| By: Michael Cummings

How nursing homes are changing and new business models for elder care are emerging

The nursing home industry can provide us with an object lesson in the intersection of public perception, public policy, and consumer choice for health care delivery business models. We can draw four key lessons from the history and current environment (both regulatory and economic) within the skilled nursing facility industry.


The nursing home industry experienced rapid growth in the 1960s and ’70s, principally due to the creation of Medicare in 1965. Simultaneously, and as far back as 1962, the U.S. Senate was conducting hearings into quality of care issues. During the next 45 years, congressional hearings were conducted into quality of care issues at nursing homes, focusing on poor care, inadequate physical plant, and access issues. The negative public perception of nursing homes and the ensuing regulation correcting the deficiencies (actual and perceived) were emblematic of the conflict between societal expectations and nursing home performance. Periodic undercover press coverage detailing substandard care gave rise to public outcry for regulatory reform. By the 1990s regulatory monitoring of facilities led to the imposition of punitive sanctions against offending nursing homes, including the publication of infractions. This inevitably led to further deterioration in the industry’s reputation. Ironically, as the industry’s reputation among the general public has suffered, the result of efforts to correct nursing home quality has been that:

  1. Quality has improved remarkably. Among many other positive metrics, approximately 90% of Massachusetts family members indicate they were pleased with their relatives’ care.(1)
  2. Just as facility quality is improving, public policy initiatives are reducing the need for nursing home beds by shifting patient care to alternative, less-regulated sites.

The first lesson from the industry is that the penalties associated with a damaged reputation are likely to have negative consequences far in excess of the actual damage caused by fines and sanctions. The nursing home’s place in the continuum of health care is threatened by the negative perceptions associated with quality of care issues.

Public Policy

Elder Care advocates have long pushed for care alternatives for the elderly. Some of the most promising alternatives were, until recently, not available to the vast majority of the elderly due to cost. Assisted Living Centers were developed during the last 30 years as residential alternatives to nursing homes that provide a less institutionalized and less medically driven health care alternative to nursing homes. Many of the original founders of Assisted Living Centers gained their experience in the nursing home industry. The lessons from the nursing home industry of a heavy regulatory burden and public oversight paired with difficult-to-manage public contracting via Medicare and Medicaid was not lost on the founders. Eschewing public funds, the industry largely developed along a private pay model. With private rates starting at a minimum of $2,500 a month and reaching much higher rates in many centers, this option is closed to the vast majority of elders.

The second lesson is that public policy initiatives designed to correct the failings of one part of the health care ecosystem will impact other parts to the system. The sheer size of government funding, combined with shifts in public policy can have a powerful effect on changing the competitive environment. Elder care advocates’ work in creating the regulatory and reimbursement environment within nursing homes have inadvertently led the largest sector of alternative care to place a high price on their service, pricing out many elders.

With Assisted Living Centers unavailable to most elders, advocates next turned to home care as an affordable alternative to institutional care. Through intense lobbying, advocates have developed programs funded through Medicare and Medicaid to pay for home care. There is a wide dispersion of services available, and programs vary widely by state. Levels of care can begin with just a few hours of assistance per day or include payment for full-time, live-in caregivers, depending on the program. Although data is scarce, the anecdotal perception among both federal and state government officials is that home care is both more effective and efficient.

As alternative models develop for elder care the consequences for competitors in the health care ecosystem are only now being realized. In addition, government oversight of these models is lagging far behind their growth. Looking back on the rapid growth of the nursing home industry in the 1970s, government regulators realized only after the fact that there were widespread financial and care abuses taking place. Recently, we see history repeating itself as the Justice Department has arrested large numbers of home health care providers and others caring for elders in the home, accusing them of defrauding Medicare. In addition, both federal and state government regulatory agencies are woefully unprepared to monitor the quality of care provided in an elder’s home by home care providers.

The third lesson is that new, potentially effective models require carefully monitoring from the beginning. The realities of elder vulnerability have not changed in the last 50 years, and careful monitoring is essential.

Consumer Choice

Public policy initiatives combined with market demand for alternative care options have greatly expanded consumer choice. The critical questions now facing consumers are access and cost. As the health care ecosystem expands and includes new care models consumers face an often bewildering array of choices and the various consequences for the elder’s care associated with those choices. In many cases, options are closed to elders due to cost; in others alternative care does not provide the level of care required for the truly infirm. In still other situations, choice can be limited simply due to the availability of programs in specific geographic regions.

The fourth lesson is that choice, while important, must be accompanied by education and the ability to understand the consequences of those choices if the ecosystem is to develop effective and efficient care.

Implications for Nursing Homes

In the short and intermediate term, nursing homes are likely to experience deterioration in their performance. Currently, nursing homes provide two key services: short-term rehabilitation for patients requiring acute care after hospitalization and long-term care for residents unable to live alone. There will be a marginal decline in rehabilitation services as insurers such as Medicare and private insurers attempt to shift rehabilitation services into the elder’s home or provide care on an outpatient basis. This change in demand patterns is, however, likely to run into severe headwinds as Medicare begins to impose penalties on hospitals for unnecessary readmissions. Anecdotal evidence suggests that while more expensive than home care, admission to nursing homes for rehabilitation have better long-term health outcomes that lead to fewer readmissions. The efficacy of the nursing home approach requires both data developed over time and a realization by public policymakers that home care is not a panacea.

The second service nursing homes provide, long-term care, will experience an extended period of decline as consumers choose home care as their preferred option. The impact on the industry will be a period of overcapacity leading to facility closures to match market demand to industry capacity.

Finally, as public policymakers attempt to reduce spiraling health care costs, nursing homes will offer the health care ecosystem a place for short term admission that in past decades would require an admission to an acute care hospital. In other words, nursing homes will provide short inpatient admissions for sub-acute elders requiring 24-hour care for a short term at a cost per day that is substantially less than that at an acute care hospital. The advent of Accountability Care Organizations will help fuel this need.

The Health Care Ecosystem: Lessons from the Nursing Home Industry 

Emerging health care delivery business models should pay heed to the lessons of the nursing home industry. Reputations are critical in health care. Once an organization or an industry begins to lose its reputation, the lack of legitimacy can lead to public policy initiatives that reallocate public resources to business models deemed more worthy. Heightened regulatory enforcement reduces the flexibility to innovate and consumers will seek out alternatives perceived as providing better care. If alternatives are not themselves effectively regulated, or consumers are not fully apprised of their choices and the consequences of these choices, then we risk repeating the cycle again.

Nursing homes will continue to have a place in the ecosystem. Having squandered their initial reputation, they entered a cycle in which they always operate under close regulatory scrutiny. The industry therefore has lost much of the vital ability to innovate and meet changing consumer demand.


The author is Lecturer in Management at Babson College and the founder of LTC Group, a Massachusetts corporation that owns and operates long-term care facilities.

1. “Research Report: Massachusetts Department of Public Health Nursing Home Satisfaction Program Survey Administration and Reporting,” accessed September 17, 2012,

2. The continuum of care refers to the need for progressively higher levels of care intensity as elder ages.

3. Medicare is Federal Health Care Insurance for those older than 65 and the disabled. Medicaid is a state-managed health care program for those with incomes below a predetermined level.