On the Economics of Institutional Care of the Elderly in the U.S.: The Effects of a Change in Government Reimbursement

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Abstract
We present an optimization model of a nursing home which incorporates the following characteristics: proprietary profit maximization, the distinction between private and Medicaid patients, non-essential expenditure aimed at market identification, and cost-based government reimbursement. The model is used to analyze the effect of changes in government reimbursement. The theoretical analysis indicates that increases in government reimbursement need not lead to increases in non-essential cost expenditures and private patient charges; in fact the contrary may result. The econometric analysis suggests empirical support for the latter. Higher reimbursement factors are associated with lower charges.

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