The Effect of Closure on Quality: The Case of Rural Nursing Homes

In the early 2000s, there were a significant number of closures in the nursing home industry. This paper analyzes the effect of rural nursing home closure on the quality of care provided by the nursing homes in the market that do not close. We develop a theoretical model that shows that the direction of quality change after a closure is dependent on how quality enters the demand and cost functions. Quality changes for competitor facilities that remained open and are within 15 miles of the closure are compared to quality changes in a comparison group of facilities that are further away. Overall, the quality of care provided by competitor facilities improved after the closure. These improvements are likely because of efficiency gains in the competitor facilities due to economies of scale. From a quality perspective, the potential increase in market power caused by a nursing home closure may not be a concern if the closure occurs in an area that has lower occupancy rates than the national average.