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Geographic Reclassification: Why You Should Assess Your Wage Index Classification

One of the most – if not the most – pressing issue that hospital administrators face is balancing quality care and maximum efficiency. At a time when patient needs are growing exponentially, many funding sources are declining. Ensuring Medicare reimbursements are accurately determined is a significant concern. Reassessing your geographic classification can be an important step in this direction.

The wage index, or Medicare  wage index (MWI), is part of the Inpatient Prospective Payment System (IPPS). Since the early 1980s, Medicare has been paying hospitals a set amount for groups of patients who are clinically similar – as opposed to each individual procedure, service, or day of care. The goal was to encourage greater efficiency.

The MWI plays a significant role here: CMS uses a national standard payment and then makes adjustments for patient characteristics (e.g. condition) and hospital characteristics (e.g. labor costs for that market). Hospitals incur vastly different labor costs based on their specific locations or markets, and each market is assigned a specific wage index value. The wage index is then used to adjust prospective payment amounts to account for these variations. For example, if a hospital operated in a high-cost labor market, its payments may be adjusted upwards.

How does CMS calculate the wage index? Gleaning data from Form S-3 of hospitals’ cost reports, which they are required to submit yearly, they divide the average hourly wage (AHW) paid by all IPPS hospitals in a labor market by the AHW for all IPPS hospitals in the country.

Hospitals can undertake a reclassification process; they may be redesignated from one market – or Core-Based Statistical Area (CBSA) – so they can use that area’s wage index value. This may be advantageous in terms of the payment amounts they receive.

R-C Healthcare can help you determine if reclassification is beneficial for your organization, if you meet the wage and distance criteria, if it is advantageous to rescind your reclassification, and if your hospital’s status allows for specific waivers. It can be a complex process, but our expert team is here to guide you through every step.


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