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Asymmetric Accounting Performances and Labor Adjustments in the U.S. for-Profit Skilled Nursing Facilities, 1998-2014

Haizhen Lin, Ayung Tseng

Background: Studies have documented the positive relationship between skilled nursing facilities’ staff level and patient outcomes or quality. However, less attention has been paid to supply-side frictions; for example, SNF’s ability to retain employees during economic downturns.

Objective: We first validate whether SNFs’ accounting performances present asymmetric patterns due to accountants’ conservative judgments. Next, we examine whether SNFs exhibit asymmetric labor adjustments. If accounting performances are more negative during downturns than their positive counterparts during upturns, SNFs will face greater financial burdens to retain employees during adverse periods.

Methods: Our data is state-audited annual cost reports that SNFs submitted to the CMS from 1998 to 2014. We use county-level occupancy rate changes as the instrument for business fluctuations and run a piecewise linear regression to capture any asymmetry between positive and negative business fluctuations.

Results: We find that the commonly-used accounting profitability measure, return on assets (ROA), decreases more during economic downturns relative to the corresponding increases during upturns. When decomposing ROA into two components i.e. accrualss that involve accountants and cash flows that do not involve accountants, we find asymmetric patterns in only accrualss but not in cash flows, consistent with accountants’ conservative judgments driving the asymmetry. When examining labor adjustments, we find that SNFs are reluctant to lay off employees during downturns relative to the speed of recruiting new employees during upturns. In a subsample, we find that higher-skilled nurses are retained while lower-skilled employees are laid off during adverse periods.

Conclusion: Our findings suggest that SNFs face greater financial hardships during economic downturns due to capital providers’ reliance on accounting reporting. During those difficult times, SNFs adjust their labor forces by curtailing lower-skilled employees more than higher-skilled nurses. Our findings on SNFs’ supply-side constraints complement the proposal of mandating SNFs’ minimum staffing requirements.