Turbocharging Profits? Contract Gaming and Revenue Allocation in Healthcare

Atul Gupta, Ambar La Forgia and Adam Sacarny

No 32564, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: I13 I18 L33 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-hea and nep-ind
Note: AG EH
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