Effect of Competition on Gaming Behaviors: Evidence from the Home Health Care Industry

Many studies on competition in a health care market considered the effect of competition on the price and quality of services. However, few have looked at how competition leads health care providers to adopt service provision patterns that increase profits but not necessarily correspond to a patient’s health needs (termed as gaming behaviors hereafter). We argue that competition leads health care providers to engage in gaming behaviors, especially when price competition is restricted as in Medicare or Medicaid. As competition intensifies, each provider’s market share and profit start to shrink and providers then become more involved with gaming behaviors. However, the effect of competition on gaming behaviors is less pronounced for providers with stable finance.

This paper addresses the effect of competition on gaming behaviors in the context of the Medicare home health industry. The Medicare home health payment system provided a unique opportunity for home health agencies to adopt a gaming behavior between 2001 and 2007. The payment system made a fixed payment for each patient based on a patient’s expected costs in most cases. However, the payment system made significant extra payments once an agency had provided a tenth therapy visit in a two-month-long treatment period. As a result, agencies had a strong incentive to provide ten or slightly more visits to gain a huge marginal benefit at the tenth.  

Using Medicare Claims and Provider of Services Files 2001 to 2007, we find strong empirical support that competition increased home health agencies’ gaming behavior. More specifically, a 0.1 lower Herfindahl-Hirshman Index (HHI) (with a range of 0 to 1) predicts a 2.2 percentage point higher likelihood of targeting 10-13 therapy visits. Given that a typical agency’s likelihood of providing 10-13 therapy visits was about 41.3 percent in 2001, the 2.2 percentage increase is not minor.

We also test how the effect of competition varies depending on each agency’s financial stability. In particular, as a measure of financial stability, we consider whether each agency was vertically-integrated with hospitals or skilled nursing homes. Vertically-integrated agencies tend to be financially stable because they have a more stable inflow of patients and have access to relatively profitable patients. As we expected, vertically-integrated agencies were less responsive to competition. As the HHI decreases by 0.1, the vertically-integrated agencies’ likelihood of providing 10–13 therapy visits increases by 1.1 percentage points compared to 2.5 percentage points for non-vertically-integrated agencies.

This study extends the literature on competition in a health care market, but with a particular focus on the effect of competition on gaming behaviors. In addition, the study findings suggest that the government should pay more attention to provider entry. Numerous new agencies increase the competition, which increases each agency’s adoption of gaming behaviors. In the same vein, the Certificate of Need program, which regulates the entry of new agencies to the market, can have implications for agencies adopting gaming behaviors. This is more so because most new agencies are not vertically-integrated, and therefore tend to be more responsive to competitive pressures.