Under pressure: Reputation, ratings, and inaccurate self‐reporting in the nursing home industry

• Author: Amanda Sharkey,Amandine Ody‐Brasier
• Date: 01 October 2019
• Published date: 01 October 2019
• DOI: http://doi.org/10.1002/smj.3063

RESEARCH ARTICLE

Under pressure: Reputation, ratings, and inaccurate

self-reporting in the nursing home industry

Amandine Ody-Brasier

1

| Amanda Sharkey

2

1

Yale University, School of Management,

New Haven, Connecticut

2

University of Chicago, Booth School of

Business, Chicago, Illinois

Correspondence

Amandine Ody-Brasier, Yale University,

School of Management, 165 Whitney

Avenue, New Haven, CT 06517.

Email: amandine.ody-brasier@yale.edu

Abstract

Research Summary:This paper examines firms' strategic

responses to reputational pressures in a critical healthcare

domain—the U.S. nursing home industry. We investigate

whether organizations improved in terms of care quality

following an exogenous change in the required number of

nursing hours associated with star-based ratings to which

nursing homes are subject. We show that although firms at

risk of losing a star tended to self-report higher staffing

levels after the policy change, these reported increases

were not associated with improvements in an important

patient outcome—bedsores. These findings are consistent

with false reporting of staffing data, or insufficient or inef-

fective hiring practices. Although we cannot definitively

establish the existence of false reporting, supplementary

analyses offer little support for the latter two possibilities.

Managerial Summary:Third-party ratings systems often

stipulate that firms meet certain standards to attain a favor-

able evaluation. Firms must make strategic decisions about

whether and how to comply with these. This paper exam-

ines firms' strategic responses to changes in the required

number of nursing hours associated with star-based ratings

in the nursing home industry. Our results indicate that

firms at risk of losing a star responded by reporting

staffing increases. However, we find no concurrent

improvement in a patient outcome that previous research

suggests should change as a result of increased staffing.

We investigate whether the lack of improvement may be

due to insufficient or ineffective hiring, and find scant evi-

dence of either one. Although we lack direct evidence

Received: 17 May 2018 Revised: 15 May 2019 Accepted: 28 May 2019 Published on: 5 August 2019

DOI: 10.1002/smj.3063

Strat Mgmt J. 2019;40:1517–1544. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 1517

of false reporting, our findings suggest this as a strong

possibility.

KEYWORDS

healthcare, nursing homes, rating systems, reputation, response to

regulation

1|INTRODUCTION

Information asymmetries are endemic to markets for many types of products and services (Akerlof,

1970). In recent decades, a multitude of ratings, rankings, certification/labeling, and disclosure sys-

tems have arisen to mitigate such disparities between consumers and producers. These forms of

third-party evaluation involve the disclosure of novel information that sheds light on a firm' s standing

relative to others along valued dimensions, such as quality or environmental performance, thereby

contributing to organizational reputation (Espeland & Sauder, 2016; Lange, Lee, & Dai, 2011; Rao,

1994; Rindova, Williamson, Petkova, & Sever, 2005).

Research across a variety of empirical settings demonstrates that information provided by third-

party evaluators can, through the mechanism of reputation, shape consumer and investor choices

(e.g., Bowman & Bastedo, 2009; Gordon, Knock, & Neely, 2009; Lyon & Shimshack, 2015; Mere-

dith, 2004; Pope, 2009; Sauder & Lancaster, 2006). Moreover, scholars have argued that ratings,

rankings, and other third-party evaluations—because of their wide reach and perceived expert

status—can drive more sudden and dramatic shifts in reputation than may have occurred in the past

(Espeland & Sauder, 2016; Rindova et al., 2005). Thus, ratings and other forms of public evaluation

represent an ever more consequential part of the environment in which firms make strategic

decisions.

In turn, policymakers and government officials have increasingly adopted ratings and other forms

of public evaluation, a strategy that Schneiberg and Bartley (2008) characterize as “regulation by

information.”When used as a policy tool, these forms of public evaluation are premised on the idea

that reputational incentives—in the form of consumer and investor responses to newly public

information—can incentivize organizations to maintain or improve their performance on such other-

wise difficult-to-observe dimensions as quality, safety, and environmental compliance.

However, there are a range of strategic actions that firms might adopt in the face of such regula-

tion by information. On the one hand, some organizations have responded to ratings and rankings by

initiating changes that have led to substantial improvements (see, e.g., Jin & Leslie, 2003; Bennear &

Olmstead, 2008; Chatterji & Toffel, 2010; Sharkey & Bromley, 2015). Chatterji and Toffel (2010)

show, for example, that firms tend to reduce their emissions of toxic pollutants once their output

becomes subject to public ratings.

On the other hand, some organizations have responded by engaging in various forms of “gaming

the system,”which Espeland and Sauder (2007, p. 29) define broadly as “manipulating the rules and

numbers in ways that are unconnected to, or even undermine, the motivation behind them.”For

instance, medical facilities have chosen to admit relatively healthier patients, which improves the

mortality ratings that form a key basis of their ratings but does nothing to improve the treatment of

sick individuals (Dranove, Kessler, McClellan, & Satterthwaite, 2003). Additional types of gaming

1518 ODY-BRASIER AND SHARKEY