Competition and Fraud in Health Care

Governments rely on private firms to provide public goods and services. Although competition among these firms reduces prices and the costs of procurement, it has an ambiguous effect on fraud: competition can both dissipate the rents that attracted fraudulent firms to the market while at the same time reducing margins to the point where legitimate firms no longer remain viable. We study this tradeoff in the government’s procurement of durable medical equipment. Following Medicare’s switch from regulated prices to competitive bidding, we find that fraudulent firms’ cost advantage allowed them to gain market share as legitimate firms exited the market.