The graying of America means that millions of patients who are facing health challenges, yet who remain healthy enough to live on their own, are turning to home health care providers to delay or prevent admission into assisted living facilities.

Since 10,000 baby boomers are turning 65 every day through 2029, demand for home health care services is likely to continue climbing. So let's take a closer look at the home health care industry and whether home health care companies may be right for portfolios.

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Source: Gentiva Health Services

What is home health care?

Most home health care patients are 65 or older and often they have a short-term need for care, such as following surgery. Home health care patients may also suffer from chronic disease that requires long-term treatment, such as diabetes.

Home health care services include both medical and skilled nursing services and personal care, including bathing, nutrition, and transportation services. Home health care can also include medical equipment and supplies, physical therapy, and psychological services, too.

How does the home health care industry work?

About 3% of every dollar spent on health care in the United States is spent on home health care.

While many people pay for home health services out-of-pocket, home health care companies rely heavily on payments from Medicare and Medicaid -- two government programs that typically pick up a lot of the tab for elderly patients.

Since home health care companies often rely on short-term care, many of the larger companies are diversifying their businesses to include hospitals, assisted living, and long-term care facilities. Home health care companies may also run rehab centers, nursing homes, and skilled nursing facilities because these businesses may serve as a natural referral source for each other. That said, the industry remains highly fragmented, with the 50 largest companies accounting for approximately 25% of industry revenue, according to Hoover's.

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Source: Gentiva Health Services

What's driving demand for home health care?

An older population is significantly increasing demand for home health care companies, but the industry is facing challenges along the way.

One of the biggest challenges facing the industry comes from its reliance on government programs. Medicare and Medicaid are under significant pressure to cut costs in the face of rising health care spending. According to a McKinsey report, the Congressional Budget Office estimated that the 2010 Affordable Care Act, for example, would cumulatively cut $39.7 billion from federal home health care reimbursements over the following decade. If those estimates prove true, small and midsized home health care providers could be forced out of the market as reimbursement rates fall.

While the threat of falling reimbursement creates risk, home health care providers could see patient volume increase thanks in part to the growing adoption of health care information services.

These health care information services may allow patients to spend more time in their home because these systems are increasingly able to monitor and evaluate patient health using real time data. Since care complexity is a major reason behind the shifting of patients from home health care settings to acute settings, "smarter" medical devices and health care information systems, may significantly reduce or delay inpatient admissions tied to chronic disease or fractures from falling.

Home health care demand may also see demand grow thanks to the shift toward new health care delivery models.

For example, accountable care organizations, or ACOs, are organizations that combine primary care, specialty care, and acute care in a bid to improve patient health at a lower cost. Instead of being paid a fee for each service performed for a patient, ACOs are paid a flat rate per patient per period. Since ACOs goals are aligned with the cost-saving goals of home health care, home health care utilization could climb if ACOs become increasingly widespread.

Why invest in home health care companies?

According to the Census, the over-75 crowd will be the fastest growing segment of our population between 2020 and 2030.

But that doesn't mean that all home health care providers will succeed and thrive, particularly given the risk of falling reimbursement. That suggests that the industry will consolidate and may favor larger companies with economies of scale.

Regardless, overall spending on home health care services is likely to climb given the total number of patients is heading higher and that suggests that investors may be right to keep home health care providers on their watch list.

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