service states have always had complete freedom in determining reimbursement levels. The nursing home industry has warned that Medicaid reimbursement levels already are too low and that further reductions would adversely affect the quality of care. Second, the Balanced Budget Act of 1997 also dramatically altered Medicare reimbursement methods for nursing homes and home health agencies and combined these changes with large budget savings. In some cases the changes have been major. As states gain new freedom to set Medicaid nursing home reimbursement levels and the federal government reduces Medicare payments, it becomes increasingly important to understand whether and how these changes might affect access and quality in long-term care. As reported below, changes in payment policies are creating great turmoil in the long-term care sector. The withdrawal of substantial resources from long-term care providers is troubling, especially because many of the recommendations in this report require more, not less, funding.


Research on reimbursement and its potential impact on the quality of care generally focuses on two broad areas of concern. First, what is the relationship between the costs of long-term care and the quality of care? This policy question is important because like most other areas of Medicaid policy, nursing home reimbursement levels and methods vary dramatically by state. For example, average Medicaid nursing home reimbursement rates for 1998 varied from a low of $62.58 per day in Nebraska to a high of $329.62 per day in Alaska. Second, does the method of payment (e.g., flat rate, prospective payment, use or type of casemix adjustment), independent of its level, affect the quality of care? This is potentially very important since government policy makers have considerable control over these policy levers.

Level of Cost or Payment and Quality

Although measuring cost and payment levels is comparatively straight-forward, measuring the quality of care is not, and the way quality is assessed can significantly affect the results of studies that examine the relationship between the two. All of the studies examined here focused on nursing homes.

Most studies have analyzed the relationship between cost or payment and quality by using some form of input (e.g., staffing levels) or process indicator as the measure of quality. For example, using 1995 –1996 Online Survey and Certification Assessment Reporting (OSCAR) System data, Harrington and colleagues (1998b,c) found a small but positive relation-

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