This month, Medicare announced that it will not use corrected wage data for Nantucket Cottage Hospital in establishing the rural floor for Massachusetts. What does this mean for Massachusetts hospitals? It means millions of dollars less in Medicare funds to help support local hospitals and the patients they serve.
Given the impact of this recent Medicare decision it is worth taking a few minutes to explain something called the "area wage index." The area wage index is a cost-of-living adjustment applied to Medicare payments. Because it costs more to hire a nurse in Chicago than in rural Idaho, a hospital in Chicago gets a little bit more money from Medicare than a hospital in Idaho.
Each hospital across the country completes a host of forms documenting its wages. Medicare takes this information and calculates an area wage index for each county. As you can imagine, it is a painstaking, complicated process, involving consultants, CFOs, and auditors. It is also high stakes, as a hospital's wage data not only impacts its own Medicare payments, but those for all other hospitals in the same county. This means each hospital must depend on the accuracy of the wage data submitted by the other hospitals in their county.
The stakes are even higher here in Massachuetts because we are impacted by something called the "rural floor."
The stakes are even higher in Massachusetts because of something called the "rural floor." The rural floor provision says that every hospital in a state must receive, at a minimum, an area wage index that is equal to or greater than that of the rural hospital with the lowest wages. For most states the rural floor has no impact, because rural areas usually have a lower cost of living than urban areas in a state, making the rural floor provision moot. However, here in Massachusetts, we have Nantucket Cottage Hospital (NCH), a rural hospital on an island with a very high cost of living. The area wage index for NCH exceeds the wage index of most other hospitals in the state. So, most other hospitals in Massachusetts benefit from the rural floor level set by NCH.
Since 2012, the rural floor has brought Massachusetts hospitals more than $1.5 billion in additional Medicare funding. Last year alone, it was about $180 million. State and commercial payers have also benefitted, as this has enabled them to give hospitals lower than inflationary increases over the past several years. But next year it will be $85 million less as a result of a data entry error that, when discovered months ago, was immediately corrected by Partners with Medicare. But, Medicare's deadline for data corrections had passed. Earlier this month, we learned that Medicare has decided not to accept the corrected data. This means lower Medicare payments to many Massachusetts hospitals for the coming year—including a reduction of more than $9 million for Partners' hospitals. To put this amount in perspective, that represents nearly 10% of Partners' annual operating margin last year.
The rural floor is a controversial provision. It has its critics, particularly those hospitals from other states that, because of national budget neutrality, pay the price of increased funds to Massachusetts' hospitals. But those critics who applaud Medicare for its decision on Massachusetts this year, may well regret it in the future. Adherence to a procedural deadline that forecloses an accurate calculation of the area wage index for any state's hospitals is never a good thing. Partners, in consultation with the Massachusetts Hospital Association, is currently considering all of its options with respect to appealing this disappointing ruling.
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