Turbocharging Profits? Contract Gaming and Revenue Allocation in Healthcare
Co-authors: Atul Gupta (University of Pennsylvania) and Ambar La Forgia (UC Berkeley)
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.
Adam Sacarny's research explores the relationship between health care payment policy, provider and patient decision-making, and clinical quality. Much of this work involves using randomized controlled trials to test interventions in the health care delivery system. His research on health care providers has studied the effects of behavioral interventions on overprescribing, the adoption of hospital documentation and coding practices, and the relationship between hospital clinical outcomes and market share.
