Buying healthcare quality with grants and donations.

We find that grants and contracts increase California healthcare clinics' average costs, but donations do not. We interpret these results as meaning that grants and contracts change the nature of the product while donations are used to increase output without changing the product. One possible scenario is that grants and contracts are targeted money used to enhance quality. A theoretical analysis shows that quality is enhanced more if grants and contracts are used to reward quality rather than as seed money to create quality. The empirical evidence, however, is that grantors are motivated by the second reason.