OIG: CMS should revisit hospital wage index system, citing $140M in overpayments

Phoenix Children's Hospital
CMS uses the hospital wage index to adjust payments to hospitals in order to best reflect local labor prices. (Phoenix Children's Hospital)

CMS' hospital wage index system has been systematically overpaying hospitals for over a decade, the HHS Office of Inspector General (OIG) found in a recent report.

Between 2004 and 2017, the Medicare program overpaid at least 272 hospitals to the tune of $140.5 million. The OIG identified several vulnerabilities causing the inaccuracies and offered six recommendations to fix them—but to date CMS has only concurred with one.

Primarily, OIG suggested that CMS reconsider comprehensively reforming the wage index system, which adjusts payments to hospitals to reflect local labor prices. As envisioned in the Affordable Care Act, CMS started that process by issuing a plan in 2012 to switch to a commuting-based wage index (CBWI). While Congress declined to implement it that year, OIG continues to recommend it as a potential solution.

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"We recommend that CMS and the Secretary revisit the plan to comprehensively reform the wage index system, including the previously researched option of a commuting-based wage index," OIG wrote (PDF).

"The CBWI would use smaller, more discrete labor market areas and only incorporates wage data from hospitals that actually employ workers in that area. The result would be a wage index specific to an individual hospital based upon the labor markets from which that hospital hires its workers," CMS wrote in the executive summary of that plan.

In response to OIG, CMS said it would consider the recommendation in the president's next budget. But OIG included five further recommendations in the case that comprehensive reform doesn't happen:

  • Seek legislative authority to penalize hospitals that submit inaccurate or incomplete wage data. OIG noted that currently, CMS only has authority to penalize hospitals if they intentionally misrepresent or falsify the data.
  • Seek legislation to repeal the "rural floor," which requires that area wage indexes applied to urban hospitals be equal to or higher than the wage index for rural hospitals in the same state. OIG argued that this decreases accuracy because it relies on a false assumption that average urban hospital wage rates are always higher than average rural hospital wage rates.
  • Seek legislation to repeal the "hold-harmless" provisions in federal law, which prevent hospitals from having their wage indexes lowered because of the geographical reclassification of other hospitals.
    • Absent such legislation, OIG also recommended that CMS rescind its own hold-harmless policy
  • Work with Medicare administrative contractors (MACs) to conduct data audits on a limited number of hospitals each year. OIG noted that currently, MACs only perform limited reviews of such data.

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Thus far, CMS has only concurred with the recommendation to work with MACs to conduct data audits. It specifically did not concur with OIG's recommendation to rescind its own hold-harmless policy.

CMS argued that "its current hold-harmless policy promotes stability in wage indexes for hospitals in the reclassifying hospitals' original geographic areas," OIG wrote. "We responded that promoting stability for those hospitals decreases wage index accuracy and suggested that if CMS will not rescind its policy, it should consider revising it to increase accuracy."

CMS said that it would consider the other recommendations in the president's next budget.