Unbiased Analysis of Today's Healthcare Issues

Wage Index Reclassifications

Written By: Jason Shafrin - Aug• 16•10

Should Medicare pay hospitals located in New York City more for the same care as hospitals in Montana?  Prima facie, one might believe that New York hospitals should receive higher wages since the costs of operating a hospital are much higher in New York.  Labor (i.e., nurses, doctors, etc.) may prefer to live in an urban environment and thus it is possible that the cost to attract labor in Montana would be higher.

To adjust inpatient prospective payments to hospitals, Medicare created a wage index system.  Each hospital’s wage index value determines whether their payments will be adjusted upwards or downwards depending on the cost of labor in their area.  The cost of labor is currently defined as the average hospital worker wage (adjusted for occupation) in a given metropolitan statistical area (MSA).

This simple methodology, however, is complicated by exceptions.  Today, I review some of those exceptions where hospitals can reclassify to MSAs where they’d receive a higher wage index value.

According to a 2007 MedPAC report, these exceptions include:

  • Lugar counties: Entire counties may be reclassified to an adjacent metropolitan statistical area (MSA) if they are adjacent to more than one MSA and, taken together, the commuting pattern to those MSAs would classify them to a single MSA under Office of Management and Budget (OMB) rules. For example, if 13 percent of the workers in a county commute to MSA 1 and another 13 percent commute to MSA 2, the sum of those commuting would be 26 percent. Under OMB rules, 25 percent of workers must commute to a single MSA for a county to be part of that MSA; thus, the county would qualify as a Lugar county.
  • Medicare geographic classification review board decisions: Hospitals may request reclassification to an adjacent labor market area if they meet conditions of geographic proximity and comparable wage costs.  Close geographic proximity is defined as being located within 15 miles (if urban) or 35 miles (if rural) from the border of the area to which they seek to be reassigned. Proximity may also be demonstrated if at least 50 percent of the hospital’s employees reside in the reassigned area.  Comparable wage costs are defined as having an average hourly wage rate at least 108 percent (if urban) or 106 percent (if rural) of the average hourly wage in their actual labor market location, and having an average hourly wage at least 84 percent (if urban) or 82 percent (if rural) of the average wage rate in the area to which they seek to be reassigned.  Comparable wage costs are based on weighted three-year average hourly wages.  Sole community hospitals and rural referral centers are not required to meet the proximity criteria. In addition, hospitals that are currently classified or have ever been classified as rural referral centers are not required to meet the 106 percent criterion (they can reclassify even if their wages are not higher than their regional average).

Hospitals that do not meet the geographic reclassification regulations have also been reclassified:

  • Section 508 reclassifications were created in the Medicare Prescription Drug, Improvement, andModernization Act of 2003; they were to expire at the end of fiscal year 2007.
  • Section 401: Section 401 allows hospitals to be classified for wage index purposes as rural although they are in an urban area.
  • Special exceptions: Special exceptions are reclassifications allowed at the discretion of the Secretary for certain providers that previously qualified under rules for group (countywide) reclassifications, where statutory changes related to other prospective payment system provisions would otherwise have disqualified these providers from reclassification.  These exceptions were implemented in fiscal year 2005  (CMS 2004).
  • Outcommuting adjustment: The outcommuting adjustment allows wage indexes for counties in lower wage index areas to be blended with higher wage index areas in proportion to the number of county residents who are hospital workers and who commute to those higher wage index areas.
  • Rural floor: The rural floor exception requires that any MSA wage index in a state be equal to or greater than the statewide rural wage index in that state.  The rural floor exception was extended to states without rural areas and an imputed rural floor was created for those states.  [REVISION: PPACA revised the rural floor so that in FY2011 the rural-floor budget neutrality adjustment would apply at the national rather than state level. ]
  • Hold harmless: Under the hold-harmless provision, hospitals now in rural but formerly in metropolitan markets are allowed to retain former metropolitan designation for three years, fiscal years 2005–2007.

Why is there such a complicated system? The crudeness of the current wage index measure and political pressure from hospitals likely explains the need for these exceptions.

Source: Medicare Payment Advisory Commission (MedPAC) “Report to the Congress: Promoting Greater Efficiency in Medicare,”  June 2007, p. 128.

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