Agency and Market Area Factors Affecting Home Health Agency Supply Changes

The Balanced Budget Act (BBA) of 1997 mandated the development of a Medicare prospective payment system (PPS) for reimbursing home health agencies (HHAs) and the immediate implementation of an interim payment system (IPS) to contain the rapid growth of Medicare home health care (HHC) expenditures until a PPS could be implemented. Two of the more prominent changes that took place after the Medicare IPS was implemented in October 1997 were a drop in Medicare's HHC expenditures by nearly 50 percent, and widespread agency closures that reduced the national supply of Medicare-certified HHAs by about 25 percent (GAO 1999; Office of the Inspector General 2000). These dramatic 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. While documenting substantial changes in the supply of Medicare HHAs and the heavy geographic concentration of agency closures in several Southwestern states, early investigations concluded that these agency closures did not produce a shortage of Medicare HHAs, and that beneficiaries' access to services was not generally affected (GAO 1999; OIG 2000). Later empirical research showed that while Medicare HHC utilization rates sharply fell, rates of decrease were not that much greater among beneficiaries in states with the highest prevalence of agency closures, or among “high cost” Medicare HHC user subgroups (Komisar 2002; Liu, Long, and Dowling 2003; McCall et al. 2003). The Medicare IPS was short-lived, being replaced by an episode-based PPS for Medicare HHAs in October 2000. It nevertheless represents a large “natural experiment” that elicited unexpectedly sharp decreases in both agency supply and Medicare HHC utilization rates. While considerable public attention was given to the vast number of agency closures that occurred (GAO 1999; OIG 2000), relatively little research has sought to understand why some agencies closed and others did not, or potential associations between agency-level characteristics and the supply-side changes made by surviving agencies that may have potentially allowed some agencies to avoid market exit. The natural experiment created by the IPS presents an opportunity to gain some important insights about factors that influenced agency-level market supply behavior in response to the reimbursement shocks created by the IPS. While Medicare HHC utilization rates declined in all 50 states between 1996 and 1999 (GAO 2000) these aggregate data do not show the substantial variability in Medicare service volume changes among individual HHAs between those same years. For example, our study data show that among 6,924 HHAs that actively served Medicare beneficiaries in both 1996 and 1999, about 31 percent of them served more beneficiary users in 1999 than in 1996. Moreover, about 16 percent of these survivor agencies increased total Medicare visits between 1996 and 1999. These data are not at all suggestive of a uniform supply response to the IPS among agencies that did not close. In addition to market exit, in this study we consider service delivery changes made by surviving agencies that resulted in significant changes in their geographic service areas as forms of agency-level supply response. An agency can increase local supply by expanding its delivery of visits to patients living in previously unserved areas, and contract local supply by discontinuing the service delivery to patients in areas it currently serves. Medicare HHA supply change can also occur without any change in an HHA's geographic service area. However, there is an important fundamental geographic basis for the policy concerns that arose after the many HHA closures that followed the IPS. When a Medicare HHA closes or contracts its geographic service area, the potential adverse impacts upon beneficiary access should be spatially concentrated in those places where service is discontinued. Given the geographic basis of HHC service delivery, travel costs naturally limit the geographic extent of HHA service areas, which in turn, may limit the number of agencies able to expand service to affected areas. We are unaware of any studies to date that have sought to explain why Medicare HHC utilization rates did not decline much more sharply in areas where numerous agency closures occurred relative to other areas. We can conjecture that beneficiaries were not affected much because some nearby agencies likely expanded their geographic service areas and possibly some new agencies may have entered those market areas. However, we cannot explain the apparent modest utilization impacts associated with the many agency closures without empirical evidence showing that HHAs actually made changes in their geographic service areas in markets where substantial reductions in Medicare HHA supply occurred. In this research, we undertake the first step toward a fuller understanding of the agency supply changes that followed the IPS by actually measuring geographic supply contraction and expansion among surviving Medicare HHAs after implementation of the IPS. Furthermore, we investigate agency-level and market area factors associated with expansion, contraction, and market exit after the IPS.