Home health agencies' costs in the PPS era

To understand the cost structure of home health agencies (HHA) following the implementation of PPS we estimated a hybrid cost-function. We used Medicare cost-reports merged with case-mix information from OASIS. The log of annual costs was the dependent variable. Independent variables included outputs (number of patients and variables measuring case mix), wage index, contract labor use, chain affiliation, years under Medicare certification, and fixed state effects. Inference was based on robust standard errors with clustering by state. Predicted costs included the Baser correction to avoid bias. We calculated marginal costs as a percent of total costs for all variables. The study included 7,064 for-profit and non-profit Medicare certified HHAs nationally in 2010.

The home health industry is dominated by for-profit agencies (90%), which tend to be newer than the non-profit agencies, with most receiving Medicare certification after PPS implementation in 2000. For-profit agencies tend to have smaller scale operations (261 vs. 902 median unduplicated patients per year respectively) and different cost structures, and are less likely to be affiliated with chains (21% vs. 40%). Our estimates suggest diseconomies of scale (p=0.03), a negative marginal cost for contracting with therapy workers (p<0.05), but a positive marginal cost for contracting with skilled nursing (p<0.05).

These findings suggest that efficiencies might be achieved by promoting non-profit, smaller agencies with more contract therapy and more salaried skilled nursing. This conclusion should be tested in future studies, including measures of quality in the cost function as well, as CMS continues with policies to contain costs.