Blog, Reimbursement, The Hospital Finance Podcast®

Factors that could affect the future of the wage index [PODCAST]

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The Hospital Finance Podcast

In this episode, we are joined by BESLER’s Bob Mahoney to discuss the factors affecting the wage index in the proposed 2020 IPPS rule.

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Highlights of this episode include:

  • Background on why the wage index is mentioned prominently in the proposed 2020 IPPS rule.
  • What dramatic changes are being proposed by the Office of Inspector General (OIG) for wage index.
  • Reasons why the OIG is seeking legislative authority to penalize hospitals and repeal the rural floor.
  • How the 2020 IPPS proposed rule addresses the concerns raised by the OIG.
  • And more…

BESLER’s Laura Legg shares her thoughts on the implications of the IPPS proposed rule for 2020 in a related episode of our award-winning podcast: “A look at the IPPS proposed rule 2020”


Mike Passanante: Hi, this is Mike Passanante. And welcome back to the Hospital Finance Podcast®.

Today, we’re going to be talking about factors affecting the wage index in the proposed 2020 IPPS rule. And joining me to discuss that is Bob Mahoney who is a senior consultant on our Reimbursement Services team here at BESLER.

Bob, welcome back to the podcast.

Bob Mahoney: Thanks, Mike. Glad to be here! And I think this is an interesting topic.

Mike: Yeah, I think so too. So Bob, why don’t you just tee this up for us because, as I mentioned in the opening here, the wage index is mentioned prominently in the 2020 proposed rule. And that seems to stem from a report that came out from the OIG last November. What’s going on?

Bob Mahoney: Yeah! November 23rd, the OIG issued a report that was highly critical to the Medicare wage index process. And it suggested dramatic changes.

And then, all of a sudden, in April, the proposed rule for FY 2020 came out. And we’re seeing some dramatic changes to the wage index.

And just really, I think, to kick this off, the best way is I just want to go through the wage index for people that might not be familiar with it.

In section 1886 of the Social Security Act, the secretary of the Medicare rule proposed to adjust the wage level and the geograph of a hospital compared to the national average wage level.

And to put that in simple terms, if the cost of living across the country was the same for everybody, the wage index across the country would be one. But as we know, of course, it’s different to live in different parts of the area, in different cities, and you know, the East Coast and the West Coast.

So, to adjust Medicare payments so Medicare could treat patients properly and pay people properly they have working in that right area, they came up with the wage index in that rule.

And the wage index—New York and the East Coast and the West Coast, Silicon Valley has the highest wage index, well over 1.0, close to 2.0. And rural states and states in the Midwest have well under one.

And the way it’s done is based on how you submit your cost report. S-3 part 2 through 5, you submit wage data hours, wage-related costs and contract labor data, and that’s how they come up with your wage index.

Now, the weight hospital providers have put into account based group by counties. So it’s called CBSA, it’s county-based statistical areas. And based on your county’s wage index is how you get paid.

But there are ways to move out of this, to re-class out and get a better wage index. Those are by being rural, by being a frontier state which came in the ACA, geographic re-classes and out-migration adjustments.

And as with anything, when the new rules come out and different loopholes, people use it to get the better wage for their hospital. And that was really what the OIG report comes in.

And this isn’t the first time this has happened. In 2005, MedPack issues a report what a lot of the same results, issues against the wage index. And again, in 2011, the AHA released a report talking about the wage index and issues that had to be done.

And so far, not a lot has been done. But now we’re seeing it in the final rule.

Mike: So Bob, why don’t you walk us through this latest OIG report. And tell us what in there kind of stirred the pot this time.

Bob Mahoney: I guess what really stirred the pot is the OIG reported that the Medicare program overpaid at least 272 hospitals $140.5 million. And that number is going to raise some eyebrows and get people talking, especially with the current administration looking to keep quality but cut costs.

The OIG said there was significant vulnerabilities in the wage index. And they recommended a comprehensive reform of the wage index to reflect labor prices in the true hospital area. And it speaks to the re-class I discussed earlier and many other issues. So, we want to just make sure that it’s discrete.

The biggest thing they said that they wanted to use is CBWI which is commuting base wage index. And that’s a significant change. A CBWI would use smaller discrete labor market areas, and only use wage data from hospitals that employed workers in that area; in theory, matching the labor market to the area (which is a significant changes. As we’ve discussed, it’s not exactly happening that way now).

Mike: Bob, does the OIG have any other recommendations in that report?

Bob Mahoney: They certainly did. And let me walk through those now.

They wanted to seek legislative authority to penalize hospitals that submitted inaccurate and incomplete wage data. The wage index is budget neutral. So everybody, if one gets higher, and somebody gets slower, and it all comes out even, and it’s based on county groups, and everybody’s spread out, if the data is not completed or accurate, you’re just not getting the information properly. And the money’s being moved around based on this data.

And when, we look at the files, you’ll see quite anomalies where some people, it’s a dollar an hour, and some people are making a thousand dollars an hour for the same task in the same county. You just know that’s not correct. It’s just not being filled out properly. And it’s very important.

So, if hospitals in a good CBSA have a rule that helps them—it looks like, sometimes, they don’t put an effort into that. And the OIG doesn’t think that’s the best way to do business.

They also want to seek legislation to repeal the rural floor. The interesting thing about the rural floor is there’s three states—New Jersey, Delaware and Rhode Island—that do not have a rural floor. They’re considered all-urban.

The rural floor states that no hospital in the state can be lower than the lowest rural hospital. So if you’re an urban hospital, and there’s a rural hospital that pays well, you’re going to get that payment.

And it’s kind of a rule that was set out to protect rural hospitals, but it has been used by other hospitals and other states to gain wage dollars which helps their Medicare payment. And it’s been an issue along that now states are becoming rural, completely rural.

They’re also wanting to repeal the whole homeless provisions and the hospitals from having their wage index because of geographical re-classes of other hospitals. One of the hospitals gets aggressive, they re-class, it hurts another hospital because of that.

They also want to work with the Medicare administrator, the MACs, for greater audits. Like I said, if you have bad data, if you ordered it more, you might capture some of that data. But everybody’s pressed for time. The MACs just generally do a scope order on its wage index and don’t spend as much time as OIG believes they should.

So far, CMS has agreed that the MAC should have greater scope on wage audits and more audits. And that’s been going on since MedPack. We discussed earlier that this information needs to be reviewed with greater scope.

Mike: Okay. So, those are all the things that the OIG recommended. How does the proposed rule address those concerns?

Bob Mahoney: Well, I guess what they’re doing is they’re proposing changes to the rural floor calculation, making it making it more difficult and less advantageous for urban hospitals to become rural.

Rural hospitals currently receive rural floor in states that have it and benefits and drug pricing benefits. And now, what has happened is, because of the way it works, there are hospitals in New York City in midtown Manhattan that are considered rural. There’s hospitals in Los Angeles and in Chicago that are considered rural and are reaping the benefits of being a rural hospital while paying their employees properly. So that throws off the whole system. And that’s something that the OIG has major concerns with.

Mike: Any other changes, Bob?

Bob Mahoney: Yes. And what they’re proposing, when hospitals have a wage index below 25th percentile if you bind up all 3000 hospitals in the country, they would see an increase; where those above the 75th percentile would see a decrease. So really, they’re trying to bring everybody closer together and make less room for people to try to maximize the wage index through appeals and re-classes and other ways that it’s been done.

Mike: So Bob, besides the OIG report, are there any other factors that are driving these changes in the proposed rule?

Bob Mahoney: As you can tell by everything I’ve said before, CMS does believe that hospitals are using the urban to rural re-class to inappropriately influence the wage index. There’s hospitals in states and cities that are rural. And there’s hospitals spread out that are becoming the states that are all rural. And they’re getting the benefits that a rural hospital does. Although it’s set up great in concept, and it does work, there was some legalities and appeals that have made it happen that we’re seeing the urban to rural change. That was part of the OIG’s item. And I think that’s something that the proposed rule is going to adjust. I think we’re going to see more changes to that going further.

Mike: Bob, thanks for stopping by today and shedding some light on these proposed changes to the wage index. I suppose we’ll have to wait a couple months to see how everything shakes out.

Bob Mahoney: Yeah, when the final rule comes out—I mean, this is in the comment period. Obviously, hospitals that are going to get hurt by this are writing comments and reaching out to their legislators to try to keep their wage index the way it is. But the OIG, the administration now know that’s an issue. And it’ll be interesting to see what happens. I look forward to speaking about it when the final rule comes out. Thank you.

Mike: Sounds great! Thanks for coming by, Bob.


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