Combining survey, audit, and administrative data on skilled nursing facilities (SNFs) from 1999-2017 with three complementary empirical approaches, we document that several states use creative funding schemes to divert federal Medicaid matching funds away from the intended purpose. These practices bias the intended subsidy effects of matching funds and distort the allocation of patients and resources across health care providers. Using the case study of Indiana, we document an increase in Medicaid dementia SNF stays and an associated increase in mortality pointing to a reduction in allocative efficiency in the matching of vulnerable patients to long-term care providers.