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.
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