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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%, implying large spillovers on other payers.
Nonprofit hospitals deployed most funds toward operating costs. For-profits鈥揹riven by
a large chain鈥揹educted 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.
