Five-star ratings for sub-par service: Evidence of inflation in nursing home ratings

Niam Yaraghi is a Fellow in the Brookings Institution’s Center for Technology Innovation. He is an expert on the economics of health information technologies. Nearly two million Americans spend an average of 835 days of their lives in one of the 15,700 nursing home facilities in the United States (National Center for Health Statistics 2009). The Department of Health and Human Services estimates that in 2009, 4.1 percent of Americans over 65 years old lived in these facilities. This percentage increases with age, ranging from 1.1 percent in the population of 65 to 74-year-olds to 13.2 percent in the population older than 85 (Fowles 2012). In 2012 alone, Medicaid spent $140 billion on long-term services and supports (Eiken et al. 2014). Despite the importance of nursing homes in the quality of life of millions of Americans and the billions of dollars spent on them, very little information has been available about their service quality. The Centers for Medicare & Medicaid Services (CMS) designed and implemented its nursing home rating system after a congressional hearing in 2007 in which Senator Ron Wyden asked why it was “easier to shop for washing machines than it is to select a nursing home” (Duhigg 2007). Given the lack of alternative information resources on nursing homes, the publically available CMS rating has become the gold standard in the industry since its inception, and has been widely popular among patients, physicians, and payers (Thomas 2014). The recent study of Werner et al. (2016) sheds light on the importance of CMS ratings for nursing homes; according to their analysis, after the release of the ratings, the market share of one-star facilities decreased by eight percent while the market share of five-star facilities increased by more than six percent. Given its important role, nursing homes have a significant incentive to improve their ratings; however, these ratings may not always reflect true quality. As we discuss below, the rating system is prone to inflation by nursing homes.