Medicare Payment and Reimbursement

Rural-state hospitals hail changes to Medicare wage index

July 10, 2019 1:00 pm
  • National and state hospital groups were split on whether the area wage index (AWI) change should be implemented as proposed.
  • A change is needed to arrest the increase in rural hospital closures.
  • Hospital wages in both urban and rural states could shift as a result of the AWI change.

Rural-state hospitals strongly back a proposed Medicare area wage index (AWI) change, but national hospital advocates are warning against it.

In April, the Centers for Medicare & Medicaid Services (CMS) proposed changes to the Medicare wage index calculation, including a methodology that would increase the wage index for certain low-wage-index hospitals and change how statutory rural-floor wage index values are calculated. The changes would include a transition for hospitals that experience significant decreases in their wage index values as a result.

Specific changes would include:

  • Increasing the wage index for hospitals with a wage index value below the 25th percentile
  • Decreasing the wage index for hospitals above the 75th percentile
  • Maintaining a revenue-neutral impact on Medicare
  • Removing urban-to-rural hospital reclassifications from the calculation of the rural-floor wage index value
  • Capping at 5% any decrease in a hospital’s wage index from its final wage index for FY19

Why the AWI change is needed

In comments submitted in June, rural hospitals and their advocates said the proposed wage index change is critical.

“By reducing the dramatic and harmful disparities, hospitals in majority rural states will have the ability to stay open while a better system to account for differences in wages is created,” wrote Donald Williamson, MD, president and CEO of the Alabama Hospital Association.

Williamson noted that a 2018 report by the Office of the Inspector General (OIG) of the Department of Health and Human Services found that the wage index is often inaccurate, resulting in at least $140.5 million in overpayments to 272 hospitals from 2014 to 2017. The time fame reflected findings only of CMS’s last five reports.

He countered the expected objections from hospitals in states with more of an urban population by noting that the adjustment would add 0.4 percentage points to the wage indices of rural hospitals while reducing those of urban hospitals by only 0.2 percentage points in FY20.

The change would increase Medicare payments to Arkansas hospitals by $12.3 million, according to the Arkansas Hospital Association. That raise would be welcome in a state where more than one-third of hospitals had negative total margins as of 2017.

“In a predominantly rural state like Arkansas, structural inequalities like those embedded in the AWI methodology hurt not only our hospitals but also all residents – which only exacerbates already-serious health disparities,” wrote Bo Ryall, president and CEO of the Arkansas Hospital Association.

The Georgia Hospital Association (GHA) projected that the AWI change would increase Medicare payments to hospitals in its state by more than $14 million, including almost $6 million for rural hospitals. Seven of the 107 rural hospitals that have closed since 2010 were in Georgia, according to a University of North Carolina tracking project.

The change also could have a broader impact on wages.

“In a sense, the AWI is a major reason that hospitals above the national average can sustain paying higher-than-expected wages,” wrote Earl Rogers, president of GHA. “The growing disparity in reimbursement between high-cost and low-cost states due to AWI is becoming a disincentive for high-cost states to control wage costs.

The change would reverse the “downward spiral of the current AWI formula,” which has caused “significant financial strains to already-struggling hospitals across Tennessee,” wrote Craig Becker, president and CEO of the Tennessee Hospital Association. “Since 2010, 13 Tennessee hospitals have closed, with 10 of those serving rural communities, and the AWI is a significant factor.”

National groups express concerns about the changes

National hospital organizations supported the AWI boost for hospitals in states with larger rural populations — but not the method of implementation.

The increase “should not be accomplished by penalizing other hospitals, especially in light of the fact that Medicare currently reimburses all inpatient PPS hospitals below the cost of care,” the American Hospital Association (AHA) wrote to CMS.

Opposition to the budget-neutrality guideline was echoed by every other national hospital group for reasons that included:

  • There is no statutory requirement for CMS to apply budget neutrality to AWI changes.
  • Such a change would exacerbate existing Medicare underpayments to hospitals.
  • The change would worsen Medicare margins, which are projected to reach -11% for 2019.

“Further, while CMS describes this proposal as necessary to support rural hospitals, it actually penalizes certain rural hospitals,” AHA wrote.

Specifically, the change would result in lower payments to 5% of rural IPPS hospitals at a time when 70% of such hospitals have negative Medicare margins, according to AHA.

“Such a reduction in funding is a heavy burden for these small providers, who rely on Medicare and Medicaid for a majority of their revenue,” wrote AHA.

The Federation of American Hospitals (FAH) also rejected three alternative CMS funding approaches for the AWI change — including increasing the amount by which wage index values for high-wage-index hospitals are reduced, thereby producing a positive adjustment to the standardized amount. FAH described the approach as a “significant and unnecessary redistributive policy.”

Some of the harshest criticism came from the Association of American Medical Colleges (AAMC), which questioned CMS’s legal authority to undertake the proposed changes. The group, which represents teaching hospitals and health systems, joined other national hospital groups in urging a non-budget-neutral approach and raised concerns that the change would last “at least” four years.

“CMS should explore other ways to ensure that the data for the wage index is accurate and that those hospitals at the low end of the wage index are paid appropriately,” AAMC wrote.

If finalized, the AWI changes would go into effect Oct. 1.


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