Influence of For-profit Agencies in the Home Health Market

In the last decade, Medicare home health care experienced a drastic increase in its spending. Its annual growth rate, in real terms, was 7.79 percent between 2001 and 2009, far exceeding 3.68 percent, Medicare's aggregate spending growth rate during this period. This dramatic increase in Medicare home health spending was surprising because the increase occurred under the prospective payment system (PPS), which was introduced mainly to control rapidly rising expenditures.

To understand this spending increase, it is essential to understand the supply-side response under the PPS, that is, how home health agencies adjusted their service provision patterns under the new payment system. In contrast to the supply side, patient demand for home health care is unlikely to have changed. Medicare home health care does not require patients to make any out-of-pocket payments for either deductibles or co-payments.

This study focuses on the market ownership structure (i.e., for-profit market share) to understand how agencies adjusted their service provision patterns under PPS.  Each health care provider operates in a market with a mix of for-profit and non-profit health care providers who potentially compete with each other; this competition influences each provider's service provision patterns.

The main focus of this paper is to examine changes in the influence of the for-profit market share on each provider's service provision patterns over time. Although several studies have addressed the static influence of for-profit market share on each health care provider's service provision patterns, their focus has been the influence of for-profit market share each year, not the changes in influence over time. Their approach might be limited because it typically takes time for health care providers to adjust service provision patterns in response to for-profit market share, especially after a drastic policy change that can significantly affect the market.

This study offers three explanations for changes in the influence of for-profit market share on service provision patterns over time. First, agencies enter the market because they perceive opportunities for high-profit margins, and those entrants strategically pursue profit-seeking service provision patterns more than the incumbents. Second, profit-seeking behaviors among entrants encourage neighboring incumbents to imitate the entrants' behaviors. Third, existing, chain-affiliated agencies learn profit-seeking behaviors from others in the chain.

Using Medicare claims 2001-2007, we find that the influence of for-profit market share on profitable home health service provisions increased gradually among for-profit and non-profit agencies over time under the PPS. We also find that the proposed mechanisms—particularly the first and the third—explain the gradual change in the influence of for-profit market share on service provision patterns, among for-profit agencies. The PPS attracted many for-profit agencies to the market, and those newer for-profit agencies engaged in profit-seeking service provision patterns to a greater degree. In addition, we show that the profit-seeking behaviors of new agencies led neighboring for-profit agencies to mimic those behaviors. However, this result was valid only for one type of profit-seeking behavior. Finally, existing chain-affiliated for-profit agencies were more likely to resemble profit-seeking behaviors of other agencies in their chain.