CMS throws rural hospitals a lifeline with wage index changes

Alabama hospitals, some of the lowest-reimbursed hospitals in the country, could get a $34 million boost next fiscal year if the CMS holds firm on a plan to tweak the hospital wage index. 

Starting in October, the agency wants to raise the index for low-wage hospitals at the expense of decreasing it for high-wage hospitals. The goal is to help close a wide payment disparity that some advocates say is fueling the rash of rural hospital closures. Still, rural hospitals are worried about how the change will affect them, and if it will be enough. Meanwhile, urban hospitals are likely to fight the expected reimbursement cut.

The change is one of the most sweeping ideas in the CMS’ inpatient prospective payment system proposed rule, which was issued April 23 and totals more than 1,800 pages. Overall, the proposal called for a net 3.2% pay raise—roughly $4.7 billion—for hospitals compared with fiscal 2019.

“A hospital in rural Alabama can receive a Medicare payment of $4,000. A hospital in a high-wage area could receive a payment of $6,000 for the same case,” CMS Administrator Seema Verma said in a call last week with reporters. 

Alabama lawmakers sent a letter to Verma in March urging reform of the wage index, which they say has jeopardized the state’s rural hospitals. Their letter followed a November report from HHS’ Office of Inspector General suggesting a complete overhaul. It found that the wage index often relies on inaccurate wage data, resulting in at least $140.5 million in overpayments to 272 hospitals from 2014 to 2017. The OIG said in a statement that it was pleased that CMS’ proposal echoed some of its findings.

The index pulls data on wages, hours worked and wage-related costs from hospitals’ Medicare cost reports to set payments. It also factors in the cost of living as it sets market-based payments, which means a larger hospital would impact an area’s wage index more than a smaller facility. 

But the CMS lacks the authority to penalize hospitals that submit inaccurate wage data and Medicare administrative contractors’ limited reviews don’t always catch errors, the OIG found. Some hospitals also manipulate the reclassification process to secure higher pay.

The agency’s tweaking of the math, however, doesn’t address those underlying problems of data quality. 

“Rather than fix it, they are saying it is not very accurate so we are going to move up the low end and cut back the high end, which is really getting even further away from the philosophy of a payment system—to use good data to make these decisions,” said Paul Ginsburg, director of the USC-Brookings Schaeffer Initiative for Health Policy.

A proposal from the Medicare Payment Advisory Commission, which Ginsburg is a member of, ensuring Medicare funding for rural hospitals that transition to a free-standing emergency department may have more of an impact, he suggested. 

The Alabama Hospital Association said that the CMS proposal is a positive step to help shore up the state’s healthcare delivery system. Three-quarters of Alabama hospitals are operating in the red—88% for its rural hospitals—and 13 hospitals have closed in the past eight years, according to the association.

The CMS proposal would bring Alabama in line with hospitals across the country, said Danne Howard, chief policy officer at the association.

“Rural hospitals are just struggling to exist,” added Maggie Elehwany, vice president of government affairs and policy at the National Rural Health Association. “Two years ago, we had 40% of rural hospitals operate as a loss. Today we have 46%.”

Still, the Massachusetts Health & Hospital Association, which objected to “providing relief to one subset of hospitals by arbitrarily cutting payments to another subset of hospitals that have genuinely higher labor costs,” questioned if the wage index was the right mechanism to help ailing rural hospitals.

That broader question may dog the CMS as it goes through the comment period and if it ultimately implements the change. Since it needs to be budget-neutral, any decreases in the wage index are sure to infuriate hospitals on the losing end and turn up the heat on the CMS to scale back the proposal, which is open for comment until June 24.

“Improving wage index values for some hospitals—while much needed—by cutting payments to other hospitals, particularly when Medicare already pays far less than the cost of care, is problematic,” according to a statement from the American Hospital Association. “CMS has the ability to provide needed relief to low-wage areas without penalizing high-wage areas.”

The CMS called for hospitals that have a wage index value below the 25th percentile to get an increase that is “half the difference between the otherwise applicable wage index value for that hospital and the 25th percentile wage index value across all hospitals.”

Meanwhile, a hospital in the 75th percentile will get a decrease to ensure the wage index change is budget-neutral. The agency also proposed a 5% cap on any decrease to a wage index in fiscal 2020 compared with 2019.

“We don’t know how the formula is going to break down because we know they want it to be budget-neutral,” Elehwany said. “We would love to see them invest new money in fixing this.”

Raising the wage index for lower-wage, often rural, hospitals is a bit of an advantage, but by no means a big fix, added Christina Campos, administrator of Guadalupe County Hospital in Santa Rosa, N.M.

Elehwany noted that lawmakers have talked about boosting rural payments but have taken little action. Several bills were introduced last Congress that would have reversed some prior cuts to rural hospitals. The Save Rural Hospitals Act, for instance, called for ending cuts to facilities instituted by budget sequestration and eliminating cuts to disproportionate-share hospitals mandated by the Affordable Care Act. While Congress has moved to delay the DSH cuts, other reforms were not addressed and legislation has yet to be reintroduced in the new Congress.

HHS Secretary Alex Azar also bashed the wage index during a Senate hearing earlier this year, but said that there is only so much his department can do on its own.

“I appreciate you recognize so much of the absurdity is based in statute,” Azar said to Sen. Sheldon Whitehouse (D-R.I.), who questioned Azar about the disparity during the hearing.

The proposed rule also laid out some new changes to the data that the CMS provides for calculating the wage index.

Hospitals often will refer to printed or online documents from the CMS’ public-use files to calculate their own wage index. However, the CMS will occasionally round data, which has led to inconsistencies for stakeholders making their own calculations.

“Therefore, to help ensure consistency in the calculation, we are proposing to modify how the wage data numbers are rounded,” the CMS proposed rule stated.

The agency will not round up or down certain data such as cost support. But the CMS will round numbers for any dollar amounts in the wage index calculation, such as average hourly wages, by two decimals.

The CMS identified and excluded 81 providers with aberrant data that should not be included in the wage index in 2020 unless the data is corrected. 

Still, given the system’s core flaws, the ultimate impact of the wage index changes is uncertain, Ginsburg said.

“You really don’t know what these changes are going to be accomplishing, for better or worse,” he said.

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