Market Changes in the Supply and Use of Home Health Services: 1996-1999


U.S. Department of Health and Human Services

Market Changes in the Supply and Use of Home Health Services: 1996-1999

Executive Summary

Frank Porell, Ph.D., University of Massachusetts, Boston

Korbin Liu, Ph.D., The Urban Institute

Douglas Wissoker, Ph.D., The Urban Institute

David P. Brungo, M.B.A., Ph.D., Candidate University of Massachusetts, Boston

January 2004

This report was prepared under contract #HHS-100-97-0010 between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and the Urban Institute. For additional information about this subject, you can visit the DALTCP home page at or contact the ASPE Project Officers, William Marton and Hakan Aykan, at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, S.W., Washington, D.C. 20201. Their e-mail addresses are: and

The opinions and views expressed in this report are those of the authors. They do not necessarily reflect the views of the Department of Health and Human Services, the contractor or any other funding organization.

Two of the most prominent changes that took place in the home health care (HHC) delivery system over the three years following the Balanced Budget Act (BBA) of 1997 were a nearly 50% decrease in Medicare’s HHC expenditures and the market exit of a substantial number of home health agencies (HHAs). These changes prompted concerns from advocates and the home health industry about the potential impact of agency closures on access to home health services by Medicare beneficiaries, especially among the sickest beneficiaries and those living in rural areas.

Studies by official agencies, such as the U.S. General Accounting Office (GAO) and the U.S. Department of Health and Human Services, Office of Inspector General, examined the impact of the BBA policies on beneficiaries and providers. While documenting changes in the supply of HHAs, these studies concluded that agency closings did not cause a shortage of Medicare home health providers and that beneficiaries’ access to services were not generally affected. Our research builds on these prior studies, and examines, in greater detail, dynamic responses of HHAs within delineated health services market areas (HSMAs). We analyze changes between 1996 and 1999 in market entry and exit of HHAs, as well as changes in the expansion or contraction of service areas by ongoing agencies. We then relate home health utilization changes to such supply changes within HSMAs. Our aim was to address three substantive issues:

  • To document changes in the structure and composition of Medicare HHC markets associated with the interim payment system (IPS);
  • To develop a fuller understanding of the supply behavior (exit, entry, contraction, expansion) following the IPS;
  • To identify changes in beneficiary home health utilization associated with supply changes of HHAs.

Our market area analyses of changes between 1996 and 1999 indicated that those geographic locations where agency closures were the greatest were the same ones where new agency entry or service area expansion of existing agencies was the greatest. Hence, while reports of significant agency closures portended serious HHA supply problems, potential gaps in service area coverage left by those exiting agencies were largely filled by others. Our findings that beneficiary utilization rate changes were only slightly affected by agency closures are consistent with the findings that supply of agencies was not depleted because of the closings. They are also consistent with GAO’s conclusion that beneficiary access to Medicare home health services was not compromised by agency closures.

We found that certain groups of HHAs were more predisposed to exit or contract their service areas than others. Notably, higher rates of closure were associated with for-profit, freestanding, and recently certified agencies. In addition, rates of closure were considerably higher in certain regions of the country. Similar findings emerged in prior studies on the subject, but we also found that the agencies that were likely to enter market areas or expand service areas had about the same characteristics. Recently certified agencies, for example, were among the most dynamic providers. We infer from these results that such agencies were very flexible in their response to Medicare payment policies and market conditions.

Although Medicare home health use declined dramatically after the IPS, its major effect appears to be a reduction of number of visits per user, rather than reductions in the number of users per Medicare enrollee. Hence, access to Medicare HHC did not seem to be a major problem. We also found that agency closures, per se, did not greatly increase the likelihood of not obtaining any Medicare home health services. It was beyond the scope of our study, as well as prior ones, to determine if the generalized reductions in utilization following IPS resulted in negative health outcomes for Medicare enrollees. We are pretty confident, however, that agency closures were not a big part of the issue. Overall utilization reductions appeared to be due primarily to changes in payment policies, per se, and not to the intermediate factor of agency closings.

Given the dynamic behavior of the Medicare HHA industry found in this study, future research would also benefit from examining the service area expansion and contraction, as well as actual closures and openings of HHAs. Measurement of these types of activities helps to provide, for example, a fuller explanation of supply-related effects on beneficiary utilization and access to services. A natural application of this framework may be an examination of the impact of changes after Medicare started paying for home health services under a prospective payment system in 2000.

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