Today’s Globe has a front-page above-the-fold article about Nantucket Cottage Hospital: “21 States Take Aim at Mass. Hospital’s Medicare Windfall-Nantucket’s Tiny Hospital that funnels hundreds of millions to other institutions.”

The article makes it sound like we’re a money laundering operation cleaning up dirty wads of cash as they come in to the state from Medicare.

“…the 19-bed hospital on the tony island…has become a national symbol of inequity and political machinations in the way the federal government reimburses hospitals for treating Medicare patients.”

The reporter tells the story as if Massachusetts hospitals teamed up with Senator Kerry in 2011 and found a way to game the complicated Medicare reimbursement system. And now, after an Institute of Medicine report from last summer, which named the shift in reimbursement (from other states to Massachusetts) the “Nantucket Effect,” 21 other state’s hospital associations finally figured out the game, and the game is up.

“…a coalition of 21 states is seeking to reverse the windfall, calling it the “Bay State boondoggle,” the product of “Yankee ingenuity” — the artful manipulation of obscure payment formulas.”

I cannot remember exactly when, but before our affiliation with Partners Healthcare in 2008, NCH had already declared as a Critical Access Hospital. This reform was put in to place to help save rural hospitals that are suffering across the country. If you met the criteria (which centered around hospital size and proximity to other hospitals), Medicare agreed to reimburse you based on your costs alone, rather than on the complex formulas this article discusses. For NCH, this was a big benefit, given our high costs of doing business.

But even back then, there was a formula that determined the reimbursement rates for a state’s hospitals, and it included the “Rural Wage Index,” a calculation of how expensive it is to do business at the most rural hospitals in the state. When a hospital opts for Critical Access designation, it is no longer used in the calculations of the Rural Wage Index.

Partners did not come to Nantucket Cottage Hospital in 2008 wanting to acquire the hospital simply because they needed a small hospital on a tony island to fill out their portfolio. They didn’t ask NCH to give up their Critical Access designation, with the promise to make whole any losses they might incur as a result, just to be nice. This was their promise even back then, recapturing the hundreds of millions of dollars that had been diverted from state hospitals when that designation kicked in.

There was no attempt to game the system. Massachusetts Hospitals Association, along with the big hospital systems in the state, all noticed the checks from the government were getting smaller, researched it and realized why (our change to Critical Access designation) and found a quick and easy fix. Acquire NCH and drop the designation. Nothing wrong there.

To the 21 states crying foul now, I say, what took you so long? Don’t blame Massachusetts or Nantucket Cottage Hospital. Blame the Centers for Medicare and Medicaid Services that would even start with such an archaic formula to determine how much they should pay a hospital for taking care of sick, elderly people.

Anyone unfamiliar with it will not believe the rules involved with Medicare reimbursement to hospitals. To summarize, a hospital is not paid according to the services a Medicare beneficiary needs. They are paid according to the diagnosis. If you have Medicare, and are admitted with pneumonia, Medicare has already determined that a pneumonia ought to be good for 1.8 days of hospital stay (as long as you also have an IV in place and are receiving IV antibiotics). If your pneumonia is complicated, and you end up needing to stay an extra few days, there is no change in how much they pay. If you are 78 and otherwise healthy and independent, but too weak from the pneumonia to go home just yet, that is tough. Medicare will not pay more than the amount needed to cover the 1.8 days. The hospital has to decide whether to eat the added costs of your stay, or push you off to a nursing home.

Hospitals have to know that they’re going to get paid the 1.8 days, and have to bill Medicare accordingly. Some hospitals have as many Utilization Managers as they have nurses, in order to do this right. Reason is, if a hospital does it wrong, if they assume that since a patient has a comorbid diagnosis like a urinary tract infection means that they get 2.4 days of stay, instead of 1.8, and they’re in a gray area of the rules, then a private auditor, a Medicare-endorsed bounty hunter, can come to a hospital 3 or 4 years later, audit the books, interpret the rule in a way that best benefits it (while working on a commission), declare fraud, and insist on a refund with penalties! Seriously. The mafia is jealous of this arrangement!

And, finally, to make matters worse, the amount that Medicare will pay for the 1.8 days varies by locale, according to formulas like the one discussed in this article. A formula so complex that it took these 21 states 4 years to realize why they were losing money!

So, don’t come pointing fingers at Nantucket! These days you hear a lot about “entitlement reform” and reporters and pundits are usually talking about how the Republicans want the Democrats to agree to spend less on healthcare for the elderly. To cut spending. But this article shows that we truly do need to reform this entitlement. Not at the expense of the beneficiaries. But to the advantage of hospitals across the country trying to survive on Medicare payments. If the rules could be reformed, made simpler, hospitals could cut costs dramatically and do better, even, with lower reimbursements (by replacing administrators with lower-cost healthcare providers), and we could use the money saved to pay down the debt, to mint $1 Trillion coins, to improve access to mental health and preventive services, or even to cover the pending costs of Alex Jones’ therapy!

(photo from Flickr user Images_of_Money)

UPDATE: The states have delivered a letter to President Obama asking that Nantucket Cottage Hospital be placed on a floating barge, so as to not be considered a Massachusetts hospital. Read about it here.