Tackling the wage index

When it comes to addressing Medicare's hospital wage index, hospital associations have a choice: Do they want to focus their efforts on one battle or the larger fight?

The battle here is over an adjustment to the “rural floor” component of the Medicare hospital wage index, while the calculation of the index as a whole represents the bigger fight. In calculating a state’s hospital wage index, no urban area hospital can have a wage index below the state’s rural hospitals, which creates a rural floor. Critical-access hospitals, meanwhile, are not included in that calculation. Until the Patient Protection and Affordable Care Act, the CMS had required that any payments through wage-index adjustments must be budget-neutral (using existing funds) within a state—meaning just the hospitals in a state would be affected by payment changes resulting from wage-index adjustments. Now, wage-index adjustments must be budget-neutral on a national basis.

Sources attribute the change largely to strong support from the Massachusetts delegation under the leadership of Sen. John Kerry (D-Mass.) before the bill became law. In 2008, 19-bed Nantucket Cottage Hospital converted from critical-access hospital status to a prospective payment system hospital, which meant that wage data for that hospital would be included in the wage-index calculation.

According to the Coalition of American Hospitals—a group of 20 hospital and health associations that came together to overturn the provision—the rural floor there went up considerably, and because no urban hospital can receive less than a rural hospital, all of the cities in Massachusetts were treated, in essence, as the island hospitals that had higher labor costs. The issue becomes thorny when budget neutrality is applied nationally. Payment increases to some states will result in reductions for others.

In a state-by-state analysis, the group reports that Massachusetts stands to gain about $367 million annually in inpatient and outpatient payments as a result of a change. Other states that will benefit include New Jersey ($68.2 million) and Connecticut ($38.3 million), while others will see considerable reductions, including New York (about $56 million) and Texas (about $45.8 million). All told, 43 states could see reductions totaling about $3.5 billion over 10 years. The coalition wants the provision reversed either through regulation or legislation.

But Linda Fishman, senior vice president of policy at the American Hospital Association (which is not part of the coalition), said the entire hospital wage-index issue—not just the rural floor component—should be examined. Last year, the AHA established a task force that Fishman said might have recommendations on the issue for AHA’s governing board in the fall. A CMS report on the hospital wage index that was to be released by late December should be out soon, a CMS official said.

Still, the members of the coalition—which the National Rural Health Association joined last week—emphasize that the rural floor component is a serious policy flaw that merits correction.

“This reduction is material and will be felt more and more by hospitals as the ACA payment reductions kick in the next couple years,” said Herb Kuhn, president and CEO of the Missouri Hospital Association and a commissioner for the Medicare Payment Advisory Commission. Kuhn’s association is part of the coalition, and he did not speak on behalf of MedPAC.

Massachusetts hospitals, meanwhile, contend the law just restores an earlier policy.