It's sometimes easy to forget the importance of the Medicare Hospital
Area Wage Index, which is used to adjust payments for Medicare inpatient
and outpatient services, SNF services, home health services, and rehab
services. Minor variations in a labor market area's wage index can
have a substantial impact on a hospital's overall Medicare payments.
Because of the significance of the wage index on Medicare payments,
the Georgia Chapter of EFMA, in conjunction with the Georgia Hospital
Association, recently developed a resource tool-"Medicare Hospital
Wage Index"-to help heighten awareness and provide education
on the importance of the Medicare area wage index. This resource
provides an overview of the Medicare area wage index, why it is
important, and a checklist aimed at helping hospitals make sure
that they are including all allowable costs in their cost report
data that is used to calculate the area wage index. There is also
information regarding the FY 2003 wage index development timetable.
Why is the hospital area wage index important?
The hospital area wage index is used to adjust Medicare payments
for not only inpatient services, but for outpatient services, skilled
nursing facility (SNP), home health, rehab, and other Medicare prospective
payment systems (PPS). Even a slight decrease in a labor market's
area wage index can have a significant impact on a hospital's overall
Medicare payments. For example, a five percent change in the wage
index translates into a payment change of roughly $200 per discharge
for the typical hospital, or $500,000 annually for a hospital with
2,500 Medicare discharges. The negative impact is even greater when
the decrease in payments for outpatient services is taken into consideration.
If the wage index for a labor market area does not accurately reflect
true labor costs, hospitals could needlessly lose millions of dollars
of reimbursement. In addition, under the capital prospective payment
system, capital payments are adjusted for local cost variation based
on the hospital wage index.
What is the hospital area wage index?
The wage index reflects the relative level of wages and salaries
for hospital workers in a metropolitan area or statewide rural area.
The hospital wage index is a measure of wage levels across areas,
relative to the national average hourly wage for hospital employees.
The national average hourly wage is determined by adding the salaries
and wage-related costs and hours of all hospital employees (excluding
those attributable to skilled nursing units, home health services,
or other sub provider units) and home office salary costs and hours
for all hospitals in the country. Total salaries are divided by
To calculate an average hourly wage for a particular labor market
area (MSA or rural area), CMS sums the total gross allowable wages
and wage-related costs of PPS-eligible hospitals within a labor
market area, and divides them by the total paid hours for which
such wages and wage-related costs were paid for the labor market
area. The average hourly rate for a defined labor market area is
divided by the national average hourly wage to calculate the area
wage index for a defined labor market area.
If a particular wage market has an index value of 0.91, that means
that the hourly hospital wages paid in the market area average 9%
less than the hourly wages for all hospitals paid under the prospective
payment system for that year. Because the index value is less than
one, the standardized rates for hospitals in this market will be
reduced. A wage index value of 1.1 indicates that the hourly hospital
wages in the market area are 10% greater than the national average,
and the standardized payment rates will be increased accordingly.
The area wage index is used to adjust hospital payments under the
various Medicare Prospective Payment Systems (PPS). The labor portion
of the inpatient DRG payment determines approximately 71% of the
total payment amount. Outpatient labor costs are estimated at 60%
of the payment rate. Labor costs for home health services represent
77% of the payment and are approximately 78% for skilled nursing
facilities. With so much of the total payment adjusted by the area
wage index, as a proxy for labor costs, accuracy in the reporting
of wage data is vital. It is important to make certain that all
allowable costs are included on the Medicare cost report when completing
worksheet S3, Parts II and III.
Because the wage index adjustment is budget neutral, if the wage
index values increase in one labor market area, the wage index in
other MSAs will have to decrease. Likewise, if wage index values
in other states increase, then wage index values in Georgia could
What Can Hospitals Do To Improve Their Wage Index?
There are a number of reasons why a particular area's wage index
may be incorrect. First, Worksheet S-3, Part II and III is an informational
part of the Medicare cost report, so some hospitals may not devote
as much attention to this part of the cost report. Second, hospitals
that experience turnover in financial reporting staff may experience
problems with consistency in reporting wage index data from one
year to the next. In addition, there is a three to four year lag
in the reporting of data and its use for calculating the wage index.
For example, the FY 2003 wage index will be based on the 1999 Medicare
cost report. Even so, hospitals have the opportunity to review their
wage index data prior to the publication of the final wage index
and to correct any inaccurate data that may be used during the wage
index development process. If one hospital in an MSA has submitted
incorrect data which results in a lower wage index, all hospitals
in the MSA will suffer decreased Medicare reimbursement.
Problems with the wage data can arise due to hospital failure to
properly report costs on the cost report, failure to properly request
revisions to the wage data, or failure to verify the data that the
intermediary and CMS uses to calculate the wage index.
It is to the benefit of all hospitals in a labor market area to
work together to review the preliminary wage index data provided
by CMS during the wage index development process. A Wage Index Checklist
is listed below to assist hospitals in making sure that all allowable
costs are included in cost report data.
Wage Index Check List
When completing Worksheet S-3, Part II and III of the Medicare
cost report, make sure that the following costs are included:
Total wage and salaries paid to hospital employees
On-call or stand by wages
Contract labor for direct patient care services
Physicians salaries and wage related costs for Part A
services, including teaching physician salaries and wage related
Intern and Resident salaries and wage related costs.
Contract management personnel costs for CEO, COO, CFO and
Home office salaries
Wage-related costs (fringe benefits):
FICA taxes (employer portion only)
Medicare taxes (employer portion only)
annuity (TSA) employer contributions
and non-qualified pension plan costs
pension service cost
fees associated with pension plan
care program administration fees
(purchase or self-funded)
State or Federal
expenses (tuition reimbursement) (staff training?)
costs of medical services provided to employees
Sick pay accrual
care cost (only the current year)
Day Care Cost
reported as wages to IRS
Because the same area wage index is used for all PPS hospitals
in a particular labor market area, there is an incentive for those
hospitals to work together to make sure that the data used to calculate
the area wage index for their area includes all allowable costs.
Collaboration between hospitals on wage index issues is a win-win
effort. HFMA and GHA, working together, will be glad to facilitate
a meeting of hospitals in a labor market area to review in more
detail the wage index data. If your hospital is interested in participating
in such an effort, or if you would like a copy of the wage index
document, please contact Robert E. Bolden, FHFMA at (770) 249-4505,