Our results support the contention, derived from structural inertia theory, that where in the organization change occurs determines whether it is disruptive and thus contributes to performance failure or adaptive, protecting against failure. Our results indicate that change of ownership, particularly when it occurred with greater frequency over the study period, increases the likelihood of termination from public program participation. This suggests that major reorganization required by change in ownership disrupts the organization’s structural stability and accountability, increasing the risk of performance failure (Hannan & Freeman, 1984
). Change to for-profit chain affiliation also increased the odds of a free-standing nursing home being terminated from Medicare/Medicaid participation. While this result may be time sensitive, reflecting the increased vulnerability associated with membership in financially over-extended chains during the study period, it supports the contention that organizations that undergo core structural change in a sense become newagain and at risk for the “liability of newness” (Nyhan et al., 2001
). However, while our results are consistent with prior studies that found that firms are most likely to fail at founding and reorganization (Zucker, 1987
), a more recent study suggests that the hypothesis of a renewed liability of newness associated with core change might not be applicable to older and larger organizations (Wischnevsky & Damanpour, 2006
Prior studies have argued that while the process of change is disruptive and potentially detrimental, the content of change may be beneficial if it results in a better fit with environmental demands (Haveman et al., 2001
). Peripheral change in the form of related diversification represents a rational response to a confluence of market and regulatory events that change the expectations of key resource providers regarding the role of the nursing home. However, while statistically significant, the effect of related diversification was modest, suggesting that peripheral change in a complex and challenging operating environment may offer limited protection against performance failure.
Major change in reimbursement clearly increases the vulnerability of U.S. nursing homes to performance failure. As the major payer for nursing home services, changes in Medicaid reimbursement may be particularly disruptive. With respect to Medicare, our results suggest that there was fall-out during the years of PPS phase-in, in that the likelihood of program termination was significantly higher in the years 1998–2000. However, there was no sustained impact in later years. This suggests that while the impact of this environmental shock was profound, it was limited to facilities lacking the financial strength (as our results suggest, perhaps due to high Medicaid census or low occupancy) to withstand it. The departure of these weaker facilities may have left the industry more financially robust and increased the level of quality industry-wide through elimination of those providing the poorest quality of care, both of which may be desirable consequences. However, the facilities terminated from program participation in the wake of PPS may be those serving the poorest and most vulnerable populations. Thus, an unintended consequence of both federal and state case mix implementation may have been to decrease nursing home access to those in greatest need (Mor, Zinn, Angelelli, Teno, & Miller 2004
; Smith, Feng, Fennell, Zinn, & Mor, 2007
Consistent with studies of hospital failure (Alexander et al., 1996
; Zucker 1987
), inferior financial and quality performance increases the likelihood of public program termination. The consistency of this finding across multiple measures of performance is noteworthy. This suggests that a performance “report card” incorporating these and potentially other performance measures, may be a useful predictor of nursing homes at risk for termination. From a policy perspective, termination from public program participation reduces access to care for vulnerable residents whose care is reimbursed by these programs, particularly in markets with fewer nursing home care providers. An “early warning” system based on reported performance measures could be usefully employed by regulators to intervene (if deemed to be in the public interest given available alternatives) by identifying problems and taking corrective action before program termination. New Jersey recently implemented such an “early warning system” based on monthly reporting of financial indicators, intended to detect hospitals in underserved areas whose poor financial health may place them at risk for failure (Tamari, 2008
There is also evidence for another concept derived from structural inertia theory, the “liability of smallness”, since the odds of failure decrease monotonically with size, with the largest facilities (over 200 beds) being least likely to fail. Gifford and Mullner (1988)
found that small hospitals are more likely to close, consistent with this concept and our findings with respect to nursing home performance failure.
The impact of the control variables included in our analysis merits some comment. Our assumption that a more munificent environment, represented by per capita income, would be a buffer against organizational failure was born out, although the effect was minimal. Of considerable interest, higher Medicaid payment rates, which have recently been associated with better nursing home quality (Grabowski, Angelelli, & Mor, 2004
), were found to reduce the odds of termination in our study. However, how much society is willing to subsidize the entire nursing home industry to reduce the risk of a small number of failures has not be explicitly discussed in debates about the cost of delivering high quality nursing home care.
While some of the factors we considered, such as Medicare PPS introduction, are specific to the U.S. nursing home industry, we believe our findings have relevance for other countries facing similar challenges in long term care provision. Efforts by policy makers in the U.S. and United Kingdom (U.K.) to assure the quality of institutional care while at the same time increasing the availability of home care have focused on payment reforms and increased regulatory oversight (Clarkson, Hughes, & Challis, 2003
; Weimer et al., 2007
). Price pressures a decade ago apparently contributed to closures of facilities in many regions of the U.K. (Darton, Netten, & Forder, 2003
). Thus, as in our study, pricing policy may be an important contributor to declining performance culminating in failure. However, the literature on facility closures suggests that while reimbursement rates and local prices have not kept pace with rising costs, policy changes related to increasing support for home care also appear to have been a factor (Clarkson et al., 2003
; Darton et al., 2003
; Netten et al., 2003
). A survey of local authorities in the U.K. revealed that during 2000–2001, six percent of homes were closed, primarily smaller homes. Thus, like U.S. facilities, U.K. homes may be vulnerable to the “liability of smallness”.
In addition to facing similar price and cost pressures, there are similarities in the changing operating environment. Similar to the effect that assisted living has had on the demand for nursing home services in the U.S., changes in demand for U.K. nursing homes is reflected in the placement of high dependency residents in residential facilities rather than nursing homes (Netten et al., 2003
). Finally, while more related to cost than price, the change in care standards in the U.K. that appears to have increased vulnerability to closure may be an environmental shock with ramifications similar to the introduction of case mix reimbursement (MacDonald & Cooper, 2007
While we believe the results of this study provide important baseline information regarding the determinants of performance failure in nursing homes, there are some limitations to our analyses. First, in measuring peripheral change we were confined to examples of investment in post-acute care diversification that were available in our data. Other types of adaptive peripheral change (for example, implementation of clinical information systems or staff development initiatives) may also reduce the likelihood of performance failure, but data reflecting these innovations are not available on a national basis. In addition, because 1996 was the first year that all relevant data items were recorded in OSCAR, we cannot determine if diversification efforts preceded that date. Also, our measure of the extent of diversification does not reflect changes in the composition of the service portfolio over time, only in the level of investment. Also, while we have established that our measures of core and peripheral change, environmental shock and performance relate to organizational failure as we have defined it, these relationships may not bear out under alternative definitions. Because we limit our analysis to urban facilities, findings are not generalizable to rural locations. Finally, while theory posits that core structural change is disruptive and would lead to performance failure, measurement imprecision may compromise the accuracy of temporal sequencing with respect to ownership change and termination. Thus, we cannot rule out the potential for reverse causality. However, most of the effect of ownership change on termination appears to be anterior because the frequency of ownership changes is strongly related to termination and most termination date events occur after the ownership change date.
In conclusion, while prior studies have examined determinants of poor performance in nursing homes (Zinn, Mor, Feng, & Intrator 2007a
), to the best of our knowledge, our study is the first to consider how differences in the location of structural change, prior performance in key functional areas, and environmental shock contributes to major performance failure. Given the key role nursing facilities play in caring for the frailest and most vulnerable populations, the causes of performance failure need to be better understood, particularly if these causes are the unintended consequences of policy change. Future research should consider what aspects of prior performance are most predictive of failure and how implementation of adaptive mechanisms like diversification lowers risk. Poor performance and the frequency of change in ownership may reflect weak management unable to sustain acceptable levels of quality resulting in greater risk for termination. Effective management will institute adaptive organizational changes in response to environmental scanning. Knowledge of how managers identify and then adapt to the myriad threats they encounter on an ongoing basis can inform effective intervention strategies.