Creative Financing and Public Moral Hazard: Evidence from Medicaid and the Nursing Home Industry

Martin Hackmann (), Juan Rojas () and Nicolas Ziebarth ()
Additional contact information
Martin Hackmann: UCLA and NBER
Juan Rojas: Charles River Associates
Nicolas Ziebarth: ZEW

No 18860, IZA Discussion Papers from IZA Network @ LISER

Abstract: Medicaid finances U.S. nursing home care through federal matching grants that reward verifiable volume, not quality. We show that states exploit this through creative financing, diverting funds earmarked for nursing homes. This turns the federal match into a pure volume subsidy and generates a novel allocative distortion we term public moral hazard. We develop the mechanism theoretically and test its predictions using 24 federal audits and administrative microdata from Indiana. Event studies show Medicaid dementia volume rises 12\%; structural quality estimates show the expansion concentrates in the lowest-quality facilities, reallocating patients toward worse providers and reducing one-year survival.

Keywords: fiscal federalism; moral hazard; Medicaid; nursing homes; quality of care; joint funding; misallocation of matching funds (search for similar items in EconPapers)
JEL-codes: H51 H75 I11 I13 I18 J14 (search for similar items in EconPapers)
Date: 2026-08
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