Traditional practice attempts to control public nursing home expenditures by controlling the supply of beds via Certificate of Need (CON) regulations. Many in the health services arena acknowledge that such regulation may have lead to a supply constrained market for nursing home care. Yet most researchers ignore or fail to account properly for this potentially binding constraint when investigating the demand for nursing home care.

This project makes use of available statistical techniques to account for the potentially binding supply constraint. Using a Tobit model to adjust for right hand censoring private pay and Medicaid demand equations are estimated at the market and firm level in the State of Michigan for 1987. For comparative purposes, ordinary least squares (OLS) regression models were also estimated.

Results indicate that although the private pay nursing home market is likely not supply constrained, the Medicaid demand for nursing home care is. Therefore, although private pay nursing home demand can be adequately evaluated with traditional OLS regression analyses, the use of such methods to estimate the Medicaid demand for care produces biased and inconsistent estimates. Substantial differences were found between the OLS and Tobit estimates for Medicaid demand at both the market and firm level.

When OLS regression methods are used, a positive relationship between poor quality and Medicaid demand is detected. However, once Tobit models are used to account for the potentially binding supply constraint, no such relationship exists. This finding supports previous speculation that Medicaid nursing home residents have the ability to differentiate between good and bad quality, but when faced with a supply constraint simply are not in a position to exercise their preferences for good quality.

Although these results indicate that CON legislation hinders access and quality for Medicaid recipients, they do not necessarily argue for their removal. Responsible nursing home policy must be concerned with access, quality, and costs. Few would argue that CON has not been effective in controlling costs. The challenge is to control costs while simultaneously ensuring access and quality.