CMS Wage Index: Optimizing Geographic Reclassification

By David J. Andrzejewski, CHFP, and Jay Sutton, FACHE, CNRA
| 5/28/2019
CMS Wage Index: Optimizing Geographic Reclassification
The slightest inaccuracies in a hospital’s average hourly wage (AHW) and wage index value could mean significant losses in Medicare reimbursement. That is why it is critical for acute care inpatient prospective payment system (PPS) hospitals – which are required to file an annual Medicare cost report – to accurately report their hospital wage index data in compliance with Centers for Medicare & Medicaid Services (CMS) regulations.

Reviewing wage index data annually and paying careful attention to how it is calculated are important for all organizations reporting hospital wage index data – especially those that have reclassified geographically to a new core-based statistical area (CBSA). The deadline for hospitals to update the wage index data on file with Medicare typically is around Sept. 1 each year. For 2019, the deadline is Sept. 3. As organizations prepare to meet that deadline, they should consider the following advice for optimizing annual wage index data and receiving the full benefit of their geographic reclassification.

Understanding geographic reclassification

Through geographic reclassification, CMS provides an avenue for hospitals to adjust their area wage index (AWI) value. These are the three most common scenarios under which hospitals might obtain geographic reclassification for wage index purposes:
  • An individual hospital reclassifies to another rural or urban area.
  • All hospitals in a rural county reclassify to an urban area.
  • All hospitals in an urban county reclassify to another urban area.
Hospitals must submit an application to reclassify via a CMS online portal by the annual September deadline. Once a hospital is approved for reclassification, its new status is good for three years. The hospital has to renew its reclassification after three years by refiling the application.

An organization’s calculated wage index value may be different every year even if its classification data does not change. Organizations should review their data as reported on worksheet S-3, part II of the Medicare cost report each year.

Little differences add up to large amounts

A hospital reclassification group (HRG) is a common group of hospitals that geographically reclassify to the same CBSA for AWI purposes. Once a hospital is established within its HRG, management should verify that it fully understands the reimbursement group and works with the other hospitals in the group to optimize PPS reimbursement.

Hospitals within a geographic reclassification group should optimize AHW each year with the following goals in mind:
  • Continuing to meet reclassification criteria
  • Reaching the core rate of requested CBSA, not just a blended rate
    • When the combined AHW (reclassified plus home hospitals) is within at least a 1% difference of the home CBSA AHW, all hospitals will achieve the core CBSA rate.
  • Increasing the blended rate so all hospitals in the group benefit
When AHW data is optimized, an organization can receive the full benefit of belonging to its HRG. If AHW is not optimized by even a penny, reductions in reimbursement can be dramatic. Consider the following examples.

Example 1:
In the 2019 final AWI calculations, a Midwestern HRG needed to reach a target AHW of $38.3328. The group’s combined AHW was calculated at $38.3368, exceeding the target core rate for its CBSA by less than 1 cent. In this example, the reclassified hospitals experienced an estimated $546,000 in additional PPS reimbursement due to the combined AHW exceeding the core AHW by less than a penny.

Example 2:
In another example in the final 2019 AWI calculations, this time involving an HRG reclassifying to a West Coast CBSA, two reclassified hospitals calculated their AWI at $49.68, while core hospitals in the same area calculated their AWI at $51.36. The resulting combined AHW, $50.83, was $0.01 less than the target amount ($50.84), resulting in a reduction of approximately $538,000 in PPS reimbursement for the two reclassified hospitals. Again, being off by even a penny or less can cause a hospital to lose significant reimbursement, such as the half-million dollars lost in this case.

Optimizing data is a continual process

All organizations that are required to file an annual Medicare cost report – including those that recently have reclassified geographically – must review their wage index data on a yearly basis. This data changes, and, as illustrated in the previous examples, even slight fluctuations in the numbers can affect reimbursement amounts – often for the worse. Paying close attention to how an organization’s data is calculated, including assessing updated wage index values, is critical.

Hospital wage index reporting involves complicated math, with even small data mistakes meaning the difference between receiving full PPS reimbursement and having reimbursement decreased significantly. To make sure they are optimizing their geographic reclassification and properly assessing wage index data annually, some organizations may benefit from working with third-party specialists in this area.

Contact us

Jay Sutton - social
Jay Sutton