Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

AUGUST 1998 

OEI-02-94-00321 

Hospital Stays For Medicare 

Beneficiaries Who Are Discharged To 

Home Health Agencies 
OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 

protect the integrity of the Department of Health and Human Services programs as well as the 

health and welfare of beneficiaries served by them. This statutory mission is carried out through a 

nationwide program of audits, investigations, inspections, sanctions, and fraud alerts. The 

Inspector General informs the Secretary of program and management problems and recommends 

legislative, regulatory, and operational approaches to correct them. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 

Inspector General. It conducts short-term management and program evaluations (called 

inspections) that focus on issues of concern to the Department, the Congress, and the public. The 

inspection reports provide findings and recommendations on the efficiency, vulnerability, and 

effectiveness of departmental programs. 

OEI's New York Regional Office prepared this report under the direction of John I. Molnar, 

Regional Inspector General and Renee C. Dunn, Deputy Regional Inspector General. Principal 

OEI staff included: 

REGION HEADQUARTERS 

Ellen Vinkey Tricia Davis, Program Specialist 

Steve Shaw Mark Krushat 

Linda Moscoe 

To obtain copies of this report, please call the New York Regional Office at 212-264-1998. 

Reports are also available on the World Wide Web at our home page address: 

http://www.dhhs.gov/progorg/oei 
EXECUTIVE SUMMARY

PURPOSE 

To determine if hospital ownership of a home health agency has an effect on the inpatient length 

of stay. 

BACKGROUND 

This section follows up on the OIG report, “Medicare Hospital Discharge Planning,” OEI 02-94-

00320, that found hospital ownership plays a significant role in the referral process to home health 

agencies. There is an on-going concern that hospitals owning home health agencies are 

discharging patients sooner to these services and increasing their Medicare reimbursement. The 

Balanced Budget Act of 1997 includes a provision addressing this cost shifting practice, as well as 

a provision that spells out requirements for hospitals that own post-hospital services, including 

home health agencies. We based this study on an analysis of Medicare data for all Medicare 

patients in 6 diagnosis related groups (DRGs) in 120 hospitals. 

FINDINGS 

Hospital Ownership of a Home Health Agency Affects Hospital Length of Stay 

Patients discharged to any HHA from hospitals owning HHAs had a shorter length of stay than 

similar patients discharged from hospitals not owning HHAs. The average hospital stay for 

patients discharged from a hospital that owns a home health agency was 6.0 days compared to a 

7.0 day stay for patients discharged from hospitals that do not own home health agencies. This 

difference is statistically significant. 

This Difference Occurs Regardless of Whether the Patient is Discharged to the Hospital’s 

Own Home Health Agency 

Among hospitals that own a home health agency, the patients’ average length of stay does not 

change if the patient is discharged to a home health agency owned by the discharging hospital. 

The average stay for patients discharged to a home health agency owned by their discharging 

hospital is 6.1 days. The hospital stay for patients discharged to a home health agency not owned 

by their discharging hospital is 6.0 days. 

The Effect of Hospital Ownership Varies by Diagnosis Related Group 

When we analyzed patients in different diagnosis related groups separately, we found that patients 

who had bowel procedures (DRG 148), joint replacements (DRG 209) and those with chronic 

obstructive pulmonary disease (DRG 88) and were discharged to a HHA from a hospital that 

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owned one had shorter hospital stays. The differences were 4 days for bowel procedures and 1 

day for joint replacement and pulmonary disease. We found no statistically significant differences 

in the length of hospital stay based on hospital ownership of a home health agency for patients 

with heart failure and shock (DRG 127), vascular procedures (DRG 478), and heart procedures 

(DRGs 105, 106, and 107). 

CONCLUSION 

As part of the 1997 Balanced Budget Act, Congress changed the payment formula for Medicare 

inpatient stays for patients in certain diagnosis related groups who are discharged early to posthospital settings, including home health agencies. Such cases will now be considered “transfers” 

rather than “discharges” and reimbursement for the inpatient stay will therefore be reduced. Our 

finding that hospital ownership of home health agencies is associated with shorter hospital lengths 

of stay for certain diagnosis related groups provides additional analytical support for this 

provision. 

In light of our findings, we suggest that the Health Care Financing Administration consider 

hospital ownership as an additional factor when selecting future diagnosis related groups to be 

covered under this new “transfer reimbursement provision.” 

COMMENTS 

We received comments on the draft report from the Health Care Financing Administration and the 

Assistant Secretary for Management and Budget (ASMB). The ASMB agree with our conclusion 

and suggested a technical change in the background which we have made. 

The HCFA agree that they should continue to monitor the data to understand the effect of 

hospital ownership on post-acute patient referral patterns, but they are not prepared to use 

hospital ownership as a factor when selecting DRGs to be covered under the new transfer 

provision. We agree that hospital ownership is only one variable among others and that HCFA 

should continue to monitor data to better understand the effect of hospital ownership on postacute referral patterns. We certainly did not intend to imply that hospital ownership should be a 

deciding factor in making these decisions. 

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TABLE OF CONTENTS

PAGE

EXECUTIVE SUMMARY

INTRODUCTION ........................................................................................................... 1

FINDINGS ...................................................................................................................... 5

Hospital Ownership Affects Length of Stay....................................................................... 5

Hospital Ownership Does Not Affect Where The Patient Goes ........................................ 5

Hospital Length of Stay Varies By Diagnosis Related Group ............................................ 6

CONCLUSION ............................................................................................................... 8

APPENDIX

Hospital Length of Stay Data ........................................................................................... A-1

Comments ........................................................................................................................ B-1
INTRODUCTION

PURPOSE 

To determine if hospital ownership of a home health agency has an effect on the inpatient length 

of stay. 

BACKGROUND 

This inspection follows up on the Office of Inspector General report, "Medicare Hospital 

Discharge Planning", OEI 02-94-00320. We found that hospital ownership plays a significant role 

in the referral process to home health agencies (HHAs). Sixty-two percent of patients discharged 

from hospitals that owned a home health agency were referred to an agency owned by the 

hospital. We also found that ownership affected the duration of hospital stay. The hospital stay 

was 1 day shorter for Medicare patients discharged to the hospital's HHA than for patients 

discharged to an HHA not owned by the discharging hospital. Although this 1 day difference was 

not statistically significant, when combined with our other findings it warranted further study. 

Concerns About Hospital Ownership 

There is an on-going concern that hospitals owning post-hospital services are discharging patients 

sooner to these services. Post-hospital services include: home health agencies, nursing homes and 

rehabilitation and other specialty hospitals. By following this pattern, hospitals can lower their 

costs for patients for whom they are receiving a lump sum prospective payment from Medicare 

and discharge these same patients to post-hospital services for which they are being paid on a cost 

basis. This cost shifting results in increased Medicare reimbursement for the hospital. 

Early Hospital Discharges 

In 1983, Medicare implemented the prospective payment system (PPS) in response to concerns 

that patients were remaining in the hospital longer than necessary. This system pays a lump sum 

for patient hospital stays based on diagnosis. Subsequent to implementation of the PPS there has 

been a significant reduction in the average length of stay for Medicare hospital patients. There are 

growing concerns as to whether patients are being discharged prematurely and post-hospital 

services, like home health, are being over utilized. 

According to the Prospective Payment Commission, the average length of a hospital stay for 

Medicare patients fell 13 percent between 1991 and 1994. During a similar period, the 

Commission found that, the share of Medicare facility payments going to post-hospital care 

providers increased 15.5 percent. As one example, Medicare payments for home health care 

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totaled an estimated $16.9 billion1

 in FY 1996, and are projected by the Congressional Budget 

Office to grow to $26 billion by the year 2000. 

Discharge Planning Referrals 

Medicare requires hospitals to have a discharge planning process that identifies patients’ posthospital needs soon after admission and puts in place a plan that will ensure a safe discharge from 

the hospital. Section 1802 of the Social Security Act seeks to ensure that free choice is 

guaranteed to all Medicare patients in choosing a post-hospital provider, such as a home health 

agency. When there is hospital ownership of post-hospital services, it raises concerns about the 

discharge planning process. First, will patients be given the freedom to choose a post-hospital 

provider in an environment where the hospital discharge planner works for an organization which 

also owns post-hospital services? And secondly, in an effort to maximize Medicare 

reimbursement, will hospitals use the discharge planning process inappropriately to shorten 

patient hospital stays and transfer patients to post-hospital services they own? 

1997 Balanced Budget Act 

The Balanced Budget Act of 1997 included a provision that changes the Prospective Payment 

System Diagnosis Related Group (DRG) payment formula for Medicare patients in certain DRGs 

discharged to post-hospital care, including home health agencies. Medicare patients in these yet 

to be determined DRGs will be considered "transfer" cases instead of "discharges" if the patient is 

referred to a home health agency. In a proposed rule published on May 8, 1998 HCFA identified 

10 DRGs that they recommend as “transfer” cases, if the patient is transferred to an HHA within 

three days of a hospital admission. In instances where a patient in one of these DRGs stays in the 

hospital for a period shorter than the average stay and is then transferred to post-hospital care in a 

prospective payment system (PPS) exempt setting, reimbursement will be reduced. The hospital 

will be reimbursed on a per-day basis with double payment for the first day of the stay. Where a 

large portion of the costs are incurred during the first days of the stay, the law allows for payment 

based on 50 percent of the full DRG plus 50 percent of the transfer payment. 

Other provisions of the Balanced Budget Act require hospitals referring patients to home health 

agencies (HHA) and other post-hospital providers to: 

! not specify or otherwise limit Medicare patients in terms of which post-hospital service 

provider they receive services from; 

! provide Medicare patients with information on HHAs and other post-hospital providers 

which serve the area; 

! disclose to the Medicare patient any financial interest which the hospital may have in a 

HHA or other post-hospital provider to which they are referred; and, 

1

1997 HCFA Statistics. HCFA Pub. No. 03403, October 1997. 

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! disclose to HCFA the nature of any financial interest which the hospital has in a home 

health agency or other post-hospital service provider, as well as related referral rate 

information. 

Ownership Studies 

A number of studies indicate that hospital ownership of post-hospital care facilities may affect 

patient length of stay. Findings related to the relationship between hospital ownership of postacute services and patient referrals have been varied. For this reason, we have continued our 

work in this area. 

Work by Kathryn H. Dansky et al entitled "Understanding Hospital Referrals to Home Health 

Agencies" analyzed 1990 discharge data from 61 Pennsylvania hospitals. Results showed that 

HHA ownership was a significant predictor of home health referrals for both rural and urban 

hospitals, with the effect being greater for urban hospitals. The results also suggested that home 

health referrals for heart failure (DRG 127) and bowel procedures (DRG 148) are especially 

sensitive to hospital ownership of a home health agency. 

The HCFA funded research project, "A Study of Post-Acute Care," included an analysis of 

whether hospital ownership of a post-acute facility (including a home health agency) was a 

predictor of discharge placement. Hospital ownership of a post-acute facility was not found to be 

a consistent predictor of whether or not a patient received post-acute services, nor whether the 

post-acute provider was hospital-owned. 

The Prospective Payment Assessment Commission (ProPAC) has done a number of analyses 

relevant to this study. For example, they found that patients discharged from hospitals with a 

skilled nursing facility (SNF) were 24 percent more likely to use a SNF than patients whose 

hospitalization was in a facility without a SNF. They did not find a significant difference in use of 

home health care when the hospital owned a HHA. 

There are a number of other factors that may affect the hospital length of stay and subsequent 

discharge to a home health agency such as the availability of post-hospital services, the severity of 

the patient’s illness, hospital ownership of other post-hospital services, hospital location, and 

other hospital characteristics. The purpose of this study is to determine if hospital ownership of a 

home health agency affects the hospital length of stay. 

METHODOLOGY 

Using Hospital Cost Report Information System (HCRIS) data for the most recent year available 

(PPS 12), we selected a random sample of 240 hospitals. Specialty hospitals, hospitals that are 

not paid under the prospective payment system, were excluded from our sample. Hospitals were 

stratified by size (less than 100 beds, 100 to 299 beds, and more than 299 beds) and grouped by 

whether or not a hospital owns a HHA (ownership status). Six cells were created for our 

analysis. We then verified size and ownership status with a mail survey; we had a 98 percent 

response rate. 

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We based our sample on the first 20 hospitals selected for each cell. If one of those hospitals’

HCRIS data was inaccurate, that hospital was dropped and replaced by the next hospital for that

cell with accurate HCRIS data. This process resulted in a sample of 120 hospitals with 20 in each

cell. 

All Medicare patient hospital claims for 1996 associated with the sample hospitals for 6 DRG

groups were selected using the Medicare Provider Analysis and Review Hospital Record database

(MEDPAR). To determine that patients were discharged to a HHA, we used the hospital

discharge indicator and matched it to their HHA records to select only those patients who actually

received HHA services.

We analyzed lengths of stay for the following DRG groups:

! 148- Bowel Procedures with Co-morbidities (bowel procedures);

! 127- Heart Failure and Shock;

! 209- Joint Re-attachment of the Lower Extremity (joint replacement);

! 88- Chronic Obstructive Pulmonary Disease;

! 478- Vascular Procedures with Co-morbidities (vascular procedures); and,

! 105, 106, and 107- Cardiac Valve Procedures without Cardiac Catheter; Coronary Bypass

with Cardiac Catheter and Coronary Bypass without Cardiac Catheter (heart procedures). 

The first five of these DRG groups were chosen based upon two criteria: 1) they had the highest 

volume of patients discharged from hospitals to HHAs; and 2) the number of patients in each of 

these DRGs constituted at least 1 percent of all patients discharged from hospitals, regardless of 

post-hospital care. Because we also wanted to include DRGs with higher weights, that is DRGs 

associated with higher resource consumption and larger payments, we grouped patients in DRGs 

105, 106 and 107 together. 

We then grouped all the patients who were discharged to a HHA in their respective hospitals 

according to ownership and compared the overall average length of stay across hospitals and 

within each strata. For further detail, see Appendix A. This analysis was also performed for each 

DRG group. Within the group that owned an HHA, we also compared the length of hospital stay 

for those beneficiaries that went to the hospital’s own HHA to those that went to another HHA. 

This inspection was conducted in accordance with the Quality Standards for Inspections issued 

by the President’s Council on Integrity and Efficiency. 

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FINDINGS

Hospital Ownership of a Home Health Agency Affects Hospital Length of Stay 

Patients discharged to any HHA from hospitals owning HHAs had a shorter length of stay than 

similar patients discharged from hospitals not owning HHAs. The average hospital stay for 

patients discharged from a hospital that owns a home health agency was 6.0 days compared to a 

7.0 day stay for patients discharged from hospitals that do not own home health agencies. (See 

Figure I). This difference is statistically significant. 

Figure I 

This Difference Occurs Regardless of Whether the Patient is Discharged to the Hospital’s 

Own Home Health Agency 

Among hospitals that own a home health agency, the patients’ average length of stay does not 

change if the patient is discharged to a home health agency owned by the discharging hospital. 

The average stay for patients discharged to a home health agency owned by their discharging 

hospital is 6.1 days. The hospital stay for patients discharged to a home health agency not owned 

by their discharging hospital is 6.0 days. 

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The Effect of Hospital Ownership Varies By Diagnosis Related Group 

Ownership Effects Hospital Length of Stay For Diagnosis Related Groups 148, 209, and 88 

Patients in DRGs 148, 209 and 88 discharged to any HHA from a hospital that owned one had

statistically shorter inpatient stays than those who were discharged to a HHA from a hospital that 

did not own one. For patients who had bowel procedures (DRG 148) the difference in the length

of the hospital stay was 4 days. Similarly, patients that had joint replacements (DRG 209) and

chronic obstructive pulmonary disease (DRG 88) had hospital stays that were 1 day shorter (See

Figure II). 

Figure II

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Hospital Ownership Does Not Effect Length of Stay For Diagnosis Related Groups 127, 478,

105, 106 , and 107

We found no differences in the length of the hospital stay for the remaining three DRGs. These

included the following: heart failure and shock (DRG 127), vascular procedures (DRG 478), and

heart procedures (DRGs 105, 106 and 107). Although there is a 1 day difference for vascular

procedures, it was not statistically significant. We might hypothesize that patients in these DRGs

are less likely to be safely discharged early than patients in the other DRGs. (See Figure III).

Figure III

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8
CONCLUSION

As part of the 1997 Balanced Budget Act, Congress changed the payment formula for Medicare 

inpatient stays for patients in certain diagnosis related groups who are discharged early to posthospital settings, including home health agencies. Such cases will now be considered “transfers” 

rather than “discharges” and reimbursement for the inpatient stay will therefore be reduced. Our 

finding that hospital ownership of home health agencies is associated with shorter hospital lengths 

of stay for certain diagnosis related groups provides additional analytical support for this 

provision. 

In light of our findings, we suggest that the Health Care Financing Administration consider 

hospital ownership as an additional factor when selecting future diagnosis related groups to be 

covered under this new “transfer reimbursement provision.” 

COMMENTS 

We received comments on the draft report from the Health Care Financing Administration and the 

Assistant Secretary for Management and Budget (ASMB). The ASMB agree with our conclusion 

and suggested a technical change in the background which we have made. 

The HCFA agree that they should continue to monitor the data to understand the effect of 

hospital ownership on post-acute patient referral patterns, but they are not prepared to use 

hospital ownership as a factor when selecting DRGs to be covered under the new transfer 

provision. We agree that hospital ownership is only one variable among others and that HCFA 

should continue to monitor data to better understand the effect of hospital ownership on postacute referral patterns. We certainly did not intend to imply that hospital ownership should be a 

deciding factor in making these decisions. 

We received comments on the draft report from the Health Care Financing Administration and the 

Assistant Secretary for Management and Budget (ASMB). They generally agree with our 

conclusion. The actual comments received are in Appendix B. 

The HCFA agrees that they should continue to monitor the data to understand the effect of 

hospital ownership on post-acute patient referral patterns, but they are not prepared to use 

hospital ownership as a factor when selecting DRGs to be covered under the new transfer 

provision. We agree that hospital ownership is only one variable among others that HCFA should 

continue to monitor to better understand the effect of hospital ownership on post-acute referral 

patterns. In a prior OIG report, “Medicare Hospital Discharge Planning,” OEI-02-94-00320, we 

looked at many different variables and found that hospital ownership plays a significant role in the 

referral process to home health agencies. We also found that ownership affected the duration of 

hospital stay, but the difference was not statistically significant. Because of these other findings 

we studied the issue further in this inspection, and found the shorter hospital length of stay to be 

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9 
statistically significant. These findings support the need for continued monitoring of this data. 

The ASMB suggested a technical change in the background which we have made. 

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10
APPENDIX A

ANALYSIS OF HOSPITAL LENGTH OF STAY DATA 

All beneficiaries in our sample hospitals who were discharged to a home health agency were 

grouped according to hospital provider number. Overall hospital average lengths of stay were 

calculated for each hospital. Information regarding the number of days spent in the hospital by 

each patient, as well as their DRG, came from the MEDPAR database. The analysis involved 

comparisons of the following data: (1) overall hospital average lengths of stay between hospitals 

owning HHAs and hospitals not owning HHAs and (2) overall hospital average lengths of stay in 

DRGs 148, 127, 209, 88, 478, and 105,106, and 107 between hospitals owning HHAs and 

hospitals not owning HHAs. 

In order to test for statistical significance, p-values were calculated for the average lengths of stay 

at the 90 percent level of confidence. The overall length of stay demonstrated a significant 

differences at the 90% level of confidence (see Table I). The length of stay difference for DRGs 

148, 209, and 88 was also significant at the 90% level of confidence (see Table II). 

Table I 

Average Lengths of Stay for Hospitals When 

Beneficiaries Were Discharged to HHAs 

Mean: 

HHA 

Ownership 

Standard 

Error 

Mean: 

No HHA 

Ownership 

Standard 

Error 

t-test p-value Degrees 

of 

Freedom 

Discharged 

to a HHA 

5.98 0.25 6.91 0.33 2.271 0.02859 40 

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A - 1 
Table II 

Average Lengths of Stay for Hospitals When Beneficiaries 

Were Discharged to HHAs in Certain DRGs 

Mean: 

HHA 

Ownership 

Standard 

Error 

Mean: 

No HHA 

Ownership 

Standard 

Error 

t-test p-value Degrees 

of 

Freedom 

DRG 148 11.15 1.41 15.18 1.12 2.242 0.03279 29 

DRG 127 5.22 0.21 5.62 0.29 1.092 0.28214 35 

DRG 209 5.88 0.22 7.48 0.55 2.703 0.01119 30 

DRG 88 5.42 0.35 6.47 0.32 2.236 0.03222 33 

DRG 478 10.11 1.12 11.22 0.67 0.845 0.40701 23 

DRGs 

105,106,107 

10.80 0.73 9.94 0.94 -0.727 0.47311 30 

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A - 2 
APPENDIX B

COMMENTS ON THE DRAFT REPORT 

In this appendix, we present in full the comments from the Health Care Financing Administration 

and the Assistant Secretary for Management and Budget. 

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B - 1 
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B - 2
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B - 3
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B - 4
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B - 5
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B - 6