The Effects of Healthcare Payment Systems on Skilled Nursing Facilities' Cost Structure and Human Resource Strategies

We examine whether skilled nursing facilities' (SNFs') cost structures vary based on their Medicaid payment systems: fixed-price (FXP) or cost-plus (C+). FXP systems—which tie payments to patient conditions, rather than costs—increase SNFs' operating risk by decreasing the association between revenues and costs. Results suggest that cost elasticities are greater in SNFs that operate primarily under FXP, with weaker results in non-profit SNFs compared with for-profit SNFs. We conclude that SNFs' cost structures are managed in part based on the operating risk resulting from their payment systems. We also find that, under FXP, managers of for-profit SNFs introduce more variable costs into their cost structures by deploying more contract labor. Finally, we show that greater use of contract labor by for-profit SNFs in FXP settings is concentrated below the registered nurse skill level. For non-profit SNFs, we find no differences in contract labor across payment types. Data Availability: All data are publicly available from sources indicated in the text.