Home health care cost-function analysis

An exploratory home health care (HHC) cost-function model is estimated using State rate-setting data for the 74 traditional (nonprofit) Connecticut agencies. The analysis demonstrates U-shaped average costs curves for agencies' provision of skilled nursing visits, with substantial diseconomies of scale in the observable range. It is determined from the estimated cost function that the sample representative agency is providing fewer visits than optimal, and its marginal cost is significantly below average cost. The finding that an agency's costs are predominantly related to output levels, with little systematic variation due to other agency or patient characteristics, suggests that the economic inefficiency in a cost-based HHC reimbursement policy may be substantial.