The private demand for nursing home care

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Abstract

The fact that many nursing home patients are mentally and physically disabled has led some observers to conclude that they represent irrational consumers who are incapable of disciplining the nursing home care markets. This assumption has, in turn, led policy makers to favor regulatory solutions to nursing home problems. This paper tests the accuracy of this assumption by estimating a demand equation for private nursing home patients. Evidence if found that the private patients' response to price and quality differences among nursing homes is generally systematic and consistent with expectations derived from a conventional constrained optimization model of their behavior. Such behavior is generally consistent with consumer rationality. Some implications for public policy are discussed.

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      Market power was measured at 8.2% for private organisations, but was over 28% for non-profit organisations. Nyman (1989) estimated a demand function for places in a nursing homes sample from Wisconsin, USA. He found that providers could set price over 50% higher than marginal costs (a Lerner index of −0.59 compared to our −0.11).

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    The author wishes to thank Joseph Newhouse and two anonymous referees for helpful comments on an earlier draft. The author, however, is solely responsible for any errors or oversights.

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