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Why adjusting wage index now can affect future reimbursement [PODCAST]

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In this episode, Scott Besler, Senior Manager in our Reimbursement Integrity team at BESLER, discusses adjustments to the wage index and potential changes that could affect hospital reimbursement.
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Mike Passanante: Hi, this is Mike Passanante. Welcome back to the Hospital Finance Podcast. Today, I’m joined by Scott Besler. Scott is a Senior Manager in our Reimbursement Integrity Team here at Besler Consulting. And he’s joined us to help us understand more about why adjusting the wage index now can affect future reimbursements.

Scott, welcome to the program.

Scott Besler: Thanks for having me, Michael.

Mike: So, Scott, let’s start out. Why don’t you just explain to us briefly what the wage index is.

Scott: Simply put, Medicare adjusts for an area’s difference in wages. Parts of the country have different wages; Medicare is no different.

Mike: Scott, how is the wage index calculated?

Scott: Through the Medicare Cost Report where a hospital’s salaries an hours are determined from that cost report. The salary and hours are then separated into various labor markets known as Core Based Statistical Areas or CBSA’s.

The CBSA’s wage index value is the ratio of that area’s average hourly wage to the national hourly wage. So if that CBSA has an average hourly wage greater than the national, then the wage index would be greater than 1. On the flipside, if it’s less than the national, that wage index would be less than 1.

CBSA’s are a United States geographic area defined by the OMB. So, CMS really has nothing to do with it. It’s really based upon the OMB definition of labor markets.

There are both urban and rural CBSA’s. And each of those areas have their own wage index. And these areas were last updated for federal fiscal year 2015 with OMB Bulletin 13-01. And that was released in February 2013 (not used until ‘15, but it was released in February of ’13).

And then, this bulletin itself was revised in 2015, July of 2015 with OMB Bulletin 15-01. These changes were minimal when compared to the February 2013 Bulletin.

Mike: So, back to that 2013 Bulletin, you mentioned that the changes were minimal when compared to it. How drastic were the changes in the 2013 OMB Bulletin?

Scott: Good question! The labor markets had not been updated since 2004—well, really, federal fiscal year 2005. So it was to be expected that there would be many changes throughout.

2004 had some drastic changes, then the OMB Bulletin also had subsequent drastic changes.

Again, it’s based upon population. And then, the OMB uses the Census Bureau of Statistics to generate these areas. So, there were some areas that became urban that were rural, and some areas that were rural that became urban.

That does create some issues for hospitals. And CMS allowed during that federal fiscal year to have a blending of the wage index, so that it could lessen the hit that hospitals would take from these new defined labor markets.

Mike: So, you just mentioned labor markets and urban and rural CBSA’s. Does every state have both?

Scott: Well, 47 states do have both; and there are three states that do not have any rural CBSA’s. Those states are considered “all urban.” And those states are Delaware, New Jersey and Rhode Island. And the term “all urban” has been used since federal fiscal year 2005.

Mike: Does it matter those states do not have both?

Scott: I think it does. States that have rural CBSA’s cannot have an urban CBSA wage index that is less than that of the rural area.

For example, if an urban CBSA in California is less than the rural CBSA for California, that urban CBSA’s wage index value and the hospitals that are located in that area are then increased to that of the state rural wage index.

The all urban states do have a rural floor. It’s called an imputed rural floor. And that has its own calculation. And as I’ve mentioned, all of the hospitals in that particular area have their salary and wages combined and compared to all of the salaries and wages of the hospitals in the country to calculate the wage index.

So, all urban states have a calculation that uses a low-to-high average, and applies that low-to-high average to the highest wage index value in that particular state. And that becomes the imputed rural floor.

It sounds confusing, but a low-to-high average can never be greater than 1.

So, a low-to-high average for the three all urban states is then calculated. The state has the opportunity to use that low-to-high average for their state specific or they can use the low-to-high average in the aggregate of the three all urban states combined, and then apply that to the highest wage index value in the state.

Now, Rhode Island, their imputed rural floor does not use the low-to-high average. Rhode Island uses an increase to the CBSA’s that have a rural floor issue. I can explain that a little further.

A rural floor issue is any state that has an urban CBSA less than a rural area. That state would have what I call a “rural floor issue,” meaning the urban CBSA is brought up to the rural floor. And there’s a table in the federal register that lists all the states that have a true rural floor impact.

Hospitals that are impacted by the regular rural floor calculation total 367 hospitals in 30 states. There’s also three all urban states, and that’s roughly 30 hospitals.

So, there are 17 states that technically do not have a rural floor impact. However, those 17 states do have the opportunity to be brought up to the rural floor. And I will get into it a little later, about the frontier state which is, in essence, a type of rural floor.

Mike: So, let’s dig into the wage index a little bit deeper. Scott, why is the data and information reported on the wage index important?

Scott: Well, it’s important because hospitals need to review their wage index to make sure that it’s optimal. You have so many opportunities to review your wage index. There’s right before submission of the cost report, and then there’s the open window period. But it doesn’t impact your payment at time of submission of your cost report, so some hospitals leave that for another day to go and work on.

It’s very important that it’s going to impact your payment, both in-patient and out-patient.

Mike: When the cost report is submitted, is that the last chance to make changes?

Scott: Right now, no. CMS offers the hospitals what we call an “open window,” and that’s the time between when the hospital files their cost report to when they actually have to submit final adjustments to their MAC for calculation of the wage index.

So, for an example, a 12/31 hospital files a cost report between that December and May, that open window is from that May until the following September—I’m sorry, it’s over a year. So, it’s going to be that May followed by the September of the following year—usually, September 1st.

On the other hand, a 630 hospital would have until the November where they filed their cost report and then the following September again to submit their adjustments.

And there is some discussion that the burden that this open window causes for the MACs and CMS. They’re under strict deadlines and CMS has thrown it out there that they may want to only accept adjustments that the provider could not submit at time of the cost report submission. And usually, those relate to contracted labor, some home offices that their cost reports are not done by the time they submit their cost report. CMS acknowledges that. But when it’s wide open and so broad, it’s a tremendous burden on the MAC’s and CMS may just do away with this open window.

The open window used to be in December several years ago. Then it went from December to November to October in subsequent years. And then, now we have it in September. And that’s the last. It’s been in there for the past three years.

Mike: Are there any other instances where a hospital can improve upon their own labor market’s wage index?

Scott: Yes. First, what they have to do is they file their wage index accurately. And they need to pay close attention to their audit adjustments.

CMS, through the MACs, has always reviewed the wage index, so it’s nothing new. But the adjustments that may have been approved in the past may not be in the future. And we have seen instances where CMS is taking a tougher look at certain items on the wage index that may have passed audit previously.

And again, there are several MACs throughout the country. I think the provider community wants these MACs to treat everything fairly. So these MACs are actually getting together with CMS’s tutelage and learning from each other and making the same adjustments across the country.

That was always an argument that some providers would make in states where the MAC was more strict on certain adjustments and maybe more liberal on others. And it created some angst and some confusion. And then as hospitals become part of these major systems that cross state boundaries and have different MACs, that’s where you see some of the fluctuations in the adjustments.

And I think the provider community really just wants to be told, “What can we do, and we’ll do it.”

MACs are regional. And some felt that the MACs, as I’ve said, would treat one area different than the other. I’m just convinced that in the future, hospitals will be in better positions once they know the rules that they’re going to have to follow with the wage index.

And I just think it’s the next step that CMS and the MAC’s are taking to ensure that the wage index is as accurate as possible.

Another area where I think hospitals can improve is hospitals file an occupational mix survey. Every three years, hospitals have the opportunity to file this survey (which is in statute, so it’s part of the law), so no matter what happens with wage index in the future, occupational mix would be some part of it.

The occupational mix accounts for what CMS determines as a hospital’s choices in labor. So, for instance, hospitals that use more RNs would have a negative occupational mix. And a negative occupational mix is an occupational mix that is below one. That’s then applied to your wages. So, hospitals need to have a good balance of their RN’s, LPN’s, nursing aides, orderlies, and then there’s also an all other category.

And that survey is due this July. The date says July 1st, but that’s a Saturday. So, more than likely, the survey will be due on July 3rd, the following Monday. My suggestion is hospitals get an early start and get it done on time.

There are not many major changes to the new survey. Hospitals have been doing it for the past nine years. It’s nothing new. But I think hospitals should really take a hard look and consider a stronger review this time around.

Also, there’s re-classifications. CMS calls these “exemptions.” Hospitals have different exemptions that they can receive; and re-classification is one of them. An individual hospital can re-classify or a group or county hospitals can re-classify. And there are different criteria for both. Hospitals should know that criteria.

Many of the hospitals with the new delineations had opportunities to re-classify. Some that did re-classify no longer had to because their county or group of hospitals were absorbed into the new core-based statistical area.

So, you should know what your thresholds are. The regs are out there. Again, CMS doesn’t like re-classifications. It’s another burden on them. But right now, in the process that’s out there, they’re still out there.

So, hospitals should take advantage of any type of re-classification opportunity.

There’s also something called a frontier state. And this is where hospitals in these states cannot have a wage index that’s below 1. So, if their urban CBSA is below 1, if you’re one of the frontier states (and Alaska and Hawaii are excluded, both of them have rural floors that are well above one), you then will be considered a frontier state.

And there are only 50 hospitals in five states that are considered truly frontier states.

And then some hospitals that are in counties can receive an add-on called outmigration adjustment. This is another exemption. So, hospitals located in the county that has a specific number of residents that travel to a different county for employment may be eligible if they meet certain thresholds for this adjustment.

Now, one of the interesting things about this is if you re-classify, you’re not eligible for this adjustment. So, your county may have an outmigration adjustment, and that’s why hospitals should really review the proposed rule when it comes out because you’ll need to determine if the outmigration plus your wage index is greater than the wage index that you get when you re-classify.

There’s a 45-day window from the time of publication until the time you need to either withdraw your re-classification application or continue it.

And there are changes that are coming down the pipe for wage index. There’s some that have been discussed ad nauseam. I don’t know how frequent that’s going to occur. But the likelihood of changes is viable.

Mike: You think it’s coming soon?

Scott: Soon, I don’t know—you know, the election, the Affordable Care Act. If you had asked me four years ago, I would say we probably would’ve had changes by now.

But again, I don’t think the process is broken. I think the process just needed some adjustments to it. I think CMS and the MACs do a tremendous job with trying to eliminate the cliffs and the valleys.

They don’t want to have hospitals in one county to have a drastic wage index difference from that of a county that’s adjacent to them. It just doesn’t seem fair. Hospitals in one area that are across a river from another state can pay their RN so much more, can pay for talent, they can really drive business. And you see that with even health systems where some of the major hospitals in their health system may not have the higher wage index because they’re part of another state that has a rural floor that’s through the roof.

So, things like that can really impact a hospital’s decision and overall wage index.

Mike: Scott, what should hospitals be doing now?

Scott: My suggestion is review and evaluate their S3, which is the schedules on the Medicare Cost Report. Make them part of your cost report preparation.

Many do, but there are hospitals, because there’s no reimbursement impact, they delay the completion of those schedules until right up in time of submission, and then they also know they have a fallback of the open window. If that open window were to go away, I think you would see some drastic changes in wage data.

And again, it’s easy for me to say, but hospitals need to find time to make this part of their submission because my feeling is CMS is not far away. They’ve already pulled back the submission of the open window from December to September. I don’t think they’re far away from taking it off the table with the exception of some minor adjustments (home office, contracted labor, as I’ve mentioned earlier).

I think hospitals can also review their occupational mix survey as I had said. And CMS releases public use files. They call them PUF files. They release them four or five times a year. They are a tremendous tool to use when comparing your wage data to other hospitals in your labor market.

It’s the one part where I think wage index can unite hospitals across different corporations and different health systems. When you’re in the same labor market, you really need to talk to your neighbors to see what are they doing to optimize their wage index.

And also, know your CCN, know your provider numbers and know the provider numbers of the hospitals in your area, so you can do these analytics each release of the public use data.

Mike: Thank you, Scott. And if the hospital would like a hand reviewing their wage index, how can they get a hold of you?

Scott: Email is the best way, SBesler@Besler.com.

Mike: Easy enough! Thanks for joining us, Scott. I appreciate it.

Scott: I appreciate it, Michael. Thank you.

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