This study examines “tunneling” practices through which health care providers covertly extract profit by making inflated payments for goods and services to commonly-owned related parties. While incentives to tunnel exist across sectors, health care providers may find it uniquely advantageous to do so. Masking profits as costs, thereby obscuring true profitability, may dissuade regulators from imposing stricter quality standards and encourage public payers to increase reimbursement rates. Likewise, tunneling effectively “shields” assets from malpractice liability risk, by moving them off the firm’s balance sheet. Using uniquely detailed financial data on the nursing home industry, we apply a difference-in-differences approach to study how firms’ stated costs change when they start transacting with a related party, allowing us to infer by how much these payments are inflated. We find evidence of widespread tunneling through inflated rents and management fees paid to related parties. Extrapolating these markups to all firms’ related party transactions, our estimates suggest that in 2019, 63% of nursing home profits were hidden and tunneled to related parties through inflated transfer prices.
Authors
- Acknowledgements & Disclosure
- We are very grateful to Andy Allison, Samuel Antill, Matt Backus, Tal Gross, Charlene Harrington, Ambar La Forgia, Szymon Sacher, Edward Shore, Maggie Shi, and Ashley Swanson for helpful conversations. Kevin Wang provided excellent research assistance. This project received financial support from Arnold Ventures. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Ashvin Gandhi I have received external research funding exceeding $10,000 during the last three years from Arnold Ventures, Washington Center for Equitable Growth, and PALTC Foundation. I received payments exceeding $10,000 from the NIA IMPACT Collaboration through Brown University for other research related to nursing homes. I also received research funding exceeding $10,000 within the last three years from the National Institute on Aging. Lastly, I have received internal funding in excess of $10,000 from internal UCLA grants. To my knowledge, these organizations do not have any interests in the findings of this research. Moreover, they do not have any right to review the manuscript.
- DOI
- https://doi.org/10.3386/w32258
- Published in
- United States of America
