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costs, financial performance, nursing homes, quality of care, revenues



  1. Weech-Maldonado, Robert
  2. Neff, Gerald
  3. Mor, Vince


The study describes the relationship between quality of care and financial performance (operating profit margin) as it pertains to the nursing home industry. We found that nursing homes that produce better outcomes and process of care were able to achieve lower patient care costs and report better financial performance.


The nursing home industry has experienced significant financial challenges in recent years. Nursing homes have been facing declining revenues as a result of changing policies in government reimbursement, an increasing proportion of long-term-care insurance, and declining demand for nursing home care.1,2 At the same time, nursing homes have been facing increasing costs pressures as a result of caring for residents with greater disabilities and post-acute care needs, as well as higher nurse staffing costs.2 As a result of declining revenue streams and increasing costs, some nursing homes have declared bankruptcy in recent years.3,4


The financial performance of nursing homes is primarily affected by two things: the ability to generate revenues and the ability to control costs. In response to declining revenues, many nursing homes have shifted their focus to the quality of care and other services provided in hopes of attracting more private-pay residents to their facilities.5 Private-pay resident reimbursement is much greater than the reimbursement received from Medicaid, Medicare, and long-term-care insurance for the same services. Attracting a large number of private-pay residents can provide a very lucrative means of increasing the financial performance of the firm. Furthermore, nursing homes that produce high-quality care may be shielded from local competitive forces by charging above-average prices. Customers that are satisfied with the quality are more likely to be price tolerant.6


It is reasonable to suggest that producing high-quality care will result in higher costs for the facility.7 Studies have considered nursing home expenditures a measure of the firm's pledge to deliver high-quality care,8 but findings also suggest that quality of care and efficiency of care are positively related.9 The latter findings imply that nursing homes providing high-quality care generate less waste and fewer errors, thereby improving staff productivity, reducing costs, and improving financial performance.10,11 Therefore, nursing homes that have a higher quality of care may be able to simultaneously achieve higher revenues and lower costs, and as a result achieve better financial performance.


The study on which this article is based examined the relationship between quality of care and financial performance in nursing homes. The relationship between quality of care and financial performance needs to be investigated as more and more nursing homes focus on enhancing their quality of care as a means of improving their financial performance. While several studies have examined the cost-quality relationship in nursing homes, there have been no empirical studies of the quality-financial performance relationship in the nursing home industry.12-14 In this study, we include the operating profit margin as a financial performance measure. This profitability ratio measures the ability of the organization to control expenses relative to revenues. We also use a more comprehensive definition of quality that consists of structural quality indicators, process quality indicators, and risk-adjusted outcome quality indicators. Finally, we incorporate market characteristics such as the competitive environment to control for market characteristics when analyzing this relationship.


Throughout the development of the nursing home industry, several attempts have been made to ensure that patients receive quality care. But what exactly is quality care? The next section will address quality care within nursing homes.