HHS’ OIG continues to push for Medicare wage index overhaul

HHS’ Office of Inspector General on Tuesday continued to push for a complete overhaul of the “inaccurate” wage-based formula used to set hospital payments while CMS takes a piecemeal approach.

HHS OIG released its annual report on its unimplemented recommendations, and its proposal for a wage index overhaul was among its top requests. Short of full reform, CMS increased reimbursement of hospitals in low-wage areas, capped any annual decreases in the wage index at 5% and tweaked what’s known as the rural floor reclassification to try to preempt gaming of payments by urban hospitals. Analysts expected those budget-neutral changes to shift more than $200 million a year to hospitals in low-wage markets.

“Wage indexes may not always accurately reflect local labor prices, thus Medicare payments to hospitals and other providers may not be appropriately adjusted to reflect local labor prices,” the report reads, adding that CMS lacks authority to penalize hospitals that submit inaccurate or incomplete wage data, and Medicare administrative contractor limited reviews do not always identify inaccurate wage data.

The OIG noted that the Trump administration’s fiscal year 2021 federal budget for HHS includes a legislative proposal to create a pilot program to test comprehensive wage index reform. The program would redefine the labor market area to commuting data by zip code, identify an alternative source for wage data, repeal reclassifications and authorize a penalty for hospitals that submit inaccurate data.

President Donald Trump also issued an executive order on Aug. 3 that would test a new payment model offering rural hospitals “flexibilities from existing Medicare rules and predictable financial payments” that would “encourage value-based care.”

But the OIG hasn’t received a final management decision for the its recommendation, and it is overdue, the agency said.

The wage index pulls market-specific wage and cost-of-living data from hospitals’ cost reports to set payments to hospitals. But that flawed system has resulted in a wide pay gap between low- and high-wage hospitals, the OIG said, citing its 2018 report that found at least $140.5 million in overpayments to 272 hospitals from 2014 to 2017.

One of the sticking points has been the rural floor provision, which ensures that a wage index applied to an urban hospital cannot be lower than the rural area wage index. The intent was to prevent some urban hospitals being paid less than the average rural hospital in their state.

But the provision has led to some urban hospitals reclassifying themselves as rural in order to manipulate the rural floor wage index value. As a result, CMS stopped factoring urban-to-rural reclassifications into the rural floor wage index value last year.

Also, CMS recently released wage data that hospitals can use to apply for reclassification for fiscal year 2022. The deadline is Sept. 1.

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