The dilemma of vacant beds: Did lenient CON policies toward hospitals make nursing homes ’sick’?

Government regulators use certificate-of-need (CON) licensing for multiple purposes and objectives. This study examines an initiative in Florida during much of the 1990s when CON restrictions on skilled nursing home care were greatly relaxed in an attempt to relieve financial distress of acute care hospitals in Florida. The policy shift freed hospitals to provide lucrative post-discharge care under Medicare at their in-house skilled nursing units. The consequences of this policy for freestanding skilled nursing facilities are examined in this paper. For the analysis, we create two measures of hospital-based skilled nursing facility (SNF) activity within each health service area: an annual measure of the total number of hospital-based SNF days and an annual measure of hospital-based SNF revenue in the health service area. Under the assumption that the amount of hospital-based SNF care in a market is endogenous, we instrument it using two measures: the number of patients discharged from hospitals in the health service area to SNF care and the weighted average of occupancy rates for acute care in hospitals within a health service area. Panel regression models of freestanding skilled nursing facility performance are estimated with spatial effects and nursing home fixed effects that control for unspecified sources of performance variation across homes within the industry. We find that, in the period 1991 to 1997, the freestanding nursing home industr