Creative Financing and Public Moral Hazard: Evidence from Medicaid and the Nursing Home Industry
This paper studies the misallocation of Medicaid funds, its consequences for reimbursement rates, the quantity, and the quality of care provided. Combining two decades of administrative, audit, and survey data on U.S. nursing homes, we show that states employ creative financing schemes to divert federal matching funds from their intended purposes. Our theoretical and empirical analysis demonstrates that, to increase federal matching funds, such schemes distort the quality-quantity tradeoff. In Indiana, exploiting plausibly exogenous variation in the rollout of a creative financing scheme, we find a disproportionate expansion of Medicaid-funded care for dementia patients in the lowest-quality nursing facilities.
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