control supply and reduce spending on nursing home care. This began in the early 1980s, when federal budget cuts to state Medicaid programs became standard features of the budget process (Bishop, 1988). The most important policies affecting the supply of long-term-care bed supply are state certificate-of-need (CON) programs.

The health planning and CON program established in 1974 (P.L. 94-641) gave states considerable authority and discretion to plan and control the capital expenditures for nursing facilities and other health facilities (Kosciesza, 1987). The effectiveness of CON policies in controlling bed supply has been widely debated and the policies opposed by many providers (Cohodes, 1982; Friedman, 1982; Swan and Harrington, 1990; Mendelson and Arnold, 1993). These controversies resulted in the federal repeal of the program in 1986 (Kosciesza, 1987).

Even after the federal repeal of the program, 44 states continued to use CON, moratoria policies, or both to regulate the growth in nursing facilities in 1993. In 1993, 31 states had CON, moratoriums, or both for ICF-MR facilities and 9 had CON for residential care. CON and moratoria policies for nursing facilities have been found to be associated with lower growth in bed ratios and higher occupancy rates (Harrington et al., 1994a). Other studies have shown that lower nursing home bed supply is associated with lower costs to the Medicaid program (Harrington and Swan, 1987; Nyman, 1988a). Thus, because of the cost pressures on states, we can expect most states to continue their efforts to limit the supply of nursing home beds even though their bed supply is not keeping pace with the aging of the population.

Market Competition Effects

Medicaid nursing home days of care account for a major proportion of all patient days (Levit et al., 1994). Nevertheless, most nursing facilities prefer private clients because facilities can generally charge private-paying residents higher daily rates than Medicaid (Scanlon, 1980a,b; Lee et al., 1983; Phillips and Hawes, 1988; Buchanan et al., 1991). Buchanan and colleagues (1991) estimated that private patient payment rates for nursing home care was 20 percent per day higher than Medicaid rates in 1987. Unfortunately, data on private pay rates for nursing facilities are generally unavailable.

Nursing facilities also tend to prefer those patients that are the least sick (unless they receive higher rates for sicker patients under case-mix reimbursement) or for whom they can provide the most cost efficient care (Holahan and Cohen, 1987; Kenney and Holahan, 1990; Falcone et al., 1991). When nursing facilities are selective in their admission policies, the access to care of those individuals with the greatest need may be limited. Where the supply of nursing home beds is limited, problems in gaining access to needed services may be exacerbated (Kenney and Holahan, 1990; Falcone et al., 1991). As noted above,

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