Alabama Caught in the Mire of the Hospital Wage Index

Danne Howard, chief policy officer with AlaHA

"The methodology was flawed to begin with," says Danne Howard, chief policy officer with Alabama Hospital Association (AlaHA), about Medicare's method for calculating the reimbursement rate for hospitals, especially rural facilities. "But it's become even worse."

In 1983, as part of the Inpatient Prospective Payment System, Medicare moved away from repaying hospitals based on each service and began to pay them a set amount for each group of patients based on their clinical similarities. The intent was to encourage hospitals to operate more efficiently.

About two-thirds of that Medicare payment rate depends on the hospital wage index (HWI). "The concept was to allow for geographic differences in cost of living and wages," Howard says.

Medicare calculates the index based on annual data submitted by hospitals, along with other factors. The index is also based on whether the hospital has been designated as either a metropolitan or rural labor market within their region. Those markets are then assigned a specific index value computed each year to center on a value of 1.00, which represents the national aggregate hospital hourly wage.

Alabama rural hospitals currently hold a .68 HWI--the lowest in the nation. The highest rural index goes to California at 1.86.

Numerous provisions exist that adjust that number. "For instance, no urban hospital can receive less than the highest rural wage index in their area," Howard says. In the three states who have no rural hospitals, a minimum index was set in 2005. This imputed rural floor meant New Jersey hospitals received an additional $33 million in 2016.

The biggest impact on Alabama occurred under the Affordable Care Act (ACA). "Alabama was already disenfranchised because of our low costs and wages," Howard says. "We had the lowest reimbursements in the nation, and then the ACA changed the wage index from state budget neutrality to a nationwide neutrality."

Dubbed the Bay State Boondoggle, the change was subtlety inserted into the ACA and greatly benefited Massachusetts, which has only one hospital designated as rural. That facility sits on Nantucket Island populated primarily by wealthy individuals. Those high Nantucket "rural" wages ensured the remaining hospitals in the state--all categorized as metropolitan--were also reimbursed at the inflated Nantucket wage index or higher.

"That switch to a nationwide neutral budget meant Alabama had to lose some of our wage index and money to balance the new higher wages in Massachusetts," Howard says. Nine other states also gained from the Boondoggle. "It took away about $10 million from Alabama hospitals."

Now every year, states like Connecticut, Massachusetts and California submit their rising labor cost data to Medicare, and their wage index tends to go up. "Alabama's reimbursement goes down to maintain that national budget neutrality," Howard says, "because Medicare is just allocating available dollars, not adding more dollars to the pot."

Alabama and others have attempted to change the process to no avail. The most recent was introduced last year by the Republican Representative from Nebraska. That bill--H.R.2224--endeavored to repeal the Bay State Boondoggle Act.

"We have repeatedly asked for legislation that has gone nowhere," Howard says. Their latest goal was to establish a minimum wage index of .91 for all hospitals. To make that happen and keep the national Medicare budget neutral, five states--Connecticut, New Hampshire, California, Massachusetts, and New York--would have had to lower their wage index.

"Our delegation could not be more supportive, but they are not members of committees of jurisdiction, and the California state delegation is huge," Howard says. "So we're outnumbered by states that would lose. And there is a lot of money at stake."

Another troubling aspect to the wage index process surfaced in March last year. A report from the Office of Inspector General (OIG) at Health and Human Services found that the Nantucket Cottage Hospital--that single "rural" hospital at the heart of the Boondoggle--overstated its 2011 Medicare wage data. That led to a falsely inflated wage index in 2015 and higher Medicare reimbursements. As a result, Medicare overpaid the Nantucket hospital an estimated $156,000 and overpaid 55 other Massachusetts hospitals around $133.6 million.

Despite the error being discovered, CMS has no mechanism to recover overpayments or remedy underpayments resulting from inaccurate wage data. The OIG also recognized that the overpayments to Massachusetts hospitals caused underpayments to hospitals in other states.

Howard, who has been with AlaHA for 22 years, says the association has been working on the Medicare reimbursement issue with Congress since she was hired. "Alabama hospitals receive two to five times less for the exact same care given at other hospitals," she says.

Georgia is reimbursed approximately 22 percent higher than Alabama. The discrepancy means nurses and healthcare professionals living in west Alabama are more likely to choose to work in Georgia, leaving Alabama hospitals struggling to fill positions.

"We don't argue there should be some variations for cost of living," Howard says. "But the disparity in the wage index continues to grow wider and wider. It's a good concept, but it's flawed."


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Alabama Medicare hospital wage index, Birmingham Medical News, hospital wage index, Jane Ehrhardt, Medicare HWI


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