Nursing homes provide a complex array of services to a heterogeneous group of patients. They offer both clinical care and a living environment that serves as the residents’ home. Nursing homes allocate their revenue-constrained resources between these various products in ways that depend on the market environment they face.

In this study, we examine costs associated with clinical care, hotel services, and administration in New York State (NYS) nursing homes during the 1990s. We choose this time period because throughout this decade nursing homes experienced several major changes in their environment, which may have had an impact on their resource allocation decisions. In the next section, we describe these changes and discuss how they might have affected costs. We then examine data for 1991, 1996, and 1999 to determine if these changes have occurred and to what degree.

Nursing home activities and, hence, costs can be divided into three major categories: clinical (medical and personal) care, hotel services, and administration. This typology is useful because as we discuss below, each type of cost is subject to different influences and is likely to exhibit different trends. Furthermore, each influences different aspects of nursing home care. Table 1 defines these three cost categories in terms of cost centers as reported by nursing homes in their annual financial reports.

During the 1990s, the environment for nursing homes changed in ways that likely affected all three cost categories: sub-acute care continued to grow and became an important line of business for many nursing facilities, the competitive environment changed with many nursing homes markets no longer exhibiting excess demand, and the introduction of the Minimum Data Set (MDS) reporting system and increased regulations and fraud investigations increased the administrative burden that nursing homes had to meet.