Patient versus Provider Incentives in Long-Term Care

How do patient and provider incentives affect the provision of long-term care? Our analysis of 551,000 nursing home stays yields three main insights. First, due to limited cost-sharing, Medicaid-covered residents prolong their nursing home stays instead of transitioning to community-based care. Second, when facility capacity binds, nursing homes shorten Medicaid stays to admit more profitable out-of-pocket private payers. Third, providers react more elastically to financial incentives than patients. Thus, targeting provider incentives through alternative payment models, such as episode-based reimbursement, is more effective than increasing patient cost sharing in facilitating transitions to community-based care and generating long-term care savings. (JEL H51, H75, I11, I13, I18, I38, L84)