Responding to strong industry resistance, HCFA indicated last week that it would scrap the notion of using hospitals' nearest competitors to redefine Medicare labor markets.
Instead, the agency proposed reconfiguring labor markets by blending the nearest-neighbor concept with a system that would give more weight to hospitals' individual wages.
The revised plan was explained in HCFA's proposed fiscal 1995 rule for the Medicare PPS, published in the May 27 Federal Register. The agency said it had studied nine options for redrawing labor markets according to hospitals' closest neighbors, an idea first recommended in 1993 by the Prospective Payment Assessment Commission.
Last year, HCFA published possible changes in hospital wage indices based on ProPAC's proposal, which was aimed at correcting inequities in Medicare labor markets.
The HCFA data showed dramatic redistribution of Medicare payments. In response, the agency received 266 public comments, only 33 of which offered unqualified support for nearest-neighbor labor markets.
In addition to nearest-neighbor alternatives, HCFA studied seven options for subdividing current labor markets to see whether they would yield fairer wage indices on which to base Medicare payments. The agency concluded that none of the options studied would "constitute a clearly demonstrable improvement over the current system."
Now, hospitals with wage costs that are much higher than the prevailing labor market rate can apply to the government for geographic reclassification, which enables them to receive payments that more accurately reflect their wage costs. According to HCFA, the current reclassification system is at least as beneficial as either the nearest-neighbor or subdivided labor market remedies.
The agency predicted, for example, that under the current system, 1,672 hospitals would get a boost in their fiscal 1995 wage index equal to more than $200 per Medicare case, while 590 hospitals would lose more than that amount.
However, HCFA suggested that the new method would produce much more favorable results. Under this proposal, each hospital's own wages would comprise 25% or 50% of its wage index, with the balance derived from the average hourly rate of all other hospitals in the metropolitan statistical area or statewide rural area.
Hospitals with wages that are determined by thresholds to be far greater than those in the surrounding labor market could seek an alternative wage index, derived completely or in part from its 10 nearest neighbors.
Under such a system, more than 600 hospitals would be eligible for some degree of change in the way their wage indices are computed in fiscal 1995, compared with just 362 hospitals that are expected to qualify for reclassification next year, HCFA predicted.