New entrants' practice patterns in Medicare home health care after the prospective payment system revision in 2008

Background: Medicare home health care spending increased under the prospective payment system (PPS) that was introduced specifically to control the rising spending. To explain this unexpected spending rise, we focused on new home health agencies that entered the market under the PPS. The high profit margins under the PPS attracted many new agencies to the market partially due to home health care's unique feature of low entry costs. We examined whether new entrants were more likely to adopt the practice patterns leading to higher profit margins than incumbent agencies that had been operating in the market before the PPS. Methods: Using 2008 to 2010 Medicare Home Health Claims and Provider of Services File, we estimated regressions of agencies' practice patterns controlling for agency and patient characteristics. Results: We found that new entrants were more likely than incumbents to adopt practice patterns leading to high profit margins. They were more likely to target the 14th and 20th therapy visit where marginal revenue is relatively greater than that of other number of visits. Under the payment system that compensates extra therapy visits but not for other types of visits, entrants were also more likely to provide therapy visits, but less likely to provide medical social service visits. Conclusions: Given the high entry rates of agencies under the PPS, distinct practice patterns among entrants explain the drastic home health spending increase under the PPS. Heterogeneity in agencies' practice patterns also suggests an opportunity to improve efficiency in the Medicare home health care market.