Certificate of Need and the Cost of Competition in Home Healthcare Markets

Background Certificate-of-need (CON) laws were originally implemented starting in 1974 with the federal Health Planning Resources Development Act, as a means of curtailing excess capacity and containing costs. Hospitals and nursing homes were required to obtain permission by a state planning agency before expanding capacity. Although the federal mandate was repealed in 1987, many states continue to maintain CON laws, now primarily targeted at long-term care including home health (HH) agencies. However, little is known about the impact CON laws have on HH agencies, whose costs have been the target of other legislation such as the Medicare Balanced Budget Act. CON analyses applied to other long-term care providers are unlikely to generalize to HH. Whereas in other care modalities, the patient travels to the provider, in HH the provider travels to the patient, changing the economics of the production of care. Over the last decade, HH has increased dramatically in terms of the number of patients served, providers in the market, and dollars spent. These historical trends, which followed changes in HH payment, also demonstrate that the industry is very responsive to policy and payment changes. Thus CON laws may provide an important policy lever for HH care.

Methods Data on costs, number of patients served and other agency characteristics were obtained from 2010-2015 Medicare Cost Reports for freestanding and hospital-based HH agencies through the Healthcare Cost Report Information System maintained by the Centers for Medicare & Medicaid Services. These data were linked to information on state CON laws published by the National Conference of State Legislators. The unit of analysis was the agency-year (N=51,022, corresponding to 10,790 unique HH agencies). Average per-patient costs were estimated using random effects regressions with serial correlation. Primary predictors were the CON laws in effect for that agency-year (home health CON, nursing home CON and their interaction). Other controls included the percent of patients on Medicare and whether the agency was hospital-based, part of a chain, and/or not-for-profit; had contracts for skilled nursing, HH aides and physical, occupational and speech therapy; and had changed ownership.

Results Both HH and nursing home CON laws were significantly associated with lower average per-patient HH costs (-$1228 and -$361 respectively, both p<.001), while their interaction had a significant positive association ($1039, p<.001). HH agencies were predicted to have average per-patient costs of $5035 if the state had neither type of CON law, but only $4485 if the state had both. The impact of HH CON laws was larger in states without nursing home CON than in states with such laws (-$1228 versus -$189). Sensitivity analyses adding county-level nursing home casemix to the specification yielded similar estimates.

Discussion Although various arguments have been made both for and against CON laws, their original purpose was for cost containment, so it is important to understand whether these laws appear to meet that goal. We found evidence that CON laws did constrain HH costs, although the magnitude of their effect depended on complex interactions between CON laws for HH versus nursing homes.