MedPAC takes aim at the Medicare wage index and reiterates support for site-neutral payment

In its semiannual report to Congress, the Medicare Payment Advisory Commission (MedPAC) recommends significant changes to two key aspects of Medicare policy: the wage index and site-neutral payment.

1. A revamp of the wage index

The wage index consistently generates concern among healthcare stakeholders, including in Medicare’s FY24 proposed rule for hospital inpatient payments. According to CMS’s projections, the wage index and some of its exceptions and reclassifications loom as significant factors in regional variations in estimated payment rates during the coming fiscal year.

For example, CMS projected a 6.4% average increase in operating-cost payments for urban hospitals in the Pacific region, compared with a 0.2% decrease for those in the New England region. A key driver of such differences is the application of the rural-floor exception (i.e., the wage index for any hospital located in an urban area of a state may not be less than that for hospitals located in rural areas in the same state), with budget neutrality factored in.

Proposed technical changes to the rural wage-index methodology would have a notable impact. Those changes specifically would entail including hospitals that have reclassified as rural hospitals in all rural wage-index calculations.

Although stakeholder feedback suggests the changes make sense, they reflect the complexity and opacity of the wage index.

Referring to hospital payments, MedPAC stated, “Inaccuracies and inequities have grown, in part because Congress and CMS have made additional exceptions to the already byzantine IPPS [inpatient prospective payment system] wage index.”

For example, two-thirds of hospitals were subject to wage-index changes based on exceptions in 2022, according to MedPAC’s data, and budget-neutrality provisions necessitated a corresponding 2.2% reduction in overall inpatient payments.

“While there are motivations for each IPPS wage-index exception, collectively, they detract from the core goal of the wage index — accurately and equitably reflecting differences in labor costs across geographic areas — because most have either no or a flawed empirical basis, can be manipulated, and add administrative burden,” the report states.

Features of a new approach

MedPAC’s recommendation is for an updated wage index that would:

• Use all-employer, occupation-level wage data with different occupation weights for the wage index of each provider type
• Reflect local-level differences in wages between and within metropolitan statistical areas and statewide rural areas
• Smooth wage-index differences across adjacent local areas
• Eliminate exceptions

Key outcomes of the new wage index would include:

• Narrowing the spread between the highest and lowest wage-index values
• Reflecting differences in labor costs at a more granular level (e.g., the county level) and mitigating wage-index cliffs
• Shifting Medicare payments toward hospitals in:
  • Areas where hospitals pay less than market-area wages for RNs
  • Areas with low wage-index values that now are supported by the temporary low-wage-index exception
  • Counties with higher labor costs than the average in their broader labor market

The changes could significantly affect Medicare payments, including increases of more than 5% for nearly one in five hospitals and decreases of more than 5% for one in 10 hospitals. Hospitals that would face the prospect of a large decrease include those in areas where hospitals pay RN wages that are substantially higher than the wages paid by other employers of nurses in the market. Hospitals that have received more than a 35% increase in their wage-index value via exceptions also would be subject to a sizable payment reduction.

The volatility would require phasing in the changes slowly or incorporating a stop-loss policy, MedPAC said.

“Once fully implemented, wage-index systems such as the ones we modeled would result in more equitable payments across regions and across types of providers,” the report states.

2. A push for site-neutral payment

The report also includes MedPAC’s latest recommendations on site-neutral payment in Medicare, with policymakers eyeing ways to reimburse hospitals at physician payment rates for a wider range of outpatient services.

Over the last year or so, recommendations from the commission have generated momentum in Congress to implement site-neutral payment more extensively. For example, a sweeping, bipartisan House bill includes a provision to phase in site-neutral payment for drug administration services starting in 2025.

A newly released, bipartisan Senate bill would end grandfathered exceptions related to site-neutral payment as allowed in the Bipartisan Budget Act of 2015 and would reduce the rates charged by off-campus emergency departments (EDs) in some scenarios.

MedPAC in 2022 recommended that the payment rate for a service be based on which type of ambulatory setting (hospital outpatient department, ambulatory surgery center or physician practice) was the most frequent site of the service. That proposal made it into a House bill draft this year but was not part of the bill regarding drug administration services.

Expanding to many APCs

There is concern among hospital advocates that an expansive approach to site-neutral payment may be only a matter of time. Such trepidation indicates why the American Hospital Association is scheduled to host a media briefing June 26 on Capitol Hill as part of a lobbying effort against site-neutral payment policies.

MedPAC’s proposal includes 66 APCs for which Medicare payment would be based on either the physician fee schedule or ambulatory surgery center rate. Many of the affected ambulatory payment classifications (APCs) would be for imaging and other diagnostic procedures.

MedPAC noted that payment changes would be made on a budget-neutral basis, meaning rates would increase for the 103 APCs not subject to change. The commission said site-neutral payment rates should not apply to complex procedures or services provided in the ED.

Even with budget neutrality, long-term savings for Medicare would be derived from the expected disincentive for hospitals to acquire physician practices and then bill for services at the hospital outpatient department rate.

“Despite the potential losses for some hospitals, this recommendation would not be expected to affect providers’ willingness or ability to furnish the affected services,” MedPAC’s report states.