Government Monitoring of Health Care Quality: Evidence from the Nursing Home Sector

In contracting out, monitoring is an important policy tool to extract information on firm quality and incentivize quality provision. This paper examines a central quality inspection of nursing homes, a sector with significant welfare implications but widespread public concerns about its quality of care. Using data on nursing homes across the US, we find that nursing homes exhibit strategic responses to the inspection. Nursing homes increase the quantity and quality of labor inputs, reduce admissions, increase temporary discharges, and improve patient care in response to the inspection. However, nearly all responses described above drop immediately once the inspection is completed. While inspection rating is unlikely to reflect nursing homes’ absolute quality given the strategic responses, using a quasi-experimental research design we find that inspection rating predicts nursing homes’ relative quality. Finally, we examine the effects of quality deficiency citations issued by the inspection on incentivizing nursing homes to improve quality of care, finding mixed impacts.