Action by CMS closes a loophole used by some hospitals to game the system.

“It appears that hospitals in a limited number of states have used urban-to-rural hospital reclassifications to inappropriately influence the rural floor wage index value,” the Centers for Medicare & Medicaid Services (CMS) recently said in a fact sheet. “To address the unanticipated effects of rural reclassifications on the rural floor and the resulting wage index disparities created by urban to rural hospital reclassifications, CMS will remove urban-to-rural hospital reclassifications from the calculation of the rural floor wage index value beginning in FY 2020.”

So, what does this mean? Hospitals across the country are paid a base amount for wage and non-wage-related operating expenses, under prospective payments. Non-wage expenses are multiplied by the Diagnostic-Related Group (DRG) “weight,” based on the diagnosis of each patient. Wage-related costs in this computation are multiplied by a “wage index,” because wages fluctuate across the country. 

Here is where the loophole was created. Base amounts are also different for urban and rural areas of the country. A special rule said that if the rural wage index for a state was higher than a local urban wage index, the urban hospital would be reimbursed under the statewide rural wage index as a floor. 

Before the current change, some urban hospitals were allowed to be reclassified as rural, under certain conditions. For example, let’s say there are only two rural hospitals in a small state. 

If an urban hospital with a high wage index was reclassified as rural, the wage index for many (and sometimes all) urban hospitals in the state could rise dramatically.

CMS has known for years that some states played this game. Indeed, some of the consultants pulling off these loophole increases bragged about it. 

So, who is complaining? Since all Medicare funding changes are budget-neutral, when one state gets more, all the other states get less. Massachusetts hospitals obtained an additional $367 million in Medicare payments in the 2012 fiscal year that otherwise would have gone to other states.

I am always glad to see everyone play fair. I still think that the overall concept of wage indexes favors states with high costs. Is it fair to pay California hospitals vastly more than Florida hospitals because wages are higher in California? Additionally, the computation of wage indexes is based on the data included in Medicare cost reports. Well, if it made sense, it wouldn’t be Medicare, would it?

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