Changes in the relationship between nursing home financial performance and quality of care under public reporting

The relationship between financial performance and quality of care in nursing homes is not well defined and prior work has been mixed. The recent focus on improving the quality of nursing homes through market-based incentives such as public reporting may have changed this relationship, as public reporting provides nursing homes with increased incentives to engage in quality‐based competition. If quality improvement activities require substantial production costs, nursing home profitability may become a more important predictor of quality under public reporting. This study explores the relationship between financial performance and quality of care and test whether this relationship changes under public reporting. Using a 10‐year (fiscal years 1997–2006) panel data set of 9444 skilled nursing facilities in the US, this study employs a facility fixed‐effects with and without instrumental variables approach to test the effect of finances on quality improvement and correct for potential endogeneity. The results show that better financial performance, as reflected by the 1‐year lagged total profit margin, is modestly associated with higher quality but only after public reporting is initiated. These findings have important policy implications as federal and state governments use market‐based incentives to increase demand for high‐quality care and induce providers to compete based on quality. Copyright (C) 2010 John Wiley & Sons, Ltd.