The fastest growing segment of the health care industry combines cost-effective, high-quality care with the comforts of home - home health care - special edition: The State of Health Care in America 1995

Business & Health, Annual, 1995 by Geoffrey Leavenworth

The graying of America, efforts to control increasing medical costs, and advances in technology that make sophisticated patient care more mobile are all contributing to the growth of home health care. Provided by nurses, social workers, home health aides, or physical, occupational, and respiratory therapists, home care is gaining popularity among recovering, disabled, or chronically ill individuals. Total home care spending in the United States was estimated to be $40.1 billion in 1994 in a recent study conducted for the U.S. Department of Health and Human Services (HHS) by Lewin-VHI Inc., a Fairfax, Va., consulting firm. Medicare home health expenditures have tripled from $3.9 billion in 1990 to an estimated $13.2 billion in 1994. According to the U.S. Bureau of Labor Statistics, the fastest-growing occupation in the U.S. labor market is that of home health aide, which is projected to grow by 138 percent from 1992 to the year 2005. And according to the Health Care Financing Administration (HCFA), home health has been the fastest growing segment of the health care industry since 1989, growing by 23.8 percent in 1993, compared with 7.8 percent growth for health care as a whole in 1993.

The federal government pays the largest share of home health care costs. Medicare paid for 32.9 percent in 1994 according to the Lewin-VHI study, while Medicaid was responsible for 21.2 percent of total home care. The study, which includes several categories of home care not previously included in such reports - such as personal assistance to those with chronic disabilities and certain forms of residential care for individuals with mental retardation or developmental disabilities - found that other public programs accounted for 16 percent of home care spending. Out-of-pocket payments by individuals amounted to 23.7 percent compared to private insurance payments of 6 percent.

In spite of its growth, however, home care remains a mere sliver of national health care spending - only about 4 percent of the $1 trillion total health care bill. Some analysts see the diminutive size of the home health industry, relative to other health care sectors, as an indicator of its potential for growth.

This year, the home health care industry faces several tough issues: initiatives by the federal government to measure the quality and patient outcomes of home health providers while reducing fraud and abuse; new restrictions that would prohibit physicians from referring patients to home care companies, or any other entities in which they have a financial interest; the further consolidation of home health companies; and the vagaries of the next chapter of the health care reform saga.

Cost-Effectiveness

A part of the dramatic growth of home health care is based on the notion that it is cost-effective and highly preferred by patients. And on the surface, the argument in favor of home health seems clear. It is cheaper to treat a person at home than in a hospital bed. And people prefer the comfort of their homes and the care of their families. Based on government figures, average hospital charges per day in 1992 were $1,459 and skilled nursing facility charges per day were $264, while average home health charges per visit were $75. Estimates for 1994 were $1,756, $284, and $83, respectively.

"Home care keeps families together, serves to keep the elderly independent, prevents or postpones institutionalization, and promotes healing," says Val J. Halamandaris, president of the National Association for Home Care (NAHC) in Washington. "Home care is personalized, efficient, safer, and improves the quality of life. It is less expensive, it extends life, and it is the preferred form of care."

But to hear Bruce C. Vladeck, administrator of HCFA, the cost savings associated with home care are dubious. "It's never been clear to me why a patient who needs three hours of skilled services can get those services cheaper in a very decentralized, one-on-one setting, such as the home, as opposed to benefiting from the economies of scale of having the patients in one place. Given the way we pay hospitals, the incremental price for an additional day of hospitalization is zero. So anything we pay for home care when a patient would otherwise have stayed in the hospital is a net increase." For example, HCFA pays hospitals a flat rate for angina, which varies according to location but averages about 5,000. The hospital receives that amount whether the patient stays three days or five days. Thus, in an administrative sense, the effective rate for an additional day in the hospital is zero. If Vladeck's logic seems contorted or overly bureaucratic - obviously the actual cost of a day in the hospital is not zero - it should be remembered that this is a man who will sign checks for $253 billion in 1995.

Managed care organizations (MCOs), especially those with capitated contracts, would seem to be ideal laboratories for studying the cost-effectiveness of home health. After all, in a capitated arrangement, the organization receives a flat rate for care and is rewarded for providing the most efficient services. "With a managed care system, you've got to provide care across the whole continuum," says Deloras L. Jones, regional nursing director for the northern California region of Kaiser Permanente, who works in Oakland. "The home is one part of the continuum, but it is becoming increasingly important. Patients will be cared for at home longer than in the hospital, and some patients will be cared for at home instead of ever going to the hospital. Home care is not only cost-effective, but it is also individualized care that families seem to prefer." Jones says home care staff in her region has increased 33 percent over the past seven years, although part of that increase is due to absorbing care that had been administered by home care providers outside Kaiser. The company has found that home care for congestive heart failure patients has reduced hospitalization by early intervention and that the cost of home care is much less expensive than the cost of dealing with patient crises at the hospital, she says.