The Nation's elderly population is forecast to increase by 50% by the turn of the century while the cost to the Medicaid program of maintaining the poor elderly in nursing homes has been increasing at an annual rate almost double that of inflation. At these rates of increase the financial drain will bring the taxation system to its knees. Recent changes in the Medicaid laws have transferred the job of reducing the long term care costs to the individual states by encouraging them to experiment with various alternative reimbursement plans, yet there are legislative restrictions regarding what they can do.

This study proposes a reimbursement plan with financial incentives for lowering controllable costs as an alternative to the present Mississippi Medicaid plan for reimbursing intermediate nursing home care. The data base includes the cost reports filed with the Division of Medicaid for the fours years, 1982 through 1985. The proposed model plan uses the data base to simulate the financial outcomes to the facilities and the Medicaid program using two alternative behavioral assumptions; that facilities in search of the financial bonuses available under the proposed plan will reduce their controllable costs, and that facilities will not be motivated to reduce controllable costs under the proposed plan. The study further suggests which cost items are candidates for cost reduction by statistically examining the difference between the means for high cost and low cost providers.

The results show statistically significant savings would result to the Medicaid program under the proposed plan regardless of which behavioral assumption is assumed. Additionally, the results show that low cost facilities would have a statistically significant higher return on assets than high cost homes for both behavioral assumptions. However, the results do not support a statistically significant difference in return on assets for low cost facilities between the existing plan and the proposed plan. Further research is suggested to examine the possibility of returning a larger portion of the program savings to the low cost facilities to provide them with a greater incentive for reducing costs and a statistically significant larger return on assets.