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Keywords:

  • Health care costs;
  • Medicare;
  • instrumental variables

Objectives. To determine whether the case mix index (CMI) based on the 53-Resource Utilization Groups (RUGs) captures all the cross-sectional variation in nursing home (NH) costs or whether NHs that have a higher percent of Medicare skilled care days (%SKILLED) have additional costs.

Data and Sample. Nine hundred and eighty-eight NHs in California in 2005. Data are from Medicaid cost reports, the Minimum Data Set, and the Economic Census.

Research Design. We estimate hybrid cost functions, which include in addition to outputs, case mix, ownership, wages, and %SKILLED. Two-stage least-square (2SLS) analysis was used to deal with the potential endogeneity of %SKILLED and CMI.

Results. On average 11 percent of NHs days were due to skilled care. Based on the 2SLS model, %SKILLED is associated with costs even when controlling for CMI. The marginal cost of a one percentage point increase in %SKILLED is estimated at U.S.$70,474 or about 1.2 percent of annual costs for the average cost facility. Subanalyses show that the increase in costs is mainly due to additional expenses for nontherapy ancillaries and rehabilitation.

Conclusion. The 53-RUGs case mix does not account completely for all the variation in actual costs of care for postacute patients in NHs.