Hospital Wage Index

20.1.1 - Hospital Wage Index (Rev. 70, 01-23-04) Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts “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.” This adjustment factor is the wage index. CMS defines hospital geographic areas (labor market areas) based on the definitions of urban (e.g., Metropolitan Statistical Areas (MSAs)) and rural areas issued by the Office of Management and Budget. The Act further requires the wage index to be updated annually, based on a survey of wages and wage-related costs of short-term, acute care hospitals. These data are collected on Worksheet S-3, Parts II and III of the Medicare Cost Report (Form CMS-2552). To ensure the accuracy of the wage index, fiscal intermediaries are required to perform annual desk reviews of hospitals’ wage data. CMS also publishes the wage data, and allows hospitals an opportunity to review and request corrections to the data, before the wage index is finalized. In computing the wage index, CMS derives an average hourly wage for each labor market area (total wage costs divided by total hours for all hospitals in the geographic area) and a national average hourly wage (total wage costs divided by total hours for all hospitals surveyed in the nation). A labor market area’s wage index value is the ratio of the area’s average hourly wage to the national average hourly wage. If a labor market area’s average hourly wage is greater than the national average, the area’s wage index value will be greater than 1.0000. If an area’s average hourly wage is less than the national average, the area’s wage index value will be less than 1.0000. The wage index adjustment factor is applied only to the labor portion of the standardized amounts. Section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index value applicable to any hospital that is located in an urban area may not be less than the area wage index value applicable to hospitals located in rural areas in that State. Furthermore, this wage index floor is to be implemented in such a manner as to ensure that aggregate prospective payment system payments are not greater or less than those that would have been made in the year if this section did not apply.