Nursing homes set their prices by estimating the elasticity of demand for private pay patients. Typically, nursing homes first try to fill as many of their beds as possible with patients willing to pay prices above the Medicaid reimbursement rate. Only then they proceed to fill the remaining beds with Medicaid patients.

Question

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Nursing homes often aim to maximize their revenue by first filling beds with private-pay patients who can afford rates higher than what Medicaid reimburses. This strategy allows them to cover costs not fully compensated by Medicaid and only then do they fill remaining beds with Medicaid patients, who pay at a lower, fixed rate.

Nursing Homes Set Their Prices by Estimating the Elasticity of Demand