Nursing Homes in Equilibrium: Implications for Long-term Care Policies

Published: 2020
Project ID: UM20-13


Long-term care is one of the most significant risks Americans face in late life. About a third of Americans older than age 70 need help with Activities of Daily Living, requiring either a nursing home or community- and home-based care. The cost of long-term care is so high that many individuals rely on the government to receive it. When the government subsidizes the cost of long-term care, it influences nursing homes’ decisions with respect to the quality and prices of private beds. This, in turn, affects the demand for nursing home care and the public burden of long-term care. We study long-term care policies in the context of nursing home care market with decision-makers on both sides of the market: households choosing between nursing home and alternative care, and nursing homes making price and quality decisions. Our model generates patterns of long-term care usage observed in the Health and Retirement Study, both at the extensive margin (entering nursing-home versus using home- and community-based care) and at the intensive margin (number of hours of care received), conditional on key demographic and economic variables. We use the model to evaluate equilibrium effects of long-term care policies, including means-tested subsidies (Medicaid) for nursing homes and home- and community-based care, on care use, the financial health of both households and public insurance programs, and economic welfare. We show that failure to consider responses from both sides of the market is likely to result in misleading conclusions about the effects of long-term care policies.