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Hospital Wage Data Inaccuracies Led to Medicare Reimbursement Issues

OIG found significant vulnerabilities with the hospital wage index system, which resulted in inaccurate Medicare reimbursement for hospitals.

Medicare reimbursement and hospital wage index

Source: Thinkstock

By Jacqueline LaPointe

- CMS may not be appropriately adjusting Medicare reimbursement to hospitals for local labor prices, a new HHS Office of the Inspector (OIG) report reveals.

The HHS watchdog found “significant vulnerabilities” in the hospital wage index system while conducting 41 reviews of hospital wage data from 2004 to 2017. Specifically, the organization observed:

  • CMS lacks the authority to penalize hospitals that submit inaccurate or incomplete wage or occupational mix data
  • Limited reviews by Medicare Administrative Contractors (MACs) did not always identify inaccurate wage data
  • Rural floor policy decreases wage index accuracy
  • Federal and CMS hold-harmless provisions pertaining to geographically reclassified hospitals’ wage data decrease wage index accuracy

“As a result of these vulnerabilities, wage indexes may not always accurately reflect local labor prices; therefore, Medicare payments to hospitals and other providers may not be appropriately adjusted to reflect local labor prices,” the OIG wrote.

CMS uses hospital wage data collected annually through the Medicare cost report to determine hospital reimbursement under the Medicare Inpatient Prospective Payment System (IPPS). The data influences the market basket index, which CMS uses to annually adjust Medicare base payments for price inflation.

The federal agency also uses hospital wage data to periodically calculate what percentage of the IPPS operating payment relates to labor versus supply costs, otherwise known as the labor-related share.

READ MORE: The Difference Between Medicare and Medicaid Reimbursement

Additionally, hospital wage data influences wage indexes, which CMS uses to annually adjust Medicare reimbursement to hospitals to account for labor prices in local labor markets. The wage index used for adjustment is based on hospital wage data.

CMS also calculates a rural area wage index for each state, known as the rural floor, to prevent the “anomaly” of some urban hospitals receiving reimbursement lower than the average rural hospital in their state.

Wage indexes also influence the hospital geographic reclassification process, in which CMS can reclassify IPPS hospitals into a higher wage index for higher Medicare reimbursement rates if they meet certain requirements related to proximity and average hourly wage.

Federal law and CMS policies, however, contain hold-harmless provisions to protect hospitals from having their wage indexes lowered because of hospital geographic reclassification of their peers.

With hospital wage data greatly influencing Medicare reimbursement, the OIG explained that accuracy is critical.

READ MORE: Key Ways to Improve Claims Management and Reimbursement in the Healthcare Revenue Cycle

“For IPPS base payments to be set and adjusted accurately, hospitals must submit accurate wage and occupational mix data,” the HHS watchdog explained. “Inaccurate wage data could lead to an inaccurate market basket index or to an inaccurate labor-related share for operating payments. Inaccurate wage data could also lead to inaccurate wage indexes and geographic adjustment factors.”

But the organization’s audit of laws, policies, and hospital wage data revealed that the inability of CMS to penalize hospitals that submit inaccurate or incomplete hospital wage data through their Medicare cost reports threatens accuracy.

And the OIG identified material inaccuracies in each of the 41 reviews of hospital wage data from 2004 to 2017. In just the five most recent reviews, the watchdog estimated that CMS paid a total of $140.5 million in overpayments to more than 270 hospitals because of inaccurate wage data.

“Because of budget neutrality, those net overpayments resulted in approximately the same amount of underpayments to other hospitals nation-wide,” the OIG continued. “Although the net effect to the Medicare program was approximately null because of budget neutrality, some hospitals experienced underpayments because of inaccurate wage data. Additionally, although we did not audit the market basket index or labor-related share, both could have been made less accurate by the errors we found in our reviews.”

Additionally, the limited-scope reviews of hospital wage data by Medicare Administrative Contractors resulted in hospital wage data vulnerabilities, OIG reported.

READ MORE: Slow and Steady Still the Motto for Value-Based Reimbursement

MACS conduct “desk reviews” of wage data for all hospitals assigned to them, the report explained. The desk reviews are “more limited in scope than audits, focusing on quickly detecting aberrant wage data for possible correction.”

The desk reviews, however, were not enough to catch the inaccurate data found in OIG’s five most recent reviews that resulted in over $140 million in overpayments, the report showed.

“While desk reviews may be effective for finding certain types of errors, a program of in-depth audits targeted at hospitals with a high level of impact on their area wage indexes may be more effective in identifying the types of errors we found in our prior reviews,” the OIG stated.

Federal law and CMS policies pertaining to the rural floor and hospital geographic reclassifications also decreased wage index accuracy, OIG added.

For example, Nantucket Cottage Hospital in Massachusetts submitted inaccurate wage data in 2015. CMS used the data to set the rural floor wage index for the state, and as a result, Medicare overpaid all 56 acute care hospitals in Massachusetts a total of $133.7 million.

The inaccurate data from the one hospital may have also influenced underpayments to hospitals in other states because of the national budget neutrality provision of the rural floor benefit, OIG pointed out.

Similarly, the policies regarding hospital geographic reclassifications decreased wage index accuracy. For instance, CMS reclassified Alta Bates Medical Center in 2014. CMS then used the medical center’s wage data to determine the wage index for its original geographic area and its reclassification area as if the medical center was entirely in both labor markets, which OIG noted is not possible.

Alta Bates Medical Center submitted inaccurate hospital wage fata, resulting in $154,000 in Medicare overpayments to the medical center, as well as overpayments of $1.85 million to 13 hospitals in the original geographic area and $3.4 million to 19 hospitals in its reclassification area in 2014.

To improve hospital wage data accuracy and ensure accurate Medicare reimbursement, OIG recommended CMS:

  • Obtain legislative authority to penalize hospitals that submit inaccurate or incomplete wage data in the absence of misrepresentation or falsification
  • Partner with MACs to create in-depth wage data audits for a limited number of hospitals each year
  • Seek legislation to rescind the rural floor wage index law
  • Explore legislations to eliminate the hold-harmless provisions in the rules pertaining to the wage data of reclassified hospitals
  • Eliminate the CMS hold-harmless policy that requires the federal agency to use wage data from reclassified hospitals in the calculations of wage indexes of original geographic areas

In response, CMS agreed with the recommendation to work with MACs to establish more in-depth reviews of hospital wage data.

However, the federal agency did not concur with the recommendation to rescind the hold-harmless policy. CMS explained that “it is appropriate to use a reclassifying urban hospital’s wage data to calculate the wage index of its original area because it believes that using data ‘from the most hospitals to calculate the average wages for an area provides the most accurate and stable measure.’”


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