The Impact of Asymmetric Information and Ownership on Nursing Home Access
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The Impact of Asymmetric Information and Ownership on Nursing Home Access ERIC W. CHRISTENSEN CNA Corporation, Alexandria, VA
RICHARD J. ARNOULD University of Illinois at Urbana-Champaign
A consistent pattern in the nursing home industry is that non-profit institutions serve a lower proportion of Medicaid patients than do for-profit facilities. This is contrary to the expectation that non-profit, altruistically motivated firms should serve a larger proportion of the less profitable Medicaid patients than proprietary firms. The literature confirms this pattern empirically, but provides no theoretical basis for it, which is the contribution of this paper. Specifically, we show theoretically that information disparities between providers and consumers regarding quality fosters an environment in which the percentage of uninformed consumers is a key factor in determining public-private patient mix. Keywords: nursing homes, asymmetric information, non-profit JEL classification: I11, L31
1.
Introduction
The presence of the non-profit sector in the in the nursing home market may serve to mitigate market failures stemming from information asymmetries between providers and consumers regarding quality.1 Informational advantages for providers exist due to the cost to consumers of obtaining information and the often-impaired decision-making ability of nursing home consumers (Fraundorf, 1977). As a consequence, non-profit institutions are appealing to consumers because consumers believe them to be inherently altruistic and will therefore provide high-quality care. Conversely, consumers believe that profit-motivated firms may exploit their informational advantages by reducing quality to enhance profits as Akerlof (1970) shows. Given that information asymmetries exist in nursing home markets, we model their impact on access to care for publicly and privately funded patients in both the for-profit and non-profit sectors. Before doing this, we review the literature as it pertains to asymmetric information in health care markets and develop an asymmetric information model that is consistent with the literature and nursing home markets. Finally, we explore the comparative
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statics of the model’s equilibrium and empirically test one of the comparative statics results.
2.
Background
Prior to purchase, consumers cannot observe easily or without cost many product attributes such as quality in nursing home markets. The lack of information regarding product quality reduces the effectiveness of competitive forces, which would otherwise require sellers to produce socially optimal products. Even when product attributes are difficult to observe, Shapiro (1983) argued that consumers can make reasonable inferences about current product quality based on the quality of past purchases. However, this “reputation” effect has little relevance in nursing home markets because repeat purchases are rare and because there is little movement of patients between facilities (Spector, Selden and Cohen, 1998).2 Also, quality
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