How Massachusetts hospitals increased Medicare reimbursement rates by 20 percent

The answer is by using exceptions/loopholes to payment rules.  The Medicare Wage Index adjusts payments to hospitals based on hospital worker wages wages in the hospital’s labor market.  Payment exceptions, in this case the rural floor, causes payments to hospitals in Massachusetts to increase by 16.4 percent simply by having one hospital reclassify.  Here is how it happened.

Prior to 2012, the Nantucket Cottage Hospital was classified as a critical access hospital and therefore did not figure into the computations for the states’ IPPS [Inpatient Prospective Payment System] HWI [Hospital Wage Index] rural floor. However, as a result of being acquired by a large health system, the Nantucket Cottage Hospital converted to IPPS status, becoming the only rural IPPS hospital in the state of Massachusetts. This change resulted in the rural floor wage index being applied to 60 urban hospitals in the state of Massachusetts, increasing wage indexes for these hospitals from an average of 1.16 in FY2011 to 1.35 in FY2012.

The Institute of Medicine calls this loophole the “Nantucket effect.”