This article presents evidence that in 1983 excess demand was a prevailing characteristic of nursing home care markets in Wisconsin, a state with one of the highest bed to elderly population ratios. It further shows that excess demand is the source of at least three types of error in use-based estimates of the determinants of the need for nursing home care. First, if excess demand is present, estimates of the determinants of Medicaid use may simply represent a crowding out of Medicaid patients, driven by the determinants of private use. As a result, factors associated with greater overall need in an area will be correlated with fewer Medicaid patients in nursing homes, ceteris paribus. Second, estimates of the substitutability of home health care for nursing home care may be misleadingly insignificant if they are based on the bed supply-constrained behavior of Medicaid-eligible subjects. Third, because the determinants of bed supply become the determinants of overall use under excess-demand conditions, the determinants of use will reflect, to some extent, the nursing home's desire for profits. Because profitability considerations are reflected in use based estimates of need, these estimates are likely to be misleading.
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