The service offered by a nursing home consists of caring for persons needing different levels of care. This alone suggests that the combination and distribution of those needing care, ranked according to the level of care they need, could influence the costs the nursing home incurs. The level of care needed can be defined by the number of care minutes required each month. In Austria, agreement has been reached on defining seven levels of care, whereby levels five to seven are deemed to be complete care (Bidner, 2005). Accordingly, nursing homes can be compared with hospitals to the extent that the service provided to the individual person can now be classified in terms of the levels of care. In hospitals, a billing system was constructed based on the diagnosis-related groups that enable diseases to be classified in this way. This system not only enabled increased cost transparency to be achieved, but also made it possible for costs to be reduced as a result of the hospital specializing in specific case mixes (Farley & Hogan, 1990). Based on the fact that in Austria the residents of a nursing home are subdivided according to levels of care which reflect the intensity of the care received, extending this type of reasoning to the nursing homes would appear to be possible.
The aim of the present work is to demonstrate that economies of scale exist in nursing homes and that these economies of scale are influenced by the composition of the nursing home residents measured in terms of their care needs. A constant distribution of the levels of care over the total number of residents should therefore yield economies of scale and, consequently, an optimal size must be possible for the nursing home at which economies of scale are exploited to the maximum extent. If the number of residents cannot be changed, it may be possible on the basis of this theory to lower the costs per home resident by redistributing the persons needing care according to the level of care required.