Tunneling and Hidden Profits in Health Care

Ashvin Gandhi; Andrew Olenski

doi:10.3386/w32258

Tunneling and Hidden Profits in Health Care

Ashvin Gandhi & Andrew Olenski

Working Paper 32258

DOI 10.3386/w32258

Issue Date March 2024

Revision Date September 2025

This study examines whether healthcare providers tunnel profits and assets to commonly-owned related parties by making inflated payments for their goods and services. Such practices allow providers to understate their profitability—which may encourage regulators to increase reimbursements and relax quality standards—and shield assets from malpractice liability. Using uniquely detailed nursing home financial data, we find evidence of widespread tunneling to related-party real estate and management companies. Our estimates suggest that 68% of nursing home profits are tunneled to related parties and that accounting for tunneled profits and assets raises the implied typical investment IRR from 4.83% to 13.11%.

We are very grateful to Andy Allison, Samuel Antill, Matt Backus, Judson Caskey, Jess Cornaggia, Paul Eliason, Tal Gross, Atul Gupta, Charlene Harrington, Ambar La Forgia, Ian Larkin, Jetson Leder-Luis, Tong Liu, Szymon Sacher, Maggie Shi, Edward Shore, and Ashley Swanson for helpful conversations. We also thank seminar participants at the NBER Economics of Health Program Meeting, the NYC Health Economics Annual Conference, the Becker Friedman Initiative Annual Health Economics Conference, University of Georgia, University of Southern California, UCLA Anderson, the Brookings Institution, and the RAND Corporation. Kevin Wang provided excellent research assistance. This project received financial support from Arnold Ventures. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Ashvin Gandhi
I have received external research funding exceeding $10,000 during the last three years from Arnold Ventures, Washington Center for Equitable Growth, and PALTC Foundation. I received payments exceeding $10,000 from the NIA IMPACT Collaboration through Brown University for other research related to nursing homes. I also received research funding exceeding $10,000 within the last three years from the National Institute on Aging. Lastly, I have received internal funding in excess of $10,000 from internal UCLA grants. To my knowledge, these organizations do not have any interests in the findings of this research. Moreover, they do not have any right to review the manuscript.
MARC RIS BibTeΧ

Tunneling and Hidden Profits in Health Care

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