OIG: Direct Wage Index Increases to Low-Margin Rural Hospitals

January 05, 2021 - Rural hospitals struggling the most financially are not benefitting from a Medicare reimbursement adjustment meant to help providers paying the lowest wages to their employees, according to a new report from the HHS Office of Inspector General (OIG).

The report released on Dec. 30 found that more rural hospitals were low-wage providers, with 53 percent of bottom quartile hospitals classified as rural.

Over half (55 percent) of rural hospitals paid under the Inpatient Prospective Payment System (IPPS) also had wage indexes in the bottom quartile for 2020, OIG reported.

Additionally, almost 40 percent of the low-wage hospitals had negative profit margins, according to Medicare cost report data obtained for the federal audit.

However, profit margins significantly varied, ranging from a low of -133 percent to a high of 47 percent in 2016, the most recent year for which OIG calculated hospital profit margins.

The results of the audit indicate a need for a more targeted approach to hospital wage index adjustment, with low- or negative-margin hospitals receiving more focus, OIG stated.

Last August, CMS announced changes to the hospital wage index adjustment in the 2020 IPPS final rule to improve the accuracy of the wage index adjustment system and narrow the gap between high- and low-wage providers.

The rule increased the wage index for hospitals with average wage indexes in the bottom quartile for at least the next four years.

“The Trump Administration is providing relief to rural communities and addressing payment policies that have disadvantaged rural hospitals, making it harder for them to stay open and provide care to the one in five Americans living in rural areas,” CMS Administrator Seema Verma said at the time.

Rural hospital closures have accelerated, and already COVID-19 is putting more rural hospitals at risk of shuttering their doors because of financial hardships.

Critics have argued that the circularity of the wage index adjustment – the fact that CMS calculates the current year’s average wage index based on wage data submitted by hospitals in their Medicare cost reports – and the four-year lag by the time CMS uses the wage data has prevented some hospitals from raising wages. In turn, low-wage hospitals have not received the appropriate wage index bump to cover current costs.

To help CMS implement changes to the wage index adjustment system, OIG conducted a federal audit of hospitals with average wage indexes in the bottom percentile for 2020.

The audit found that the bottom quartile largely included rural, smaller, and lower-volume hospitals.

Bottom quartile hospitals were also located in 24 states overall, but most (41 percent) operated in just six states – Alabama, Louisiana, Mississippi, Arkansas, West Virginia, and Puerto Rico. The six states also had more than 90 percent of their hospitals in the bottom quartile.

In addition, 57 percent of the hospitals in the bottom quartile operated in states that did not expand Medicaid eligibility to more low-income people under provisions of the Affordable Care Act. The availability of Medicaid under expansions could theoretically help rural hospitals generate revenue and decrease uncompensated care.

States with hospitals in the bottom quartile also had the lowest possible state minimum wage and average hourly wages of hospitals in the same area could vary, meaning some hospitals were already paying significantly higher wages than other hospitals in the same area before CMS implemented changed to the bottom quartile wage index adjustment.

OIG said CMS should consider studying why some hospitals in a specific area were able to pay their employees higher wages than other hospitals in the region prior to hospital wage index changes.

“More information might enable CMS to focus the adjustment more precisely on the hospitals most needing the adjustment (those that are least able to raise wages),” the watchdog said in the report.

CMS should also consider monitoring the wage data for hospitals in the bottom quartile over the next few years to determine whether wage index changes are successful with increasing wages across low-wage providers.

CMS finalized in the 2021 IPPS the continuation of the new low wage index policy.