More and more people are living past 75, 85, and even 95. As they age, the elderly suffer not only acute illness requiring care in hospital, but chronic disabling conditions that require long-term care.

The joint state-federal Medicaid program is the predominant payment source for institutional long-term care in Illinois. Nearly 62 percent of institutional long-term care population is receiving Medicaid.

Under the Medicaid program, the federal government will not provide a state with federal financial participation (FFP) unless the state also contributes its portion. In order to painlessly maximize FFP, many states began establishing taxing policies that both specifically targeted certain health care providers (e.g. nursing homes) and contained hold harmless guarantees. Hold harmless policies essentially guaranteed that assessed providers would receive back in enhanced reimbursement rates at least as much as and usually more than they paid in assessments. This is called assessment program.

The state of Illinois began their assessment program in fiscal year 1992. Under the fiscal year 1992 program, nursing homes were assessed at a rate of 15 percent m their fiscal year 1991 Medicaid revenue. In fiscal year 1993, nursing homes were assessed at a rate of $6.30 per occupied bed day.

The primary focus of this research will be to analyze the impact of the assessment program on nursing home markets. The central hypothesis to be tested is that nursing homes may increase private pay patients price, decrease private pay patients bed days, and increase Medicaid patients bed days due to assessment program.

The empirical study supports the hypothesis. The total impact of the assessment program increases private pay patient price, decreases private pay patients bed days, and increases Medicaid patients bed days.

Also, we calculate the elasticity of this effect on the nursing home price and output. This total effect of the assessment program has a large and positive impact on Medicaid patients bed days and a slightly negative impact on private pay patient price. However, this total impact has a large and negative impact on private pay patients bed days. This is the area that we need to pay attention to.