Analysis: Wage index changes in the IPPS Final Rule

• The Centers for Medicare & Medicaid Services finalized multiple changes to the wage index to address “disparities” between high- and low-wage index hospitals.
• The policy would be effective for at least four years to allow employee compensation increases implemented by these hospitals enough time to be reflected in the wage-index calculation.

The Centers for Medicare & Medicaid Services (CMS) finalized multiple changes to the wage index to address “disparities” between high- and low-wage index hospitals (all changes are available in the CMS FY2020 Inpatient Prospective Payment System (IPPS) Rule: Executive Summary compiled by HFMA).

Most significantly, the rule increases the wage index for hospitals with a wage index value below the 25th percentile for a fiscal year by half the difference between the otherwise applicable final wage index value for a year for that hospital and the 25th percentile wage index value for that year across all hospitals.

The policy would be effective for at least four years to allow employee compensation increases implemented by these hospitals enough time to be reflected in the wage-index calculation. To offset the cost of increasing payments to low-wage index hospitals, the rule applies a uniform budget neutrality adjustment to the standardized amount.

This a fairly significant modification from what was proposed. The proposed rule offset the cost of increasing payments to low-wage index hospitals by decreasing the wage index values for hospitals with wage index values above the 75th percentile.

Takeaway

Medicare pays hospitals less than what it costs efficient hospitals to provide care to Medicare beneficiaries. Don’t take my word for it; take MedPAC’s.

So, CMS needed to do something to ensure the financial viability of rural PPS hospitals given they see more patients covered by Medicare and Medicaid and are typically located in areas with relatively low-wage indexes.

Why this approach to stabilizing the finances of rural PPS hospitals goes wide left:

1. The policy assumes that hospitals that benefit from this change will use the increase in Medicare revenue to increase wages and that those wage increases will translate into an increased wage index values four years from now to when the policy is scheduled to sunset. This isn’t a particularly hot take, but I think this is off for two reasons:

First, it’s not a stretch to assume that many hospitals in low-wage areas might have open positions that need to be filled but are on hold due to budget issues. And, they probably also have a long capital wish list that includes items that are past useful life but due to budget issues have had their useful lives extended with a lot of maintenance that can be pennywise but pound foolish.

Second, some of the new dollars might be used to increase wages. But my guess is the lion’s share will be used to backfill open positions (at the market clearing local wage for the skill in question, which won’t increase the wage index) and/or be used to replace equipment (which absolutely won’t increase their wage index) now that they have more pounds to spend.  

2. The wage index is intended to be a relative value system. So even if hospitals that benefit from this use all the increased Medicare revenue to increase salaries for existing staff, the improvement will only be sustainable if the average hourly wage for these hospitals increases relative to other hospitals over the long term.

Given that wages are typically based on market demand for talent and overall cost of living in the locality, that seems unlikely. And, even if these hospitals can sustainably increase their average hourly wage relative to other hospitals, CMS has just created another set of disadvantaged hospitals if it removes the wage-index floor it has created without putting net new dollars into the system. 

CMS states in the final rule that this policy will be in effect for “at least four years.” My guess, based on the above, is this becomes a permanent feature of the wage index if it survives the inevitable court challenge for being “arbitrary and capricious.” And, it still doesn’t address the fact that Medicare pays hospitals less than the actual cost to provide care to beneficiaries.