Private-Pay Demand for Nursing Facilities in a Market with Excess Capacity

Several researchers have modeled the demand for nursing-home care by private-pay patients in markets with excess demand. This paper examines private-pay demand using 2002 data from Texas, a large market where most nursing facilities are underutilized. The demand for private nursing-home care increases with facility size, per-capita income, and the percent of population at least 65 years old. On the other hand, private-care demand decreases in nursing homes operated for profit and in facilities facing greater competition. The price elasticity of demand for private care is estimated to be −0.69. These results are statistically significant at the 10 percent level or better in regressions estimated by instrumental variables using the full sample as well as a sample from which probable outliers have been removed. However, the relationship of demand to the nursing home's case mix is statistically imprecise, and our measure of nursing staff per bed seems to be affected by outlying observations. The findings tend to support previous research showing that private-pay demand reflects economically rational decisions made by nursing-home residents and their representatives.