The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Nursing Homes

  • Edward C. Norton
Reference work entry


Nursing homes are healthcare providers for persons, often elderly, who need assistance living with chronic illness. This article describes the main economic issues of supply and demand for nursing home care, including quality of care and long-term care insurance.

Nursing home care is an important area for health economics because it represents the largest share of long-term care expenditure. The potential for needing nursing home care affects economic decisions for individuals over a lifetime and across generations (Norton 2000). For example, an elderly widow anticipating a need for long-term care may decrease her savings or increase her bequests to qualify for means-tested public insurance, or may demand informal care from a working daughter, even though she ultimately never enters a nursing home.

Long-term care differs from acute medical care in four fundamental ways (Norton 2000). First, long-term care is care for chronic illness or disability instead of treatment of an acute illness. Medical expenses accumulate unrelentingly. Second, the nursing home industry is dominated by for-profit facilities sometimes facing excess demand, in contrast to the hospital industry which is dominated by non-profit facilities with an excess supply of beds. Third, nursing homes have many close substitutes, including informal care. Informal care may affect the caregiver’s labour supply or may influence bequests, if such bequests are used to elicit attention and informal caregiving by children. Fourth, in contrast to relatively comprehensive acute care insurance for elderly, few people purchase private long-term care insurance and most public insurance is means-tested, with high co-payments. Thus, long-term care is usually the greatest out-of-pocket expenditure risk faced by the elderly.

This article summarises the theoretical and empirical economic research on nursing homes and long-term care. In addition to discussing supply and demand, particular attention is focused on quality of care and the market for long-term care insurance.


Aging Assisted living Chronic care Elderly Informal care Insurance Long-term care Nursing homes 

JEL Classifications

I110 I130 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Edward C. Norton
    • 1
  1. 1.