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21 states take aim at Mass. hospitals’ Medicare windfall

Nantucket’s tiny hospital that funnels hundreds of millions to other institutions

Matthew O’Neill waited for a taxi after being treated for a broken arm at Nantucket Cottage Hospital.Jonathan Wiggs/Globe Staff/Globe Staff

WASHINGTON — Nestled on an island 30 miles out to sea, Nantucket Cottage Hospital is the only rural hospital in Massachusetts, as defined by the federal government. Its weathered cedar shingles and widow’s walk evoke the bygone era of its founding a century ago, when the hospital consisted of just three tiny cottages.

But the 19-bed hospital on the tony island, where the number of residents balloons from 10,000 to 50,000 each summer and the median home price hovers north of $1 million, has become a national symbol of inequity and political machinations in the way the federal government reimburses hospitals for treating Medicare patients.


Under an arcane hospital payment system, Nantucket Cottage’s rural designation has allowed the state’s 81 other hospitals to collectively reap between a $256.6 million and $367 million annual bonus for the last two years — at the expense of other states. An Institute of Medicine report released in July referred politely to the bonanza as the “Nantucket effect.”

Now a coalition of 21 states is seeking to reverse the windfall, calling it the “Bay State boondoggle,” the product of “Yankee ingenuity” — the artful manipulation of obscure payment formulas.

“The entire way the payment system is now calculated has become so complex and so susceptible to gaming and manipulation that you’d play the game yourself if you were running a hospital, to make sure your reimbursements continue to go up,” said Dr. Donald Berwick, President Obama’s former administrator of the Centers for Medicare and Medicaid Services and a health policy lecturer at Harvard Medical School. “It’s a zero sum game. What Massachusetts gets comes from everybody else.”

Massachusetts comes out a winner due to a Medicare rule that says a state’s urban hospitals must be reimbursed for wages paid to doctors and staff at least as much as rural hospitals.


Since Massachusetts has only one rural hospital, Nantucket Cottage sets the floor for wage reimbursements. Typically, rural hospitals have lower wages than urban ones.

But wages on Nantucket are high because of its remote location and high cost of living. Thus, the rural wage floor established on Nantucket has become a boon for hospitals in the rest of the state.

Massachusetts, Connecticut, New Hampshire, and Rhode Island are among only nine states that win under the current system, negotiated in part by Senator John Kerry as part of the national health reform law. Massachusetts is by far the largest beneficiary, followed by California, which receives half as much money.

But those days could be numbered. The issue is expected to resurface in Congress in February, with entitlement reform as a backdrop during the debt ceiling negotiations. Proposed legislation has already been discussed by Republicans.

The American Hospital Association has also embarked on a study of the contentious system, which the organization has deemed “greatly flawed.” And the Centers for Medicare and Medicaid Services has recommended reforms for the wage reimbursement system that could eliminate the provision that benefits Massachusetts.

“Here you have a small hospital on an island in the Atlantic Ocean basically setting the payments for all the hospitals in Massachusetts, and as a result, reducing the payments for hospitals all across the country,” said Herb Kuhn, president of the Missouri Hospital Association. “It’s unfair and unjustified.”

As a result, Kuhn said, Missouri hospitals lose $15.6 million a year. According to the most recent federal data available, states like Texas, New York, Michigan, Florida, and Illinois are the biggest losers, forfeiting tens of millions of dollars each year under the current system.


The dispute with Massachusetts began in 2011 after Medicare implemented legislation cosponsored by Kerry, a Bay State Democrat, and Senator Robert Menendez, a New Jersey Democrat. The amendment to the federal health reform law required that Medicare reimbursements for hospital wages come from a national pool of money instead of from each state’s allocation. As a result, any increase for Massachusetts meant a decrease for other states.

In Massachusetts, 81 of its 82 hospitals benefit under the Medicare rural floor wage reimbursement rule. In contrast, only two of Missouri’s 88 hospitals receive the rural floor benefit. Many of Missouri’s 17 rural hospitals serve towns with a dwindling agricultural base of between 5,000 to 10,000 people.

Nantucket Cottage entered into the rural hospital payment system in 2008 after it was acquired by Boston-based Partners HealthCare. The Nantucket hospital previously had been paid under a different formula, but made the switch to the rural hospital payment system to help the rest of Massachusetts hospitals reap a financial reward even though its own Medicare reimbursement would decrease as a result. Partners had ensured that Nantucket Cottage would be made whole financially because the rest of its hospitals would benefit greatly.

The state’s largest hospital network had estimated that it would receive an extra $40-50 million a year as a result of the shift in the payment system.


A Nantucket hospital official declined to comment, calling the issue a “political hot button.” The hospital spokesman deferred to Partners, which referred a reporter to the state hospital association.

“These are what the rules are, and Massachusetts hospitals are following the rules,” said Tim Gens, executive vice president of the Massachusetts Hospitals Association. “Many hospitals in all states make adjustments within the rules. We’re doing the same thing.”

Massachusetts lawmakers are girding themselves for a renewed onslaught of criticism. The state’s congressional delegation defends the measure as a corrective to previous rule changes that hurt Massachusetts hospitals.

In 2009, the Centers for Medicare and Medicaid Services required states to pay for a wage adjustment related to rural hospitals rather than spread the payment across the country, as was the longstanding practice. In addition, delegation members said, Massachusetts hospitals had lost out on $500 million in Medicare reimbursements when the federal government determined in 2004 that the state did not qualify for the rural hospital wage adjustment.

Representative Michael Capuano, a Somerville Democrat, said Massachusetts deserves the extra payments and he criticized those who are trying to take the money away.

“This is an attempted money grab by people who think they can treat Massachusetts unfairly again,” Capuano said. “It is a big item that is part of a complicated formula, but the bottom line is what the Kerry provision did was to reinstate what had been in place for an awfully long time before CMS started changing the rules, taking our money and sending it to other states.”


A Kerry spokesman declined to comment.

Representative William Keating, a Bourne Democrat, said he anticipates that health care spending will be scrutinized in the upcoming deficit reduction talks but said the fuss over Massachusetts’ current fortune is unwarranted.

“Unless they separate Nantucket from Massachusetts, it is what it is,” Keating said.

Gens, representing Massachusetts hospitals, said the association is not opposed to change.

“But if there’s going to be an attempt at reforming the system, it should be a comprehensive one, not just looking at one adjustment and letting the others stand,” Gens said.

Broad reform, which industry leaders all agree is necessary, is unlikely to come any time soon. In the meantime, other states will try to get back the money that they lost, said Dan Boston, a health care lobbyist representing the coalition of 21 hospital associations.

If Massachusetts lost the money, many hospitals across the state would operate in the red or close to it, Gens said, potentially costing jobs and leading to reductions in community benefits and medical services.

Meanwhile, proposed legislation to undo what opponents have coined the “Massachusetts fix” is under discussion in Congress. Potential scenarios include a “claw back,” taking back the money Massachusetts has received in the last two years, or trimming future collections, Boston said.

Alan Sager, a health policy and management professor at Boston University School of Public Health, said Massachusetts won by “exploiting the rural hospital provision” and that it “can’t count on being floated by revenue that is skimmed from other states.”

“That’s how wars used to start: One country would grab a province from another and the country that was hurt would nurse its grievance and fight back, maybe in alliance with other countries,” Sager said. “That’s not a recipe for peace in health care.”

Tracy Jan can be reached at tjan@globe.com. Follow her on Twitter @GlobeTracyJan.