The Wage Index is more than a number—it’s a vital source of revenue protection and opportunity for hospitals nationwide. At BESLER’s Reimbursement Symposium 2025, Reimbursement Manager Cody Bales delivered practical guidance on understanding, optimizing, and leveraging the Wage Index for “The Reimbursement Pro.” Here’s a comprehensive overview of what you and your organization need to know and next steps.
What is the Wage Index?
Medicare adjusts payments to hospitals by region to account for labor cost differences. Specifically, the Wage Index is calculated from hospital data submitted annually via Worksheet S-3 (Parts II-IV) of the Medicare Cost Report. This data includes:
- Salaries and Hours.
- Contract Labor (including nursing and other areas).
- Physicians and related organizations.
- Wage-related costs, such as retirement, insurance, and taxes.
Hospitals’ wage data is aggregated within Core Based Statistical Areas (CBSAs) – not by individual hospital – to generate an Average Hourly Wage (AHW). The CBSA’s AHW is then divided by the national AHW: for example, a CBSA AHW of $48.01 vs a national AHW of $50.34 yields a wage index of 0.9537.
Why Should Hospitals Focus on the Wage Index?
Wage index factors update annually. Year-to-year changes can have massive financial implications. Each wage index year uses historical cost report data; for example, the 2027 Wage Index cycle is based on cost reports beginning from 10/01/2022 to 09/30/2023. Hospitals should pay close attention to:
- Timely and accurate reporting of wages and hours.
- Reviewing contract labor and physician agreements.
- Maintaining precise payroll and contract documentation.
- Understanding key dates, such as CMS’s revision deadlines (e.g., September 2, 2025, for FFY 2027).
Strategies for Improving Your Wage Index
- Contract Labor Review
- Accurately report all direct patient care under contract, including nursing, pharmacy, and therapy.
- Exclude non-labor costs and ensure contract invoices separate labor from other charges.
- Include contracted physicians where eligible; maintain clear, documented time studies when needed.
- Wage-Related Cost Optimization
- Make sure benefit allocations reflect actual participation—consider how FICA limits and varied plan participation affect allocations.
- For self-insured health plans, using a third-party administrator (TPA) can sometimes allow higher reported costs, but only if claims are paid at bona fide commercial rates with robust documentation.
- Accurate Hours Reporting
- Hours are reported based on paid dates within the cost report period.
- Include: regular, holiday, PTO, and overtime hours (at regular time).
- Exclude: unpaid leave, bonus hours, shift differentials, capitalized salaries, hours not actually worked.
- Review Worksheet A salaries to payroll reports and examine payroll earn codes for proper categorization.
- Occupational Mix Review
- The Occupational Mix Survey adjusts wage index dollars, primarily based on the composition of the nursing staff. Over-employing Registered Nurses (RNs) (relative to the national mix) can result in a negative adjustment to your AHW, while staffing relatively more LPNs/Nursing Assistants can increase the AHW.
- Properly categorize all nursing staff (exclude those with only administrative/educational roles and Part B billing providers from the RN pool).
- Ensure survey results reflect reality by working closely with HR, payroll, and nursing administration personnel.
- Geographic Reclassifications
- Hospitals may apply for geographic reclassification if their workforce’s wage levels are more in line with a neighboring area. This is especially important if your hospital is on the border between two CBSAs or is a “Section 401” hospital (urban-to-rural reclassification).
- Individual and group reclassification applications must meet stringent distance and wage percentage thresholds.
- Reclassification can lock in a higher wage index for a three-year cycle.
- Providers should remain vigilant throughout the cycle for opportunities and errors, and stay aware of the potential to withdraw reclassification status based on changing data.
Special Provisions and Legislative Changes
- No hospital can be assigned a wage index below its statewide rural wage index (rural floor provision).
- Recent legislation has introduced an “Imputed Floor” for states lacking rural areas.
- Wage data for urban hospitals reclassified as rural (Section 401 hospitals) is included in the rural wage index calculation, which can impact which providers ultimately see the rural floor adjustment.
Timing, Deadlines, and Best Practices
- The wage index cycle is continuous: next year’s factor relies on data several years back, and data releases occur several times throughout the year.
Key Takeaway
Optimizing your Wage Index is an ongoing, multi-step process that directly impacts your organization’s bottom line. With meticulous payroll and contract documentation, strategic use of occupational mix and geographic reclassification, and robust internal review, hospitals can unlock significant value.
For more detailed support or a consultation on how BESLER can help you maximize your Wage Index potential, contact us today.
