The policy implications of the cost structure of home health agencies

To examine the cost structure of home health agencies by estimating an empirical cost function for those that are Medicare-certified, ten years following the implementation of prospective payment.

2010 national Medicare cost report data for certified home health agencies were merged with case-mix information from the Outcome and Assessment Information Set (OASIS). We estimated a fully interacted (by tax status) hybrid cost function for 7,064 agencies and calculated marginal costs as percent of total costs for all variables.

The home health industry is dominated by for-profit agencies, which tend to be newer than the non-profit agencies and to have higher average costs per patient but lower costs per visit. For-profit agencies tend to have smaller scale operations and different cost structures, and are less likely to be affiliated with chains. Our estimates suggest diseconomies of scale, zero marginal cost for contracting with therapy workers, and a positive marginal cost for contracting with nurses, when controlling for quality.

Our findings suggest that efficiencies may be achieved by promoting non-profit, smaller agencies, with fewer contract nursing staff. This conclusion should be tested further in future studies that address some of the limitations of our study.