Objective. To use the natural experiment created by the Medicare interim payment system (IPS) to study supply change behavior of home health agencies (HHAs) in local market areas.
Data Sources. One hundred percent Medicare home health claims for 1996 and 1999, linked with Medicare Provider of Service and Denominator files, and the Area Resource File.
Study Design. Medicare home health care (HHC) claims data were used to distinguish HHAs that changed the local market supply of Medicare HHC by their market exit or by significant expansion or contraction of their geographic service area between 1996 and 1999 from other HHAs. Multinomial logit models were estimated to analyze how characteristics of agencies and the market areas in which they served were associated with these different agency-level supply changes.
Principal Findings. Changes in local HHA supply stemming from geographic service area expansions and contractions rivaled those owing to agency closures and market entries. Agencies at greater risk of closure and service area contraction tended to be smaller, newer, freestanding agencies, operating with more visit-intensive practice styles in markets with more competitor agencies. Except for having much less visit-intensive practice styles, similar attributes characterized agencies that increased local supply through service area expansion.
Conclusions. Supply changes by HHAs largely reflected rational market responses by agencies to significant changes in financial incentives associated with the Medicare IPS. Recently certified agencies were among the most dynamic providers. Supply changes were more likely among agencies operating in more competitive market environments.