2019 Wage Index Differences and Selected Characteristics of Rural and Urban Hospitals
The Medicare Hospital Inpatient Prospective Payment System (IPPS) is designed to pay hospitals for services provided to Medicare beneficiaries based on a national standardized amount adjusted for the patient's condition and related treatment. Further, Social Security Act Section 1886(d)(3)(E) requires that the standardized amount be adjusted for differences in hospital wage levels among labor markets, which the Centers for Medicare & Medicaid Services (CMS) implemented through the wage index system.
In November 2018, the Office of Inspector General (OIG) issued a study titled "Significant Vulnerabilities Exist in the Hospital Wage Index System for Medicare Payments." The OIG identified four significant vulnerabilities in the wage index system: (1) CMS lacks the authority to penalize hospitals that submit inaccurate or incomplete wage data and noted instances where some hospitals had submitted inaccurate wage data and inadvertently been overpaid by Medicare; (2) Medicare administrative contractor (MAC) limited reviews do not always identify inaccurate wage data; (3) the rural floor decreases wage index accuracy; and (4) hold-harmless provisions in federal law and CMS policy pertaining to geographically reclassified hospitals' wage data decrease wage index accuracy. The OIG concluded that these vulnerabilities mean that wage indexes may not always accurately reflect local labor prices and, therefore, Medicare payments to hospitals and other providers may not be appropriately adjusted to reflect local labor prices. Several U.S. legislators have also criticized hospital wage index for adding to rural disparities.
This brief characterizes rural/urban disparities in the 2019 CMS hospital wage index by describing and comparing the wage indices of rural and urban hospitals by the number of beds, the amount of net patient revenue, and Medicare payment classification. Results show small rural hospitals have the lowest hospital wage indices in the nation, the highest wage indices are found among urban hospitals; and there is substantial variation in the wage index among hospitals with different Medicare payment classifications.