Their physical buildings are in the same place, but 121 hospitals last week made virtual moves that will significantly increase their Medicare payments. As mandated by the Medicare Prescription Drug, Improvement and Modernization Act, the CMS announced which of the 540 hospitals that applied for geographic reclassification were successful.
Hospitals requested the reclassifications so that the portion of their Medicare payments based on area wages better reflects what they have to pay workers. Many hospitals in Detroit, for instance, were reclassified to the Ann Arbor, Mich., metropolitan service area where wages more accurately reflect those paid by Detroit-area hospitals.
For Henry Ford Health System, which had two of its three acute-care hospitals reclassified, the change will amount to $10 million in new revenue over the next year and $7 million to $8 million in fiscal 2005, said James Connelly, senior vice president and chief financial officer.
"When we visited with (former CMS Administrator Tom Scully) last December, one of his first comments was that Detroit's wage index looks low," Connelly said.
According to CMS sources, the process for selecting the hospitals was a fair one dictated by statute and conducted by the Medicare Geographic Reclassification Review Board, which operates within the CMS but makes its decisions independent of agency officials.
Still, hospitals in only 25 states were awarded reclassifications, and Michigan hospitals received almost 30% of applications granted. In Connecticut, home of Republican Rep. Nancy Johnson, who played a central role in negotiating the Medicare law that made the reclassifications possible, 10 of the state's 30 acute-care hospitals were winners, with seven becoming part of the Long Island, N.Y., metropolitan service area. Johnson also chairs the House Ways and Means health subcommittee.
Sens. Charles Grassley (R-Iowa) and Max Baucus (D-Mont.), who both served on the conference committee that wrote the Medicare law, did well for their states, too. The CMS reclassified four Iowa hospitals and six in Montana.
The reclassifications are retroactive to April 1. The 121 hospitals will share $900 million over three years, money allocated by the Medicare law to repair wage-based payment inequities.
"One hundred twenty-one hospitals were fixed, so (the money) went a long way and got a lot of hospitals into reclassification," a CMS official said. The review board, the official said, "took care of the priorities. That's where the $900 million went."
The priority hospitals consisted of those that met at least one of several criteria for reclassification. For instance, hospitals that pay average hourly wages that are at least 108% of the average for their region were viable candidates. Of the 121 reclassified hospitals, 100 were reclassified under that criterion or one of six others.
Only one applicant-Samuel Mahelona Memorial Hospital in Kapaa, Hawaii-was reclassified by the criterion under which the vast majority of hospitals applied. That criterion required that the hospital be rural or had submitted performance data to the National Voluntary Hospital Reporting Initiative by Nov. 15, 2003.
A portion of every Medicare payment is based on a regional wage index that represents the ratio of that region's average hourly hospital wage to the national average. Used to compensate hospitals for their unique labor costs, the wage index for years has been a controversial way to adjust payments based on regional variations.
"It is surprising to see that only one out of four applications was approved," a Deloitte & Touche analysis said. "A review of the approved list of hospitals and the areas to which they have been reclassified confirms the ongoing difficulty of identifying similar hospital labor markets for payment purposes."
In Norton, Va., 133-bed Bon Secours St. Mary's Hospital opted not to apply for reclassification after a review by an outside consultant that found the hospital would not benefit. "We're already paying wages sufficiently high enough that it would not help us to make the appeal," said Barbara Hale, St. Mary's vice president of finance and CFO.
Nearby Norton Community Hospital did apply-and received-a reclassification. "I don't know why St. Mary's didn't apply for it. That's crazy," said Tim Matney, CFO of the 129-bed hospital. Matney estimated that Norton Community would add $400,000 to its annual revenue as a result of the change. "It will help us a lot," he said.
In Boston, 526-bed Beth Israel Deaconess Medical Center applied for a reclassification but did not get one. "It would have been a significant difference-somewhere in the range of $7 million the first year and closer to $14 million the second or third," said Richard Nagy, the hospital's director of reimbursement and revenue analysis.
"We knew it was a long shot," Nagy said, adding that rural hospitals and those reclassified from Connecticut to New York "probably ate up quite a bit of the money." CMS sources confirmed that once the money ran out, other qualifying hospitals simply did not make the cut.
It was not clear if the CMS prioritized applications that arrived before others. In any case, prospective payment regulations for 2005 could reshuffle the deck again. In those regulations, which the CMS will issue in draft form next month, the agency plans to update the geographic classification system with data from the 2000 census; currently hospitals are classified based on 1990 census data.
"Once we've figured out how to translate the 2000 census data into the inpatient PPS, I don't know what classifications will look like," a CMS spokeswoman said. "They will probably be different."