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OIG audit: CMS should improve hospital wage index adjustments for rural hospitals


The Centers for Medicare and Medicaid Services’ hospital wage index system isn’t doing enough to support facilities in the bottom quartile, specifically those in rural locations, according to an audit conducted by the Department of Health and Human Services Office of Inspector General.

OIG’s audit found that of the hospitals in the bottom quartile of the area wage index for the federal fiscal year 2020, 53{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} were in rural areas. These hospitals also tended to be smaller and lower-volume facilities, according to the report.

Because of these findings, the watchdog agency urges CMS to focus its bottom quartile wage index adjustment on hospitals with low or negative profit margins rather than the ones with higher, positive profit margins.

It further suggested that CMS look into why some hospitals in a certain area could pay higher wages than other hospitals in the same area, even before the use of the bottom quartile wage index adjustment.


The bottom quartile was made up of 866 hospitals across 24 states and Puerto Rico. There were six that accounted for 41{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of the bottom quartile hospitals – Puerto Rico, Alabama, Louisiana, Mississippi, Arkansas and West Virginia. Each of these had more than 90{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of their total hospitals in the bottom quartile.

More than half of the hospitals in the lowest quartile are in states that did not expand Medicaid under the provisions of the Affordable Care Act. In theory, expanding Medicaid can improve hospital revenues because previously uninsured patients could become insured under Medicaid and seek treatment, resulting in higher volumes, according to OIG.

States that had hospitals in the lowest quartile also had the lowest minimum wages, with most states that offer the federal minimum wage ($7.25) falling into the bottom quartile.

The audit also found that hospital profit margins within the last quartile varied significantly. For example, the margins ranged from -133{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} to 47{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} for 2016. Of the 783 hospitals for which data was collected, 303 had negative profit margins that year.


CMS uses area wage indexes to adjust Medicare standard payments to hospitals in the inpatient and outpatient prospective payment systems to reflect the prices hospitals face in their local labor markets.

It uses wage data from four years prior in the calculations, which raises concerns about how it could prevent some hospitals from raising wages.

To make up for that, beginning in 2020, CMS began adjusting the hospital wage index to bring the hospitals in the bottom quartile closer to those in higher quartiles. CMS plans to continue this tactic for at least four years with the hope that hospitals in the bottom quartile will use the opportunity afforded by higher Medicare payments to raise wages.

CMS has also created a new value-based payment model for rural healthcare providers, called the Community Health Access and Rural Transformation (CHART) Model. It provides support through new seed funding and payment structures, operational and regulatory flexibilities and technical and learning support.

Additionally, CMS increased Medicare payment rates for inpatient psychiatric facilities, skilled nursing facilities and hospices by 2.2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, 2.2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, and 2.4{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, respectively.


“We recognize that CMS’s initiative to minimize hospital burden during the pandemic could make it difficult for CMS to focus on new initiatives,” OIG said in the audit. “However, when post-pandemic conditions allow for new initiatives, CMS could consider focusing the bottom quartile wage index adjustment more precisely toward the hospitals that are the least able to raise wages without that adjustment.”

Twitter: @HackettMallory
Email the writer: [email protected]



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