Turbocharging Profits? Contract Gaming and Revenue Allocation in Healthcare

Firms often exploit weaknesses in government contracts to boost revenues, yet little is known about how they allocate these funds. We study how hospitals allocated $3 billion obtained from gaming a Medicare loophole. The average gaming hospital increased Medicare and total revenue by around 10 percent, implying large spillovers on other payers. Nonprofit hospitals deployed most funds toward operating costs. For-profits—driven by a large chain—deducted funds off their balance sheets, distributing them to executives and shareholders. Accordingly, we detect reductions in mortality only at nonprofits. Our results imply that the consequences of engineered windfalls vary substantially by hospital ownership. (JEL D86, H51, I11, I12, I18, L31)