Factors Affecting Supply and Use of Services Agency and Market Area Factors Affecting Home Health Agency Supply Changes Frank W. Porell, Korbin Liu, and David P. Brungo 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 distin- guish 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 asso- ciated 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. Key Words. Home health care, Medicare, geographic service area, supply behavior The Balanced Budget Act (BBA) of 1997 mandated the development of a Medicare prospective payment system (PPS) for reimbursing home health agencies (HHAs) and the immediate implementation of an interim payment r Health Research and Educational Trust DOI: 10.1111/j.1475-6773.2006.00561.x 1847