Fiscal Shenanigans, Targeted Federal Health Care Funds, and Patient Mortality.

We explore the effectiveness of matching grants when lower levels of government can expropriate some of the funds for other uses. Using data on the Medicaid Disproportionate Share program, we identify states that were most able to expropriate funds. Payments to public hospitals in these states were systematically diverted and had no significant impact on patient mortality. Payments that were not expropriated were associated with significant declines in patient mortality. Overall, subsidies were an effective mechanism for improving outcomes for the poor, but the impact was limited by the ability of state and local governments to divert the targeted funds.