Firms often exploit loopholes in government contracts to boost revenues. The welfare consequences of this behavior depend on how firms use the marginal windfall dollar, yet little evidence exists to guide policymakers. This paper studies how hospitals allocated over $3 billion obtained from gaming a Medicare payment loophole. The average gaming hospital increased both Medicare and total revenue by around 10%, implying large spillovers on other payers. Consistent with theories of organizational behavior, nonprofit hospitals deployed most of the windfall toward operating costs, while for-profits deducted the entire amount off their balance sheet, distributing a substantial portion to executives and shareholders. Accordingly, we detect modest reductions in mortality rates at nonprofits but no changes at for-profits. Our results imply that the consequences of such engineered windfalls vary substantially by hospital ownership.
Authors
- Acknowledgements & Disclosure
- We thank Amitabh Chandra, Zack Cooper, Josh Gottlieb, Tal Gross, Jetson Leder-Luis and Pierre-Thomas Léger; seminar participants at Berkeley Haas, Columbia, Johns Hopkins, the University of Pennsylvania, Weill Cornell, and the Harvard-MIT-BU joint health economics seminar; and conference participants at Whistler Health Economics, ASHEcon, Midwest Health Economics, Annual Health Economics, NBER Organizational Economics, Becker Friedman Institute Health Economics Initiative, and the National Tax Association meetings for their helpful comments and suggestions. We gratefully acknowledge support from the National Institute on Aging (P01-AG005842). All remaining 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.
- DOI
- https://doi.org/10.3386/w32564
- Published in
- United States of America
Table of Contents
- Introduction 3
- Background 7
- Medicare and outlier payments 7
- Opportunities to game payments 8
- The legal disputes and aftermath 9
- Theoretical Background 10
- Incentive to Game 10
- Use of Excess Revenue 11
- Data 12
- Research Design 14
- Designating hospitals as gamers 14
- Characteristics of gamer hospitals 15
- Construction of sample and matching 16
- Empirical strategy 17
- Results 19
- Excess revenue 19
- Use of excess revenue 21
- Inputs to care 22
- Quality of care 23
- Heterogeneity by hospital ownership 24
- Executive compensation and shareholder payouts 26
- Robustness checks 28
- Discussion and Conclusion 29
- Additional Details on Outlier Payments and the Legal Disputes -1
- History of Outlier Payments -1
- Additional Details on the Legal Disputes -1
- Calculating and Simulating Outlier Payments -1
- Calculating DRG Payments 7
- Calculating Outlier Payments 8
- Holding Patients Constant 9
- Flow of Funds Calculation -1
- Supplementary Figures and Tables -1
