On November 21 2018, Health and Human Services’ Office of Inspector General (HHS-OIG) released a report, titled “Significant Vulnerabilities Exist in the Hospital Wage Index System for Medicare Payments”, which describes their examination of the wage index system for acute-care hospitals. The objective of their analysis was to identify “significant vulnerabilities” and propose solutions to address these vulnerabilities. Both the Medicare Payment Advisory Commission (MedPAC)[1] and the Institute of Medicine (IOM)[2] previously advocated for reform of wage indices to increase payment accuracy in prior years. Both recommended that that Secretary of HHS should have the authority to establish a new wage index system to increase accuracy. In this report, the OIG reviewed wage data from 41 acute-care hospitals and analyzed laws and policies pertaining to the wage index system dated between 2004 and 2017.

Key Takeaways:

Wage Index reform will:

• Create a pathway for CMS to retroactively recoup overpayments based on inaccurate wage index data from hospital cost reports. Evaluation of cost reports by MACs from hospitals will trigger a deeper look at wage reporting if any discrepancies are noted. The OIG did not state an intention to pursue recoupment of payments prior to the release of this report.
• Require annual reporting of occupational data from hospitals. Currently, occupational reporting (Ex: wage data broken down by labor type) is required from hospitals once every 3 years.
• Penalties will likely be imposed for hospitals that do not accurately or falsely report their wage index or occupational data. Types or severities of penalties were not indicated.
• Hospitals that have a large impact on the wage index of a geographic area will likely be placed under increased scrutiny from MAC reviews. This OIG report did not define this exact specification.

Current Methodology for the Calculation of Wage Indices

Within the current Medicare payment system, acute-care hospitals receive payments, called base payments[3], under the Inpatient Prospective Payment System (IPPS) when patients are discharged; these base payments create incentives for hospitals to optimize their efficiencies. Base payments consistent of a(n):

• Operating base payment, which includes labor and supply costs.
• Capital base payment, which covers depreciation, interest, rent, and property-related insurance and taxes.

Base payments are multiplied by a diagnosis-related factor to adjust for costs that vary by the patient’s illness, which also includes a high-cost outlier adjustment for very ill patients with increased associated costs, when applicable. Both the operating base payment and capital base payment include adjustments that reflect the local market, such as wage rates for laborers.

Notable Terminology Pertaining to Wage Indices:

• “Rural floor”: a provision, established by Federal law, requiring that the wage indices applied to urban hospitals in a State cannot be lower that the wage index for the rural hospitals in that State. Under this law, some hospitals can be reclassified to areas with higher wage indices to receive higher payments. The rural floor must be applied so it is budget-neutral nationally.
• “Hold-harmless”: a provision, established by Federal law and CMS policy, to protect hospitals from having their wage indices lowered because of the geographic reclassification of other hospitals.
• “Commuting-Based Wage Index”: an alternative formulation that uses commuting data within a geographic region to create a more flexible, hospital-specific labor market.

Adjustments to Base Payments

CMS uses wage indices annually to adjust hospital payments to consider local labor prices within that year; these indices are calculated via the collection of:

• Wage data, associated hours, and wage-related costs submitted by acute-care hospitals in their Medicare cost reports.
  • Limited reviews from MACs on this data, intended to identify inaccurate reporting by acute-care hospitals.
• Occupational data reported every 3 years from acute-care hospitals.
• Base payment data, adjusted for inflation and geographic location.

Accurate base payments for IPPS relies on correct reporting from acute-care hospitals. Hospitals may seek reclassification to a higher geographic wage index area to receive higher payment rates; this reclassification is usually effective for 3 years. Overall, adjustments in wage indices are required to be budget-neutral.

OIG Report Findings:

The OIG stated that there are current liabilities within the current wage index system. Most significantly, there are currently no methods in which CMS can retroactively adjust wage indices if any inaccuracies in wage data were found later, which often results in overpayments.

The OIG identified four significant vulnerabilities in the wage index system:

1. CMS lacks the authority to penalize hospitals that submit inaccurate or incomplete wage or occupational data.
   • For example, in 2016, only 6% of hospitals required to submit surveys pertaining to occupation did so in 2016.
   • Also in 2016, the OIG estimates that inaccurate wage calculations resulted in $140.5 million in overpayments.
2. Since the review processes of indices by MACs are limited, they cannot always identify inaccurate wage data.
3. The rural floor decreases wage index accuracy:
   • Current policy allows urban hospitals to receive a rural floor adjustment to receive additional payments[4]
4. The hold-harmless provisions decrease wage index accuracy be allowing hospitals to reclassify.

The OIG has concluded that wage indices may not always accurately reflect local labor prices. Therefore, Medicare payments to hospitals may not be appropriately adjusted, resulting in overpayments.

Recommendations from the OIG:

Based on the findings in their report, the OIG recommends that CMS seek legislation to:

1. Allow comprehensive reform, in tandem with the Secretary of HHS, including the option of a commuting-based wage index.
2. Authority to penalize hospitals that submit inaccurate or incomplete wage data.
3. Repeal the law which creates the rural floor provisions.
4. Repeal the law which creates the hold-harmless provisions.
5. Work with the MACs to develop a program to better evaluate wage indices, including a focus on hospitals whose wage data have high levels of influence on the wage index of their area.

CMS Response to the OIG:

CMS’s response to the OIG’s report was the following:

• CMS agreed with the OIG’s recommendations to institute a better method of evaluation by MACs.
• CMS did not agree in the repeal of hold-harmless provisions, stating that the current hold-harmless policy promotes stability in wage indexes for hospitals.

 

[1] MedPAC, Report to the Congress, Promoting Greater Efficiency in Medicare, June 2007, pp. 123-125 and 131.

[2] IOM, Geographic Adjustment in Medicare Payment: Phase I: Improving Accuracy, second edition, 2012.

[3] MedPAC, Payment Basics: Hospital Acute Inpatient Services Payment System, October 2017, pg. 2.