Significant Vulnerabilities Exist in the Hospital Wage Index System for Medicare Payments

We observed significant vulnerabilities in the wage index system while conducting 41 reviews of hospitals' wage data, with reports issued from 2004 through 2017. CMS uses area wage indexes to adjust hospital payments annually to reflect local labor prices. CMS calculates each area's wage index based on wage data submitted by acute-care hospitals in their Medicare cost reports. Medicare administrative contractors (MACs) perform limited reviews of these data. Federal law requires that the area wage indexes applied to urban hospitals in a State cannot be lower than the wage index for the rural hospitals in that State. This provision is called the "rural floor." Federal law allows some hospitals to reclassify to areas with higher wage indexes to receive higher payments. "Hold-harmless" provisions in Federal law and CMS policy protect hospitals from having their wage indexes lowered because of the geographic reclassification of other hospitals.