In the face of increasing costs and declining revenues, more and more nursing homes in the US are focusing on improvements in quality of care to increase their financial performance. This study examined the relationship between quality of care and financial performance of nursing homes in 5 states in the US. Key findings showed that nursing homes that produce better outcomes and care processes were able to achieve lower costs, and better financial performance. Further research is required to examine the strategies used by nursing homes to simultaneously increase quality and lower costs.

Background: Some nursing homes in the US have declared bankruptcy as a result of declining revenue streams and increasing costs. The declining demand for nursing home care has affected revenue streams, while residents with greater disabilities and post-acute care needs, have led to increasing costs. Yet, current policies to reimburse nursing homes, based on prospectively determined case-mix adjusted rates, reward facilities that contain their spending on care. More nursing homes are focusing on providing quality care to increase their financial performance. This study examined the relationship between quality of care and financial performance of nursing homes, by using "operating margin" (defined as net patient revenue minus total gross operating costs, divided by net patient revenue) as a measure of financial performance. Other measures of cost were also used in the analysis.

Method: Administrative databases for 1996 were merged for all nursing homes in five US states. Of 1287 nursing homes, 706 facilities that had filed Medicaid cost reports to their state agencies and were not hospital based were used in this analysis. The proportion of for-profit agencies in the study sample was slightly higher at 57% as compared to 52% in the excluded set. Process and outcome indicators of quality were derived from the Minimum Data Set data and included: prevalence of physical restraint use and catheter use as process measures; and prevalence and incidence of pressure ulcers, cognitive decline and mood declines as outcome measures. Registered Nursing (RN) staffing mix, a measure of the expertise of nursing staff, was used as a measure of structural quality. The effects of the study variables were measured using structural equation modeling.

Findings: Results revealed that better outcomes were associated with lower costs. The association between process and outcome measures of quality and financial performance was positive. However, the association between RN staffing mix and financial performance was very small and negative. No correlation was found between outcome measures of quality and revenues.

Conclusions: Findings revealed nursing homes that produced better outcomes of care were able to achieve lower patient care costs. The lack of correlation between outcome measures of quality and revenue suggests that: (1) nursing homes were not able to increase revenues by providing higher quality of care beyond a certain threshold, such as that required to meet regulatory requirements, or (2) nursing homes with higher quality care were unable to disseminate this information to potential residents, and thus were unable to increase their market share of private-pay residents to realize higher revenues. Notwithstanding the invariance of revenue and quality measures, operating margins were improved when quality was enhanced.

These findings suggest that nursing homes should be able to provide higher quality of care and have lower costs of care, and thereby do well under the prospective payment system. Further research is required to examine: (1) strategies used by nursing homes to enable them to increase quality of care and lower costs, and (2) mediating or intervening factors that may explain the observed relationships, such as productivity and efficiency.

Reference: Weech-Madonado R, Neff G, Mor V. Does Quality of Care Lead to Better Financial Performance? The Case of the Nursing Home Industry. Health Care Management Review 2003; 28 (3): 201-216.

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