The National Alliance of Safety-Net Hospitals has submitted formal comments to the Centers for Medicare & Medicaid Services in response to the latter’s proposed hospital payment plan for FY 2020.

Responding to the proposed inpatient prospective payment system published by CMS in April, NASH primarily addressed a CMS proposal to change how it calculates Medicare disproportionate share (Medicare DSH) uncompensated care payments and proposed changes in the Medicare area wage index system.

On Tuesday, the NASH blog presented the alliance’s written comments about proposed changes in Medicare DSH uncompensated care payments.  Yesterday, it presented a detailed alternative proposal to CMS’s April 2019 recommendation for calculating those payments.  Today, the blog presents NASH’s response to proposed changes in the Medicare area wage index system.  The complete NASH response to the proposed CMS regulation can be found here.

Proposed Changes in the Medicare Area Wage Classification System

The “Compression Proposal”

The Medicare area wage classification system adjusts Medicare payments to hospitals based on hospitals’ labor costs relative to the average labor costs of hospitals across the country.  Parts of the country where labor costs are greater than average are assigned a higher wage index, more than 1.0, which is applied to Medicare’s standard payments; areas with lower wage costs, on the other hand, are assigned a lower wage index, less than 1.0, which is applied to the same standard Medicare payments.  The wage index assigned to each hospital is based on an objective formula that reflects hospitals’ actual incurred labor costs in different parts of the country.

CMS has proposed what is being referred to as a “compression proposal” that would inflate the wage indexes of hospitals with indexes below the 25th percentile so Medicare can direct more money to those hospitals.  To pay for this increase and make this proposal budget-neutral, CMS calls for arbitrarily cutting the wage indexes of hospitals currently above the 75th percentile for wage index values.

This wage index proposal seeks to address what CMS describes as “growing disparities between low and high wage index hospitals, including rural hospitals that may be in financial distress and facing potential closure” by providing “certain low wage index hospitals with an opportunity to increase employee compensation without the usual lag in those increases being reflected in the calculation of the wage index.”

NASH does not dispute CMS’s conclusion that some distressed hospitals may need additional financial assistance from Medicare and urges CMS to identify such hospitals.  At the same time, however, NASH believes CMS should explore means other than the proposed wage index changes for providing this additional assistance.

This wage index compression proposal raises a number of concerns.  There is, to be sure, a growing disparity in the wage indexes of hospitals because there is a growing disparity in wages in different parts of the country.  The wage index itself, however, has neither caused nor contributed to this disparity; it is, instead, a reflection of this disparity.  Previous commenters have suggested that it is possible that the lag in wage data could suppress a hospital’s ability to increase wages, but the existence of such wage suppression is undocumented and its potential impact is limited by several factors, including the presence of other hospitals in a labor market area; Medicare fee for service representing only a portion of hospital reimbursement; and probably most significantly, the FY 2005 modification of the wage index that artificially reduces the labor-related share for labor market areas with a wage index adjustment less than 1.0 that was expressly created by Congress to address this perceived issue.

The assertion that this proposal would help rural hospitals facing financial struggles is undermined by NASH’s analysis that only 26 percent of the redistributed money would even reach rural hospitals while 74 percent of the redistributed money would go to urban hospitals.  In fact, there are more than 60 rural hospitals in 20 different states that lose money under the proposal.

Finally, it is not clear from the explanation provided in the proposed rule that the Secretary has the authority to implement this change.  The rule states that the adjustment would be made under

…section 1886(d)(3)(E) of the Act, which gives the Secretary broad authority to adjust for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level, and requires those adjustments to be budget neutral, and our exceptions and adjustments authority under section 1886(d)(5)(I) of the Act.

Between CMS’s proposed inflation of the lowest quartile and its proposed reduction to the highest quartile, it is not reasonable to conclude that the proposed policy change would continue to reflect “…the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level…”  CMS cannot, as the rule seems to argue, arbitrarily alter wage adjustments as long as it ensures that those above the national average are greater than 1.0 while those below the national average are below 1.0.  Inherent in the concept of an area’s relative wage is the proportionality of that relativity, which is lost under this proposal.

NASH asks CMS to withdraw this proposal.  There undoubtedly are hospitals in need of additional financial support and many are located in low-wage areas, but we do not believe the wage index is either the cause of their troubles or an appropriate means of addressing them.  NASH believes CMS should identify the true root causes of these financial challenges and then work with Congress to secure the funding needed to address this problem.

The Proposed Exclusion of the Wage Data of Some Hospitals

NASH also objects to CMS’s decision to exclude wage data from eight hospitals located in the “northern” region of a single state because the wages these providers pay are noticeably higher than the wages paid by other hospitals in the area.  In this case, one entity owns multiple hospitals and negotiates common wages with its workforce throughout the region in which its hospitals are located.  CMS has expressed concern that these common wages are not representative of the wages hospitals need to pay in the areas in question.

CMS asserts that it does not believe these wages “accurately reflect the economic conditions in their respective labor market areas during the FY 2016 cost reporting period.”  NASH believes this conclusion misses the point:  The actual wages paid in a region are not a proxy meant to reflect economic conditions.  They are the economic conditions that the wage index is meant to reflect.  In this situation, a hospital or hospitals in a region paying higher wages forces other hospitals in that region to increase their wages to compete for staff.  It is these local market conditions, and not Medicare fee-for-service payments, that dictate the wages paid to hospital staff.

NASH objects to CMS’s proposal to eliminate wage data that it acknowledges to be legitimate.  Doing so for these particular hospitals for the reasons articulated in the proposed rule would set a dangerous precedent for the future elimination of other unquestionably legitimate wage data.  We believe this is a step CMS should not take and urge the agency to restore the wage data of the excluded hospitals to the calculation of the average wages in the wage index areas in which they are being paid.

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See NASH’s entire response to the proposed Medicare regulation here.