The relationship between costs and quality in nonprofit nursing homes

We investigate the relationship between costs and quality in nonprofit nursing homes, which represents a key issue in the present context of adoption of cost containment measures. We estimate a total cost function for nursing home services using data from 45 nursing homes in Southern Switzerland between 2006 and 2010. Quality is measured by means of clinical indicators regarding process and outcomes that are derived from the Minimum Data Set. Conversely from many previous studies, we use panel data and estimate fixed effects models and control for unobserved heterogeneity. This allows to capture nursing homes specific features that may explain differences in quality or costs levels. We find evidence that poor levels of quality regarding outcome, as measured by the prevalence of severe pain and weight loss, lead to higher costs. Quality endogeneity is addressed through IV and GMM approaches using measures of residents empowerment through families as instruments