Miscalculations by Nantucket Cottage Hospital in Massachusetts in wages and costs in 2015 resulted in Medicare paying all hospitals in the state $133 million more than it should—creating a chain reaction that resulted in hospitals around the country being underpaid by CMS.

As explained in a report from HHS’s Office of the Inspector General, CMS adjusts Medicare payments under the Inpatient Prospective Payment System (IPPS) and Outpatient Prospective Payment System (OPPS) based on wage data and local labor costs. It requires urban hospitals to be paid at least what a rural hospital receives.

In Massachusetts, this creates a problem: Only one facility, the Partners Healthcare-owned Nantucket Cottage Hospital, is considered “rural,” even though it serves a primarily wealthy population on an island with a high cost-of-living.  

The 2015 wage index was based on what Nantucket reported in fiscal year 2011. The OIG report determined the hospital didn’t comply with requirements in its report, overstating wage-related costs, salaries and contract labor wages while understating home-office wages and hours.

While this resulted in an overpayment of only $156,000 to Nantucket itself, because it sets the floor for the entire state, the impact on overall Medicare payments was far greater.

“We also estimated that Medicare overpaid 55 other hospitals in the state a total of $133.6 million for fiscal year 2015 inpatient services and calendar year 2015 outpatient services because the hospital’s wage data set the rural floor wage index for Massachusetts. Because of the rural floor budget neutrality provision in section 3141 of the Affordable Care Act, the overpayments to Massachusetts hospitals caused underpayments to hospitals in other states,” the OIG report said.

OIG didn’t estimate how much other hospitals were underpaid due to Nantucket’s errors.

Partners Healthcare “strongly disagreed” with the OIG reporting on the effect on other hospitals, unsuccessfully arguing those determinations should be deleted from the final report.

“The inclusion of the impact on other hospitals in the OIG’s findings strongly implies that the hospital is somehow responsible for payments to other hospitals in addition to the payments it receives for services rendered to Medicare beneficiaries. It is not,” wrote Partners revenue and reimbursement director John O’Leary. "The hospital did not establish the rural floor, nor is it responsible for payments to other hospitals that may result from the establishment of a rural floor."

Partners didn’t dispute all of the report’s conclusions, concurring with findings regarding severance pay reported without hours, typographical errors in physician salaries and contract labor wages, and some unallowable contract labor travel costs.

In its conclusion, OIG recommended the hospital “ensure that all personnel involved in Medicare cost report preparation follow the requirements in the Provider Reimbursement Manual,” as strength review procedures for future reports. The overpayments themselves, however, won’t be recouped, as CMS has no mechanism to do so under the prospective nature of IPPS and OPPS.