The Causal Effects of Home Care Use on Institutional Long‐Term Care Utilization and Expenditures

Limited evidence exists on whether expanding home care saves money overall or how much institutional long‐term care can be reduced. This paper estimates the causal effect of Medicaid‐financed home care services on the costs and utilization of institutional long‐term care using Medicaid claims data. A unique instrumental variable was applied to address the potential bias caused by omitted variables or reverse effect of institutional care use. We find that the use of Medicaid‐financed home care services significantly reduced but only partially offset utilization and Medicaid expenditures on nursing facility services. A $1000 increase in Medicaid home care expenditures avoided 2.75 days in nursing facilities and reduced annual Medicaid nursing facility costs by $351 among people over age 65 when selection bias is addressed. Failure to address selection biases would misestimate the substitution and offset effects. Copyright © 2015 John Wiley & Sons, Ltd.