The Effects of Labor Configuration on Quality and Cost of Home Health

We investigate the role of labor configuration choices in determining quality and costs of health care, and examine health care provider firms’ labor configuration choices in response to regulatory pressures to improve home health care quality. This is important as labor is both the key determinant of patient well-being and the lead driver of medical cost in this space. We use novel and rich panel data from a provider of home health services with 93 branches across 16 states. The data include patient encounter data, worker data including internal staffing and wage changes, and branch-level financial performance data. Home health agencies (HHAs) offer an excellent setting for our research as it is highly labor-intensive. With all services delivered at the patient’s home, workforce features are the most salient determinant of the quality and costs of care.

First, we shed light on two mechanisms through which workforce configuration affects quality of care. The first concerns the difference in productivity between permanent and temporary workers. Health care providers have long employed temporary workers alongside permanent ones to maintain agile labor capacity facing variable health care demands. Permanent workers are likely to be more productive and provide higher quality of health care because higher-quality, more experienced workers tend to sort into permanent positions. The longer and more intense engagement with the firm and superior knowledge of its culture and standards may also contribute to the value of permanent workers. The second is that quality deteriorates with workload of workers. For example, working extended shifts may lead to errors. Furthermore, increasing the number of care recipients per provider leads to less time spent with each patient, which further reduces quality. We develop an empirical framework to study the impact of permanent versus temporary labor and workload of workers on health care quality. Furthermore, to examine the efficiency of these mechanisms, we compare the benefits of improved healthcare quality from using higher permanent labor ratio or not overworking workers with the firms’ costs of using such strategies.

Next we examine the firms’ labor configuration choices in response to increased pressures on improving health care quality. HHAs faced an exogenous increase in the competitive pressure to prevent rehospitalizations when the Hospital Readmissions Reduction Program (HRRP) introduced financial penalties to hospitals for excess 30-day readmissions for Medicare patients in FY 2013. Since hospitals are a significant source of referrals to HHAs, HHAs’ ability to reduce readmissions has become the key competitive differentiator. The competitive pressure to improve health care quality and lower readmissions is greater for HHAs with a higher share of Medicare patients originating from hospitals as well as in more competitive markets. Thus, we empirically examine whether the HHAs’ labor configuration choices shift in response to the HRRP favoring higher quality, using the triple interaction of pre-HRRP Medicare share of admissions originating from hospitals with the pre-HRRP home health market competitiveness index and the introduction of HRRP.