Wage index reform could buoy rural hospitals

HHS' Office of Inspector General suggested changes to the wage index in a new report that found holes in the system that has resulted in millions of dollars of improper payments to hospitals across the country. The flawed calculations have created a series of winners and losers whose reimbursement levels are minimally tied to wages, labor costs and cost of living, as the index initially intended.

Rural Alabama hospitals have some of the lowest reimbursement rates in the country, said Danne Howard, chief policy officer at the Alabama Hospital Association. When the Affordable Care Act mandated that the wage index is budget-neutral on a national basis, that worsened the system's existing problems, she said. The reimbursement gap widened between hospitals in Alabama and California, where payments are three times higher.

Without comprehensive reform, which is the OIG's top suggestion, rural Alabama hospitals will never get out from the bottom of the pile and residents will lose access to care, Howard said.

"It will cause more closures, some of which are imminent," Howard said, adding that the wage index and number of uninsured in the state, which didn't expand Medicaid, are the two biggest contributing factors. "It's probably the most fragile of situations I have seen in my 23 years at the association."

Hospitals have told the CMS that the wage index disparities between high- and low-wage areas are vast, particularly for rural hospitals or ones that are financially struggling, CMS Administrator Seema Verma said. This has made improving the current system a priority, she said.

"We know that accurate and appropriate Medicare payment rates are essential to all hospitals, especially rural ones," Verma wrote in a recent blog post on the agency's site.

But the CMS doesn't have the proper tools to ensure the rates are accurate, the OIG report found.

The CMS lacks the authority to penalize hospitals that submit inaccurate wage data and Medicare administrative contractors' limited reviews don't always catch inaccurate data, the report found. The wage index's rural floor and hold-harmless provisions decrease the tool's accuracy, the OIG said.

The rural floor provision ensures that the wage indexes applied to urban hospitals cannot be lower than the rural area wage index. The intent was to prevent some urban hospitals being paid less than the average rural hospital in their state.

But the Medicare Payment Advisory Commission has said that the policy is built on the false dichotomy that hospital wage rates in all urban labor markets are always higher than average hospital wage rates in rural areas. Also, the CMS has said that the rural floor creates a benefit for a minority of states that is then funded by a majority of states, including states that are overwhelmingly rural.

Until the Affordable Care Act, the CMS had required that any payments through wage-index adjustments must use existing funds, or be budget-neutral, within a state. But now that wage-index adjustments are budget-neutral on a national basis, errors in one rural hospital's wage data can have national impact. In fiscal 2018, hospitals had their wage indexes lowered by 0.67% to maintain national budget neutrality with respect to the rural floor, according to the OIG report.

In Massachusetts, that meant that 36 urban hospitals would receive a wage index based on hospital wages in Nantucket, home to the only rural hospital contributing to the state's rural floor wage index. The CMS estimated that those 36 hospitals would receive an additional $44 million in inpatient payments.

These increased payments were not based on actual local wage rates but on the requirements of the rural floor wage index law. Payment increases resulted in reductions for other states across the country.

Also, Nantucket Cottage Hospital submitted inaccurate wage data for 2015, resulting in an overpayment of $133.7 million to all 56 acute-care hospitals in Massachusetts.

Even if rural hospitals raise wages to compete with urban hospitals, it's disappointing to see that their numbers will be skewed lower, said Christina Campos, Guadalupe County (N.M.) Hospital's administrator.

"The whole idea of not being held accountable around accurate reporting serves to hurt rural hospitals more because of the rural floor," she said. "We will continue to give money to urban areas, and under a budget-neutral system, rural areas will continue to lose."

It's a perpetual death spiral for hospitals in states like Alabama, Howard said.

"Wages can't go up at the same rate as California and therefore to accomplish budget-neutrality, Alabama loses," she said.

New models are needed for how rural hospitals operate, but this is something that exacerbates the situation, said Dan Mendelson, president of Avalere Health.

"To the extent that underpayment is hurting hospitals on thin margins, this adds to their troubles," he said.

But getting Congress to act may be difficult, said Paul Ginsburg, director of the USC-Brookings Schaeffer Initiative for Health Policy and Leonard D. Schaeffer chair of health policy studies at the Brookings Institution. Building political impetus will be difficult given that there are some specific winners who are getting paid too much at others' expense, he said.

"It's hard to see this getting high in the priority list, which is unfortunate," Ginsburg said. "It's a very valuable report that identified some real broken aspects of the system that clearly need to be fixed."

It would be helpful if the hospital associations got together and start pressing for reform in data integrity, Mendelson said.

"It is hard for government organizations to make changes without engagement from the industry," he said. "I think that is the piece that needs to come along."

In 2012, then-HHS Secretary Kathleen Sebelius proposed a system that accounts for hospital hiring patterns by using commuting data to establish a wage index value for each hospital rather than by broader markets. The commuting-based index would use smaller, more discrete labor market areas and only incorporate wage data from hospitals that actually employ workers in that area.

Short of a complete overhaul, which the CMS is currently considering but sources said is more of a long shot, the OIG proposed several recommendations to improve the index. The CMS should seek legislative authority to penalize hospitals that submit inaccurate wage data and work with Medicare administrative contractors to develop a program of in-depth wage data audits at certain hospitals each year that skew their market's wage index, the OIG said.

The CMS should also seek legislation that repeals the rural floor and hold-harmless provisions. Otherwise, the CMS should aim to repeal the hold-harmless provisions relating to the wage data of reclassified hospitals. Or, it should look to rescind its own hold-harmless policy to use the wage data of a reclassified hospital to calculate the wage index of its original geographic area.

The CMS said it would consider each recommendation except for the last one, stating that using data "from the most hospitals to calculate the average wages for an area provides the most accurate and stable measure."

"If the new Congress doesn't pay attention to rural areas, we will continue to have the urban and rural divide we see in healthcare," Campos said.