Is home health care a substitute for hospital care?

A previous study used aggregate (region-level) data to investigate whether home health care serves as a substitute for inpatient hospital care and concluded that "there is no evidence that services provided at home replace hospital services." However, that study was based on a cross-section of regions observed at a single point of time and did not control for unobserved regional heterogeneity. In this article, state-level employment data are used to reexamine whether home health care serves as a substitute for inpatient hospital care. This analysis is based on longitudinal (panel) data--observations on states in two time periods--which enable the reduction or elimination of biases that arise from use of cross-sectional data. This study finds that states that had higher home health care employment growth during the period 1998-2008 tended to have lower hospital employment growth, controlling for changes in population. Moreover, states that had higher home health care payroll growth tended to have lower hospital payroll growth. The estimates indicate that the reduction in hospital payroll associated with a $1,000 increase in home health payroll is not less than $1,542, and may be as high as $2,315. This study does not find a significant relationship between growth in utilization of home health care and growth in utilization of nursing and residential care facilities. An important reason why home health care may serve as a substitute for hospital care is that the availability of home health care may allow patients to be discharged from the hospital earlier. Hospital discharge data from the Healthcare Cost and Utilization Project are used to test the hypothesis that use of home health care reduces the length of hospital stays. Major Diagnostic Categories with larger increases in the fraction of patients discharged to home health care tended to have larger declines in mean length of stay (LOS). Between 1998 and 2008, mean LOS declined by 4.1%, from 4.78 to 4.59 days. The estimates are consistent with the hypothesis that this was entirely due to the increase in the fraction of hospital patients discharged to home health care, from 6.4% in 1998 to 9.9% in 2008. The estimated reduction in 2008 hospital costs resulting from the rise in the fraction of hospital patients discharged to home health care may have been 36% larger than the increase in the payroll of the home health care industry.