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Nantucket Cottage Hospital Did Not Accurately Report Certain Wage Data, Resulting in Overpayments to Massachusetts Hospitals

Medicare acute-care hospitals must report wage data annually to the Centers for Medicare & Medicaid Services (CMS). Wage data include wages, associated hours, and wage-related costs. CMS uses the wage data to calculate acute-care hospital wage indexes, which measure geographic area labor market costs relative to a national average. Federal law requires CMS to annually adjust Medicare hospital payments to reflect local labor markets; CMS uses area wage indexes to do this. Federal law also requires that the area wage indexes applied to hospitals in urban areas of a State may not be less than the area wage index of hospitals located in rural areas in that State. This provision is known as the "rural floor." Section 3141 of the Affordable Care Act requires that CMS apply this rural floor in a manner that is budget neutral on a national level. Accordingly, to balance the increase in wage indexes for hospitals receiving the benefit of their States' rural floors, CMS must lower wage indexes nationally by applying a rural floor budget neutrality factor.

Nantucket Cottage Hospital (the Hospital) did not always comply with Medicare requirements for reporting wage data in its fiscal year 2011 Medicare cost report. As a result, the Hospital overstated wages and wage-related costs by $232,000 (net) and understated hours by 18,060 (net). This affected both the numerator and denominator of its average hourly wage calculation.

These errors occurred because the Hospital (1) did not follow the cost report requirements in the Provider Reimbursement Manual and (2) did not have adequate review and reconciliation procedures to ensure that the Medicare wage data it reported to CMS were accurate, allowable, supportable, and in compliance with Medicare requirements.

The incorrect wage data increased the Hospital's occupational mix adjusted average hourly wage from $49.0523 to $52.9095 and increased the Hospital's wage index from 1.2363 to 1.3336, overstatements of approximately 7.3 percent. As a result of the cost reporting errors, we estimated that Medicare overpaid the Hospital a total of $156,000 for fiscal year (FY) 2015 inpatient services and calendar year (CY) 2015 outpatient services. We also estimated that Medicare overpaid 55 other hospitals in the State a total of $133.6 million for FY 2015 inpatient services and CY 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. We did not estimate the total underpayments to hospitals in other States.

Because of the prospective nature of the inpatient and outpatient payment systems, CMS has no mechanism to recover overpayments or remedy underpayments resulting from inaccurate wage data.

We recommended that the Hospital (1) ensure that all personnel involved in Medicare cost report preparation follow the requirements in the Provider Reimbursement Manual and (2) strengthen review and reconciliation procedures to ensure that the Medicare wage data it reports to CMS in the future are accurate, allowable, supportable, and in compliance with Medicare requirements.

In written comments on our draft report, Partners HealthCare, responding on behalf of the Hospital, stated that the Hospital did not concur with several of our findings relating to the first recommendation. The Hospital concurred with our findings relating to the second recommendation.

Copies can also be obtained by contacting the Office of Public Affairs at Public.Affairs@oig.hhs.gov.

Download the complete report.

Office of Inspector General, U.S. Department of Health and Human Services | 330 Independence Avenue, SW, Washington, DC 20201