Competition and Fraud in Healthcare

with Renuka Diwan, Paul Eliason, Jetson Leder-Luis, Ryan McDevitt, and Jimmy Roberts
Work in Progress
BibTeX citation available here. Contact me for a recent draft.

Abstract: Governments rely on private firms to provide public goods and services. Competition among these firms to win procurement contracts theoretically reduces costs and increases quality but has an ambiguous effect on fraud: competition can both dissipate the rents that attract fraudulent firms to the market while at the same time reducing margins to the point that only low-cost, fraudulent firms remain viable. We study this tradeoff in Medicare’s procurement of durable medical equipment (DME), where the staggered rollout of competitive bidding allows us to identify the relationship between competition and fraud. We find that fraudulent firms increased their market share after competitive bidding, with the gains coming from legitimate firms exiting the market rather than fraudulent firms manipulating the competitive bidding program or committing more fraud.