Hospital Specific Wage Index is Viable and Rural Floor Adjustment Dispute Settled

The HHS Secretary submitted plan to Congress on a viable reform as to how wage index used in the hospital inpatient prospective payment system (IPPS) is calculated, and has reached a settlment involving how the rural floor wage index determination was made which could result in payments of up to $3 billion to hospitals.

In her report to Congress, the HHS Secretary stated that she believes the commuting based wage index (CBWI)  methodology for determining the wage adjustment to payments made under IPPS could be a viable alternative to the current Medicare wage index system.  The CBWI would create a wage index value for each hospital as opposed to the current system which generates a wage index value for all hospitals in a specific area.

 Hospital Specific Wage Index

Currently the wage index value for a hospital is based of a geographic based area known as a core-based statistical area which produces in an average hourly wage for each MSA and a single statewide rural wage index.  In its 2007 report to Congress, the Medicare Payment Advisory Commission (MedPAC) determined that under the current system over one-third of IPPS hospitals receive an adjustment to their age index resulting in non-intuitive results.

The CBWI would use commuting data to define a hospital’s labor market area.  The CBWI would aggregate wage data based on where the hospital workers reside, not like in the current wage index determination, where they work. Commuting flows would be used to identify the areas from which a hospital hires its workers and to determine the proportion of its works hired from each area. The CBWI would use geographic units such as zip code or census tracts.

Section 3137(b) of the Patient Protection and Affordable Care Act (PPACA)(P.L. 111-148) required the HHS Secretary to submit a report to Congress that includes a comprehensive plan to reform the Medicare wage index adjustment.  In developing the plan, the Secretary was directed to take into consideration the goals set forth by MedPAC in their 2007 report.

 Rural Floor Settlement

The Secretary also agreed to reimburse hospitals for inaccurately calculating the rural floor adjustment from 1999 through 2011.   The rural floor adjustment is intended to ensure that hospitals in metropolitan areas do not have a wage index lower than that for hospitals in rural areas of the state.  Instead of reducing Medicare payments to hospitals solely to account for the cost of the rural floor adjustment, HHS reduced payments each year beyond the amounts needed to achieve budget neutrality.

Under the agreement, about 2,200 hospitals will be receiving reimbursement correcting this calculation. For example, Tenet Healthcare Corp will receive about $82 million for its 50 hospitals and HCA Holdings, Inc. expect to receive about $271 million for its 163 hospitals.

An additional 1,300 hospitals, not part of the agreement could still pursue litigation according to Jon Neustadter of Hooper, Lundy and Bookman who negotiated the $700 million settlement.

A district court judge in 2009 sided with the federal agency when hospitals sought court action to correct this problem. In January 2011, the federal appeals court in Washington ruled in favor of the hospitals and ordered the Obama administration to address the problem.

In August, Medicare corrected the payment rates for fiscal year 2012. Federal officials didn’t agree to settle the matter for prior years until early April 2012.