In the short term, CMS may direct Medicare administrative contractors to develop a program of in-depth wage data audits of hospitals that have a large influence over their local wage index.


Nov. 27—The Trump administration is mulling changes to the Medicare hospital wage index system, including the creation of a commuting-based wage index, according to federal officials.

The administration’s plans to change Medicare’s approach to the wage index system—used to annually adjust Medicare hospital payments to reflect labor prices in local labor markets—were revealed in correspondence with the Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services.

OIG issued a report that was highly critical of many components of the current wage index system. For instance, OIG concluded that the Centers for Medicare & Medicaid Services (CMS) lacks the authority to penalize hospitals that submit inaccurate or incomplete wage data, and that limited reviews by Medicare administrative contractors (MACs) do not always identify inaccurate wage data.

CMS calculates each area's hospital wage index based on wage data in Medicare costs reports submitted by acute care hospitals.

OIG requested several changes, which CMS said it would consider advancing next year. Those included:

  • Seeking legislative authority to penalize hospitals that submit inaccurate or incomplete wage data in the absence of misrepresentation or falsification
  • Seeking legislation to repeal the law that created the rural floor wage index
  • Seeking legislation to overhaul the reclassification provision of the wage index system, which allows hospitals to increase their Medicare payments

The push for various legislative changes may be formalized in President Donald Trump’s FY20 proposed budget, according to CMS.

A Quicker Option

In the near term, the agency may work with MACs to develop a program of in-depth wage data audits at a limited number of hospitals each year. Those efforts would focus on hospitals at which wage data has a high level of influence on the wage index of the market, according to a letter from Seema Verma, administrator of CMS.

Such audits would move beyond the existing “desk reviews” of wage data that MACs conduct of all hospitals assigned to them. Such reviews focus on quickly detecting aberrant wage data for possible correction.

Outside of “very limited circumstances,” hospital-submitted data are used by CMS to calculate wage indexes for the payment year, noted OIG.

In stating why the more intensive review was needed, OIG, cited its five most recent audits, which found inaccurate wage data that were not detected by MACs’ desk reviews. OIG estimated the inaccurate data resulted in $140.5 million in overpayments to 272 hospitals—and an equal amount of underpayments to other hospitals based on the program’s budget-neutrality requirements.

CMS also is considering is replacing the wage index methodology with a “commuting-based wage index” (CBWI), which would calculate the wage index by using commuting data to establish a labor market area and wage index value for each hospital (as opposed to using labor market areas). Congress would need to create such a system.

CMS rejected the OIG suggestion that it rescind its hold-harmless policy relating to geographically reclassified hospitals’ wage data over concerns that the policy led to inaccuracies in the hospital’s wage index.

Longstanding Concerns

Hospitals have repeatedly criticized the Medicare wage index over concerns about its accuracy, volatility, circularity, and substantial reclassifications and exceptions, the American Hospital Association (AHA) noted in a June letter to CMS.

Despite previous such concerns from members of Congress and Medicare officials, a consensus solution to the wage index’s shortcomings has not been developed, and further analysis of alternatives is needed to identify payment adjustment changes that are more accurate, fair, and effective, AHA wrote.

In the FY19 Inpatient Prospective Payment System (IPPS) final rule, CMS allowed the imputed wage index floor to expire for all-urban states. The policy, which dated from FY05, established a wage index floor (i.e., a requirement for urban hospitals in each state to have higher wage indexes than the state’s rural area wage index) for states with no rural hospitals. CMS was concerned that the policy disadvantaged hospitals in states where only rural hospitals—and no urban hospitals—were subject to the rural floor.

AHA opposed the policy change, absent any new wage index policies that addressed the original need for the imputed rural floor.

Rural floor wage indexes are budget-neutral on a national level, which means all hospitals’ wage indexes are lowered to allow for some hospitals to have their indexes raised by the application of the rural floor. In practice, the rural floor financially benefits hospitals in a very few states, and those hospitals are funded by hospitals in all the other states—including those that are overwhelmingly rural, according to CMS.

As an example, OIG cited the 36 urban hospitals in Massachusetts that in FY18 received an estimated $44 million in additional inpatient payments based on wages at a hospital on Nantucket, an island 30 miles off the coast.

“These increased payments were not based on actual local wage rates but on the requirements of the rural floor wage index law,” the OIG report stated. “These increased payments would be offset by decreased payments to hospitals nationwide, and those decreases would be not be based on actual local wage rates but on the requirements of the rural floor wage index law.”


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Wednesday, November 28, 2018