This study employed structural equation modeling to test the relationship between three aspects of the environmental context of nursing homes; Medicaid dependence, ownership status, and market demand, and two basic strategic orientations: low cost and differentiation based on service quality emphasis. Hypotheses were proposed and tested against data collected from a sample of nursing homes operating in a single state. Because of the overwhelming importance of cost control in the nursing home industry, a cost-constrained strategy perspective was supported. Specifically, while the three contextual variables had no direct effect on service quality emphasis, the entire model was supported when cost control orientation was introduced as a mediating variable.
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