On December 30, 2020, the United States Department of Health and Human Services Office of Inspector General (HHS OIG) released a report that recommended that the Centers for Medicare and Medicaid Services (CMS) improve its wage index adjustment for hospitals that are in areas with low wages. The report, which follows a federal audit, found that rural hospitals had the highest concentration of low-wage providers and out of all of the hospitals in the bottom quartile of area wage indexes, more than half were in rural areas (53%).
CMS typically uses the wage index to adjust Medicare rates to reflect wages in a specific geographic area. Therefore, accuracy in the index is important to CMS payment systems so that hospitals can be incentivized to operate efficiently while also allowing for fair compensation.
In an 2019 final rule, CMS adjusted the acute care hospital inpatient prospective payment system (IPPS) to change the calculation of the hospital wage index, in an attempt to make it more accurate and reduce the disparity between high- and low-wage providers. CMS has historically found that when facilities are undercompensated, it can lead to significant financial stress and potentially even closure, which must be avoided in underserved and rural areas.
The final rule also made it so that, beginning in the 2020 fiscal year, the wage index increased in hospitals below the 25th percentile in wage index. To help with implementation of the final rule, HHS OIG looked for similarities among hospitals with area wage indexes in that bottom quartile for 2020. HHS OIG found that in that bottom quartile, there were mostly rural facilities, but also some smaller and lower volume facilities, and they were mostly concentrated in just a few states. When looking at all of the rural hospitals in the IPPS, 55% had wage indexes in the bottom quartile.
The audit also found wide variation in the financial performance of low-index areas. Profit margins at hospitals in the bottom quartile of the wage index varied, from a low of -133% to 47%, according to an OIG analysis of Medicare cost report data from 2016.
In making its recommendations, HHS OIG noted that CMS may have a hard time focusing on new initiatives right now, as it is currently trying to minimize any additional burdens on hospitals. However, when post-pandemic conditions allow for new initiatives, HHS OIG recommended that CMS focus the bottom quartile wage index adjustment more precisely toward the hospitals that are the least able to raise wages without that adjustment. Those hospitals are the ones with low or negative profit margins rather than higher, positive profit margins. HHS OIG also recommended that CMS consider studying why some hospitals in a particular area were able to pay higher wages than other hospitals in the same area prior to the implementation of the bottom quartile wage index adjustment. It’s possible that additional information would help CMS to focus the adjustment even more precisely. CMS should monitor the wage data to try and determine whether the rule change leads to wage increases, though any changes could be skewed due to the ongoing coronavirus pandemic.