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GAO-02-431R: 

United States General Accounting Office: 
Washington, DC 20548: 

June 13, 2002: 

The Honorable John B. Breaux: 
Chairman:
The Honorable Larry E. Craig: 
Ranking Minority Member: 
Special Committee on Aging: 
United States Senate: 

The Honorable Charles E. Grassley: 
Ranking Minority Member:
Committee on Finance:
United States Senate: 

Subject: Nursing Homes: Quality of Care More Related to Staffing than 
Spending: 

Since 1990, national expenditures for nursing home care have almost 
doubled, climbing from $53 billion to $92 billion in 2000. An 
increasing amount of that spending has been financed with public 
monies. Under the Medicare and Medicaid programs, the federal 
government financed 39 percent of the nation's nursing home spending 
in 2000, up from 28 percent in 1990. As federal outlays have grown, 
the Congress has focused attention on the quality of care delivered 
and the level of staffing in nursing homes. Questions have arisen 
about how federal dollars are being spent and the relationship between 
nursing homes' spending and quality of care. To better understand what 
public monies are purchasing, whether nursing homes with high total 
expenditures spend more on nursing care, and how individual nursing 
homes' expenditures relate to the quality of care they furnish, you 
asked us to examine (1) nursing home expenditures, particularly those 
devoted to resident care, and (2) whether there is any relationship 
among nurse staffing levels, quality of care, and expenditures. 

We examined the spending and staffing for freestanding[Footnote 1] 
nursing homes in three states—Mississippi, Ohio, and Washington—that 
are geographically diverse and that collect the necessary information 
to adjust homes' spending for differences in residents' care needs. We 
analyzed 1999 cost data included in Medicaid cost reports, which 
include nursing homes' spending for all residents. We adjusted these 
spending data to account for differences in the resource needs of 
residents across homes and for differences in wages across geographic 
areas. We also analyzed federal data on the results of state surveys 
of nursing home quality in those states. In addition, we discussed 
cost reporting requirements and payment methods with Medicaid 
officials from each state. Although our findings cannot be generalized 
to the country as a whole, they provide insights into nursing home 
spending patterns. We conducted our work from December 2000 through 
April 2002 in accordance with generally accepted government auditing 
standards. (For a detailed discussion of our scope and methodology, 
see enclosure I.) 

In summary, we found that nursing homes' expenditures per resident day 
varied considerably across the three states.[Footnote 2] After 
controlling for differences in the care needs of residents and in area 
wages, average total nursing home expenditures were $133 per resident 
day in Ohio and $132 per resident day in Washington and were about 23 
percent less in Mississippi. Although the total level of spending 
varied, the average share devoted to resident-care activities such as 
nursing care[Footnote 3] and medical supplies was relatively stable 
across the states, averaging slightly more than 50 percent of total 
expenditures in all three states. The share of spending devoted to 
buildings and equipment, by comparison, was more variable. For nursing 
homes within each of the states, spending also varied widely. Nursing 
homes with high total expenditures tended to have high nursing care 
expenditures, but as spending per resident day increased, the 
proportion of spending devoted to nursing care tended to decline. Some 
of the variation in spending within the states may be due to Medicaid 
payment policies, which attempt to influence the resources nursing 
homes use, generally by encouraging spending on nursing services and 
limiting payments for other services. For two of the states we 
examined, homes with a high proportion of Medicaid residents had lower 
daily expenditures per resident than homes with a low share of 
Medicaid residents. 

Homes in Ohio and Washington that provided more nursing hours per 
resident day, especially nurses' aide hours, were less likely than 
homes providing fewer nursing hours to have had repeated serious or 
potentially life-threatening quality problems, as measured by 
deficiencies detected during state surveys. But we found no clear 
relationship between a nursing home's spending per resident day and 
the number of serious quality problems. Higher spending on nursing was 
associated with fewer deficiencies only in Washington; Mississippi 
homes with higher nursing expenditures had slightly more deficiencies, 
while in Ohio we found no relationship between nursing expenditures 
and deficiencies. We received comments from state officials from 
Mississippi, Ohio, and Washington, and from two experts in nursing 
home costs and quality, and we have incorporated into these into the 
report as appropriate. 

Background: 

Nursing homes in the United States play an essential role in our 
health care system, caring for 1.6 million elderly and disabled 
persons who are temporarily or permanently unable to care for 
themselves but who do not require the level of care furnished in an 
acute care hospital. They provide a variety of services to residents, 
including nursing and personal care; physical, occupational, 
respiratory, and speech therapy; and medical social services. On 
average, 67 percent of nursing home residents have their care paid for 
through the Medicaid program, while 9 percent are covered by Medicare, 
and 24 percent are covered by other payers or pay for the care 
themselves. 

Nursing homes treat people with a wide range of clinical conditions. 
Most facilities historically have served residents whose primary need 
is custodial care. Nursing homes also treat residents with more 
complex needs, furnishing higher intensity rehabilitative therapies 
and nursing services—such as ventilator care—that previously were 
provided only in hospital settings. The mix and amount of resources 
nursing homes use determine the cost of the care they provide. These 
resources include nurses and nurses' aides (referred to in this letter 
as "nursing"); medical supplies; other resident care resources such as 
dieticians, social workers, directors of nursing, and staff and 
supplies needed for medical recordskeeping; home operations such as 
staff and supplies needed for housekeeping, food services, laundry, 
and maintenance; capital such as depreciation on buildings, equipment, 
and furnishings; and administration such as administrator and clerical 
salaries and office supplies. 

The states and the federal government share responsibility for 
oversight of the quality of care provided in nursing homes. The 
federal government, through the Centers for Medicare and Medicaid 
Services (CMS),[Footnote 4] establishes the requirements that nursing 
homes must meet to participate in the Medicare and Medicaid programs. 
CMS contracts with state agencies to check compliance with these 
standards through on-site surveys conducted at every home at least 
once every 15 months. During these surveys, state surveyors spend 
several days on site, conducting a broad review of care and services 
to ensure that homes are meeting the needs of residents.[Footnote 5] 
Deficiencies identified during the survey process are placed in 1 of 
12 categories depending on the extent of resident harm (severity) and 
the number of residents adversely affected (scope). The most serious 
category is for a widespread deficiency that causes actual or 
potential for death or serious injury to residents; the least serious 
category is for an isolated deficiency that poses no actual harm and 
has potential only for minimal harm. 

Under their shared responsibility for nursing home oversight, state 
agencies identify and categorize deficiencies and make referrals for 
proposed sanctions to CMS.[Footnote 6] Most homes are given a grace 
period, usually 30 to 60 days, to correct deficiencies. Usually, 
states do not refer homes to CMS for sanctions unless the homes fail 
to correct their deficiencies within that grace period. CMS policies 
call for states to refer immediately for sanction those facilities 
found to have repeated severe deficiencies. 

The survey process has revealed many homes to be deficient in 
guaranteeing the safety and welfare of their residents. Each year more 
than 25 percent of nursing homes are found to have deficiencies that 
cause actual harm to residents or place them at risk of death or 
serious injury.[Footnote 7] Even so, in previous work, we concluded 
that state surveys of nursing home quality likely understate the 
extent of serious care problems, for several reasons.[Footnote 8] 
First, homes may be able to mask some problems because they can 
predict the timing of annual reviews and therefore can prepare for 
them. Surveyors can also miss problems that affect the health and 
safety of nursing home residents because of the sampling methods used 
to select the residents whose care will be reviewed and because the 
reviews rely heavily on medical records, which are not always accurate. 

In addition, the subjective nature of the survey process means that 
surveyors may apply standards unevenly. Indeed, we previously have 
reported that during attempts to validate the findings of state 
surveyors, federal surveyors have found more than three times the 
number of serious care problems recorded by state surveyors.[Footnote 
9] Further, we have found considerable variation nationwide in the 
reporting of deficiencies: there was more than a five-fold difference 
across states in the percentage of homes found by state surveyors to 
have actual harm and immediate jeopardy deficiencies.[Footnote 10] 
Such differences in reporting make comparisons across states difficult 
since it cannot be determined whether observed differences are due to 
real variations in quality or to inconsistent application of 
standards. In spite of these shortcomings, the deficiency data are the 
best available national source of information about the quality of 
care provided in the nation's nursing homes. 

Nursing Homes' Expenditures Vary Considerably, But Share Devoted To 
Resident Care Comparatively Uniform: 

We found significant variation in nursing home spending across 
Mississippi, Ohio, and Washington. Spending on capital was 
particularly variable. By comparison, the proportion of spending 
devoted to resident-care activities, such as nursing care and medical 
supplies, was relatively stable across the states, averaging more than 
50 percent of total expenditures for all three states. Within each 
state, nursing home spending varied considerably. We found that 
nursing homes with high total expenditures tended to have high levels 
of spending in all expenditure categories, including nursing, but 
those homes devoted a smaller share of their total expenditures to 
nursing compared to homes with low levels of spending. The variation 
in spending within states may be explained in part by differences 
across homes in their reliance on Medicaid reimbursement. Homes with 
large shares of Medicaid residents had lower daily expenditures than 
homes with low Medicaid shares. Further, Medicaid policies appeared to 
influence the resources used by nursing homes. Within each state, 
spending varied less for expenditure categories for which Medicaid 
payments were more restricted. 

We found that average total nursing home expenditures—excluding 
spending on therapies, drugs, and laboratory services—were $133 per 
resident day in Ohio and $132 in Washington, compared to $102 in 
Mississippi, even after controlling for differences in the mix of 
residents and in area wages (see figure 1). Although total spending 
per resident day in Ohio and Washington was similar, spending across 
expenditure categories differed somewhat. Capital spending per 
resident day averaged $22 in Washington, while in Ohio it was $13. On 
average, spending on nursing was $55 per resident day in Ohio, 
compared with $48 in Washington.[Footnote 11] But the amount spent on 
medical supplies, other resident care, and home operations combined 
was almost the same in Ohio and Washington, averaging $42 and $43 per 
resident day, respectively. 

Figure 1: Average Total Nursing Home Expenditures per Resident Day, by 
Expenditure Category, 1999: 

[Refer to PDF for image: stacked vertical bar graph] 

The graph depicts average total nursing home expenditures per resident 
day, by expenditure category in the states of Mississippi, Ohio, and 
Washington in the following categories: 

Capital; 
Administrative; 
Home operations; 
Other resident care; 
Medical supplies; 
Nursing. 

Note: Expenditures were adjusted to account for differences in the 
resource needs of residents across homes and for differences in wages 
across geographic areas. Due to data limitations, ancillary services, 
including therapies, were excluded from this analysis. 

Source: GAO analysis of fiscal year 1999 Medicaid nursing home cost 
report data from Mississippi, Ohio, and Washington. 

[End of figure] 

Although spending in Mississippi was lower than in the other two 
states, the shares of spending devoted to the different expenditure 
categories were similar to those in Ohio. Nursing expenditures in both 
states averaged about two-fifths of total spending. Other resident 
care expenditures (such as salaries and benefits for social workers 
and medical recordkeeping) were 13 percent in Mississippi and 14 
percent in Ohio. The share of spending devoted to capital was also 
similar, averaging 9 percent of total expenditures in Mississippi and 
10 percent in Ohio. 

Within each of the three states, we found wide variation in spending 
across nursing homes that was not explained by differences in area 
wages or the care needs of residents. Washington nursing homes with 
the highest spending levels had total expenditures per resident day 
that were, on average, 63 percent higher than the state's lowest-
spending nursing homes (see figure 2).[Footnote 12] There was a 
similar difference between the highest-spending and lowest-spending 
nursing homes in Ohio. In contrast, the difference between the 
highest- and lowest-spending nursing homes was much smaller in 
Mississippi (26 percent). 

Figure 2: Average Total Nursing Home Expenditures per Resident Day for 
the Lowest- and Highest-Spending Homes, 1999: 

[Refer to PDF for image: vertical bar graph] 

The graph depicts average total nursing home expenditures per resident 
day, for the lowest- and highest-spending homes in the states of 
Mississippi, Ohio, and Washington in the following categories: 
			
Lowest-spending homes; 
Highest-spending homes. 

Notes: Nursing homes with total expenditures per resident day that 
were in the top 25 percent for a state were considered to be the 
highest-spending homes. Homes with total expenditures per resident day 
that were in the bottom 25 percent for a state were considered to be 
the lowest-spending homes. 

Expenditures were adjusted to account for differences in the resource 
needs of residents across homes and for differences in wages across 
geographic areas. Due to data limitations, ancillary services, 
including therapies, were excluded from this analysis. 

Source: GAO analysis of fiscal year 1999 Medicaid nursing home cost 
report data from Mississippi, Ohio, and Washington. 

[End of figure] 

We also found that as total nursing home expenditures per resident day 
increased, the amount spent in almost every expenditure category also 
increased, but not proportionally. Although the level of their 
spending on nursing was higher, the highest-spending homes in Ohio and 
Washington devoted a smaller share of their total spending to nursing 
compared with the lowest-spending homes in each state. In both those 
states, the share of total expenditures devoted to capital increased 
as total expenditures increased. In Mississippi, the share of total 
expenditures devoted to nursing was the same in the highest-spending 
homes and lowest-spending homes, although the highest-spending homes 
provided 25 percent more nursing hours per resident day than did the 
lowest-spending homes. 

Some of the variation in spending within states may be attributable to 
Medicaid payment policies and their effects on homes with different 
proportions of Medicaid residents. We found an inverse relationship 
between spending and Medicaid share in Ohio and Washington, where 
average total expenditures per resident day were lower in homes that 
had a high proportion of Medicaid residents and higher in homes that 
had a low proportion of Medicaid residents. In Ohio, homes with a high 
Medicaid share had total expenditures per resident day that were 10 
percent lower than low-Medicaid-share homes, and in Washington, high-
Medicaid-share homes had total expenditures per resident day that were 
13 percent lower (see figure 3). In Ohio, the total expenditure 
difference between high-Medicaid-share and low-Medicaid-share homes 
was driven mostly by a difference in expenditures for administration, 
while in Washington, the difference between the two types of homes was 
due to differences in expenditures for capital, administration, and 
nursing. No relationship between spending and Medicaid share was found 
in Mississippi. Since the proportion of residents covered by Medicaid 
was greater than 65 percent for almost all Mississippi nursing homes, 
those homes may be uniformly influenced by Medicaid payment policies. 

Figure 3: Average Total Nursing Home Expenditures per Resident Day for 
Homes with the Highest and Lowest Medicaid Shares, 1999: 

[Refer to PDF for image: stacked vertical bar graph] 

The graph depicts average total nursing home expenditures per resident 
day, for homes with the highest and lowest medicaid shares in the 
states of Mississippi, Ohio, and Washington. 

Vertical bars are represented for: 

High Medicaid Mississippi; 
Low Medicaid Mississippi; 
High Medicaid Ohio; 
Low Medicaid Ohio; 
High Medicaid Washington; 
Low Medicaid Washington. 

The following categories are depicted within each vertical bar: 
Capital; 
Administrative; 
Home operations; 
Other resident care; 
Medical supplies; 
Nursing. 

Notes: Homes in which the proportion of resident days paid by Medicaid 
was in the top 25 percent for a state were considered to be high-
Medicaid-share homes. Homes in which the proportion of resident days 
paid by Medicaid was in the bottom 25 percent for a state were 
considered to be low-Medicaid-share homes. 

Expenditures were adjusted to account for differences in the resource 
needs of residents across homes and for differences in wages across 
geographic areas. Due to data limitations, ancillary services, 
including therapies, were excluded from this analysis. 

Source: GAO analysis of fiscal year 1999 Medicaid nursing home cost 
report data from Mississippi, Ohio, and Washington. 

[End of figure] 

Medicaid payment policies influence spending by creating incentives 
for homes to contain overall expenditures while encouraging spending 
on resources that most directly affect resident care and well-being, 
like nursing services (see table 1). Generally, the states we examined 
established Medicaid payment rates prospectively based on a previous 
year's spending, so that homes were at risk for any spending that 
exceeded the rate. For most spending categories, nursing homes were 
paid their costs up to a certain limit. States encouraged nursing home 
spending on nursing care and other resident care by applying higher 
limits or ceilings compared with those applied to other spending 
categories. In addition, Mississippi and Washington encouraged a 
minimum level of spending on nursing care. Mississippi made additional 
payments to homes with nursing expenditures above a certain level. In 
Washington, payments to homes with low nursing expenses were 
established based on a minimum level of nursing spending. At the end 
of the year, homes that had not spent the minimum amount had to give 
back any unspent funds. The Mississippi and Ohio Medicaid programs 
encouraged nursing homes to limit their spending in certain areas by 
offering efficiency incentives, by which homes received additional 
payments if they kept their home operations and administrative 
expenditures below the daily maximum allowable Medicaid payment 
amounts. Mississippi and Ohio also employed mechanisms to limit 
capital payments, either by not tying payment directly to a home's 
spending or by setting maximum payment rates and offering incentives 
to homes with lower expenditures. Washington's reimbursement method 
for capital was comparatively generous, which may help to explain 
higher average capital expenditures in that state. 

Table 1: Medicaid Payment Rules for Nursing Homes in Mississippi, 
Ohio, and Washington, 1999: 

State: Mississippi; 

Nursing: 
Homes paid their incurred costs up to: 120% of median costs for all 
homes[A]; 

Other resident care: 
Homes paid their incurred costs up to: 120% of median costs for all 
homes[A]; 

Medical supplies: 
Homes paid their incurred costs up to: 120% of median costs for all 
homes[A]; 

Home operations:
Homes paid their incurred costs up to: 109% of median costs for 
similar homes[B]; 

Administrative: 
Homes paid their incurred costs up to: 109% of median costs for 
similar homes[B]. 

State: Ohio: 

Nursing: 
124% of median costs for similar homes[A,C]; 

Other resident care: 
124% of median costs for similar homes[A,C]; 

Medical supplies: 
No cap 

Home operations: 
112.5% of median costs for similar homes[D]; 

Administrative: 
112.5% of median costs for similar homes[D,E]. Certain home office 
costs not capped. 

State: Washington: 

Nursing: 
115% of median costs for similar homes[A,F]; 

Other resident care: 
115% of median costs for similar homes[A,F]; 

Medical supplies: 
115% of median costs for similar homes[A,F]; 

Home operations: 
Costs associated with food services, housekeeping, and laundry capped 
at 110% of median for similar homes; other costs capped at median 
costs for similar homes[F]; 

Administrative: 
Median costs for similar homes.[F] 

Note: Payment rules for capital-related expenditures are omitted from 
this table. 

[A] Costs are adjusted to reflect differences in the resource needs of 
residents across homes. 

[B] Median costs are calculated separately for large and small homes. 

[C] Median costs are calculated separately for four geographic areas. 

[D] Median costs are calculated separately for eight groups of homes 
that are similar in number of beds and geographic location. 

[E] Nursing-related administrative costs paid as nursing costs. 

[F] Median costs calculated separately for urban and rural homes. 

Source: GAO analysis of Medicaid payment rules for Mississippi, Ohio, 
and Washington. 

[End of table] 

Across states, spending per resident day varied more and was higher 
for expenditure categories that were less constrained by Medicaid 
policies. Though Ohio and Washington have similar total expenditures 
per resident day, spending on nursing was higher and varied more 
widely in Ohio. This higher variation is consistent with that state's 
policy of establishing separate limits for more subgroups of homes, 
thereby accounting for more differences in spending across homes 
compared with Washington's system. 

Nursing Hours-—More Than Expenditures-—Related To Quality Of Care 
Deficiencies: 

In the states we examined, nursing hours per resident day—especially 
nurses' aide hours—were related to quality of care deficiencies, with 
homes providing more nursing hours being less likely to have 
identified quality problems than homes providing fewer nursing hours. 
We found no clear relationship between a nursing home's total spending 
and the frequency of quality of care deficiencies identified on state 
surveys, or between spending on nursing and quality of care 
deficiencies. In Washington, homes with higher nursing expenditures 
per resident day had fewer quality of care deficiencies. In 
Mississippi, the opposite was true, while we found no relationship 
between them in Ohio. 

We found in Washington and Ohio that nursing homes providing more 
nursing hours per resident day were less likely than homes with fewer 
nursing hours to be cited by state surveyors for having repeated 
deficiencies involving actual harm or immediate jeopardy to residents. 
This was especially true for nurses' aide hours. In Washington, 16 
percent of homes with the lowest number of nurses' aide hours per 
resident day were found to have serious deficiencies in successive 
surveys, compared with 3 percent of homes with the highest number of 
nurses' aide hours per resident day.[Footnote 13] In Ohio, among homes 
with the lowest number of nurses' aide hours per resident day, almost 
6 percent were found to have repeated serious deficiencies, compared 
to about half that many among homes with the highest number of nurses' 
aide hours per resident day. In Mississippi, however, homes with 
higher nursing hours per resident day were more likely to have 
deficiencies. The findings in Washington and Ohio echo those of some 
other studies, which have shown that staffing is positively correlated 
with quality of care, although stronger associations were found 
between registered nurses' hours and quality than between nurses' aide 
hours and quality.[Footnote 14] A HCFA study on nursing home staffing 
found that, for each type of nursing staff, there is a minimum 
threshold of staff hours to residents below which homes are at 
substantial risk of increased quality problems.[Footnote 15] 

Studies of nursing home spending have not found a clear association 
between spending and quality.[Footnote 16] One study, using defined 
outcomes as measures of quality, found that higher quality can be 
associated with lower costs.[Footnote 17] We found no consistent 
relationship between spending and quality deficiencies in the three 
states we examined. This may be indicative of the complex factors 
influencing quality in nursing homes or because increased spending 
does not necessarily purchase more hours of care.[Footnote 18] In 
Ohio, the presence of repeated serious deficiencies appeared unrelated 
to homes' spending on nursing.[Footnote 19] However, in Mississippi, 
homes with lower spending on nursing were less likely to have been 
found deficient in state surveys. This is consistent with our finding 
that homes in Mississippi with lower staffing levels had fewer 
deficiencies. By contrast, in Washington, we found that homes with the 
lowest expenditures per resident day on nursing were more likely to 
have repeated serious deficiencies than were homes with highest 
nursing expenditures per resident day. Of the lowest-spending homes, 
17 percent had repeated serious deficiencies, compared with 7 percent 
of the highest-spending homes. Further, a larger share of the highest-
spending homes had no serious deficiencies compared with lowest-
spending homes. Homes with serious deficiencies in successive surveys 
had lower average nursing expenditures (9 percent less) than did homes 
with no serious deficiencies in successive surveys. But these homes 
with repeated serious deficiencies also had higher capital and 
administrative expenditures, and as a result, had total spending that 
was 9 percent higher than homes with no such deficiencies. 

Comments From External Reviewers: 

We received comments on a draft of this report from Medicaid officials 
in Mississippi, Ohio, and Washington. They provided technical 
comments, which we incorporated as appropriate. The representative 
from Ohio reported that our findings of no relationship between 
nursing home spending and quality of care were consistent with 
analyses conducted by the state. 

We also received comments from two researchers who have done extensive 
analyses in the area of nursing home quality. We incorporated their 
technical comments as appropriate. One researcher commented on the 
complexity of the relationship between quality and staffing, noting 
that factors such as management, tenure and training, staff mix, 
retention, and turnover of staff may affect both the quality and the 
cost of care. We do not disagree with this observation. The other 
researcher was concerned about the possible interpretations of our 
results and noted that increased spending does not necessarily 
increase hours of nursing care, but that increased hours would 
increase homes' costs, which homes might afford by decreasing their 
non-nursing costs or by lowering their profits. We point out that 
nursing homes could increase nursing hours, and not necessarily costs, 
and that the homes with higher spending had disproportionately higher 
spending on capital, home operations, and administrative expenses—not 
nursing care. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to Medicaid officials in Mississippi, Ohio, and Washington and to 
interested congressional committees. In addition, the letter will be 
available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. If you or your staff have any questions, please 
call me at (202) 512-7114 or Carol Carter, Assistant Director, at 
(312) 220-7711. Staff who made major contributions to this letter 
include Christine DeMars, Dana Kelley, and Daniel Lee. 

Signed by: 

Laura A. Dummit: 
Director, Health Care—Medicare Payment Issues: 

Enclosure: 

[End of section] 

Enclosure: 

Scope and Methodology: 

To determine levels of spending in nursing homes and the factors 
influencing that spending, we analyzed the 1999 Medicaid cost reports 
of nursing homes in three states, Mississippi, Ohio, and Washington. 
The cost reports capture nursing home expenditures associated with the 
care of all residents living in Medicaid-certified nursing homes in 
the states. Because we wanted to uniformly adjust nursing home 
spending for differences in the care needs of residents, we selected 3 
of the 18 states that use the Resource Utilization Group (RUG) case-
mix classification system in their Medicaid payment systems, were 
geographically diverse, and could provide us with electronic data in a 
timely fashion.[Footnote 20] We examined the expenditures of 
freestanding nursing homes only; homes that were part of another 
facility, such as an acute care or rehabilitation hospital, were 
excluded from the analysis.[Footnote 21] Medicaid nursing home 
reimbursement practices vary considerably across states and, 
therefore, the results of our analyses cannot be generalized to the 
rest of the country. 

The three states' cost reports included slightly different 
categorizations of costs. We aggregated the more detailed spending 
available in some of the cost reports into six uniformly defined 
categories: nursing (salaries and benefits for registered nurses, 
licensed practical nurses, and nurses' aides), medical supplies, other 
resident care (such as salaries and benefits for dieticians, social 
workers, and directors of nursing; and staff and supplies for medical 
recordkeeping), home operations (such as staff and supplies needed for 
housekeeping, food service, laundry, and maintenance), administrative 
(such as administrative and clerical salaries and office supplies), 
and capital (such as depreciation on buildings, equipment, and 
furnishings; interest; leases; and rentals). Ancillary services, 
including therapies, were not included in our analysis because 
spending for these services was not uniformly reported on the state 
cost reports that we examined. 

We excluded nursing homes that had cost-reporting periods of less than 
10 months or greater than 14 months. We also excluded homes that had 
aberrant values for total expenditures per resident day and nursing 
hours. Finally, we excluded homes with missing data. In total, we 
excluded 5 percent of free-standing nursing homes in Washington and 5 
percent of free-standing homes in Ohio. In Mississippi, we excluded 31 
percent of free-standing nursing homes, largely because of missing 
data.[Footnote 22] Our final sample sizes were 105 homes for 
Mississippi, 826 homes for Ohio, and 232 homes for Washington. In 
Washington and Ohio, our final sample of homes did not differ from the 
population of free-standing homes in terms of number of beds, 
ownership, and rural and urban location. In Mississippi, our final 
sample of homes included a slightly higher share of proprietary homes 
and more large homes and fewer small homes, compared to the population 
of free-standing homes. 

To compare spending across facilities, we adjusted nursing 
expenditures for differences in resident complexity, as calculated by 
the states for each nursing home using the RUG classification system. 
Nursing, other resident care, and administrative expenditures were 
also adjusted for differences in wages across geographic areas using 
the Medicare hospital wage index. 

Our staffing analysis assessed the total number of registered nurse, 
licensed practical nurse, and nurses' aide hours per resident day, as 
reported on Ohio and Washington cost reports.[Footnote 23] Staffing 
hours were not reported on Mississippi cost reports. For that state, 
we used data from a voluntary 1-month study (December 1999) of total 
staffing hours (all nursing hours and nurses' aide hours combined). We 
extrapolated these data to a 12-month period.[Footnote 24] 

We measured quality using deficiency data reported in CMS's On-line 
Survey Certification and Reporting system.[Footnote 25] We examined 
deficiencies recorded in the following areas: physical restraints, 
abuse, quality of life, dignity, pressure sores, indwelling catheters, 
treatment of incontinence, nutrition, dehydration, unnecessary drugs, 
antipsychotic drugs, and nursing staff. Good quality homes were 
determined to be those that CMS considers to be "in substantial 
compliance" in the areas we examined. In Ohio, 56 percent of homes 
fell into this category, compared with 43 percent and 24 percent of 
homes in Mississippi and Washington, respectively. 

Because of differences in the frequency of deficiencies across the 
states, we used a relative measure to identify poor quality homes. We 
defined as poor quality those homes that had G-level deficiencies or 
worse in successive surveys. These are homes that were found in two 
consecutive surveys to have deficiencies in the same area that caused 
actual harm, potential for death or serious injury, or actual death or 
serious injury. Five percent of Ohio homes met this definition of poor 
quality and 10 percent of Washington homes did. No homes in 
Mississippi met this definition, so we chose a less stringent 
definition for that state: Poor quality was defined as homes that had 
four or more D-level deficiencies (deficiencies that have the 
potential for more than minimal harm) or two or more G-level 
deficiencies in a single survey. Fourteen percent of Mississippi 
nursing homes fell into this category. 

[End of section] 

Footnotes: 

[1] Freestanding nursing homes are not part of another facility such 
as an acute care or rehabilitation hospital. 

[2] Due to differences in the state reporting requirements for 
spending on ancillary services (such as physical, occupational, and 
speech therapy, and drugs and laboratory services), these services 
were excluded from this analysis. 

[3] Throughout this letter, "nursing" refers to services provided by 
registered nurses, licensed practical nurses, and nurses' aides. 

[4] 0n July 1, 2001, the Health Care Financing Administration (HCFA) 
was renamed the Centers for Medicare and Medicaid Services (CMS). This 
letter refers to the agency as HCFA when referring to actions taken 
before the name change and as CMS when referring to actions taken 
since the name change. 

[5] Surveyors assess the provision of services in residents' plans of 
care, the use of physical restraints, the incidence of pressure sores, 
the treatment of incontinence, the use of antipsychotic drugs, the 
rate of medical errors, the adequacy of the nursing staff, the 
maintenance of residents' quality of life and personal dignity, the 
facility's cleanliness, and the thoroughness of employee background 
checks, among many other areas. 

[6] States are responsible for enforcing standards in homes with only 
Medicaid certification. 

[7] U.S. General Accounting Office, Nursing Homes: Additional Steps 
Needed to Strengthen Enforcement of Federal Quality Standards, 
[hyperlink, http://www.gao.gov/products/GAO/HEHS-99-46] (Washington, 
DC: March 1999). 

[8] U.S. General Accounting Office, California Nursing Homes: Care 
Problems Persist Despite Federal and State Oversight, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-98-202] (Washington, DC: July 
1998). 

[9] U.S. General Accounting Office, Nursing Homes: Sustained Efforts 
Are Essential to Realize the Potential of the Quality Initiatives, 
[hyperlink, http://www.gao.gov/products/GAO/HEHS-00-197] (Washington, 
DC: Sept. 2000). 

[10] Immediate jeopardy deficiencies are those that have caused or 
have the potential to cause serious injury or death. 

[11] Due to data limitations, we were unable to separate nursing-
related administrative expenditures from nursing expenditures in Ohio, 
which may explain in part that state's higher nursing costs per 
resident day. 

[12] Nursing homes with total expenditures per resident day that were 
in the top 25 percent for a state were considered to be the highest-
spending homes. Homes with total expenditures per resident day that 
were in the bottom 25 percent for a state were considered to be the 
lowest-spending homes. 

[13] Nursing homes with nurses' aide hours per resident day that were 
in the top 25 percent for a state were considered to be the highest-
aide-hour homes. Homes with nurses' aide hours per resident day that 
were in the bottom 25 percent for a state were considered to be the 
lowest-aide-hour homes. 

[14] Joel W. Cohen and William D. Spector, "The Effect of Medicaid 
Reimbursement on Quality of Care in Nursing Homes," Journal of Health 
Economics 1996;15:23-48; John A. Nyman, "Improving the Quality of 
Nursing Home Outcomes: Are Adequacy- or Incentive-Oriented Policies 
More Effective?" Medical Care 1988:26(12):1158-1171. 

[15] Health Care Financing Administration, Report to Congress: 
Appropriateness of Minimum Nurse Staffing Ratios in Nursing Homes, 
Summer 2000. 

[16] See for example Mark A. Davis, "On Nursing Home Quality: A Review 
and Analysis," Medical Care Review 1991; 48(2):129-166; John A. Nyman, 
"The Effect of Competition on Nursing Home Expenditures Under 
Prospective Reimbursement," Health Services Research 1988; 23(4):555-
574; Donald F. Vitaliano and Mark Toren, "Cost and Efficiency in 
Nursing Homes: A Stochastic Frontier Approach," Journal of Health 
Economics 1994;13:281-300. 

[17] Dana B. Mukamel and William D. Spector, "Nursing Home Costs and 
Risk-Adjusted Outcome Measures of Quality," Medical Care 2000; 
38(1):78-89. 

[18] For example, a home may pay higher wages or it may hire a 
different (and more skilled) mix of personnel, which would increase a 
home's costs without raising care hours. 

[19] Reviews of 1999 Ohio nursing home cost report data by that 
state's Bureau of Long Term Facilities also found no clear 
relationship between nursing home spending and the frequency of 
quality of care deficiencies. 

[20] This classification system sorts nursing home residents into 
groups based on their clinical condition, functional status, and 
expected use of certain services. Payments for each group are adjusted 
up or down to reflect the level of resources needed to care for the 
average resident in the group, relative to the overall average cost. 

[21] Because of their affiliations with hospitals and other health 
systems, the cost structures of facility-based nursing homes can 
differ substantially from those of freestanding homes. For this 
reason, we excluded those homes from our analysis. 

[22] The most common missing information was the staffing data. The 
voluntary nature of the special staffing survey may have contributed 
to the number of homes with missing data. 

[23] Due to data limitations, we were unable to separate out spending 
on rehabilitation aides from spending on nurses' aides in Washington 
nursing homes. 

[24] We also examined Mississippi nursing home staffing data from 
another point in time and determined that the December 1999 data were 
a reasonable representation of the year. 

[25] These data record the findings of routine and follow-up state 
surveys to assess compliance with federal standards. We used results 
from the most recent survey for each home; generally, homes' most 
recent surveys were in 1999 or 1998. Deficiencies identified in the 
survey process are placed in 1 of 12 categories, labeled "A" through 
"L" depending on the extent of resident harm (severity) and the number 
of residents adversely affected (scope). The most dangerous category 
(L) is for a widespread deficiency that causes actual or potential for 
death or serious injury to residents; the least dangerous category (A) 
is for an isolated deficiency that poses no actual harm and has 
potential only for minimal harm. Homes with deficiencies that do not 
exceed the C level are considered in "substantial compliance," and as 
such, providing an acceptable level of care. 

[End of section]