CMS Proposes Changes To Medicare Wage Index That Would Increase Reimbursement Rates To Rural Hospitals At The Expense Of Urban Hospital

On May 3, 2019, the Centers for Medicare & Medicaid Services ("CMS") published a comprehensive proposed rule ("Proposed Rule") to revise the Medicare payment structure for inpatient prospective payment systems ("IPPS") hospitals. According to the preamble of the Proposed Rule, the purpose of the Proposed Rule is to bump up Medicare's reimbursements to rural hospitals, some of which receive the lowest rates in the country.

Unfortunately for urban hospitals, any proposed changes in the Medicare reimbursement system must be budget-neutral; therefore, any increase in rural hospital reimbursement must be matched with an equal and offsetting decrease in urban hospital reimbursement.1 As reported in the Kaiser Health News on June 3, 2019, the Kaiser Family Foundation likens this to a Robin Hood-like effect - robbing from the rich to give to the poor. Like in Sherwood Forest, there are winners and losers in the world of Medicare reimbursement.

Wage Index: How it all Works

IPPS hospitals are paid a preset rate for each Medicare admission, based on the patient's Medicare Severity-adjusted Diagnosis Related Group ("MS-DRG").1 The MS-DRG considers several factors including: principal diagnosis, complications and comorbidities, surgical procedures, age, gender, and discharge destination.

Furthermore, under the Social Security Act, CMS is required to vary the labor portion of the standardized federal IPPS reimbursement rates to account for differences in area wage levels to reflect "the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level."3 For short-term acute care hospitals, CMS must update this index annually.4 When drafting the wage index, CMS refers to the "Medicare Cost Report, the Hospital Wage Index Occupational Mix Survey, hospitals' payroll records, contracts, and other wage-related documentation" to derive an "average hourly wage for each labor market area (total wage costs divided by total hours for all hospitals in the geographic area) and a national average hourly wage (total wage costs divided by total hours for all hospitals in the nation)." The final index is a ratio comparing the specific labor market area's average hourly wage to the national average hourly wage.

The wage index can have significant effects on reimbursement rates. For example, according to CMS, "a hospital in a rural community could receive a Medicare payment of about $4000 for treating a beneficiary...