The Effect of Prospective Payment on Medicaid Payment Rates for Nursing Home Care
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This paper is concerned with the effect of prospective payment on Medicaid payment rates for nursing home care. The question is whether prospective payment systems lower costs. A multivariate model analyzes the effect of prospective payment system while controlling for other factors affecting costs. The data is a pooled cross section and times series of 47 states over twelve years. In contrast to previous research, our statistical model treats the state government's choice of payment system as endogenous. While prospective payment may lower costs in a given state, higher cost states also have more incentive to adopt perceived cost saving measures such as prospective payment. As high costs may drive a state to adopt prospective payment, costs and payment method may be simultaneously determined. We use an instrumental variable estimator to avoid any possible simultaneity bias. The statistical results of this paper suggest that prospective payment systems lower Medicaid costs for skilled nursing homes. The statistical model controlled for other variables governing state skilled care costs. These variables included cost of living differences, factor costs, the extent of federal medical subsidy to the state, state ability to pay for services, and the state political culture. In contrast to previous work, the prospective payment dummy variable was treated as endogenous. A priori reasoning and previous empirical studies suggest the likely endogeneity of prospective payment choice.
