Wage Index

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New Legislation affecting Medicare Hospital Payments

July 7, 2011 in Hospitals, Medicare | No comments

Recent Legislation

  • CMS completed its implementation of Medicare severity–diagnosis related groups (MS–DRGs) and cost-based relative weights in FY 2009.
  • TMA, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), the Congress mandated payment reductions of 0.6 percent in 2008 and an additional 0.9 percent in 2009 to offset the effects of documentation and coding improvements (DCI) projected by the CMS Office of the Actuary (actual hospitals’ DCI increased payments by 2.5 percent in 2008 and by a cumulative 5.4 percent by 2009)

PPACA (i.e., Health Reform) changes to Medicare’s inpatient prospective payment system (IPPS) for hospitals

Below are six key changes that the PPACA legislation made to hospital payments in the current and future fiscal years.

  • PPACA1: Congress mandated a 0.25 percentage point reduction in the payment update for the second half of FY 2010 and for all of FY 2011.
  • PPACA2: Congress temporarily expanded (through 2012) the policy providing additional payments to hospitals that have a low volume of Medicare (not all payers) inpatient discharges and are 15 miles or more from the nearest PPS hospital.
  • PPACA3: Instituted a new two-year program to provide additional payments to hospitals located in counties with relatively low levels of Medicare spending (age, sex, and gender adjusted, but not health status adjusted)
  • PPACA4: PPACA extended for all of FY 2010 the provision in Section 508 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which gave eligible hospitals an opportunity for a one-time reclassification to a different labor market and allowed this change to increase their payments.
  • PPACA5: The frontier wage index floor will guarentee that hospitals in Montana, North Dakota, Nevada, South Dakota, and Wyoming will maintain a wage index equal to no less than 1.0.
  • PPACA6: Beginning in FY 2011 a rural-floor budget-neutrality adjustment will be applied on a national level, rather than on a state level. CMS estimated that this policy change will increase payments for urban hospitals whose wage index is raised up to the state’s rural level and will decrease payments for other hospitals (including all rural hospitals), which pay for the floor through a budgetneutrality adjustment.

Outpatient

  • Rural hospitals with 100 or fewer beds receive hold-harmless outpatient payments through 2011.  Thus, the switch from a cost-based to OPPS payment system will not effect reimbursement negatively for these providers.  In January 2012, the OPPS system is set to be instituted for these providers.

Source: MedPAC’s March 2011 Report to Congress.

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Measuring Variation in Labor Costs for the NHS

July 6, 2010 in International Health Care Systems, Labor Economics, Medicaid/Medicare | 1 comment

The cost of running a hospital in New York City is much higher than running a hospital in Bozeman, Montana.  To take into account these cost differences, the Centers for Medicare and Medicaid Services (CMS) has created a wage index to adjust the inpatient prospective payment system (IPPS) for differences in labor costs.

However, the U.S. isn’t the only country where public health agencies adjust payments based on labor costs.  For the past 30 years, England’s Staff Market Forces Factor (MFF) adjusts National Health Service (NHS) payments for medical care.  The MFF’s origin began in a1976 report from the Resource Allocation Working Party (RAWP).  Although the goal of the MFF is to control for geographic variation in input costs, labor costs make up 65% of these input costs.  Although drug and equipment costs also make up 26% of input costs, the prices of these goods are fairly constant across all English regions.  A paper by Elliot et al. (2010) investigates the construction of the labor portion of MFF in more detail.

The MFF is calculated based on standardized spatial wage differentials (SSWDs).  These SSWDs in essence calculates the difference in labor input costs for each region compared to the national average.  The paper divides the country into regions through three different mechanisms:  a region in one of three ways: 303 primary-care trusts (PCTs), 354 local authority districts (LADs) and 207 travel-to-work areas (TTWAs). LADs and PCTs are administrative areas while TTWAs are intended to constitute largely self-contained labor markets based on commuting patterns.  Using these three definitions, the authors calculate the SSWD from the Annual Survey of Hours and Earnings (ASHE) as:

  • ln(wij)=xijβprivate + vjprivate + εij
  • ln(wij)=xijβNHS + vjNHS + εij

The first equation is used to measure wage differentials for a variety of workers whereas the last only examines NHS nurses.  The variable xij contains information on age, age-squared, gender, year dummies, industry dummies and occupational dummies.  The fixed effect variable vj measures the difference in log wages from in region j from the national mean.  In the case of the NHS regression, year and occupational dummies are removed because nurses constitute working in a single industry.

To calculate the MFF for area j, the authors impose a log-to-level wage transformation for the variable vj and normalize this differential based on the national mean.

  • MFFj=100*exp[vjprivate]/exp[J-1 (Σj vjprivate)]

The authors also conduct estimate regional variation in labor costs for doctors.  Because the ASHE sample of NHS doctors is too small to estimate robust SSWDs, the authors instead obtain data on the annual financial returns of NHS trusts through the Department of Health.

How well are these adjustments working?  To answer this question, the authors examine how the differential between private and NHS pay affect the vacancy rate for NHS positions for doctors and nurses.  When private pay is higher than NHS pay, the authors find that the nurse vacancy rate increases.  This makes sense since when the private sector pays more, nurses will be more likely to take jobs outside the NHS.  On the other hand, when private sector pay for doctors is higher, the NHS vacancy rate for physicians is lower.  This seems counterintuitive that physicians would be attracted to lower paying NHS areas.  One explanation is that areas with relatively less generous NHS pay have higher private sector pay.  Thus, these physicians can take the NHS job, but also spend part of his time working for higher private-sector pay.  Using this information, the authors conclude that “The case for additional funding in high-cost low-amenity areas to employ doctors is not supported by this analysis. The MFF adjustment in the NHS funding formula should be amended to reflect this.”

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An evaluation of MedPAC’s hospital wage index revisions

March 26, 2010 in Hospitals, Medicaid/Medicare | No comments

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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