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 the quality of care. Using data on nursing homes across the US, we find that nursing homes exhibit strategic responses to the inspection in multiple core dimensions. 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 drop immediately once the inspection is completed. While inspection ratings are unlikely to reflect nursing homes’ absolute quality given the strategic responses, we find that they nonetheless predict nursing homes’ relative quality: using a quasi-experimental research design, we find that staying at higher-rated nursing homes lowers patient mortality. Finally, we examine the role of the inspection in incentivizing sustained nursing home quality improvements through quality deficiency citations, finding mixed effects.