HHS' Office of Inspector General on Tuesday continued to push for a complete overhaul of the "inaccurate" wage-based formula used to set hospital payments while CMS takes a piecemeal approach.
HHS OIG released its annual report on its unimplemented recommendations, and its proposal for a wage index overhaul was among its top requests. Short of full reform, CMS increased reimbursement of hospitals in low-wage areas, capped any annual decreases in the wage index at 5% and tweaked what's known as the rural floor reclassification to try to preempt gaming of payments by urban hospitals. Analysts expected those budget-neutral changes to shift more than $200 million a year to hospitals in low-wage markets.
Wage indexes may not accurately reflect local labor prices, which skews payments, according to the report, adding that CMS lacks authority to penalize hospitals that submit inaccurate or incomplete wage data, and Medicare administrative contractor limited reviews do not always identify inaccurate wage data. Since the wage index is budget-neutral, inaccurate data from one hospital can have a national impact.
"Certainly living with the current system has its own set of difficulties and repercussions, as does trying out incremental changes. A piecemeal approach is complicated because it is not really reforming the system," said Judith Reilly, regional senior auditor at the OIG, noting though that it could work in areas like authorizing CMS to penalize hospitals for submitting inaccurate data. "Reforming the system is also complicated; it's not an easy fix, but that doesn't mean it is infeasible. I'll be interested to find out what is happening with the (federal) demonstration project in light of the pandemic."
The OIG noted that the Trump administration's fiscal year 2021 federal budget for HHS includes a legislative proposal to create a pilot program to test comprehensive wage index reform. The program would redefine the labor market area to commuting data by zip code, identify an alternative source for wage data, repeal reclassifications and authorize a penalty for hospitals that submit inaccurate data.
President Donald Trump also issued an executive order on Aug. 3 that would test a new payment model offering rural hospitals "flexibilities from existing Medicare rules and predictable financial payments" that would "encourage value-based care."
But the OIG hasn't received a final management decision for its recommendation, and it is overdue, the agency said.
The wage index pulls market-specific wage and cost-of-living data from hospitals' Medicare cost reports to set payments to hospitals. But that flawed system has resulted in a wide pay gap between low- and high-wage hospitals, the OIG said, citing its 2018 report that found at least $140.5 million in overpayments to 272 hospitals from 2014 to 2017 that spurred a response from Alabama lawmakers. The OIG is currently working on a study that illustrates how the lower-quartile hospitals were impacted by last year's changes to the index.
"(Alabama congressional members) embraced that report because it showed some of the inequities in payments among some of the rural hospitals and some hospitals in Southeastern states," said Dave Lamir, regional inspector general of audit services at HHS' OIG. "CMS understands that there are sharp variances in indexes for hospitals that are virtually next to each other, and that inaccurate or incomplete wage data has a big impact on hospitals both within the statistical area and outside of those areas."
One of the sticking points has been the rural floor provision, which ensures that a wage index applied to an urban hospital 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 provision has led to some urban hospitals reclassifying themselves as rural in order to manipulate the rural floor wage index value. As a result, CMS stopped factoring urban-to-rural reclassifications into the rural floor wage index value last year.
Also, CMS recently released wage data that hospitals can use to apply for reclassification for fiscal year 2022. The deadline is still Sept. 1, even though the data analysis was delayed by the COVID-19 pandemic, the agency said.
House Democrats proposed a change to the Medicare wage index in their Health and Economic Recovery Omnibus Emergency Solutions bill that would increase certain urban state hospital payments. They proposed an "urban floor" of sorts comparable to the rural floor provision where the wage index for hospitals in an all-urban state could not be less than the minimum area wage index for hospitals in the same state.
