Unbiased Analysis of Today's Healthcare Issues

An evaluation of MedPAC’s hospital wage index revisions

Written By: Jason Shafrin - Mar• 26•10

Some press on a report I worked on at Acumen, LLC.

“The hospital wage index used to adjust Medicare inpatient prospective payment system (IPPS) payments to reflect the geographic differences in labor costs has created payment problems through its use of metropolitan statistical areas (MSAs) and “rest of state” areas to define hospital labor markets. However, the “blending and smoothing” approach developed by the Medicare Payment Advisory Commission (MedPAC) isn’t the best corrective mechanism. Instead, better labor market definitions are the solution, according to a new report from Burlingame, Calif.-based Acumen LLC that was commissioned by the Centers for Medicare and Medicaid Services (CMS).

Under the wage index, geographically distant hospitals that have different labor costs often receive the same wage index value because they are located within the same broad MSA or county, or neighboring hospitals that have the same labor costs receive much different wage index values because they happen to be located in different MSAs. These problems have driven as many as one-third of IPPS hospitals to seek a reclassification or an exception that increases the hospital’s wage index value, and “the overlay of the existing patchwork of reclassifications and adjustments on the wage index has created a very complicated and convoluted system,” says Acumen.”

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