961-62 through Fiscal Year 19*70-71 (Lansing, Michigan: Michigan Department of Public Health, 1^62-1971). aOccupancy rates not reported. 161 at occupancy rates for the region. reported occupancy rates, put for them. Since not all facilities it was necessary to simulate o u t ­ It was assumed that these facilities had occupancy rates similar to the regional average. In those few cases w h e r e no facilities in the region reported occupancy rates, it w a s assumed that the occupancy rate of the region's facilities was that of a n ea r by planning region. Table 29 e xh ibits a clear trend toward lessened concentration during the decade. Nine regions exhibited declining coefficients over the e ntire decade. four regions with incr eased coefficients, Harbor-St. Of those on ly Benton Joseph was in the Lower Peninsula. In comparing Gi ni coefficients for dif ferent regions for the same year, we end of 1969, .500. find a small range of values. all regions had coefficients b e tw e en By the .150 and Fr om 1965 to 1969, only the Jackson Region had values outside this range. Sault Ste. In 1960 all regions except Marie had values b e tw e en is interesting to note .29 5 and .560. It that the Detroit Region had one of the hi g he r concentrations among markets in each year. Overall concentration w i t h respect to output was c o r ­ related w i t h population, with some of the lowest levels of concentration being in the Upper Peninsula. the result of fewer facilities This is partly in those areas. That is, 162 the Gini c oefficient is affected by the number of faciliQ ties included, particularly for small number of facilities. Summary of Overall Changes There are several structural changes w h ic h occurred in the Michigan nurs ing home industry markets during the 1 9 6 0 's. Primary among changes was a gradual decline in concentration resulting in a long-term increase in market competition. among markets, With respect to the level of concentration it was principally determined by the extent of the m a r k e t — the popul ation of the market area. F ro m 1960 to 1969 there was a considerable shift in the numbers and types of nursing care facilities p r o v i d ­ ing long-term nursing care services. The number of facilities declined slightly while the number of their beds increased b y more than t h r e e - f o u r t h s . This resulted in a sharp increase in the mean num ber of beds per facility. The Detroit Region, which h a d over one-half of the state's population in 1970, had a l mo s t an equal share of Michigan's long-term nursing care beds by the end of the decade. Also the 1960's w it n e s s e d the de cline of facilities owned by Q The Gini coeff icient is influenced by the number of facilities, since it is unlikely that facilities will be of equal size, especially if more than a few facilities are included. If there is only one facility in the market, the Gini coe fficient is 0.000, pe rfect equality. The Gini coefficient would also be 0.000 if there were four facili­ ties in the market, each w i t h one-fourth the market's output. As the number of facilities increases, the likelihood of their all being equal decreases sharply. If they are of unequal size, the Gini coefficient increases. 163 individuals and partnerships and the rise of corporateowned facilities. From 1960 to 1969 the supply of corporate- owned beds quadrupled, compared to a two-fifths increase in the number of proprietary- and partnership-owned beds. majority of corporate-owned The facilities w e r e in the Detroit Region, whereas the outstate regions had more than their share of indiv idually-owned facilities. County medical care facilities and hsopitals chronic care units changed little during the decade, w h i l e non-profit facilities grew at about the same rate as did the entire industry. The size distribution of nursing care facilities, by number of beds, shifted sharply over the period. facilities expanded and new, As larger facilities replaced those small facilities which closed, the size distribution shifted in favor of larger facilities and away from smaller ones. Small facilities, those with less then 51 beds, experienced a fifty percent decline in beds during the decade. Almost two-thirds of those facilities w i t h over 150 beds were located in the Detroit Region. and 1969, there w e r e more beds in these During 1968 facilities in Detroit than in any other size classification. When corporate-owned facilities w e r e compared with those owned privately, there w e r e several marked differences. Foremost was that the former facilities were much larger than the latter, wi th a mean size of 87.4 beds in 1969 compared with 42.0 beds in privat e ly - ow n ed facilities. This explains 164 the dominance of medium -s i ze d facilities in the corporate group and the smalles t-sized facilities in the privatelyowned facilities group. Expansion and new facilities both played a major role in the growth of the industry in Michigan. The di s t r i ­ bution of facilities expa nding was proportional to the distribution of all facilities. 25 beds or less. Most expansions were for New facilities which opened were larger than the mean size of all facilities and averaged over 105 beds per new facility in 1969. Facilities w h i c h contracted did so almost always b y less than 25 beds. Contractions of more than 25 beds usually resulted in facilities being closed. The majority of those facilities w h i c h did close, however, had fewer than 2 5 beds. Measures of co ncent ration all indicated that nursing care services markets we re more competitive at the end of the decade than in 1960. In not a continuous decline. Many markets were still concentrated, but this primarily de pended on the population of the market. It must be recognized that only a small portion of the p opulation demands nursing care services at a given time. When this is combined with a limited geographical area for n u rsing care services, it is not unexpected that m o st markets contain only a few facili ­ ties . 165 Impact of Medical Assistance and Medicare' In the previous part changes in the market structure of the Michigan nursing home industry, wh i ch occurred in the 1960's, were discussed. Here, the impact of changes r esult­ ing from the introduction of Medical Ass istance and Medicare on the industry structure will be examined to determine if shifts in market structure were long -term trends or resulted from the introduction of Medical Assis t an c e and Medicare. Tables 9 and 10 present the num ber of long-term care facilities and beds in Michigan. The number of facili­ ties remained cons tant during the first part of the decade before increasing in both 1964 and 1965. number of facilities declined. was an increase of 7,400 beds end of 1966, After that the With respect to beds, there from the end of 1963 to the an increase of a third. There was little change during 196 7 but long-term care beds e x panded by 3,500 during 1968 and 1969. Table 12 presen ts the number of long-term care facilities by type of ownership. It shows that the number of cor porate-owned facilities increased by two-thirds during 1964 to 1966. At the same time the nu m b e r of facilities owned b y propri et o rs and p a rtnerships fell by almost onethird. The n umber of beds in corporate facilities more than doubled during the same period, w h il e those in i n d i v i d u a l l y owned facilities decl ined by a quarter. 166 The size distribution of long-term care facilities is presented in Table 17 which shows substantial shift in the distribution from 1963 to 1966. Not only did facili­ ties in the smallest size classification decline in number by one-third, but the number of facilities with over 50 beds expanded by two-thirds. facilities, With respect to corporate-owned the number of medium-sized facilities more than doubled from 1963 to 1966, from 36 to 84 as did the number of beds in those facilities. number of small During the same period, the facilities owned by individuals declined by two-fifths. During 1964, more facilities were opened than during any other year of the decade. facilities closed in 1964. At the same time, more Most of those which closed had 25 or fewer beds. Four-, eight-, and twenty-firm concentration ratios are presented in Tables 25 to 27. tion ratios, For four-firm conc entra­ there were large decreases in eight of the ten regions in Michigan's Lower Peninsula from 1963 to 1965. Only the Lansing and Flint Regions remained relatively constant. In six of these eight regions, concentration at the fo ur-firm level increased or remained constant during most of the period from 1965 to 1969. Similar results are arrived at from a consideration of eight- and twenty-firm concentration ratios. The Herfindahl index, presented in Table 28 provides similar results also. 167 F r o m an examination of the data on the Michig an nursing home industry, it would a pp e ar that market s t r u c ­ ture changed gradually during the early 1 9 6 0 ’s, shifted sharply in 1964 to 1966, after 1966. and again changed more slowly Especially with respect to concentration, it appears that the long-term Lrend throughout the decade was toward decreased concentration. was not continuous, middle of the decade This long-term decline however, with sharp decreases in the followed by constant or increased concentration in several markets. Assistance and Medicare Since the Medical long-term care programs became operational on October 1, 1966 and January 1, 1967, it would appear that the net effect of changes resulting from their introduction was to cause concentration to increase. That is, the effect of a shift in the source of payments and a tightening of regulations outweighed the e ff e ct of increased demand. A more specific conclusion can be reached by testing a model containing the two theories p ro posed in Chapter IV. C HA P T E R VI PUBLIC PURCHASE A N D M A RK E T STRUCTURE : TEST OF AN HYPOTHESIS A model containing the two theories of ma rk et s t r u c ­ ture evolution can now be tested and a determination made as to w h e t h e r changes in the Mi chiyan nursing home market structure resulted from the introduction of Medicar e and Medical A ss i st a nc e or were only part of a long-term trend. That is, did the shifts caused by changes brought about as a resu lt of the two programs being introduced significantly alter lon g-term trends in ma r ke t structure? Did such shifts cause c o nc e nt r at i o n to increase or decrease, yielding less or more competitive markets, respectively? Model The following model offers changes two theories regarding in n u rsing home industry ma r ke t structure during the 1 9 6 0 ’s. Recognizing only long-term changes in structure, the first theory states that di fferences in concentration be tween regions and over time can b e s t be expl ained by changes in demographic characteristics. are included in the analysis: persons to total population, Three variables the percentage of aged p opulation density, 166 and per 169 capita income. While the second theory takes cognizance of long-term changes, it also recognizes the importance of Medical Assistance and Medicare b y including a dummy variable to account for their introduction. These two theories can be put into equation form and an F-test cond ucted to determine if the second theory is significantly better than the first. The first theory, which does not take cognizance of any impact the introduction of Medicare and Medical Ass istance might have had on market structure can b e written as follows: 3 C jt ,. = 8o + i=1 E 6 a• o.*X t H ■j •t where C.. + c « four- firm c o ncentration ratio in the CD .th market in year t, jt “ percent age of total population 65 years of age and over in the jth market in year t, jt “ population per square mile in the .th market in year t, 3 X2 X^ = per capita income in the it .th ma r ke t in year t, 11 j = 1, 2, . . . 13, t = 1960, 1961, . . . 1969 The equation is also estimated using the e ight-firm c o n ­ centration ratio and the Herfindahl Index as a dependent variable. When total numb er of long-term care beds. 170 co rporate-owned beds, and proprietorship- and partnership- owned beds are used as the dependent variable, the in d ep e nd ­ ent variables become number of persons 65 years of age and over, population, and disposable income. The second theory, w h i c h recognizes the impact of the introduction of Medical Assistance and Medicar e on the nursing care services ma rk et structure, can be w r it t en as f ol l o w s : 4 C ,. - B + ): 6 ■ ■. X ■ ■ + c , 31 o i=1 r;jtA ijt ' (2) where the values of the variables are identical to those in equation _ A 4.. Jt (1 ), except; , 0 if t < the introduction of Medicare and Medicaid 1 if t > the introduction of Medicare and Medicaid. - The sign of x* determines whether the changes which jt resulted from the two programs caused concentration increase or decrease. to A positive sign means that c o n ­ centration increased and that competition therefore decreased, Equation (2) was es timated for the same dependent variables and using the same independent variables as equation The null hypothesis, Hq , is that equation a significantly bett er predictor of An F-test is conducted to determine if H (2) is not than equation o (1 ). (1 ). should be accepted 171 or rejected. The appropriate F-s tatistic can be calculated as follows: (FSS1 - E S E 2 ) k - g F (k -g) , (n-k-ri) ess2 n - where ESS. (k + 1 ) = sum of the terms in the error term in equation (1 ) squared, E S 5 2 = sum of the terms in the error term in equation (2 ) squared, g « number of independent variables in equation (1 ), » number of independent variables • 4 - 1 n = j- *. times t. in equation (2 ), k The F-sta tistic is checked against a table of F values to determine sis can the level of confidence w i t h which the null hy p o t h e ­ be accepted or rejected. If the null hypothesis be re j ected w i t h a high degree of confidence, can then equation (2 ) is a significantly better predictor of the level of con­ centration than equation (1). This means that introduction of Me d i c a r e and M e dicaid did result in a shift in co n centra­ tion . Go vernor's Planning Regions w e r e chosen over health facility service areas as the geographic boundaries for Wil l ia m Mendenhall, Introduction to Linear Models and The Design and Analysis of Experiments (B elmont, California: W a d s wo r th Publishing Company, Inc., 1968), pp. 176-179. 172 testing the model* likely to contain since the latter are smaller and therefore few, if any, nu rsing care facilities. This results in few changes in market structure and uniformly high levels for most stock measures of concentration. Also, values for the independent var iables are more easily calcu­ lated for the p la n ni n g regions, be cause they follow county lines and most data re porting of d emographic characteristics is by county. Income and population data were taken from Sales Management's Survey of Buying Power for each county and 2 each year. Sales Management's "effective bu y i n g income," which is disposable income, was used as the measure of income. The 1960 and 19 70 Censuses were the sources for 3 the number of aged persons by county. For each county, it wa s assumed that one-tenth of the change in the number of aged persons occurred each year. Since p la nning regions are com binations of counties and since it is unlikely that the portion of aged persons in the total po pulation would vary widely, it would appear that this procedure yields su fficiently accurate estimates of the n umber of aged. 2 Sales Management, Inc., Survey of Buying Power (Various i s s u e s ) , 1961-1970. 3 U.S. Department of Commerce, Bureau of the Census, 19 70 Census of Population; General Population C h a r a c t e r ­ istics: M i c h i g a n , Ad vance Report (W ashington, D . C . : O T s . G overnment P ri nting Office, 1971). Michigan State University, Graduate School of Business Administration, Michigan Stat istical A b s t r a c t , Eighth Edition, 19 70 (East Lansing, Michigan: Mi c hi g an State University, 1970). 173 The date for the introduction of Medicare and Medicaid was varied from 1964 to 1967 to find which w ou l d yield the best results. the introduction date, It is not unreasonable to vary since b y 1964 is m eant December 31, 1964 and since the Social Security Amendm e nt s of 1965 were signed into law only seven months later on July 30, To accept the introduction as occurring in 1964, 1965. it is necessary to assume that nursing care facilities were aware of the imminent passage of the law and capitalized the value of its impact. This is a plausible assumption, because it was ev ident in early 1964 that some form of insurance against high health costs for the indigent wo u ld 4 be enacted by Congress w ithin a year or two. On the other hand, the accept ance of an introd uction date as late as 1967 is reasonable, because the long-term care portions of Medicaid and Medicare did not become operational until October 1, 1966 tively. (in Michigan) and January 1, 1967, re s p e c ­ Accepta n ce of a date as late as this is b ased on the assumption that changes resulting from the introduction did not have an impact upon the industry until the two programs became operational. Three sets of equations we re estimated by the ordinary least squares technique, 4 using stock measures of A good description of the legislative struggle for en actment of Medicare and Medi caid is presen ted in Robert B. Stevens, Statutory History of the United States: Income Security (New Y o r k , N .Y .: McGraw-Hill Book C o . , 1970^ . 174 concentration as the dependent variable. Sets of equations were e st i m a t e d for four-firm concentration ratios, eightfirm concentration ratios, and Herfindahl indexes. Two other stock measures we re considered b u t rejected. A set of equa tions was not estimated for twenty-firm concentration ratios be c a u s e five of the 13 regions had ratios identical to 1.000 in each year. a dependent variable, Gini coefficients we re not used as since data was not available for 1961 or 1966 and several other cells had to be estimated or contained data from a small n u m b e r of facilities. the Sault Ste, Marie Region ha d Since four- and eight-firm c o n ­ centration ratios identical to 1.000 in eac h year, those sets of equations w e r e estimated for only 12 planning r eg i o n s . Results F or the d e p e n d e n t variable four-firm co ncent ration ratios, the best fit was a tt ained whe n 1967 was chosen as the introduction da te of Medica r e and M ed i ca l Assistance. The re s ul t s of e q ua t i o n s (1) and (2), representing the first and s e co n d theories, were as follows: (1) ■ 0.74769 + 0. Q2072X. , - 0 .00030X.,., ^ - 0.000UX,. ljt 2jt 3jt (0.01997) (0.00005) (0.00003) (2) C jt = 0.84157 + 0.01583X, ., - 0.00025x„, Al]t (0.01969) (0.00006) - 0.00017x„.t . 3]t + 0.08390V 4]t (0.00004) (0.03531) 175 where C. ^ = four-firm concent ration ratio in the .th m arket in year t, ^ t = percentage of total population 65 years of age ^ and over in the ^th m arket in year t, Xj-*. = populat ion per square mile in the .thm a r k e t year t, 3 X in . = per capita income in the .th ma r ke t in year t, jr j x 4jt = 0 if t < 1967 '1 if t _> 1967, j = 1 , 2 ,* • ., 12, t = 1960, 1961, . . ., 1969 , and the standard errors of each inde pendent variable is shown 2 in parenthesis be neath the variable. The R for e q uation (1) was 0.4457 An hypothesis, and for equation (2) w a s 0.4716. F-test was cond ucted to determ ine w he ther that equation predictor of C, the null (2 ) is not a s ig nificantly better than equation (1), should be accepted or J^ rejected. The app ropriate F-statistic, F^ ** 5.689, was sig nificant at the five-percent but not the one-percent confidence level. Therefore, the null hyp othesis can be rejected w i t h in excess of 95 pe r ce n t confidence. This means that the second theory is a si gnificantly better predictor of shifts in concentration, shifts in competition, and ceteris pa ribus than the first. T h a t is, the i n tr o ­ duction of Medicare and Medical A s si s ta n ce caused a si g ni f i­ cant shift in the long-term concentration trends in the Michigan nursing home industry markets. The F-statistic was also sign ificant at the five-percent level when the in troduction date was 1966, b u t not for eith er 1964 or 1965. 176 This is not surprising, since the dummy variable was s i g ­ nificant for 1966 and 1967, but not for the two previous years. The sign of X ^ j t indicates whether there was a shift upward or downward in four-firm concentration ratios as a result of the two programs and therefore wh ether market competition decreased or increased, four years respectively. For all wa s positive indicating an increase in c o n ­ centration and a decrease in market competition. Similar results were attained when the set of equations, w i th ei ght-firm concentration ratios as the dependent variable, wo re estimated. In this case the best fit came from using 1965 as the introduction date. (1) - O .‘ J3100 + 0.03H4&X. . C. 3t (2) C jt (0.02537) 3t = 1.10892 + 0.03345x 1]^ (0.02448) + - 0. 00049X ■ (0.00007) 3 - 0.0003fl\ (0.00007) t ^3c ~ 0 ■oooot1X f (O.00003) 3 - 0.00020X 3jt (0.00005) 0 . 1 4 2 0 B \ 4it (0.04486) where C.. 3 x ljt' = eight-firm concentration ratio in the .th market in year t, ^ x2 jt' x 3jt' and t are same as for four“ f irm c o n ­ centration ratio and (0 if t < 1965 X 4jt 1 if t > 1965. 2 The R for equation (1) was 0.4703 and for equation 0.5131. An F-test wa s conducted and the appropriate (2) was 177 statistic, = 10.097, was significant at the one- percent confi dence level. Therefore, the second theory is a significantly better pr e di c to r of changes in co n centra­ tion. The F-sta tistic w as also si gnificant at the one- percent level w h e n 1966 and 1967 we re used as introduction dates and at the five-percent level w h e n 1964 w a s used. In all four cases X,jjt was significant and positive, indicating an upward shift in concentration resulting from changes b r ou g ht about by the introduction of Medicare and Medicaid. H erfindahl indexes were not e xp l ai n ed by the independent variables. In no case did the R 2 reach a value of 0.2000 and the dummy variable, even though it was positive in each case, w a s not signif ic a nt nor did it significantly better explain the d e p e n d en t variable than did the other variables. The only independent variable w h ic h was sig2 nificant was per capita income, which had an R of 0.1454. When the du mmy variable using 1967 as the introduction date was added to per capita income, the F - st a ti s ti c comparing this equation w i t h one containing o n l y per capita income as an independent variable w a s just significant at the fivepercent confidence level. other year was This was n o t the case when any used. Three ad ditional sets of equations w e r e estimated, using total number of n u r s i n g home beds, number of p r o ­ prietorship- and p a rtnership-owned n u rs i ng home beds, and 178 number of c orporate-owned nursing home beds as the dependent variables. For the case of priva t el y -o w ne d beds, equations were e st i ma t ed the for each region but the Sault S t e . Marie Region, w h i c h had n o beds in this c a tegory during 1960's. In e stimating these equations, it was not ne cessary to standardize the independent variables to account for differences in the pl a nning regions as was done above. ind ependent variables used, disposable income, the The therefore, were population, and the number of persons 65 years of age and over. For the de p en d en t variab le home beds, the b e s t total number of n ur sing fit w a s attained when 1964 was used as the introductory date for Me d i c a r e and Medicaid. (1) Bj t = 339. 55859 + 0 . 3 0 2 6 0 x 1j t + 0 . 1 7 7 4 0 x 2 j t + 0 . 0 0 0 9 2 x 3jt (0.35917) (0.13668) (0.00005) (2) B jt , = 228.61177 + 0 . 2 3 6 5 9 xA1 n •j*. t + 0. 31029\^ A 2 j.t. + 0.00087x->3 j.* t (0.35233) (0.14332) (0.00005) + 174. 3 43 3 5X 4 j t (67.65573) where B. = total number of nursing home beds market in year t, in the .th X ^ - t = number of per sons 65 years of age and over in 3 the ..th market in year t, X^mz ] t = population of the 3.th market in ye ar t, X^., - disposable income of the .th ma r ke t in year t, jj t j „ , 0 if t < 1964 X 4jt " 'l if t >. 1964 , 179 j— 1I 2 f . t = 1960, The R 2 0.9887. . ., 13, 1961 , . . . , 1969. for equation (1) was 0.9 881 and for equation 2 While the increase in R was marginal, significant. In addition, the F-statistic, ^5 (2) was waE = 6.640, was significant at the five-percent confidence level. fore, equation There­ (2 ) w a s a significantly b et t er pr edictor of changes in the total number of beds than equation 1965 was used as the in troductory year, (1). When similar resu lts were found and the F-statistic was significant at the five-percent level. While equation equation (1) w h e n X ^ j t (2) was not significantly equaled 1966 or was positive in all four cases. 1967, better than the variable This indicates that the total number of nursing home b ed s rose as a result of the introduction of Medicare and Medical Assistance. The increase in the total number of nursing home beds, resulting from the introduction of Medicare and Medical Assistance, is not in conflict w i t h increase in con­ centration as a result of the introduction of the two programs shown in the above sets of equations. This increase in total beds does show that Medicare and Medicaid significantly increased the de ma nd for nu rsing home care and that industry capacity expanded to m e e t it. isolation, In this increased industry ca p ac i ty would tend to decrease concentration, Shepherd are accepted. if the conclusions of N e l s o n and They have found that concentration 180 is likely to decline in rapidly growing industries. Increased demand, however, by the two programs and, by itself. 5 is only one change br ought about therefore, can not be co nsidered The marked shifting of funding sources and the tightening of o pe r ating reg ulations must also be c on ­ sidered, especially their e f fe c t on the number of long­ term care facilities. Table 9 showed that the number of long-term care facilities varied only about ten percent during the 1 9 6 0 's. Thus, the increased number of bed s were due to an expa nsion of existing facilities and new, larger facilities replacing smaller ones w h i c h had closed. This increase in number of beds w i t h a relatively constant number of facilities is compatible wi th e i th e r increased or decreased concentration. The introduction of Medicare and Medicaid, of year chosen, did not significantly be t te r explain number of corporate- or pr ivately-owned beds, other ind ependent variables. owned beds, population. regardless the than did the With respect to privately- the only v a riable wh ich was significant was 2 The resulting equation had an R of 0.84 78. P jt = 207.21973 + 0 . 4 7 6 2 3 x 2:.t (0.01857) where P., ^ 5 = n umber of pr i va tely-owned beds in year t, See Chapter XI, p. 4 6. in .th ma rket 181 ^2jt = P ° P u ^-a t ^on jth m a rk e t in year t, j ~ If 2 , . . ., 12, t = 1960 , 1961, . . . , 1969. Only population and disposable income were signi ficant independent variables in explaining owned beds in a region, accounting the number of corporatefor 0.9874 of the va r i­ ation among the number of beds. COR. *= - 96. 46484 - 1. 5009 3x ? t + 0.00109X-, . 11 where C O R . ^ (0.08311) *= number of m arket in : (0.00003) 3 corporate-owned beds in the .th year t, ^ *2 jt ~ population in the ^th ma rket in year t, * 3jt ** ^ l BP osak l e income in the ^th market in year t, j = 1, 2, t = 1960, . . ., 13, 1961, . . . , 1969. It is clear from the above analysis that changes, resulting f r o m the introduction of M ed icare and Medical Assistance, c au s ed significant shifts in long-term concentra­ tion trends in the Michi ga n nursing home cally, industry. Sepcifi- the introd uc t io n of the two programs caused concentra­ tion to in c rease and, thus, competition to decrease. Medicaid and Medicare b ro u gh t about four changes w i t h r es p ec t to the Michigan n u r s i n g home industry: to public funding sources, regulations, a sharp shift from private a tight ening of operating a significant increase in demand, and a shift 182 from priva te to corporate ownership of facilities. first two changes tion; the third, The tended to result in increased c on c en t ra ­ decreased concentration; and the fourth had offsetting effects depending upon w h e t h e r corporate facilities were new or expansions of already existing facilities. it appears From the results of the testing of the model, that the shift in funding sources and the tightening of op erating regulations outweighed the increased demand for nursing care services. The introduction of Medical A ss i st a nc e and Medicare did not si gnificantly effect the ownership of facilities. which can be drawn from these Chapter VII. Policy implications findings are explored in C H A P T E R VII SUMMARY AND POLICY IM PLICATIONS In this chapter the arguments presented in previous chapters are summarized. T h e n the policy implications arising from the concl usions based on those arguments are examined, as they apply to compe tition in Michig a n' s nursing care services markets. Su mmary The p ur pose of this study has been to d et e rmine what, if any, e ff e ct the avail a bi l it y of Me d i c a r e and Medicaid pay ments for nursing care services has had on the nursing home industry m ar k et st ructure in Michigan. The industry is co m posed of nursing homes, care facilities, county medical and long-term care units of hospitals. The d i st i ng u is h in g charac teristic of these facilities is that their primary ou t pu t is the p r o v i s i o n of nursing care services. It is reasonable to expect that industry st ructure would have changed as a resu lt of the i ntroduction of these two programs, since they induced several major changes in the operat i on of nursing homes. First, the source of financing nursing care services was altered from p r e d o m i na n tl y private to primarily p ublic funding. 1B3 184 Second, regulations under which the facilities opera te d w e r e tightened. Third, there w as a sharp increase in the demand for nursing care services. T h e s e three ch anges had offsetting effects o n the market structure of the Mi c h i g a n nursing home industry. Both the shift from private to pu b li c sources of funding and the tightening of regulations tended to ma ke m arkets less competitive. As a result of the former, nu rsing homes we re held m or e a c countable for the services they provided. This forced nursing hom es to lea rn ho w to cope wi th a bureau cr a ti c pr ocess and to acquire a technical knowledge of go v er n me n t- r un programs. As a result, ma n y marginally profita b le homes chose to close or m e r g e w i t h other homes in the face of these requirements. regulations had a similar effect, T ig h t e r since m a n y facilities probably could not or did not find it profi t ab l e to m e et the tighter regulations, building regulations, p ar t ic u la r ly the in creased and w e nt out of business. Increased de m an d for nur sing care services, other hand, o n the tended to alter m a r k e t structure so that the industry b e ca m e m o r e competitive. This i n cr eased d emand could be m e t either b y the o pening of new facilities or the expansion of ex i sting ones. of scale, G i v e n li mited economies the sharp increase in demand w as not m e t on ly by the expansion of ex isting facilities. T h e small number of beds req uired to ac hieve m i n i m u m efficient size and the 185 low level of other barriers to entry made it relatively easy for new facilities to enter the market. Thus, the increased demand was met by a combination of small homes expanding to achieve economies of scale and new faci li­ ties opening. The e x pa nsion of existing facilities and the replacement of small facilities w hi c h closed by new, larger facilities tended to alter m ar k et structure so that the industry b ecame m o re competitive. These three major changes, re sulting from the introduction of Medical A s s i s t a n c e and Medicare, caused a fourth change w h i c h had offset ting effects on the competitiveness of the industry. This change was the rapid expansion of co r po r at e ownership as a type of facility ownership. It tended to cause com petition to increase w h e n the c o rp o ra t e - o w n e d facilities were new and to perpetuate it w h e n they w e r e expansions of previ ou s ly - ex i st i ng n o n c o r po r at e facilities. The net effect of these four changes on the market structure of the M i c h i g a n nursing home industry is a priori uncertain. T o de t ermine if these changes had a signifi­ cant effect on that structure, two theories of the evolu­ tion of the m a r k e t structure w e r e posed. The first theory was that structural c h anges occurred due to a long-term grow th in d e ma n d r es u lt i ng from chan ging demographic characteristics. T ha t is, as the number of aged, both absolutely and as a percentage of total population, 186 urbanization, and per capita income increased, for nursing care services increased. the demand W h il e the second theory took acc ount of long-term trends in market struc­ ture, it stated that the changes resulting from the intro­ duction of Me d icaid and M e d i c a r e caused a shift in market structure. Wh e th e r co ncentration increased or decreased is determined by the d i re c ti o n and significance of shift. the Each theory was stated in e q ua t i o n from and sets of equations w e r e estimated by the o rd inary least squares technique, using four-firm concent r at i on ratios, firm concent r at i on ratios, Herfindahl indexes, number of nursing care beds, beds, eight- total number of corpor at e -o w ne d and number of p ri v ately-owned beds as d ep e nd e nt variables. For ea ch set an F-test was conducted to d e t e r ­ mine w hether the second theory was a si gnificantly better predictor of the dependent variable than the first tyeory. When sets of equations were es timated for four-firm and e ig h t- f ir m concent r at i on ratios, the second t heory was found to be a significantly better p re d ic t or of the de pendent va r iable than the first. In all cases the sign of the dummy va r i a b l e for the in troduction of the two progra ms was positive, m e a n i n g that, ce teris parbius, co ncent ration increased as a result of M e di c a r e and Medicaid, W h e n the d ep e ndent variable was Herfindahl indexes, conce n tr a ti o n significantly increased w h e n the equa tion wi t h percapita income and 1967 as the in troductory 187 date for the dummy variable as independent variables was compared to ono with only per capita income as an inde­ pendent variable. The second theory was a significantly better predictor of the total number of nursing home beds than the first for 1964 and 1965 being used as the introductory years. Again# the dummy variable for the introduction of Medicare and Medicaid was positive in all cases# indicating that the total number of nursing home beds rose as a result of the programs' introduction. This increased capacity would tend to decrease concentration# if considered in <• isolation. However# the increase in demand which this reflects is only one change brought about by the two programs and cannot be considered in isolation. introduction of Medicare and Medicaid# The regardless of year chosen, did not significantly better explain the number of corporate- or pr ivately-owned beds, than did the other independent variables. It is clear from the test of the model that changes# resulting from the introduction of Me d icare and Medical Assistance# caused significant shifts in long-term co n­ centration trends in the Michigan nursing home industry markets. Specifically, the introduction of the programs caused concentration to increase and competition to d e ­ crease. Therefore, the shift in funding sources and the tightening of operating regulations had a stronger effect 188 on m arket structure and of f se t the effect of increased demand for nursing care services. Any shift in type of o wn e r s h i p did not s i gn ificantly effect long-term trends in m arket structure. Policy Implications W h a t policy implications are there for the adoption of new or the expan si o n of existing state and federal pro ­ grams w i t h respect to the provision of nursing care services and the compet i ti v en e ss of the markets in w hi c h they are provided? It has been the tenet of ind ustrial o r g a n i ­ zation theory that the structure of an industry is important since it influences the co nduct and p e rf o rm a nc e of that industry. If that structure iB altered, in public policy, through a change conduct and per formance will change. With respect to the M i c h i g a n nursing ho m e industry, it is unlikely that the a do p ti o n of a new or an expanded state or federally ad ministered p rogram will significantly change c ur rent industry competitiveness, due to the e n v i r o n ­ ment w i t h i n w h ic h the ind ustry already operates. That is, the changes wh i ch resulted from the introdu c ti o n of M ed icare and Me d ic a l A s s i s t a n c e w e r e one-time shifts that could not be altered or e xt ended t hrough the e x pa n si o n of an existing program or the a do p t i o n of a new govern m en t -s p on s or e d program. The r e as o n for this is clear if the changes in the enviro n me n t w i t h i n w h i c h nursing homes operated are examined. 189 The first change was the marked shift in the funding sources of payments for nursing care services. above, As stated this forced facilities to learn how to cope with a bureaucratic process and to acquire a technical knowledge of government-run programs. Those operators who could not acquire this expertise were forced to close their facilities. The operators who did develop it would have little d i f ­ ficulty in applying it to a new program. A second change was that operating regulations were tightened, building requirements. especially It is doubtful that major changes could be made in these regulations, particularly the ones concerning building specifications. M ich i g a n and the country as a w h o l e have a relatively n e w capital stock with respect to nursing care facilities. An attempt to upgrade it would be faced w i t h substantial resistance from the owners of that stock. Another factor wh ich m u s t be considered is that the owners of that capital stock represent a powerful lobby, both in M i c h i g a n and in the nation's capitol. Any attempt to significantly upgrade the services p rov i d e d by nursing care facilities must o v e r ­ come the obstacles of increased costs of providing the services, limited numbers of health manpower, and the resistance of the owners. The third change was that demand increased sharply. When M edicare was implemented, that g roup of per son s most likely to demand nursing care services, the aged, was covered. Furthermore, most 190 elderly persons have very limited resources and almost no income-earning capacity. This means that by the time they have purchased nursing care services privately for a short period of time, their medical bills are usually sufficiently large to have reduced their assets and income to such an extent that they become eligible for Medicaid. This is also true for those nonaged persons who through long illnesses demand nursing care services. Thus, Medicare and Medicaid already provide coverage for those most likely to demand these services. The final change was the expansion of corporate ownership of facilities. Since this is the predominant form of ownership now, there cannot be a significant change in this direction. Two policy implications arise from the discussion in Chapter I regarding the acceptance of the assumption that increased competition is preferable to decreased competition under current industry conditions. The first implication is that the extent of economies of scale might be increased, if the current fixed staff-bed ratios were removed from state licensing and certification requirements. One reason for the limited economies of scale currently found in nursing homes is that the primary input, personnel costs, is fixed. Allowing the number and quality of staff to fluctuate might increase economies of scale. At the same time, economies of scale could be measured directly, giving a more accurate measurement of the true minimum 191 efficient scale than is possible using the survivor technique. The second policy implication is that as the p e r ­ centage of M edicaid patients to total patients increases and as licensing and certification requirements are tightened and more strictly enforced, the scope of price and nonprice competition in the nursing care services markets will decline. Also, if large economies of scale are found after the removal of fixed staff-bed ratios, the number of firms w h i c h can efficiently operate in a given market will decrease. In either case, competition is limited, as the scope of policy makers should consider alternative mar ket solutions, such as the adoption of a public utility concept of regulation. In addition, this study can be directly applied to those states with m u c h less co mpr ehe nsi ve public programs for the pur cha se of nursing care services. That is, the changes in the structure of M i c h i g a n ' s nursing home industry are an indication of those changes w h i c h are likely to oc cur in other states if they adopt compreh ens ive programs equal to the scope of Michigan's. A p p l i c a t i o n can also be made to the i n t r o duc tio n of other public progr ams for the pu r­ chase of services or products on a large scale from an industry. A prime example of such an industry is the industry p r o v i d i n g day care for children. is just d eve lop ing and issues, The industry similar to those faced by 192 the nursing home industry in the early 1 9 6 0 's, are being raised. Principal among them is whether the federal and state governments should subsidize the purchase of day care services on a large scale basis. In both a r e a s , it is important that p rospective changes in the structure of the industry involved be considered, changes in conduct and performance. since they w i l l cause APPENDICES 193 APPENDIX A SO CI A L SECURITY ACT - TITLE XVIII - SECTION IBM (j)1 Extended Care facility (j) The term "extended care facility" means (except for purposes of subsection (a)(2)) an institution (or a distinct part of an institution) which has in effect a tr an sf er agreement (meeting the requirements of s u b ­ section (1)) with one or more hospitals having agreements in effect u n d e r section 1866 and which(1) is primarily engaged in providing to inpatients (A) skilled nursing care and related services for patients who require medical or nu r s i n g care, or (B) rehabilitation services for the re ha bi l i t a ­ tion of injured, disabled, or sick persons; (2) lias policies, which are de veloped with the advice of (and with provision of review of such policies from time to time by) a group o f professional personnel, including one or more physicians and one or more registered professional nurses, to govern the skilled nursing care and related modical or other services it provides; (3) has a physician, a registered professional nurse, or a medical staff responsible for the execution of such policies; ( 4 ) (A) has a requirement that the health care of every patient must be under the supervision of a physician, and (B) provides for having a physician available to furnish necessary medical care in case of emergency; (5) maintains clinical records on all patients; (6) provides 24-hour nursing service which is sufficient to meet nursing needs in accordance with the policies developed as provided in paragraph (2), and has at least one registered professional nurse employed full time; (7) provides appropriate methods and procedures for the dispensing and administering o f drugs and biologicals; (8) has in effect a utilization review plan which meets the r e ­ quirements of subsection ( k ) ; (9) in the case o f an institution in any State in which State or applicable local law provides for the licensing of institutions of this nature, (A) is licensed pursuant to such law, or (B) is a p ­ proved, by the agency o f such State or locality responsible for licensing institutions o f this nature, as meeting the standards established for such licensing; and (10) meets such o t h er conditions relating to the health and safety of individuals who are furnished services in such institution *U.S, Congress, House of Representatives, Compilation of the Social Security Laws,Vol. 1, section ieri (j) (Washington, D . C . : U.S. Government Printing OfFTce, 1968), pp. 311-312. 194 195 or relating to the physical facilities thereof as the Secretary may find necessary (subject to the second sentence o f section 1863); except that such term shall not (other than for purposes of subsection (a )(2)) include any institution which is pri marily for the care and treatment of mental diseases or tuberculosis. For purposes of subsection (a)(2), such term includes any institution wh ic h meets the requirements of paragraph (1) o f this subsection. The ter m 'extended care facility' also includes an institution described in paragraph (1) of subsection ( y ) , to the extent and subject to the limitations provided in such subsection. APPENDIX B GEOGRAPHICAL BOUNDARIES OF GOVERNOR'S PLANNING REGIONS AND HEALTH FACILITY SERVI CE AREAS 1 Governor's Planning Regions Planning Region County 1. Detroit Monroe Washtenaw Wayne Livingston Oakland Macomb S t . Cl ai r 2. Jackson Hillsdale Lenawee Jackson 3. Kalamazoo-Battle Creek St, Jo se p h Branch Kalamazoo Calhoun Barry 4. Benton Harbor-St. Joseph Berrien Cass Van Buren 5. Flint Shiawassee Genesee Lapeer 6. Lansing Eaton Ingham Clinton 7. Saginaw Bay Gratiot Saginaw Tuscola Sanilac Isabella Midland Bay Huron ^Michigan Department of Publ ic Health. M i c h i g a n State ^° r Hospital and Medical Facilities Construction 1970-1971 CLansing, Michigan: Michigan Cepartment o£ Public Health* 1971), pp. 58, 64-6S. 197 Planning Region County 7. Saginaw Bay (Cont.) Cl are Cladwin Arenac Roscommon Ogemaw Iosco 8. Grand Rapids^tuskcgon A1 legan Ottawa Kent Ion ia Muskegon Montcalm Occana Newaygo Mecosta Mason Lake Osceola 9. Alpena Crawford Oscoda Alcona Otsego Montmorency Alpena Cheboygan Presque Isle 10. Traverse Bay Manistee Wexford Missaukee Benzie Grand Traverse Kalkaska Leelanau Antrim Charlevoix Emmet 11. Sault Ste. Marie Mackinac Luce Chippewa 12. Marquette-Iron Mountain-Escanaba Dickinson Menominee Delta Marquette Alger Schoolcraft 13. Houghton-Ironwood Gogebic Iron 198 111 n n n i n g 13. Countv r; ion ioughton - Tronwood Ontonagon Baraga Houghton Keweenaw (font.l Health f-'acilitv Service Areas Scrvi cc 1. Area larouctte Count y Marquct t c 2. St am">augh-Tryst a 1 Falls 1ron 3. hscanaba Martinet to Delta Menominee 4. Township(s) Hancock Keweenaw Houghton All but Wells, Paving All All W e l l s , Pwing but Carden, Fairbanks Spalding, Harris Nadeau, Gourlev All All but Laird, Duncan 5. Iron Mountain Dickinson Menominee All Meyer, F a i t h o m 6. L 'An s e Baraga Houghton Ontonagon All Laird, Duncan Interior 7. Manistiquc Schoolcraft Delta Mackinac 8. Muni sing Alger 9. Newberrv Alger Schoolcraft Luce Chippewa Mackinac Burt Seney All H u l b e r t , W h it efi sh Portage, Gar field 10. Ontonagon Ontonagon All but Bergland, Matchwood, Interior 11. St. Mackinac All but Newton, Portage, Garfield, Clark 12. Sault Ignace Ste. Marie Chippewa Mackinac All but Seney Garden, Fairbanks Newton All but Burt All but Hulbert, Whitefish Clark 199 Service Area County Township(s) 13- Menominee Menominee Holmes, Daggett, Codarville, Lake, Stephenson, Mellon, Ingallston, Menominee 14. Wakefield Cogebi c Ontonagon All Berg land, Matchwood If). Petosky Emmet All but Bliss, Wawatam, Carp Lake, McKinley All Torch Lake, Central Lake, Banks, Echo, Jordan, Forest Home, Kearney Tusca Rora, Mentor, Wilmot Charlevoix Antrim Cheboygan Hi. Cheboygan Cheboygan Bliss, Wawatam, Carp Lake, McKinley All but Tusca Rora, Mentor, Wilmot, Nunda, Waverly, Forest F.mmct 17. Cay lord Ostego Antrim Cheboygan Montmorency All Warner, Star N un da Vienna, Albert 18. Rogers City Presque Isle Cheboygan Montmorency All but Presque Waverly, Forest Montmorency 19. Traverse City Leelanau Benzie Grand Traverse WexfoTd All Almira, Inland All Wexford, Hanover, Springville Elk Rapids, Milton, Helen, Custer, Chestonia, Mancelona All but T-27-N R-5-W, T-2 6- N R-5-W, T-25-N R-S-W, T-2 5- N R-6-W Ant ri m Kalkaska 20. Cadillac Wexford Lake Osceola Isle All but Wexford, Hanover, Springville Dover Burdell, LeRoy, Sherman, Rose Lake, Highland, llartwick, Maxion, Middle Branch 200 S e rv ic e A r e a County Clare Missaukee Winterficld, All Frankfort Benzi e Mani stec All but Almira, Inland Arcadia, Pleasanton, Springdale, Cleon Grayling Kalkaska T-27-N R-5-W T-26-N R-5-W T-25-N R-5-W T-25-N R-O-W All but AuSable Backus, Richfield, Nester All 20. Cadillac 21. 22. (Cont.) Roscommon Crawford 23. Manistee Mani stec Mason Lake 24. T o wn sh ip (s ) Bay City Bay Arenac Tuscola Redding All but Arcadia, Cleon, Pleasanton, Springdale Freesoil, Grant, Meade Elk, Eden All but Beaver, William All but Moffett, Clayton, Whitney, Sims Wisned, Akron, Gilford 25. Saginaw Tuscola Saginaw Denmark, Tuscola, Vassar All but Chapin, Brady, Chesaning 26. Alma Gratiot Midland Clinton Ionia Montcalm All but Washington, Elba Jasper, Porter Lebanon North Plains Howe, Richland, Perris, C r y s t a l , Bloomer 27. Alpena Presque Isle Montmorency Presque Isle All but Albert, Vienna, Montmorency All Cl inton All but Curtis, Mi lien, Mikado, Greenbush Alpena Oscoda Alcona 28. Bad Axe Huron Sanilac 29. Cass City Sanilac Huron All but Sebewaing, Brookfield, Grant Austin Greenleaf, Evergreen Brookfield, Grant, Sebewaing 201 Service 29. Cass City 30. Midland Area (Cont.) County Tuscola All but Akron, Wisned, Gilford, Denmark, Tuscola, Vassar, Ko y l t o n , Arbela, Millington, Watertown BaxMid 1and Beaver, W i l l i a m All but Warren, Geneva, Grecndale, Jasper, Porter All but Bourret, Franklin, Hamilton, Arthur Gladwin Clare 31. M t . Pleasant Clare Midland Isabel 1a Mecosta 32. Tawas Citv Alcona Iosco Arenac 33. West Branch Township(s) Oscod a Roscommon Ogemaw Gladwin Arenac Iosco All but Winterfield, Redding, Franklin, Hamilton, Arthur Warren, G eneva, Grecndale All Wheatland Curtis, Millen, Mikado, Greenbush All but Burleigh, Plainfield, Reno Whitney, Sims All but Clinto n AuSable, B a c t u s . Richfield, N e s t e r All Bourret M o f f a t t , Cla yt on Plainfield, Reno, Burleigh 34. Port Huron Sanilac St. Clair Worth All but Ira, Berlin, Mussey, Emmett, Lynn, Br oa d w ay , Greenwood 35. Thumb Area Sanilac All but Worth, Austin, Evergreen, Green lea f Lynn, Mussey, Eiamett, Broadway, Green woo d Burlington, Burnside Koylton St.Clair Lapeer T us col a 202 Service Area County Township(s) 36. Muskegon Muskegon Ottawa All but Holton, Casnovia S pring Lake, Crockery, Polkton, Grand Haven, Robinson 37. Fremont Muskegon Oceana Newaygo Holton, Casnovia Greenwood All but Troy, Li 1ley, Howe, Barton, Monroe, Norwich, Goodwell 38. Hart Oceana Newa y g o All but Greenwood Troy 39. Ludington Mason All but Grant, Meade, Freesoil 40. Grand Rapids A1legan Dorr, Leighton, Hopkin?, Wayland Wright, Allendale, Tallmadge, Georgetown, Chester All but Spencer, Oakland, Grattan Boston Ottawa Kent Ionia 41. Big Rapids Meco s t a Newa y g o 42. Greenville Meco s t a Kent Ionia Montcalm 43. Holland Ottawa Allegan 44. Ionia Ionia All but Hinton, Millbrook, Wheatland Lilley, Howe, Barton, Monroe, Norwich, Goodwell Hinton, Millbrook Spencer, Oakfield, Grattan Otisco, Keene, Orleans, Ronald All but Bloomer, Crystal, Ferris, Home, Richland Port Sheldon, Olive, Blendon, Park, Holland, Zeeland, Jamestown Laketown, Fillmore, Salem, Overisel, Saugatuck, Heath, Manlius, Ganges Easton, Ionia, Lyons, Berlins.Orange, Odessa, S ebewa 203 Service Area County Township(s) 45. Heed City Lake Osceola All but, Elk, Eden, Dover Lincoln, Richmond, Cedar, Mersey, Osceola, E v a r t , Sylvan, Orient 46. Benton Harbor Berrien All but N e w Buffalo, Three Oaks, Weesaw, Galien, Buchanan, Bertrand, Niles, Berrien Hartford Van Buren 47. Dowagiac Van Buren Cass Keeler Silver Creek, Pokagon, Wayne, LaGrange, Volivia, Pen n 48. Niles Berrien Berrien, Wees a w , Galien, Buchanan, Niles, Bertrand Howard, Milton, Jefferson, Ontwa, Calvin, Mason Cass 49. Kalamazoo Kalamazoo Barry A llegan All but Ross, Climax Prairieville Martin, Ostego, Gunplain 50. Battle Creek Kalamazoo Barry Eaton Calhoun Ross, C l i m a x Barry, Johnstown, A s s y r i a Bellevue All but Burl inton, Tekonsha, Eckford, Clarendon, Homer, Albion, Sheridan, C l a rence 51. Allegan Van Buren Allegan Bloomingdale, Pine Grove Monterey, Clyde, Valley, Allegan, Watson, Cheshire, T r owbridge 52. Col d w a t e r C alhoun Branch Burlington, T e k o n s h a All but N o b l e 53. Hastings Ionia E aton B arry Campbell Vermontvilie All but Prairieville, Barry, Johnstown, A s s y r i a 54. Paw Paw Van Buren Waverly, Almena, Lawrence, P a w Paw, Antw e r p Hamilton, Decatur, P o r t e r 204 Service Area County T o w n s h i p fs) 55. South Haven A1legan Van Buren Casco, South Haven, Ceneva, Columbia, Covert, Bangor, Arlington 56. Sturgis Branch S t . Joseph Nobl c Mottville, White Pigeon, Florence(SP. half), Sherman, Sturgis, Colon, Burr Oak, Fawn River 57. Three Rivers Cass Marcellus, Nowbcrg, Porter Flowerficld, F a b i u s , Park, Constantine, L o c k p o r t , FlorencefNW half Nottawe, M c n d o n , Leonidas St. Joseph 58. Jackson Ingham Jackson 59. Albion Jackson Calhoun Onondaga, Leslie, Bunker Hill, Stockbridgc All but S p r i n g p o r t , Parma, Concord, Pulaski Springport, Parma, Concord Pulaski Clarence, Sheridan, Eckford, Albion, Clarendon, Homer 60. Hillsdale Hillsdale All but S o m e r s e t , Wheatland, Pittsford, Wright 61. Lansing Ingham All but Onondaga, Leslie, R unker Hill, Stockbridge Oneida, Delta, Windsor Portland, Danby Westphalia, Eagle, Watertown, DeWitt, Bath Woodhull, Perry Eaton Ionia Cl inton Shiawassee 62. Charlotte Eaton All but Vermontville, Bellevue, Oneida, Delta, Windsor 63. St. Johns Clinton All but Lebanon, Eagle, Westphalia, Watertown, D e W i t t , Bath Washington, Blsa Cratiot 205 Service Area Township (s) County 64. Flint Genesee Tuscola All Arhela, Millington 65. Lapeer Oak 1and Lapeer Oxford All but Almant, Burnside, Burlington Watertown Tu sc o l a 66. Owosso Shiawassee Sa gin aw All but Woodhull, Perry Chapin, Brady, Chesaning 67. Ann Arbor Wa s h t e n a w Livingston A11 Putnam, Hamburg, Green Oak Lyon M i l a n , London Oaklan d Monroe 68. Adrian Lenawee Monroe H i llsdale All Suimerfield Somerset, Wheatland, Pittsford, Wright 69. Howell Livingston All but Putnam, Hamburg, G r e e n Oak 70. Monroe Monroe All but, Milan, London, Suamerfield, Whiteford, Bedford, E rie 71. Central Detroit Wayne 72. Northwest Detroit Oakland * W ayne 73. Northeast Detroit Macomb Wayne * Not townships. Bounded b y Detroit R iver in south, O u t e r Drive and Conner Blvd. in east, Davison A v e n u e in north, and L l v e m o i s Ave. and eastern c i t y limits o f City of D e a r b o r n in east. Novi, Farmington, Royal Oak, Southfield iNorthville, Livonia, Northwest Detroit Cities of Warren, Center Line, Fraser, Roseville, Fast Detroit, St. C l a i r ^Shores Bounded by Covant, M c N i c h o Conner A v e n u e s in w e s t , M acomb Co. in north, Lake St. C l a i r in east. 206 Service Area County Township(s) 74 . Wayne Wayne Canton, Nankin, Van Buren, Romulus, Sumpter, Huron 75. Dearbom-Wyandotte Wayne #Brownstown Cities of Dearborn, Melvindalc, R iver Rouge, Ecorse, Allen Park, Lincoln Park, Southgate, Wyandotte, Riverview, Woodhaven, Trenton, Flat Rock, Gibralter, Rockwood 76. Pontiac Oakland Macomb 77. Mt. Clemens Lapeer St. C l a i r Oakland Macomb All but Holly, Groveland, Addison, Oxford, Lyon, Novi, Farmington, Southfield, Royal Oak Shelby (West Half) W a s h i n g t o n (SW Quarter) Almont Berlin, Ira Addison Bruce, Amanda, Richmond, W a s h i n g t o n (all but S W Q u a r t e r ) , Shelby (East Half), Ray, Lenox, Macomb, Chesterfield, S terling, Clinton, Harrison The townships of New Buff a l o and Three Oaks in Berrien Co u n t y and Whiteford, Bedford, and Erie in Monroe C o u n t y are p a r t o f health facility services areas with population centers in o t h e r states. BIBLIOGRAPHY 207 BIBLIOGRAPHY Public Documents State of Michigan. Department of Social Services. Four­ teenth Biennial Report J u l y 1964-June 1 9 6 6 . Fifteenth Biennial Report July~I51>6-June 1 9 6 8 . Annual Report Fiscal 1969~ Lansing, Michigan: Department o£ Social Services, 1966-1969. Letter No. 1 0 2 . Lansing, Michigan: Department of Social Services, September 27, 1967. . 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