Hospital wage index: MedPAC's fix isn't the way to go

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.

The MedPAC approach to defining a wage index would allow index values to vary at the county level within wage areas (by "blending" a county-level index with an MSA-level index), as well as "smoothing" those initial values to limit the difference in hospital wage index values between adjacent counties to no more than 10 percent.

"MedPAC's blending-and-smoothing method is not well suited to the existing Medicare wage index," says Acumen. "The majority of hospitals that currently receive reclassifications and exceptions would benefit less from the MedPAC blending-and-smoothing method than they do from the current system of reclassifications and exceptions."

A more accurate definition of a hospital wage area will reduce problems related to mismatches between wage areas and hospital labor markets, the research organization suggests. "Acumen recommends further exploration of labor market definitions using a wage area framework based on hospital-specific characteristics, such as the commuting times from hospitals to population centers, to construct a more accurate hospital wage index. We think that such an approach offers the greatest potential for replacing or greatly reducing the need for hospital reclassifications and exceptions."

However, a more accurate wage index would hurt rural hospitals that currently benefit more from the existing reclassifications and exceptions, the organization notes.

To learn more about the Acumen's findings:
- read "Revision of Medicare Wage Index: Final Report Part II"