The Center for Medicare and Medicaid Services (CMS) recently proposed changes in the way Medicare payments for inpatient hospital visits are made through changing wage index calculations. The wage index is a method of adjusting Medicare national standard payments to account for differences in market area labor costs across the country.
The wage index is computed using the hourly wage for each urban and rural labor market area as calculated from the Medicare Cost Report. This is compared to the national average hourly wage. A labor market area’s wage index value is the ratio of the area’s average hourly wage to the national average hourly wage. A wage index above 1.0 represents a high labor cost area and a wage index below 1.0 represents a low labor cost area. The wage index is revised each year.
The labor related portion of that national standardized Medicare payment amount, 68.3 percent, is multiplied by the wage index in order to adjust Medicare payments for the relative costliness of hospital labor in a given market area. The remaining non-labor share, 31.7 percent, is unchanged.
According to Seema Verma, "one in five Americans are living in rural areas and the hospitals that serve them are the backbone of our nation's healthcare system." Additionally, Maggie Elehwany, Governmental Affairs and Policy Vice President at the National Rural Health Association, recently stated in Modern Healthcare that “two years ago, we had 40% of rural hospitals operate as a loss. Today we have 46%.” If these statistics are correct, there is a real danger of rural hospitals shutting down at an increased rate. This will exacerbate the existing healthcare disparity between urban and rural areas in terms of access to necessary healthcare.
Over time this creates a downward spiral in the wages that rural hospitals are able to pay. Rural hospitals pay low wages, putting pressure on an already low Area Wage Index (AWI), and the cycle continues. In an effort to address this threat, CMS is proposing to raise the index for low-wage hospitals while decreasing it for high-wage hospitals.
In the proposed 2019 notice of proposed rulemaking (NPRM), there are two “solutions” proposed. Under the first, hospitals with a wage index below the 25th percentile would see an increase, while hospitals with a wage index above the 75th percentile would see a decrease. This would be accomplished in a budget neutral way. The alternative proposed by CMS would give an increase to those hospitals with a wage index below the 25th percentile but would reduce the base rate for all hospitals to achieve budget neutrality.
Given the budget neutral nature of the proposal, in the aggregate, there will be winners and losers. However, in the alternative proposed model, the potential lost revenue is spread across all providers while the potential for increased payments is focused on mostly those rural hospitals that need it.
Steven Porter, “CMS Proposes Wage Index Hike for Rural Hospitals” April 23, 2019, https://www.healthleadersmedia.com/finance/cms-proposes-wage-index-hike-rural-hospitals
George H. Pink, PhD; Krise W. Thompson, MA; H. Ann Howard, BS, “2019 Wage Index Differences and Selected Characteristics of Rural and Urban Hospitals”, NC Rural Health Research Program May 2019
Robert King and Alex Kacik, “CMS throws rural hospitals a lifeline with wage index changes”, April 27, 2019, https://www.modernhealthcare.com/government/cms-throws-rural-hospitals-lifeline-wage-index-changes