A recent math error by consultants for Partners HealthCare has shed light on how the 19-bed Nantucket Cottage Hospital has increased hospital wage reimbursements throughout the state. Complex healthcare finance rules regarding hospital wages have greatly benefitted Massachusetts in the last five years, but many hospitals around the state now fear huge losses as a result of the error.

The Martha’s Vineyard and Nantucket hospitals both joined the Partners system in 2007, setting the stage for Massachusetts to cash in on a national policy that requires Medicare wage reimbursements to urban hospitals to be no less than those paid to rural hospitals. Rural hospitals usually pay lower wages, but not so on Nantucket thanks to its isolation and high cost of living. As a result, Nantucket Cottage Hospital sets a high bar for the state.

But data submitted to Medicare in September underestimated the hourly wage at the Nantucket hospital, which could lead to a $160 million shortfall in wage reimbursement across the state. “If this is not corrected, Partners stands to lose more than $18 million, which to put it in context represents about 10 to 20 per cent of our annual operating margin,” company spokesman Rich Copp told the Gazette.

Partners recognized the error in March and sent a correction to the federal government in April, well after the Feb. 16 deadline for corrections. About $45 million of the potential shortfall would result from separate findings by Medicare auditors that the company has since appealed.

Tim Gens, executive vice president for the Massachusetts Hospital Association, believed such errors were not uncommon in the state. “But that they would have such a large impact is rare,” he told the Gazette. MHA is leading the push for the Center of Medicare and Medicaid Services (CMS) to accept the corrected data.

The Vineyard will most likely be unaffected by the error.

“The area wage index doesn’t really impact us, and we have nothing to do with how it gets set,” Martha’s Vineyard Hospital president and CEO Timothy Walsh told the Gazette. “We are excluded from all of that.”

The Vineyard hospital was named a critical access facility around 2002, an optional designation that allows it to receive full reimbursement for the cost of services. Nantucket did the same a year later, but gave up the designation as part of the merger with Partners.

Some saw it as a sacrifice for the good of the state, but the honor could just as easily have gone to the Vineyard. The merger agreement required that one of the two hospitals drop its critical access status.

“Having two critical access hospitals costs the state of Massachusetts an estimated $250 million in Medicare payments, including tens of millions denied to hospitals affiliated with Partners,” the Gazette reported at the time.

“It was a strategic decision, mapping out a network,” Sally Mason Boemer, chief financial officer of Massachusetts General Hospital, which co-founded the Partners system, said a few months prior to the merger. “The change from critical access to rural has the potential to help hospitals across the state of Massachusetts.”

Nantucket Cottage Hospital made the switch in 2008, with Partners estimating additional reimbursements of around $50 million. Meanwhile, the Vineyard remains one of the few critical access hospitals in the state. As such, it stands apart from the more common prospective payment system hospitals, where Medicare reimbursements are based on a fixed amount and subject to the rural floor.

Mr. Walsh was largely responsible for the hospital’s critical access designation. “When I got here they weren’t going to convert to critical access but I convinced them that was probably the right thing to do, because it was really designed for small hospitals,” he said. “And I think it’s turned out to our benefit over the long run.”

Many have criticized Massachusetts as gaming the system at the expense of the other states. They point to a single amendment in the Affordable Care Act in 2010 that applied “budget neutrality” to the state’s rural floor, in effect tying it to national Medicare funds rather than the state’s allocation.

Reimbursements in Massachusetts are by far the highest in the country. A few years ago, a coalition of 21 states led an unsuccessful drive to reform the system, which some have called the Bay State Boondoggle. The American Hospital Association has called the system “greatly flawed,” and the CMS itself has recommended reforms to eliminate the provision.

“There has been a lot of talk about trying to find a new method of doing that wage adjustment,” Mr. Walsh said. “But to date, I don’t think anything has changed.”

Fallout from the recent error could ripple across the state. “If they were benefitting from the rural floor, then they’d see a very serious and significant decline in Medicare payments for this coming year,” said Mr. Gens, referring to the fiscal year beginning Oct. 1. In general, he said, the Boston area would not be affected, since those wages have been rising. The rural floor is recalculated every year.

Mr. Copp believes the effects would be felt across the board, implying that a hit to the Partners system could even affect the Vineyard. But he said the process for dealing with the error was straightforward. Eventually, CMS will decide whether to accept the corrected data. It will also have the final say in the auditing question.

“We believe the federal government has the responsibility to use the corrected data,” Mr. Copp said, adding that all hospitals in the state are working with the congressional delegation to make the case in Washington. Mr. Gens agreed that “CMS should use the best, most accurate data in calculating what the area wage index should be for Massachusetts or any state. We hope that’s their conclusion, but it’s under review.”

A spokesman for the Center of Medicare and Medicaid did not respond to questions from the Gazette this week, but said in an email that the appeal of the Medicare audit was also under review.