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Creative Financing and Public Moral Hazard: Evidence from Medicaid and the Nursing Home Industry

Author

Listed:
  • Hackmann, Martin

    (UCLA and NBER)

  • Rojas, Juan

    (Charles River Associates)

  • Ziebarth, Nicolas

    (ZEW)

Abstract

Medicaid finances U.S. nursing home care through federal matching grants that reward verifiable volume, not quality. We show that states exploit this through creative financing, diverting funds earmarked for nursing homes. This turns the federal match into a pure volume subsidy and generates a novel allocative distortion we term public moral hazard. We develop the mechanism theoretically and test its predictions using 24 federal audits and administrative microdata from Indiana. Event studies show Medicaid dementia volume rises 12\%; structural quality estimates show the expansion concentrates in the lowest-quality facilities, reallocating patients toward worse providers and reducing one-year survival.

Suggested Citation

  • Hackmann, Martin & Rojas, Juan & Ziebarth, Nicolas, 2026. "Creative Financing and Public Moral Hazard: Evidence from Medicaid and the Nursing Home Industry," IZA Discussion Papers 18860, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18860
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    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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