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Replacing Medicare's Geographic Payment Adjustments a Tough Slog

By John Reichard, CQ HealthBeat Editor

An Institute of Medicine panel reported that Medicare's system of geographic payment adjustments is so riddled with exceptions and flawed data that it should be replaced.

That's certain to be a tall order at best.

Hospital officials have many complaints about the current system, but in many instances they have negotiated changes to boost their payment levels. When one hospital gets more money because of a geographic adjustment, others will get less, creating winners and losers and complicating efforts to change the current system.

Forty percent of eligible hospitals, or about 700 facilities, have secured exceptions to the way they are classified for purposes of adjusting Medicare payments to account for what they pay their employees. The exceptions mean Medicare reimburses a hospital for labor costs according to a wage index from a labor market outside of the one in which the hospital buildings are located.

"One of the problems with the current system is that there are lots of what we call wage cliffs," said Duke University Professor Frank Sloan, who chaired the Institute of Medicine panel that prepared the report. The term refers to neighboring areas that have a large difference in wage index values, or in other words, large differences in how much Medicare pays to account for local labor costs.

The panel's report said where such significant differences exist "adjustments should take into account commuting patterns of health care workers. The committee believes that smoothing the boundaries will decrease the need for reclassification," a summary of the report said.

"An example of a wage cliff is found in upstate New York," the 246-page report said. "Northern Dutchess Hospital in Rhinebeck, N.Y., and Kingston Hospital, in Kingston, N.Y., are four miles apart, and although their close geographic proximity should mean that they compete against each other for labor, they have different wage indexes because they are classified as operating in different labor markets. The index for Northern Dutchess Hospital is 1.14, whereas the index for Kingston Hospital is 0.91."

The wage index is a powerful tool for moving lots of Medicare money around. That means that Northern Dutchess gets paid much more by Medicare to adjust for its labor costs than Kingston does, all other factors being equal.

The Institute of Medicine panel said that geographic payment adjustments should take into account commuting patterns of health care workers. With both hospitals trying to attract a pool of labor from the same area, accounting for where workers live and work could lessen differences in wage index values and decrease the need for geographic reclassifications, the report suggested.

The report also calls for the use of data from the Bureau of Labor Statistics (BLS) in developing wage adjustments for hospitals and doctors. The report says that the BLS data is more accurate and independent. Now, the wage indices used to make geographic adjustments in Medicare payments to hospitals and doctors are based on hospital cost data and physician surveys, among other sources.

The report also says wage indices should factor in all kinds of health care workers. Currently, differences in regional wages are based on data for registered nurses, licensed practical nurses, health technicians, and administrative staff only, failing to reflect the full workforce in many hospitals and physician practices, the report said.

Congress would have to pass legislation in order for Medicare to switch to using BLS data. "That's always a very heavy lift depending on the context of how this happens," said the American Hospital Association's senior vice president for policy, Linda Fishman.

Fishman said there are "serious shortcomings" in BLS data. For one thing, the wage data isn't specific to hospitals, she said. Also, the data excludes the cost of benefits paid to workers and it can't be verified because "BLS has a strict confidentiality policy."

"The AHA is not going to be endorsing the use of BLS data," she declared.

Federation of American Hospitals President Chip Kahn said the BLS recommendation is a non-starter. He said the Institute of Medicine panel deserves credit for tackling "one of the most vexing and complex areas in Medicare." But "I think the cure could be worse than the disease" The current system at least is transparent and allows a hospital to vet the data on which its wage index value is based, he said. "I am hopeful that in their final report they can change direction," Kahn said. The Institute of Medicine is scheduled to submit additional reports on the issue of geographic payment adjustments.

Fishman said the idea of smoothing payments in wage cliff areas "deserves some further study." But the AHA backs an exceptions process whether there is the smoothing of payments or not, she said.

Fishman noted that the Centers for Medicare and Medicaid Services is due to file a report with Congress by the end of the year on the wage indices it uses to vary payments geographically. "I think the discussion about the issue will continue for quite some time," she said.

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