On the “Bay State Boondoggle”

5822024293_6059e9d1ff_zThe Boston Globe recently ran an article discussing layoffs at Baystate Health, a large health system in Western Massachusetts.  The system is planing to lay off 300 employees to try to close a $75M deficit.  According to the Globe, the deficits are mainly driven by declining Medicaid reimbursement, but, more interestingly, by a $23M hit to Medicare revenue driven by a mistake made by Partners Healthcare, a health system on the other side of the state.

Here’s the fascinating backstory.

Under nearly impenetrable hospital payment rules, Medicare must reimburse a state’s urban hospitals for employee wages at least as much as it reimburses its rural hospitals. As a result, Nantucket sets the floor for wage reimbursements at hospitals across the state. And because Nantucket’s wages are high, due to its remote island location and steep cost of living, that has created bonuses for many other Massachusetts hospitals in recent years.

Tom Keane, writing for the Globe in 2013 noted that Cottage Hospital (which treats 150 inpatients a year) has a disproportionate effect on healthcare payments nationally:

The scam was, no question, wicked clever. Medicare is the federal program that covers health care for those over 65. Under its rules, labor-related payments to urban hospitals have a floor that is equal to wages at a state’s rural hospitals. In the Bay State, it turns out there’s only one such qualified rural hospital: the lovely Nantucket Cottage Hospital, just at the edge of the island’s historic district. Of course, we’re not talking some godforsaken region of Appalachia here, where land is cheap and wages crushingly low. Rather, Nantucket is the playground of the wealthy, and everything is exceptionally expensive

The deal (which was formalized in the ACA) became known as the Bay State Boondoggle.   It generated outrage in other states because CMS rules mandate that increased reimbursement in one area of the country has to be offset by reductions in others.  Thus, the $250-350M in additional payments received by Massachusett’s 81 hospitals came at the expense of hospitals in most other states.

It was no surprise when the presidents of the Missouri and North Carolina Hospital Associations suggested that “karma” was in play when Partners made a huge accounting mistake earlier this year.  Somehow, consultants hired by Partners underestimated wages at Nantucket Cottage, and submitted artificially low cost-of-labor numbers to CMS.  This meant that Medicare reimbursement fell dramatically for all hospitals in the state.  Partners apparently recognized the error, but their petition to CMS to allow for corrected data to be submitted was recently denied.  All Mass. health systems (particularly Lahey, Baystate and Partners) are dealing with the fallout.


What’s perhaps counterintuitive is that despite generous Medicare and commercial reimbursement, Mass hospitals aren’t getting rich.  Here is the 2015 CHIA report on acute care hospital margins in Mass: the statewide median is 2.9%

Screenshot 2016-08-13 10.38.17

Perhaps there is some irony in the fact that, despite the “boondoggle” rates, Nantucket Cottage had a total margin of -6%, driven by a -14.4% operating margin…

Screenshot 2016-08-13 13.15.49

You have to conclude that if reimbursement isn’t the problem, then costs must be. As I’ve noted, before, MedPAC sees excess capacity as the primary problem.  I think hospitals are starting to think this way as well.

After all, if this were all about the Partners accounting error, layoffs shouldn’t be necessary in Western Mass:  rates will reset again in 2017 so this would be a one-year pain point.   But, if you believe that there will be rationalization of reimbursement rates (due to intense pressure on Medicaid, increasing unwillingness of commercial payers to cross-subsidize Medicare, and a legislative solution to the Boondoggle) then getting costs under control is the only path forward.  Will the Baystate layoffs be a harbinger of things to come?