• Acumen Releases New Report on Wage Index Calculation
  • April 15, 2010 | Author: Robert E. Waters
  • Law Firm: King & Spalding LLP - Washington Office
  • On March 22, 2010, Acumen, LLC, released its Final Report, Part II on the methodology proposed by the Medicare Payment Advisory Commission (MedPAC) for calculating the wage index. In the report, Acumen detailed its analysis of the proposed “blending and smoothing” methodology, which would calculate and adjust wage indexes on a county level, rather than the current MSA and rural area level. The proposed methodology would calculate and adjust wage indexes so that the wage indexes for adjacent counties would fall within a 10 percent range, thereby reducing the incentive for hospitals to undergo geographic reclassification in order to take advantage of a higher neighboring wage index. Under the proposed methodology, CMS would apply negative budget neutrality adjustments to counteract the effect of the upward “smoothing” adjustments. Acumen concludes its report by recommending that CMS not adopt MedPAC’s proposed methodology, which it predicts will create more problems than it solves.

    As part of the Tax Relief and Healthcare Act of 2006 (TRHCA), Congress required MedPAC to develop proposals to revise the Medicare wage index system, and required the Secretary of the Department of Health and Human Services to respond to those proposals. MedPAC released its recommendations in its June 2007 Report to Congress entitled “Promoting Greater Efficiency in Medicare.” The Secretary engaged Acumen, LLC to analyze MedPAC’s proposals. In Part I of its Final Report, released in April 2009, Acumen analyzed the MedPAC proposal to use Bureau of Labor and Statistics (BLS) and census data to supplement or replace the current hospital data used to calculate the wage index. In Part II of its report, Acumen analyzed MedPAC’s proposals regarding the methodology used to calculate the wage index.

    MedPAC proposes a “blending and smoothing” process for calculation of area wage indexes. Under the proposed system, CMS would calculate a wage index on a county-level, based on a “blend” of the current MSA-level wage index and county-level BLS and census data. CMS would then “smooth” the differences between county-level wage indexes, comparing the wage index for each county to that of all adjacent counties to ensure that each wage index fell within a 10 percent range. If a greater than 10 percent disparity occurred, CMS would raise the lower county wage index as necessary. The “smoothing” process is then repeated until all differences between wage indexes of adjacent counties fall within the threshold range. CMS would then apply budget neutrality adjustments to all area wage indexes in order to ensure that aggregate Medicare payments would not be affected.

    Acumen’s report notes that the methodology proposed by MedPAC fails to fully address problems with the current wage index process, while also creating new problems. For example, one problem with the current wage index process is when “cliffs,” or large disparities between the wage indexes of adjacent MSAs occur, leading hospitals within the lower wage index area to reclassify to the higher wage index area. According to the Acumen report, as many as one-third of all hospitals reclassify in order to receive a different wage index. The proposed “smoothing” process lowers the “cliffs” between adjacent area wage indexes in order to diminish the incentive for geographic reclassification. However, by calculating wage indexes for individual counties, rather than the larger MSAs and rural areas, although the size of the “cliffs” between adjacent wage index areas decreases, the total number of cliffs increases. This actually creates more disparities between adjacent areas than the current process, which may in turn create new opportunities and incentives for reclassification.

    In addition, the smoothing process would cause “ripple” effects, as counties that initially are within the threshold wage index range of all adjacent counties fall outside of the range because one county’s wage index is adjusted. This, in turn, causes the newly-affected county’s wage index to be adjusted, which can necessitate further smoothing adjustments, and so on. The choice of the threshold range between adjacent areas is a trade-off—the smaller the range, the shorter the “cliff” between adjacent areas, but the more ripple-effects that occur. Moreover, for each upward smoothing adjustment, there must be a corresponding negative budget neutrality adjustment. Acumen estimates in its report that regardless of the size of the smoothing threshold, the budget neutrality adjustments would mean that for 50 percent of hospitals the blended and smoothed wage index values would be lower than the pre-reclassification wage index values.

    Finally, Acumen notes that the methodology proposed by MedPAC “does not guarantee an accurate representation of a hospital labor market.” Although the new methodology would calculate wage indexes on a county level rather than MSA, all hospitals within the county would receive the same wage index, even if they are located in different labor markets within the county with different labor costs.

    Overall, the methodology proposed by MedPAC fails to adequately address the problems of the current wage index process, while creating new problems of its own. Acumen therefore recommends against adoption of the MedPAC blending and smoothing methodology for calculation of the area wage index.