Medicare Hospital Payments: Adjusting for Variation in Geographic Area Wages

Medicare Hospital Payments: Adjusting for Variation in Geographic Area Wages

Medicare Hospital Payments: Adjusting for
March 3, 2021
Variation in Geographic Area Wages
Marco A. Villagrana
Medicare paid $112 billion for inpatient services at short-term, acute-care hospitals in 2018. Of
Analyst in Health Care
the approximately 4,700 such hospitals in 2018, 3,220 were paid under the Medicare inpatient
Financing
prospective payment system (IPPS), under which hospitals are paid a predetermined, fixed

payment amount. The base IPPS payment amount is the same for all hospitals, but that amount is
adjusted for geographic location, diagnoses, hospital services furn ished, and quality performance,

among other factors. In FY2021, the IPPS base payment for each Medicare beneficiary
discharged from a hospital is $5,961.19 for a hospital’s operating costs (e.g., labor and supply costs) and $462.22 for capital
costs (i.e., depreciation, interest, rent, and property-related insurance and taxes).
To account for geographic differences in hospitals’ labor costs, the IPPS base payment amount is adjusted by a hospital wage
index. The wage index adjustment generally increases the IPPS payment amount to hospitals in geographic areas with
average hospital wages above the national average; conversely, it decreases the IPPS payment amount to hospitals in areas
with wages at or below the national average.
Although the wage index is intended to ensure the IPPS payment reflects geographic differences in wages, some hospital
stakeholders in lower-wage areas have expressed concern about the fairness of the wage index due to the differences between
relatively low and high hospital wage areas. In response to some of the concerns about the wage index, Congress created a
number of exceptions. These exceptions allow qualifying hospitals to reclassify (change) to a higher wage index geographic
area or to receive adjustments to their geographic wage index values. The National Academies of Sciences, Engineering, and
Medicine (NASEM) estimated that nearly 40% of IPPS hospitals received a wage index reclassification or adjustment under
one or more of these exceptions in FY2011. A comparable percentage of hospitals continue to receive reclassifications in
FY2021, as noted in this report.
Although wage index reclassifications and adjustments usually increase the wage index of hospitals, independent analysts
conclude that these exceptions may not address all concerns about the wage index. Some analysts argue that the need for
exceptions indicates the wage index does not accurately reflect hospital labor markets. Other analysts argue that the effect of
these exceptions further distorts hospital labor markets.
Some Members of Congress, hospitals, and independent analysts have expressed interest in the differences in Medicare
hospital payments by geographic area, based on the wage index. Some of these stakeholders have recommended changes to
the wage index to more accurately reflect labor market forces faced by hospitals. Although some modifications to the wage
index have been implemented, there is no consensus about systematic reforms.
This report provides an overview of the Medicare hospital wage index, including a description of its role in the overall
hospital IPPS payment, calculation of the wage index adjustment, the wage index’s effect on Medicare payments for inpatient
hospital services, stakeholders’ concerns, exceptions and adjustments to the wage index, and proposals for wage index
reforms. Appendix B contains a legislative history of the Medicare hospital wage index.

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Contents
Background.................................................................................................................... 1
Adjusting Medicare Hospital Payments for Geographic Variation in Wages.............................. 3
Constructing the Hospital Wage Index ................................................................................ 5
Defining Geographic Labor Market Areas ..................................................................... 5
Determining Hospital Wages ....................................................................................... 7
Adjusting Hospital Wages for Occupational Mix ............................................................ 7
Calculating Geographic Area Wage Index Values............................................................ 9
Wage Index Effect on Medicare Payment ...................................................................... 9
Wage Index Geographic Reclassifications and Adjustments ................................................. 11
Reclassification Hold-Harmless Policies ..................................................................... 17
Concerns About the Hospital Wage Index ......................................................................... 19
Wage Index Reform....................................................................................................... 21
Selected Analyses and Recommendations.................................................................... 21
Administrative Policy to Address Wage Index Disparity ................................................ 23

Figures
Figure 1. Medicare Wage Index Adjustment to the Hospital Inpatient Prospective
Payment System (IPPS) Operating Base Payment.............................................................. 5
Figure 2. Hospital Labor Costs Used to Calculate the Wage Index .......................................... 7
Figure 3. Medicare IPPS Wage Index Calculation ................................................................ 9
Figure 4. Effect of the Wage Index on Medicare IPPS Operating Base Payment in Three
Geographic Areas ....................................................................................................... 10
Figure 5. Examples of Medicare MGCRB Reclassifications................................................. 13
Figure 6. Effect of the Wage Index Disparity Policy on Minimum and Maximum Hospital
Wage Index Values ..................................................................................................... 24

Figure A-1. Medicare Hospital Inpatient Prospective Payment System (IPPS) for
Operating Costs ......................................................................................................... 26

Tables
Table 1. Example: Medicare Hospital Wage Index Geographic Areas
in Minnesota, FY2021................................................................................................... 6
Table 2. Hospital Occupations Subject to the Occupational Mix Adjustment............................. 8
Table 3. Medicare IPPS Hospital Wage Index Reclassifications and Adjustments .................... 15
Table 4. Reclassification Hold-Harmless Policies ............................................................... 18

Table B-1. Legislative History of the Medicare Hospital Wage Index .................................... 27

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Appendixes
Appendix A. Medicare Inpatient Prospective Payment System ............................................. 25
Appendix B. Legislative History of the Medicare Hospital Wage Index ................................. 27

Contacts
Author Information ....................................................................................................... 29

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Medicare Hospital Payments: Adjusting for Variation in Geographic Area Wages

Background
Medicare paid an aggregate of $112 bil ion for inpatient services furnished at short-term, acute-
care hospitals in 2018.1 Of the approximately 4,700 such hospitals in 2018, 3,220 were paid under
the Medicare inpatient prospective payment system (IPPS). 2 Under IPPS, hospitals are paid a
predetermined, fixed payment amount for services furnished to Medicare beneficiaries.
Since 1983, Medicare has paid most acute-care hospitals under the IPPS for inpatient hospital
services provided to a Medicare beneficiary.3 The IPPS base payment is for services associated
with a Medicare beneficiary’s inpatient hospital stay, including preadmission-related tests and
services provided during the inpatient stay (i.e., from admission to discharge).4 The IPPS base
rate is calculated using costs reported by hospitals on the Medicare cost report for the cost
reporting period that ended during the period October 1, 1982, through September 30, 1983, and
is updated annual y.5 Under the IPPS, a hospital receives two payments, one for operating
expenses and another for capital expenses. The IPPS operating payment covers a hospital’s labor
and supply costs. The IPPS capital payment covers depreciation, interest, rent, and property-
related insurance and taxes. (For purposes of il ustration, this report focuses on how the wage
index is used in calculating the operating payment.)
The IPPS operating and capital base payments are the same for al IPPS hospitals, regardless of
location.6 These payments are the starting point and are subject to applicable adjustments. In
FY2021, the IPPS operating base payment amount to a hospital for each Medicare beneficiary
discharged is $5,961.19 and the capital base payment amount is $462.22.7 The IPPS per discharge
payment amount is updated annual y by an inflation factor. This amount does not include
applicable beneficiary cost sharing under the Medicare Part A hospital insurance benefit. This

1 Medicare Payment Advisory Commission (MedPAC), Chart 6 -14 in Health Care Spending and the Medicare
Program : A Data Book, July 2020, at http://www.medpac.gov/-documents-/data-book (hereinafter, MedPAC, Data
Book). Short -term, acute-care hospitals not paid under the Medicare inpatient prospective payment system (IPPS) are
paid by Medicare under other payment methodologies, primarily based on hospitals’ reported costs rather than on
prospectively determined, fixed payment amounts.
2 See Chart 6-1 and Chart 6-9 in MedPAC, Data Book.
3 Prior to 1983, Medicare paid for inpatient hospital services based on a hospital’s reasonable costs rather than a
standard fixed amount. IPPS hospitals are distinguished from non-IPPS hospitals—psychiatric, pediatric, long-term
care, critical access hospitals (CAHs)—by, among other factors, the method Medicare uses to pay non -IPPS hospitals.
Some of these hospitals are paid under their own unique prospective payment sy stem (PPS) such as long-term care
hospital PPS, and CAHs are paid based on their costs—specifically, 101% of cost.
4 T he IPPS unit of payment is a hospital discharge. T he IPPS payment is for a bundle of services that are provided
during an inpatient stay (i.e., from admission through discharge, including related preadmission tests).
5 Hospitals (and other Medicare-certified providers) are required to submit to CMS an annual cost report containing
information such as facility characteristics, utilization data, and financial information including cost and charges by
cost center (in total and for Medicare) and financial statement data. 42 U.S.C. §1395g; 42 C.F.R. §413.20.
6 T he IPPS operating base payment amount for FY2021 is $5,961.19, assuming a hospital submits quality data and is a
meaningful electronic health record (EHR) user, and the capital base rate is $462.22. For simplicity, this report focuses
on the IPPS operating payment unless otherwise noted.
7 See T able 1A-1E in Centers for Medicare & Medicaid Services (CMS), “Medicare Program; Hospital Inpatient
Prospective Payment Systems for Acute Care Hospitals and the Long-T erm Care Hospital Prospective Payment System
and Final Policy Changes and Fiscal Year 2021 Rates; Quality Reporting and Medicare and Medicaid Promoting
Interoperability Programs Requirements for Eligible Hospitals and Critical Access Hospitals,” 85 Federal Register
58432, September 18, 2020, at https://www.cms.gov/files/zip/fy-2021-ipps-fr-table-1a-1e.zip. Hereinafter, CMS, 85
Federal Register 58432, September 18, 2020.
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amount is the ful amount for hospitals that submitted quality data and are meaningful electronic
health record (EHR) users.
Through adjustments, the Medicare IPPS base payment accounts for variation in local market
conditions (including wages), the patient’s diagnosis and associated procedures, and other factors
in certain qualifying hospitals. Al IPPS base payments are subject to two adjustments. One is a
wage index adjustment, which accounts for the geographic differences in labor costs faced by
hospitals in different labor markets.8 The second adjustment alters payment to account for the
patient’s condition as reflected by the diagnoses and medical procedures performed, often
referred to as case mix.9 As noted above, this report focuses on how the wage index is used in
calculating the operating payment. (See Appendix A and Figure A-1 for an overview of al IPPS
payment adjustments and how the wage index fits within al IPPS adjustments.)
The hospital wage index adjustment has been the subject of ongoing debate and analysis. The
wage index general y leads to reductions in IPPS payment amounts to hospitals located in
relatively low-wage areas and increased payment amounts to hospitals in relatively high-wage
areas. Some hospitals in lower-wage areas have raised concerns that the wage index, as currently
implemented, results in geographic differences that exacerbate disparities in Medicare payment
amounts between low- and high-wage areas. Additional y, various independent analysts have
recommended modifications to improve the wage index’s fairness and accuracy. For example,
some have recommended reducing large wage index differences between adjacent geographic
areas, particularly differences between hospitals that are located near the boundaries of a wage
index area. This approach is intended to improve the accuracy and fairness by reducing wage
index “cliffs” between hospitals that are geographical y proximate but in different wage index
areas. Other analysts recommend using wage data from all health care employers rather than from
only hospitals. This approach is intended to reflect a more complete picture of the labor market
that hospitals face in a geographic area.
Congress has enacted numerous changes to the wage index since it was implemented in 1983.10
These changes consist primarily of wage index exceptions that al ow qualifying hospitals to
reclassify to a nearby geographic area with a higher wage index or otherwise receive adjustments
to their wage index values. Although these exceptions were created to resolve some stakeholder
concerns with the wage index, the changes they implement may create or exacerbate other issues.
For example, some analysts argue that a policy that necessitates as many exceptions as those
available under the wage index indicates the wage index does not accurately reflect hospital labor
markets.11 Other analysts argue that the exceptions themselves further distort hospital labor
markets. Policies designed to increase or decrease the wage index affect al hospitals, because
most wage index reclassifications and adjustments are done in a budget-neutral manner—an
increase in the wage index of some hospitals general y is offset by proportional reductions in
Medicare IPPS payments for other hospitals so that aggregate Medicare spending does not
increase as a result of most wage index reclassifications and adjustments.

8 42 U.S.C. §1395ww(d)(2)(H) authorizes the Secretary of Health and Human Services to adjust IPPS payments to
account for “area differences in hospital wage levels.”
9 T he classification system that groups similar clinical conditions and the procedures performed by the hospital during
the hospital stay is referred to as the Medicare Severity-Diagnosis Related Group (MS-DRG). T his system helps to
relate the type of patients a hospital treats (i.e., a hospital’s case m ix) to the costs the hospital incurs. A weight is
assigned to each MS-DRG that reflects the average relative costliness of cases in that group compared with the
costliness for the average Medicare case. For FY2021, there are 765 MS-DRG groupings.
10 A summary changes enacted by Congress is located in Appendix B.
11 Wage index reclassifications and adjustments are addressed in more detail in the “ Wage Index Geographic
Reclassifications and Adjustments” section of this report.
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This report provides an overview of the Medicare hospital IPPS, including an overview of the
wage index used to adjust payments for geographical cost differences. The report also describes
methods hospitals may use to request a reclassification of their wage index values and therefore
Medicare payments. In addition, the report introduces stakeholders’ concerns about the accuracy
of the wage index and presents brief summaries of selected analyses and reform proposals. The
report also provides a legislative history of the hospital wage index in Appendix B.
Labor Costs Versus Prices
As currently constructed, the wage index reflects the labor costs rather than the prices faced by hospitals in a
geographic labor market. Specifical y, the hospital wage index is the average hourly wage paid by hospitals in a
defined geographic area relative to the national hospital average hourly wage. A 201 2 analysis by the Institute of
Medicine (now the National Academies of Sciences, Engineering, and Medicine, or NASEM) notes that the wage
index is a cost index because it measures the variation in hospital-paid wages and benefits rather than the variation
in the price that hospitals face for a defined group of goods and services (e.g., wages and benefits) between
geographic areas.a In other words, rather than capture geographic differences in labor prices—the market-
determined value of the labor used to provide a medical service—faced by hospitals in a geographic area, the
Medicare wage index captures hospital-reported labor costs. The Medicare wage index does not include data of
health service providers that may be similar to an IPPS hospital, such as rehabilitation or psychiatric hospitals with
which IPPS hospitals likely compete for labor in a geographic labor market. Using only IPPS hospital costs as the
basis for constructing the hospital wage index raises two different but related concerns—circularity and accuracy.
For additional information about these and other criticisms of the Medicare hospital wage index, see “Concerns
About the Hospital Wage Index” in this report.
a. Institute of Medicine, Geographic Adjustment in Medicare Payment: Phase I—Improving Accuracy, 2012, at
https://www.nap.edu/catalog/13138/geographic-adjustment-in-medicare-payment-phase-i-improving-accuracy.
Adjusting Medicare Hospital Payments for
Geographic Variation in Wages
As noted, the Medicare IPPS payment is adjusted for numerous factors, including one that reflects
geographic wage differences. (Figure A-1 il ustrates the full range of IPPS adjustments.) The
IPPS is composed of two payments: (1) an operating base payment and (2) a capital base
payment. Both payments are adjusted for local-area labor costs, a patient’s clinical condition, and
other factors.12 The following sections address how the wage index adjusts the operating payment
portion of the IPPS payment.
Key Medicare Wage Index Terms
Average Hourly Wage: For a labor market area, the average hourly wage is the total wage costs divided by the
total hours for al hospitals in the geographic area. A national average hourly wage is the total wage costs divided
by the total hours for al hospitals in the United States (i.e., 50 states, District of Columbia, and Puerto Rico).
Base Payment: The Medicare hospital inpatient prospective payment system, or IPPS, base payment is the
standard payment rate set by the Centers for Medicare & Medicaid Services (CMS) for a hospital inpatient stay.
(IPPS is also defined below) There are two components of the base payment: one covers a hospital’s operating
costs, and the other covers capital costs. The amount of each base payment component is the same national y;
each component of the base payment is based on CMS estimates of the expected cost of providing hospital
services to a Medicare beneficiary during an inpatient stay.
Budget Neutral: The requirement that net Medicare spending for inpatient hospital services does not increase
due to increased Medicare payment rates to some hospitals. Payment increases to some hospitals must be “offset”
by proportional Medicare payment decreases to other hospitals.

12 For FY2021, the operating base rate of $5,961.19 assumes a full FY2021 payment update based on a hospital that
submitted quality data and is a meaningful EHR user. T he capital base rate for FY2021 is $466.22.
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Capital Base Payment: The IPPS capital base payment is the part of the Medicare inpatient prospective payment
system (IPPS) base payment for each inpatient stay that covers a hospital’s capital-related costs. These costs
include depreciation, interest, rent, and property-related insurance and taxes.
Geographically Adjusted Base Payment: The geographical y adjusted base payment is the payment amount
derived after the base payment has been adjusted by the wage index. CMS also terms this payment t he market
adjusted payment, referring to adjustments determined by the geographic labor market in which a hospital is
located or to which a hospital reclassifies.
Hospital Wage Index: As required by Social Security Act §1886(d)(3)(E), the hospital wage index is a Medicare
IPPS payment adjustment designed by CMS to reflect “the relative hospital wage level in a geographic area of a
hospital compared to the national average hospital wage level.”a
Inpatient Prospective Payment System: The IPPS is a Medicare payment method under which hospitals are
paid a prospectively determined, fixed payment amount for each discharge of a Medicare beneficiary. The IPPS
payment is adjusted for various factors related to a hospital’s geographic location, a patient’s diagnosis and
associated procedures, and other factors for qualifying hospitals.
Labor Share of Base Payment: The labor share is the portion of the operating base payment that is attributable
to labor and wage-related costs and therefore is adjusted by the wage index.
Nonlabor Share of Base Payment: The nonlabor share is the portion of the operating base payment that is not
attributable to labor and wage-related costs and therefore is not adjusted by the wage index.
Operating Base Payment: The operating base payment is the part of the Medicare IPPS base payment for each
inpatient stay that covers a hospital’s operating costs (primarily labor and supply costs).
Sources: CMS, Acute Care Hospital Inpatient Prospective Payment System, Medicare Learning Network Booklet,
March 2020; Medicare Payment Advisory Commission (MedPAC), Hospital Acute Inpatient Services Payment
System, October 2020.
a. CMS Wage Index web page, “Wage Index,” at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-
Payment/AcuteInpatientPPS/wageindex.
To apply labor costs to a hospital’s operating payment, Medicare multiplies the labor-related
share of the operating base payment by the wage index value assigned to the hospital’s
geographic area.13 The share of the operating base payment attributed to labor differs depending
on the hospital’s wage index value.14 The labor-related share of the operating base payment is
68.3% for hospitals with wage index values above the national average (i.e., a wage index value
>1.0) and 62% for hospitals with wage index values equal to or below the national average (i.e., a
wage index value ≤1.0).15 Figure 1 il ustrates these steps.

13 CMS, Acute Care Hospital Inpatient Prospective Payment System , Medicare Learning Network Booklet, March
2020, at https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/Downloads/
AcutePaymtSysfctsht.pdf.
14 In computing the capital portion of the IPPS, the wage index value is applied to the entire capital base payment.
15 42 C.F.R. §412.64(h) and (h)(2).
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Medicare Hospital Payments: Adjusting for Variation in Geographic Area Wages

Figure 1. Medicare Wage Index Adjustment to the Hospital Inpatient Prospective
Payment System (IPPS) Operating Base Payment

Source: Congressional Research Service (CRS), adapted from Medicare Payment Advisory Commission
(MedPAC), Hospital Acute Inpatient Services Payment System, October 2020.
Notes: COLA = cost-of-living adjustment. For hospitals located in Alaska and Hawai , the COLA adjustment is
applicable only to the nonlabor share of the IPPS payment.
Constructing the Hospital Wage Index
Each IPPS hospital is assigned a wage index value based on the geographic area in which it is
physical y located. The wage index value determination involves four steps:
1. Defining geographic labor market areas
2. Determining hospital wages
3. Adjusting hospital wages for occupational mix
4. Calculating geographic area wage index values
Each step is addressed below.
Defining Geographic Labor Market Areas
Labor costs vary between geographic areas. These costs are influenced by the cost of living, local
amenities, and labor productivity, among other factors. A labor market should include geographic
areas in which employers compete for the same workers and must pay similar local market wages
to attract employees.16
For the hospital wage index, the Centers for Medicare & Medicaid Services (CMS) uses core-
based statistical areas (CBSAs) to define geographic labor market areas.17 CBSAs are composed
of metropolitan statistical areas (MSAs) and micropolitan statistical areas, as established by the
Office of Management and Budget.18

16 Institute of Medicine, Geographic Adjustment in Medicare Payment: Phase I—Improving Accuracy, 2012, at
https://www.nap.edu/catalog/13138/geographic-adjustment -in-medicare-payment-phase-i-improving-accuracy.
Hereinafter, Institute of Medicine, Geographic Adjustm ent.
17 Between each decennial census, the Office of Management and Budget (OMB) periodically updates the metropolitan
statistical areas (MSAs). In setting the FY2021 wage index values, CMS incorporated the geographic delineation s
reflected in “OMB Bulletin No. 18–04,” released September 14, 2018, at https://www.whitehouse.gov/wp-content/
uploads/2018/09/Bulletin-18-04.pdf. OMB has more recent updates of its geographic delineations, such as “ OMB
Bulletin No. 20-01,” released March 6, 2020; CMS stated that it did not use this most recent OMB bulletin because the
bulletin was not released in time for developing the FY2021 rule.
18 An MSA and a micropolitan statistical area consist of a county or counties (or equivalent entities) associated with at
least one urbanized area of at least 50,000 population or of at least 10,000 but less than 50,000 population, respectively.
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Although CMS references CBSAs, in practice, CMS assigns a wage index value to each MSA in
a state.19 The non-MSAs, including micropolitan statistical areas, in a state receive a single wage
index value; these areas are considered rural.20 For FY2021, CMS recognizes 590 geographic
labor markets in the 50 states, the District of Columbia (DC), and Puerto Rico for purposes of the
wage index.21 Of these, 517 are MSAs and the remaining 73 are non-MSAs (i.e., single statewide
rural areas).22 A state, DC, or Puerto Rico may have multiple statewide rural area wage index
values. For example, there may be a wage index value for hospitals located in the state’s rural
area, a value for urban hospitals in the state that reclassify into the state’s rural area, and a value
for hospitals that reclassify into the state’s rural area from a neighboring state.
To il ustrate, Minnesota has eight CBSAs (the first eight items listed in Table 1, below). Any area
outside one of these CBSAs is considered the statewide rural area. Minnesota has three non-
CBSA statewide rural area wage index values, as indicated by the CBSA/area name “Minnesota”
and the CBSA number “24” in the table below. The statewide rural area wage index values for
Minnesota are for (1) within-state reclassification into Minnesota’s rural area, (2) reclassifications
into Minnesota’s rural area from Iowa, and (3) reclassifications into Minnesota’s rural area from
North Dakota.
Table 1. Example: Medicare Hospital Wage Index Geographic Areas
in Minnesota, FY2021
CBSA Number
CBSA/Area Name
Wage Index Value
33460
Minneapolis-St. Paul-Bloomington, MN-WI
1.0905
40340
Rochester, MN
1.0440
31860
Mankato, MN
1.0288
41060
St. Cloud, MN
1.0203
20260
Duluth, MN-WI
0.9916
29100
La Crosse-Onalaska, WI-MN
0.9142
22020
Fargo, ND-MN
0.9089
24220
Grand Forks, ND-MN
0.9089
24
Minnesota
0.9089
24
Minnesota (hospitals reclassified from Iowa)
0.8904
24
Minnesota (hospitals reclassified from North Dakota)
1.000a
Source: CRS analysis of Table 3, CMS, 85 Federal Register 58432, September 18, 2020, at https://www.cms.gov/
files/zip/tables-2-3-4a-and-4b-fy-2021-wage-index-tables-final-rule-and-correction-notice.zip.
Notes: CBSA = core-based statistical area; MN = Minnesota; ND = North Dakota; WI = Wisconsin.
a. North Dakota hospitals receive the frontier wage index adjustment, which sets the floor wage index value
at the national average wage index value (1.0000) for hospitals located in a qualifying state. As of FY2021,

Each also has adjacent counties that have a high degree of social and economic integration with the core, as measured
through commuting ties. See United States Census Bureau, “ Metropolitan and Micropolitan,” at
https://www.census.gov/programs-surveys/metro-micro/about.html.
19 CRS analysis of Medicare wage index data and personal communication with CMS staff.
20 A rural area classification offers hospitals additional pathways for receiving special rural designations that provide
certain payment benefits, such as sole community hospital or rural referral center status.
21 See T able 3 in CMS, 85 Federal Register 58432, September 18, 2020.
22 T he total number of statewide rural wage index areas exceeds the number of states, DC, and Puerto Rico because
each has multiple statewide rural area wage index values.
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four states’ hospitals qualify for the frontier adjustment: Montana, North Dakota, South Dakota, and
Wyoming.
Determining Hospital Wages
CMS uses hospital-reported data to calculate each hospital’s average hourly wages (AHWs). To
do this, CMS uses hospital data for paid hours and the cost (in dollars) of wages and benefits,
among other costs, for hospital employees and certain contract labor. (See Figure 2 for an
overview of wage index al owed and excluded costs.) These data include wages and hours
worked for occupational categories such as certain physicians and nonphysician practitioners,
pharmacists, plant operators, housekeepers, dietary workers, cafeteria workers, and those
performing laundry and linen service.23 Using these data, total wages are divided by total hours to
calculate each hospital’s AHW.
Figure 2. Hospital Labor Costs Used to Calculate the Wage Index

Source: CRS review and analysis of CMS, 85 Federal Register 32460, May 29, 2020, at https://www.govinfo.gov/
content/pkg/FR-2020-05-29/pdf/2020-10122.pdf.
Notes:
a. Such as Skil ed Nursing Facility services.
b. Certain Medicare certified providers, such as federal y qualified health centers and rural health clinics, can
be hospital-based if they are located in the same building or campus as a hospital and meet specified criteria.
c. Such as Critical Access Hospital services.
Adjusting Hospital Wages for Occupational Mix
A hospital’s AHW is intended to reflect the market-driven cost of labor faced by that hospital in
its specific geographic labor market. However, the AHW wage also reflects hospitals’ choices to
hire different combinations of health care professionals. For example, Hospital A and Hospital B
treat similar patients (i.e., patients with the same conditions, as reflected by the same Medicare
Severity-Diagnosis Related Groups, or MS-DRGs). Whereas Hospital A chooses to employ a
relatively higher proportion of registered nurses (RNs), Hospital B employs a relatively higher
proportion of licensed practical nurses (LPNs). (RN credentials and training are more advanced
than LPNs; therefore, salaries are typical y greater for RNs than for LPNs.) To eliminate the

23 Salaries and hours of physicians and certain nonphysician practitioners whose services are billable to Medicare Part
B are excluded from the wage index calculation. For example, certified nurse midwife, certified nurse anesthetist,
among other practitioners, are allowed to bill Medicare Part B for their services. Salaries and hours worked in
administrative or supervisory roles by physicians and nonphysician practitioners are included for the wage index.
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effect of these management hiring decisions on the wage index, a hospital’s AHW is adjusted up
or down based on occupational mix—the proportion of nursing and other occupations the hospital
employs relative to the proportion employed at hospitals national y. According to CMS, “the
varying labor costs associated with these choices reflect hospital management decisions rather
than geographic differences in the costs of labor.”24
The occupational mix adjustment (OMA) is applied only to the nursing occupational category—
RN, LPN, surgical technologist, nurse assistant, orderly, and medical assistant.25 Occupational
mix information for al other hospital occupations, including some physicians, is categorized as
“al other occupations,” and the OMA is not applied to these occupations.26
Table 2. Hospital Occupations Subject to the Occupational Mix Adjustment
Applicable Hospital Occupationsa
Non-applicable Hospital Occupations
Registered Nurses
Licensed Practical Nurses
Surgical Technologists
Al Other Occupations
Nursing Assistants
Orderlies
Medical Assistants
Source: CMS, Medicare Wage Index Occupational Mix Survey, “2019 Occupational Mix Survey Hospital
Reporting Form CMS-10079 for the Wage Index Beginning FY2022,” at https://www.cms.gov/medicaremedica re-
fee-service-paymentacuteinpatientppswage-index-files/2019-occupational-mix-survey-hospital-reporting-form-
cms-10079-wage-index-beginning-fy-2022.
Note:
a. These hospital occupations are col ectively the “nursing” occupational category. Only the nursing
occupational category is subject to the Occupational Mix Adjustment.
The OMA reduces the total wages of the nursing occupational category for hospitals with a higher
nursing skil mix than the national average and increases the total wages of the nursing
occupational category for hospitals with a lower skil mix than the national average. This exercise
determines the occupational y adjusted wages for each hospital.
Medicare collects data used to calculate the OMA through a survey of hospitals every three
years.27 The occupational mix survey conducted in 2016 is used to calculate the OMA of IPPS
payments for hospital patient discharges in FY2019-FY2021. CMS is currently analyzing the
2019 survey data, which it is to use to apply the OMA for Medicare IPPS payments in FY2022-
FY2024.

24 CMS, 85 Federal Register 58432, September 18, 2020.
25 CMS, “Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-
T erm Care Hospital Prospective Payment System and FY2012 Rates; Hospitals’ FT E Resident Caps for Graduate
Medical Education Payment; Final Rule,” 76 Federal Register 51475, August 18, 2011, at https://www.gpo.gov/fdsys/
pkg/FR-2011-08-18/pdf/2011-19719.pdf (see p. 51583). Hereinafter, CMS, 76 Federal Register 51475.
26 As noted earlier, only physicians in administrative or supervisory roles are included in the wage index.
27 42 U.S.C. §1395ww(d)(3)(E)(i).
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Medicare Hospital Payments: Adjusting for Variation in Geographic Area Wages

Calculating Geographic Area Wage Index Values
After adjusting hospital wages for occupational mix, CMS aggregates the hospital data to
calculate the wage index value for each geographic area. The Institute of Medicine (now the
National Academies of Sciences, Engineering, and Medicine, or NASEM) defines an index as “A
statistic that is designed to compare how the price for a defined group of goods and services
varies as a whole over time or between geographic areas compared with an average [emphasis
added]. This is distinct from a cost index, which measures variation in actual expenditures, such
as wages and benefits.”28
Using the wage data reported by hospitals, including occupational mix information, CMS
calculates each geographic area’s AHW and a national AHW. A geographic area’s AHW is equal
to the occupation-adjusted wages of al hospitals in the area divided by the total number of labor
hours of al hospitals in the area. The national AHW is equal to the total adjusted wages for IPPS
hospitals in the 50 states, DC, and Puerto Rico divided by the total labor hours for these hospitals.
CMS then uses these figures—the geographic area AHW and the national AHW—to calculate
each geographic area’s wage index value. The wage index value for a geographic area is the
AHW of the geographic area divided by the national AHW, as il ustrated in Figure 3.
Figure 3. Medicare IPPS Wage Index Calculation

Source: CRS.
A wage index value of 1.0 represents the national AHW. Therefore, geographic areas with an
AHW higher than the national average wil have a wage index value above 1.0; areas with an
AHW lower than the national average wil have a wage index value below 1.0. CMS publishes
the wage index values for each geographic area and for individual hospitals with the annual
hospital IPPS payment update final rule.29 Wage index values, as wel as the IPPS base rate and
other IPPS payment adjustments, change annual y.
Wage Index Effect on Medicare Payment
Figure 4, below, il ustrates how variation in the wage index value across geographic areas affects
the Medicare IPPS payment. As noted, for areas with a wage index value greater than 1.0 (the
national average wage index value), 68.3% of the base payment (or $4,653.91, given the FY2021
operating base payment amount of $5,961.19) is adjusted by the wage index.30 Las Vegas, NV, is
an example of an area whose wage index value is greater than 1.0—it is 1.1430. For areas with

28 Institute of Medicine, Geographic Adjustment. See Glossary, p. XXV.
29 For example, see CMS, 85 Federal Register 58432, September 18, 2020. Wage index data are generally contained in
T ables 2, 3, and 4 at the CMS “ IPPS Final Rule Home Page.” For example, the FY2021 wage index data are at
https://www.cms.gov/medicare/acute-inpatient -pps/fy-2021-ipps-final-rule-home-page.
30 T he 68.3% is the labor share of the IPPS operating base payment.
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Medicare Hospital Payments: Adjusting for Variation in Geographic Area Wages

wage index values that are equal to or less than 1.0, 62% (or $3,186.27 in FY2021) of the base
payment is adjusted by the wage index. Peoria, IL, which has a wage index value of 0.8621, is
one example of an area that has a wage index value that is equal to or less than 1.0. Rural Kansas
(i.e., the non-MSA areas), with a wage index value of 0.7709, is another such example.
Figure 4 il ustrates how variation in the wage index value affects the Medicare IPPS payment in
three geographic areas—Las Vegas, Peoria, and rural Kansas. In the examples included, the IPPS
operating base rate is $5,961.19. The higher wage index value in Las Vegas results in a higher
Medicare IPPS payment—not withstanding al other Medicare IPPS adjustments il ustrated in
Appendix A—than in either Peoria or rural Kansas. In other words, although al geographic areas
start out with the same IPPS base payment amount, the wage index adjustment effectively varies
IPPS payments across geographic areas. The variation reflects the difference in wages across
these areas.
The same steps apply to the other two examples il ustrated in Figure 4. The labor share that is
subject to the wage index adjustment changes depending on whether the wage index is greater
than or less than/equal to 1.0 (refer to Figure 1). In the examples in Figure 4, the geographical y
adjusted (i.e., wage index-adjusted) IPPS base payments differ—ranging from a low of $5,114.45
to a high of $6,543.41—due to the application of the different wage index values and applicable
percentage of the labor-related portion subject to the adjustment.
Figure 4. Effect of the Wage Index on Medicare IPPS Operating Base Payment in
Three Geographic Areas

Source: CRS analysis of Tables 2, 3, 4A, and 4B in CMS, 85 Federal Register 58432, September 18, 2020, at
https://www.cms.gov/medicare/acute-inpatient-pps/fy-2021-ipps-final-rule-home-page#Tables.
Notes: CBSA = core-based statistical area; IL = Il inois; IPPS = inpatient prospective payment system; NV =
Nevada; WI = wage index.
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Wage Index Geographic Reclassifications and
Adjustments
As noted, a hospital is assigned the wage index value of the geographic area in which it is
physical y located. However, since the implementation of the IPPS, Congress has created options
for qualifying hospitals to obtain wage index values different from the value assigned to the
geographic area in which the hospital is physical y located. These options involve reclassifying a
hospital into a neighboring geographic area or adjusting a hospital’s wage index value. Congress
has established these exceptions to address concerns about the wage index; for example, some
hospital industry representatives have suggested these reclassifications and adjustments are
necessary to ensure hospitals receive fair compensation under the current wage index formula.31
Despite this, an American Hospital Association (AHA) Medicare Area Wage Index Task Force
also acknowledged concerns with both the current wage index and reclassifications.32 (See
Appendix B for a legislative history of the hospital wage index.)
Qualifying hospitals may use these congressional y established exceptions to change or receive an
adjustment to their wage index values. (See the hospital wage index reclassifications and
adjustments listed in Table 3.)33 General y, these exceptions permit eligible hospitals to reclassify
into a different geographic area—usual y to a neighboring area—or to adjust their wage index
values. For example, a qualifying hospital may receive a wage index value different from the
wage index corresponding to the geographic area in which it is physical y located through a
Medicare Geographic Classification Review Board (MGCRB) reclassification.34 The MGCRB
al ows a hospital three reclassifications:35
1. Rural to urban
2. Rural to rural
3. Urban to urban
To qualify for MGCRB reclassification, a hospital must have an AHW similar to the geographic
area to which it seeks reclassification and be proximately located to that area. Proximity is
determined either by the distance from the area (i.e., no more than 15 miles for an urban hospital
and no more than 35 miles for a rural hospital) or by having at least 50% of the hospital’s
employees reside in the area.36 Figure 5 il ustrates an example of each of the three types of
MGCRB reclassifications.
The first example in Figure 5 il ustrates an MGCRB rural-to-urban reclassification. A hospital
geographical y located in rural Rio Arriba County, NM, reclassified into the Santa Fe, NM, urban
(MSA) area. The reclassification resulted in the hospital obtaining a new, higher wage index—
0.8845 instead of 0.8670. The second example il ustrates an MGCRB rural-to-rural
reclassification. In this case, a hospital geographical y located in rural Franklin County, AL, along

31 American Hospital Association (AHA), “Letter to Centers for Medicare & Medicaid Services,” April 20, 2011, at
http://www.aha.org/advocacy-issues/letter/2011/110420-cl-wageindexrep.pdf.
32 See slides by AHA, Medicare Area Wage Index T ask Force, 2013, at https://www.ahe.org/system/files/2018-04/
13juneawicallslides.pdf.
33 CMS, 76 Federal Register 51475.
34 A qualifying individual hospital or a group of hospitals may reclassify through the Medicare Geographic
Classification Review Board.
35 42 C.F.R. §412.230(a)(1).
36 42 C.F.R. §412.230(b).
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the Alabama-Mississippi state line, reclassified to the Mississippi rural area. The reclassification
resulted in an increase in wage index for this hospital from 0.6671 to 0.7902. The third example
in Figure 5 is an MGCRB urban-to-urban reclassification. In this example, a hospital
geographical y located in the Akron, OH, urban (MSA) area reclassified into the neighboring
Cleveland-Elyria, OH, urban (MSA) area, resulting in a wage index change from 0.8079 to
0.8594.
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Figure 5. Examples of Medicare MGCRB Reclassifications
(rural-urban, rural-rural, and urban-urban reclassifications, FY2021)

Source: CRS analysis of Table 3: “Wage Index Table by CBSA—FY2021” in CMS, 85 Federal Register 58432,
September 18, 2020, at https://www.cms.gov/files/zip/tables-2-3-4a-and-4b-fy-2021-wage-index-tables-final-rule-
and-correction-notice.zip.
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Notes: AL = Alabama; CBSA = core-based statistical area; MGCRB = Medicare Geographic Classification
Review Board; MS = Mississippi; MSA = metropolitan statistical area; WI = wage index.
Although most reclassifications are through the MGCRB, there are other reclassification methods
for qualified hospitals.37 For example, a hospital may choose to receive an out-commuting
adjustment based on the percentage of hospital-employed residents of the hospital’s county that
commute to work in a higher wage index area. Another example is the rural floor adjustment,
which sets the wage index value of certain urban hospitals at no less than the state’s rural wage
index value. These and other wage index reclassification and adjustment methods are described in
Table 3.
Most wage index reclassifications are implemented in a budget-neutral manner—general y
meaning the IPPS payment to some or al IPPS hospitals is reduced to “offset” an increase in the
wage index of hospitals that have reclassified.38 This is done so the aggregate amount of Medicare
IPPS spending is not greater than it otherwise would be if hospitals did not reclassify. This means
some or al hospitals pay for the increase in Medicare payments to those hospitals that have a
reclassification.39 CMS applied a budget-neutrality factor of 0.986583 to the IPPS base rate of al
hospitals to offset MGCRB, rural-to-urban, and urban-to-rural reclassifications and a budget-
neutrality factor of 0.993433 to the wage index to offset for the rural floor adjustment.40
Reclassifications and related budget-neutrality adjustments affect hospitals differently. For
example, MGCRB reclassifications and related budget neutrality is expected to result in a -0.1%
IPPS payment reduction for urban hospitals and a 1.1% payment increase for rural hospitals in
FY2021.41 Table 3 contains a summary of wage index reclassifications and adjustments.

37 Not all wage index reclassifications are mutually exclusive. T hese are addressed briefly in section “ Concerns About
the Hospital Wage Index.”
38 CMS applies budget neutrality to IPPS payment adjustments other than wage index reclassifications. For example, to
offset recalibration of the MS-DRGs.
39 AHA, “Wage Index Chartpack” November 2011, at https://www.aha.org/system/files/content/11/11nov-
wgindexchartpk.pdf. AHA estimated that approximately 1% of total IPPS payments, or $633 million, in FY2012 were
redistributed due to wage index reclassification budget neutrality. See slide 16. T his is the most recent publicly
available estimate of the dollar effect of wage index reclassification budget -neutrality policy.
40 CMS, 76 Federal Register 51475, see table “Summary of FY2021 Budget Neutrality Factors,” p. 59034.
41 CMS, 85 Federal Register 58432, see “T able I – Impact Analysis of Changes to the IPPS for Operating Costs for
FY2021,” p. 59065, for additional information about the payment effects of other FY2021 IPPS payment policies,
including other reclassifications and their respective budget neutrality factors.
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Table 3. Medicare IPPS Hospital Wage Index Reclassifications and Adjustments
Number
(Percentage)
of IPPS
Hospitals with
Wage Index
Wage Index
Effect on
Reclassification
Reclassification
Hospital
Budget
or Adjustment
or Adjustment
Wage Index
Eligibility
Duration
Neutral?
in FY2021a
MGCRBb
Reclassifies a
Hospital (or
3 years after
Yes
906 (26.4%)
hospital (or
group of al
approval
group of
hospitals in a
hospitals) into a
county) meet
different
specified
(general y
requirements
higher) wage
related to
index area
geographic
proximity and
AHW relative
to another
geographic area
Out-Commuting
Increases a
At least 10% of
Assessed
No
245 (7.1%)
Adjustmentc
hospital’s wage
a county’s
annual y and
index value via a hospital-
assigned values
county-based
employed
are fixed for 3
add-on payment
residents
years periods
determined by
commute to
blending the
work in higher
assigned wage
wage index
index value for
areas. The
hospitals in a
hospital in a
county with the
qualifying
higher wage
county cannot
index value(s) of also hold
a nearby area(s)
another type of
by the
reclassification
proportion of
(i.e., MGCRB,
hospital
or rural to
workers who
urban, or urban
commute to
to rural both
those higher
are addressed
wage index
later in this
area(s)
table)
Rural Floord
Increases urban
An urban area’s
CMS publishes
Yes
285 (8.3%)
area’s wage
wage index is
rural floor
index value so it
less than the
values annual y
is not less than
state’s rural
the state’s rural
area wage index
area’s wage
index value
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Number
(Percentage)
of IPPS
Hospitals with
Wage Index
Wage Index
Effect on
Reclassification
Reclassification
Hospital
Budget
or Adjustment
or Adjustment
Wage Index
Eligibility
Duration
Neutral?
in FY2021a
Rural to Urbane
Reclassifies
Substantial
CMS updates
Yes
64 (1.9%)
hospital from a
commuting of
periodical y
rural wage
workers
using revised
index area to a
(hospital and
OMB
higher urban
nonhospital
geographic
wage index area
employees)
delineations and
between a
U.S. Census
hospital’s
Bureau
county and
commuting data
adjacent urban
area(s)
Urban to Ruralf
Reclassifies
Hospital would
Until canceled
Yes
466 (13.6%)
hospital from an qualify, but for
by the hospital
urban wage
its urban
or the hospital’s
index area to its
location, as a
eligibility
state’s rural
rural referral
changes
area
center or a sole
community
hospital; or the
hospital is
deemed by state
law or
regulation to be
rural; or is
located in a
rural RUCA
census tractg
Frontierh
Sets a wage
At least 50% of
CMS reassesses
No
44 (1.3%)
index floor of
the state’s
periodical y
1.0 (the national
counties have a
average wage
population
index) for
density of less
hospitals
than six persons
located in a
per square mile
qualifying state
Source: CRS analysis of Table 2-Final Case Mix Index and Wage Index Table by CMS Certification Number
(CCN), CMS, 85 Federal Register 58432, September 18, 2020, at https://www.cms.gov/files/zip/fy-2021-ipps-fr-
tables-2-3-4a-4b.zip,.
Notes: AHW = average hourly wage; CMS = Centers for Medicare & Medicaid Services; IPPS = inpatient
prospective payment system; MGCRB = Medicare Geographic Classification Review Board; OMB = Office of
Management and Budget; RUCA = Rural-Urban Commuting Area. Some reclassifications are not mutual y
exclusive. For example, a hospital may have two reclassifications simultaneously—an urban-to-rural
reclassification and an MGCRB reclassification to an urban area.
a. N = 3,435, from Table 2-Final Case Mix Index and Wage Index Table by CCN - FY2021, CMS, 85 Federal
Register 58432, September 18, 2020, at https://www.cms.gov/files/zip/fy-2021-ipps-fr-tables-2-3-4a-4b.zip.
This column contains figures for FY2021; FY2021 is used to il ustrate the scope of reclassifications in a given
year. These figures may fluctuate from year to year.
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b. MGCRB: Process and eligibility criteria from 42 C.F.R. §412.230-412.280. The proximity requirement for
MGCRB reclassification is waived for rural referral centers and sole community hospitals (special payment
designations under Medicare IPPS for qualified hospitals that modify these hospitals’ IPPS base payment
rates). MGCRB is located in statute at 42 U.S.C. §1395ww(d)(10).
c. Out-commuting adjustment: Process and eligibility criteria from 42 C.F.R. §412.64(i). Out-migration
adjustment is located in statute at 42 U.S.C. §1395ww(d)(13).
d. Rural floor: Process and eligibility criteria from CMS, “Medicare Program; Hospital Inpatient Prospective
Payment Systems for Acute Care Hospitals and the Long- Term Care Hospital Prospective Payment System
and Proposed Policy Changes and Fiscal Year 2018 Rates; Quality Reporting Requirements for Specific
Providers; Medicare and Medicaid Electronic Health Record (EHR) Incentive Program Requirements for
Eligible Hospitals, Critical Access Hospitals, and Eligible Professionals; Provider-Based Status of Indian
Health Service and Tribal Facilities and Organizations; Costs Reporting and Provider Requirements;
Agreement Termination Notices,” 82 Federal Register 19796, April 28, 2018. Rural floor is located in statute
at 42 U.S.C. §1395ww Note – Floor on Area Wage Index. Previously enacted provisions at 42 U.S.C.
§1395ww(d)(8)(C)(i i) and (iv) provide duplicative wage index floors for certain hospitals though are
technical y separate from the rural floor.
e. Rural-to-urban reclassification: Process and eligibility criteria from 42 C.F.R. §412.64(b)(3). Rural-to-
urban reclassification is located in statute at 42 U.S.C. §1395ww(d)(8)(B).
f.
Urban-to-rural reclassification: Process and eligibility criteria from 42 C.F.R. §412.103. Urban-to-rural
reclassification is located in statute at 42 U.S.C. §1395ww(d)(8)(E).
g. A Rural-Urban Commuting Area, or RUCA, is developed by the U.S. Department of Agriculture,
Economic Research Service.
h. Frontier: Process and eligibility criteria from 42 C.F.R. §412.64(m). According to CMS, Montana, North
Dakota, South Dakota, and Wyoming hospitals are receiving frontier adjustments in FY2021. Nevada also
qualifies as a frontier state in FY2021; however, its hospitals currently receive a wage index greater than 1.0.
The frontier adjustment is located in statute at 42 U.S.C. §1395ww(d)(3)(E).
Reclassification Hold-Harmless Policies
Hospitals reclassifying in and out of geographic areas can change the AHW of those areas (i.e.,
the numerator in Figure 3). Statute requires the HHS Secretary to mitigate the effect of certain
reclassifications on geographic areas’ wage indexes.42 In addition to statutory requirements, CMS
administratively applies additional policies.43 Collectively, the statutory and administrative
actions are referred to as hold-harmless policies. Applicable hold-harmless policies typical y are
based on (1) the effect a reclassification has on a geographic area (i.e., the originating/geographic
area or the destination/reclassified area), (2) the magnitude of the effect, or (3) the type of
reclassification. The applicable hold-harmless policies are il ustrated in Table 4, below.

42 42 U.S.C. §1395ww(d)(8)(C).
43 CMS, 76 Federal Register 51475.
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Table 4. Reclassification Hold-Harmless Policies
Effect/Type of Reclassification
Hold-Harmless Policy
Statutory Policies
If including the wage data of reclassified hospitals would
Wage index of al hospitals—those reclassified into and
reduce the wage index for a[n urban] destination area by
those physical y located in the destination geographic
≤1%
area—is the wage index of the original hospitals.
If including the wage data of reclassified hospitals would
Wage index differs for the reclassified hospitals and the
reduce the wage index for a[n urban] destination area by
hospitals located in the destination geographic area. For
>1%
a reclassified hospital, the wage index is a blend of (1) its
geographic wage index and (2) the reclassified wage
index of the destination geographic area. The hospitals
physical y located in the destination geographic area
maintain their wage index without adjusting/including
the reclassified hospital’s wage index.
If including the wage data of reclassified hospitals would
Wage index of al hospitals in the destination area—
increase the wage index for an urban destination area
hospitals physical y located in the area and those
reclassified into the area—is a blend of the two
(originating and destination) area wage indexes.
If excluding the wage data of reclassified rural hospitals
Wage index of the originating rural area is calculated by
would decrease the wage index of the
including the wage index of the reclassified hospitals as
originating/geographic rural area
if there had been no reclassification out of the rural
area.
Administrative Policies
For urban-to-urban reclassifications, regardless of the
Subject to the applicable statutory rules listed above,
effect
the wage index data of the reclassified hospitals are
included for calculating the wage index of both the
destination and the originating/geographic areas.
For reclassifications to a rural area
Wage data of reclassified hospitals are included for
calculating the wage index of both the rural destination
area (unless doing so reduces the wage index of the
rural area) and the urban originating/geographic area.a
Source: CRS analysis of 42 U.S.C. §§1395ww(d)(8)(C), 1395ww(d)(8)(B), 1395ww(d)(10); CMS, 76 Federal
Register 51476, August 18, 2011; and 84 Federal Register 42044.
a. CMS states that the effect of this policy is that
rural areas may receive a wage index based on the higher of: (1) Wage data from hospitals
geographical y located in the rural area; (2) wage data from hospitals geographical y located in
the rural area, but excluding al data associated with hospitals reclassifying out of the rural area
under §1886(d)(8)(B) [42 U.S.C. §1395ww(d)(8)(B)-rural to urban reclassification] or
§1886(d)(10) [42 U.S.C. §1395ww(d)(10)-MGCRB] of the Act; or (3) wage data associated with
hospitals geographical y located in the area plus al hospitals reclassified into the rural area.
Also, per CMS policy change effective beginning FY2020 (October 1, 2019), the wage data of an
urban hospital reclassified to a rural area are excluded for purposes of calculating the rural floor
wage index. The rural floor increases the urban area’s wage index value so it is not less than the
state’s rural area wage index. See Table 3 in this report for additional information about the rural
floor wage index.
The interaction of reclassifications, hold-harmless policies, and budget neutrality leads to a
combination of possible increases and decreases in Medicare payments for different hospitals. For
example, al hospitals are affected by the budget neutrality to offset payment increases due to
reclassifications and hold-harmless policies. Therefore, reclassifying and hold-harmless protected
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Medicare Hospital Payments: Adjusting for Variation in Geographic Area Wages

hospitals “receive a benefit and a detriment, but non-reclassifying, non-protected hospitals
receive only a detriment.”44
Concerns About the Hospital Wage Index
Stakeholders have raised a number of concerns about the hospital wage index. Some of these
concerns are summarized below.
 Labor Market Categorization. Geographic area delineations can define labor
markets too broadly, which can result in a single wage index value for hospitals
with different labor costs. Alternatively, labor markets can be set too narrowly,
resulting in different wage index values for hospitals with similar labor costs.45
 Wage Index Cliffs. The wage index formula can result in large differences in
wage index values in adjacent geographic areas. Hospitals on either side of a
geographic labor market area dividing line may have different wage index values,
even if the hospitals are relatively close to each other. For example, one study
found 152 cases of hospitals located within 10 miles of each other that had
greater than 0.10 differences in wage index values.46
 Volatility. A geographic area’s wage index value can fluctuate from year to year
due to circularity (addressed below) and other factors, creating financial
uncertainty and complexity for hospitals. These fluctuations may be especial y
pronounced in geographic areas with few hospitals.47 For example, a CMS-
commissioned analysis found that from one year to the next, wage index values
change more than 10% for 1% of hospitals and between 5% and 10% for 8% of
hospitals.48
 Circularity. The current system—built on hospital-only wage information—may
give hospitals “undue influence over their own wage indexes.”49 For example, a
hospital that moderated its wage increases could reduce the wage index for the
geographic area; which could pressure the hospital (and other hospitals in the
same geographic area) to further restrain labor costs.50 Conversely, a hospital that
has high labor costs may increase the wage index for its geographic area,
potential y creating a disincentive to control labor costs. This influence on an
area’s wage index is especial y evident in areas with few hospitals.

44 HHS, Office of Inspector General, Significant Vulnerabilities Exist in the Hospital Wage Index System for Medicare
Paym ents, A-01-17-00500, November 2018, p. 11, at https://oig.hhs.gov/oas/reports/region1/11700500.pdf.
45 Department of Health and Human Services (HHS), Report to Congress: Wage Index Reform , 2012, at
https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Downloads/Wage-Index-
Reform-Report -to-Congress-2012.zip.
46 Institute of Medicine, Geographic Adjustment.
47 AHA, Statement for the Record of the American Hospital Association for the Institute of Medicine, September 16,
2010, at http://www.aha.org/advocacy-issues/testimony/2010/100916-statement -wage-index.pdf.
48 T homas MaCurdy et al., Revision of Medicare Wage Index Final Report Part I, Acumen, LLC, April 2009. Based on
FY2005-FY2008 Medicare hospital cost report data that do not take into account reclassifications and other
adjustments to wage index values. Hereinafter, MaCurdy et al., Revision of Medicare Wage Index.
49 Institute of Medicine, Geographic Adjustment, pp. 50-51.
50 MedPAC, Report to Congress: Promoting Greater Efficiency in Medicare, June 2007, p. 130, at
http://www.medpac.gov/docs/default -source/reports/Jun07_EntireReport.pdf. Hereinafter, MedPAC, Report to
Congress, 2007.
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 Limited Labor Mix. The current OMA is based on differences across hospitals
in nursing occupational categories. The OMA does not account for differences in
skil levels of other hospital occupations. For example, non-nursing occupations,
including physicians—many of whom are now employed by hospitals—are
classified in an “Al Other Occupations” category.51
Although the reclassification and adjustment methods in Table 3 are intended to address many of
the concerns listed above, these methods have raised additional concerns. Some of these
additional issues are listed below.
 Over- and Undercompensating Hospitals. A Medicare Payment Advisory
Commission (MedPAC) study comparing the current Medicare wage index with
alternative methodologies concluded that hospitals that reclassify receive wage
index values in excess of what would accurately reflect true labor market costs.
Conversely, hospitals that do not reclassify are undercompensated by the current
wage index.52
 Administrative Complexity. Adjudicating and navigating the wage index
reclassifications, adjustments, and hold-harmless policies is time-consuming and
complex for CMS and hospitals.53
 Overlapping Exceptions. Wage index reclassifications and adjustments can
overlap, creating additional complexity. For example, Medicare al ows a hospital
to hold two reclassifications simultaneously—an urban-to-rural reclassification
and an MGCRB reclassification to an urban area. The urban-to-rural
reclassification permits a hospital to qualify for IPPS payment adjustments
available to rural hospitals. The MGCRB reclassification al ows the same
hospital to also reclassify to the higher-wage urban area for purposes of obtaining
a higher wage index value.54
 Nonintuitive Impacts on Medicare Payment. A dual reclassification as
described above can have nonintuitive impacts on wage index values and
Medicare payments. For example, the dual reclassification noted above permits a
hospital to be both rural and urban—rural for purposes of qualifying for certain
Medicare special rural payment adjustments and urban for purposes of obtaining
a higher urban wage index.55 CMS estimates that in FY2021, 378 (11%) of 3,435

51 For additional information about the occupational mix survey, see CMS, 85 Federal Register 58432, September 18,
2020 beginning on page 58762, and CMS, “ 2016 Occupational Mix Survey Hospital Reporting Form CMS-10079 for
the Wage Index beginning FY2019,” at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/
AcuteInpatientPPS/Wage-Index-Files-Items/2016-Occupational-Mix-Survey-Hospital-Reporting-Form-CMS-10079-
for-the-Wage-Index-Beginning-FY-2019.html.
52 MedPAC, Report to Congress, 2007, p. 133-135.
53 MedPAC, Report to Congress, 2007, p. 129.
54 In an interim final rule published in FY2016, CMS changed its regulations to allow this double reclassification. CMS
implemented this change to be consistent with decisions of the U.S. Court of Appeals for the Second and T hird Circuits
that held that hospitals redesignated as rural also may obtain an urban wage index. See CMS, “ Medicare Program;
T emporary Exception for Certain Severe Wound Discharges From Certain Long-T erm Care Hospitals Required by the
Consolidated Appropriations Act, 2016; Modification of Limitations on Redesignation by the Medicare Geographic
Classification Review Board,” 81 Federal Register 23428, April 21, 2016, at https://www.govinfo.gov/content/pkg/FR-
2016-04-21/pdf/2016-09219.pdf; or CMS guidance at https://www.cms.gov/Regulations-and-Guidance/Guidance/
T ransmittals/2017Downloads/R3885CP.pdf.
55 42 C.F.R. §412.230(a)(5)(ii), at https://www.gpo.gov/fdsys/granule/CFR-2011-title42-vol2/CFR-2011-title42-vol2-
sec412-230.
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IPPS hospitals hold dual urban-to-rural and either MGCRB reclassification or
rural-to-urban adjustment.
Notwithstanding concerns with reclassifications, in FY2012, the AHA calculated that
reclassifications resulted in an average percentage gain in hospitals’ wage index of 1.9% for the
out-commuting adjustment, 7.1% for rural floor, 7.3% for MGCRB, 10.1% for rural to urban, and
16.6% for frontier.56
Wage Index Reform
Selected Analyses and Recommendations
Congress and other key stakeholders have explored reforms to the Medicare hospital wage index
that aim to remove the need for reclassifications and adjustments and to create a wage index that
more accurately reflects hospitals’ underlying labor costs. Consensus around the various reforms
has not materialized. Many of the authoritative analyses and recommendations for reforming the
wage index were published between 2007 and 2012 and are briefly described below.
In 2007, MedPAC proposed to Congress a new source—the Bureau of Labor Statistics (BLS)—
for wage data to determine MSA and rural area wage indexes.57 MedPAC also recommended
further refining MSA and rural area wage information using more granular geographic units by
using county-level census data.58 Under this change, each county within an MSA and rural area
would have its own wage index value. Further, MedPAC proposed incorporating a “smoothing
technique” to eliminate large differences in wage index values between adjacent counties (i.e.,
wage cliffs).59 MedPAC also recommended using wage data from al employers of hospital-
related occupations, such as registered nurses working in skil ed nursing facilities or non-IPPS
hospitals, such as rehabilitation or psychiatric hospitals.60 MedPAC concluded these proposed
changes would decrease year-to-year wage index volatility and result in smal er differences in
wage index values between adjoining geographic areas.61
Following the MedPAC analysis, a CMS-commissioned study issued in 2009 concluded that
despite some limitations, BLS wage information is more accurate and reliable than the current
source of wage information.62 However, with respect to MedPAC’s proposal for smoothing
differences in wage index values between adjacent counties, a subsequent CMS-commissioned
study, issued in 2010, concluded that MedPAC’s methodology would not guarantee a more

56 AHA, “Wage Index Chartpack” November 2011 at https://www.aha.org/system/files/content/11/11nov-
wgindexchartpk.pdf. See slides 14 and 15.
57 MedPAC, Report to Congress, 2007, T able 6-3, p.134.
58 MedPAC proposes using county-level Census data to supplement, not replace, MSA-level and statewide rural area
data from the BLS.
59 MedPAC, Report to Congress, 2007, p.135.
60 As noted earlier in this report, t he Medicare wage index does not include data of health service providers that may be
similar to an IPPS hospital such as rehabilitation or psychiatric hospitals with which IPPS hospitals likely compete for
labor in a geographic labor market. See MedPAC, Report to Congress, 2007, p.132.
61 MedPAC, Report to Congress, June 2007, p. 144.
62 MaCurdy et al., Revision of Medicare Wage Index.
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accurate representation of a hospital labor market and likely would not reduce hospitals’ desires
to seek reclassifications.63
In 2012, an Institute of Medicine (now NASEM) study prepared for HHS and Congress supported
using BLS data but recommended continuing to use the wage index geographic unit at the MSA
level. The study suggested, much as the 2007 MedPAC study had, using wage data from a
broader array of health-related occupations beyond just hospitals. It also recommended adjusting
the wage index for health care workers’ commuting patterns.64
HHS submitted its own reform proposal to Congress in 2012, as mandated by the Patient
Protection and Affordable Care Act (P.L. 111-148, as amended). In the wage index reform
proposal, the HHS Secretary proposed using zip codes and census tracts rather than MSAs as the
geographic unit for the wage index labor markets. The plan also proposed creating a Commuting-
Based Wage Index (CBWI) centered on where hospital workers live instead of where hospitals
are located. The report concluded the CBWI method would reduce wage cliffs and more closely
reflect hospitals’ actual wages than the current CMS method or MedPAC’s recommended
approach.65
Although CMS has made technical changes to aspects of the hospital wage index over time, the
proposed reforms noted above have not been implemented. MedPAC, in its comments to CMS on
the FY2019 IPPS proposed rule, reiterated its recommendation from 2007 that Congress should
“repeal the current wage index system and give the Secretary the authority to create a new
system.”66 MedPAC continued to support using wage data from al employers, not just hospitals,
available through the BLS; adopting a smoothing technique to reduce large differences in wage
index values between adjacent geographic areas; and setting the geographic unit at the county
rather than MSA level, among other recommendations.67
More recently, the Office of Inspector General for the Department of Health and Human Services
(HHS-OIG) identified vulnerabilities in the current hospital wage reporting system. This analysis
found accuracy and completeness problems with hospital-reported wage data. These findings
reinforce concerns that current wage index data do not reflect local labor prices, which could lead
to less accurate wage indexes. The HHS-OIG recommended the HHS Secretary “revisit the plan
to comprehensively reform the hospital wage index system, including the previously researched
option of a commuting-based wage index.”68 The HHS-OIG also recommended other changes in
lieu of comprehensive reform, including seeking legislation that
 repeals the rural floor wage index adjustment;
 gives the HHS Secretary authority to penalize hospitals that submit inaccurate or
incomplete wage data in the absence of misrepresentation or falsification; and

63 MaCurdy et al., Revision of Medicare Wage Index.
64 Institute of Medicine, Geographic Adjustment.
65 HHS, Report to Congress: Plan to Reform the Medicare Wage Index, January 25, 2012, at https://www.cms.gov/
Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Downloads/Wage-Index-Reform-Report -to-
Congress-2012.zip.
66 Letter from Francis. J. Crosson, MedPAC chairman, to Seema Verma, CMS Administrator, “RE: File code CMS-
1694-P,” June 22, 2018, =p. 8, at http://www.medpac.gov/docs/default-source/publications/
06222018_medpac_2019_ipps_comment_sec.pdf?sfvrsn=0. Hereinafter, MedPAC letter, June 2018.
67 MedPAC letter, June 2018.
68 HHS, Office of Inspector General, Significant Vulnerabilities Exist in the Hospital Wage Index System for Medicare
Paym ents, A-01-17-00500, November 2018, p. 12, at https://oig.hhs.gov/oas/reports/region1/11700500.pdf.
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 repeals the hold-harmless provisions that allow CMS to calculate each area wage
index using the wage data of hospitals that reclassify into an area and of hospitals
that are physical y located in the area and have not reclassified out.
Administrative Policy to Address Wage Index Disparity
In lieu of comprehensive wage index reforms as discussed above—some of which would require
the enactment of legislation—beginning in FY2020, CMS implemented a change to address wage
index disparity.69 Specifical y, CMS temporarily increased the wage index values of IPPS
hospitals with wage index values in the lowest quartile. As a result, the lowest wage index value
increased from 0.3711 to 0.6083 between FY2019 and FY2020. The highest wage index value
remained the same in FY2020 as in FY2019, 1.9343.70 (See Figure 6 for an il ustration of the
high-low wage index values pre- and post-wage index disparity policy.) The intent of this
temporary policy was to narrow the difference between the highest and lowest wage indexes.
As noted earlier, CMS implements most wage index reclassifications and adjustments in a
budget-neutral manner. CMS implemented the temporary wage index disparity policy in such a
manner. This means CMS applied a 0.998835 budget-neutrality factor to the IPPS base payment
of al hospitals to offset increasing the wage index of hospitals in the bottom quartile of wage
index values.71

69 CMS, “Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-
T erm Care Hospital Prospective Payment System and Policy Changes and Fiscal Year 2020 Rates; Quality Reporting
Requirements for Specific Providers; Medicare and Medicaid Promoting Interoperability Programs Requirements for
Eligible Hospitals and Critical Access Hospitals,” 84 Federal Register 42044, August 16, 2019 (see p. 42326).
Hereinafter, CMS, 84 Federal Register 42044.
70 T he wage index disparity policy was implemented in a budget -neutral manner—CMS adjusted the IPPS base rate
payment applicable to all IPPS hospitals so that aggregate Medicare IPPS spending does not increase due to the wage
index disparity policy. CMS, 84 Federal Register 42044 (see p. 42331).
71 T he AHA wrote to CMS opposing budget neutrality for the temporary wage index disparity policy. See, AHA, Letter
to Seema Verma, CMS Administrator re “CMS–1716–P, Medicare Program: Hospital Inpatient Prospective Payment
Systems for Acute Care Hospitals and the Long T erm Care Hospital Prospective Payment System and Proposed Policy
Changes and Fiscal Year 2020 Rates; Proposed Quality Reporting Requirements for Specific Providers; Medicare and
Medicaid Promoting Interoperability Programs Proposed Requirements for Eligible Hospitals and Critical Access
Hospital: Proposed Rule (Vol. 84, No. 86), May 3, 2019,” June 24, 201 9 at https://www.aha.org/system/files/media/
file/2019/06/aha-comments-cms-inpatient-pps-fy-2020-proposed-rule-6-24-2019.pdf.
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Figure 6. Effect of the Wage Index Disparity Policy on Minimum and Maximum
Hospital Wage Index Values
(temporary policy ef ective for a minimum of four years, FY2020 through FY2023)

Source: CRS analysis of CMS, “Table 2: Case Mix Index and Wage Index Table by [CMS Certification Number]”
for each fiscal year. For FY2019 (Correction Notice), see https://www.cms.gov/Medicare/Medicare-Fee-for-
Service-Payment/AcuteInpatientPPS/Downloads/FY2019-CMS-1694-FR-Tables-2-3-4.zip. For FY2020 (Correction
Notice), see https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Downloads/
FY2020-FR-Tables-2-3-4.zip. For FY2021, see https://www.cms.gov/files/zip/tables-2-3-4a-and-4b-fy-2021-wage-
index-tables-final-rule-and-correction-notice.zip.
Notes: FY2019 is the year prior to implementing the temporary wage index disparity policy; FY2020 is the first
year of the temporary wage index disparity policy. The temporary wage index disparity policy is scheduled to be
in effect for four years, FY2020 through FY2023.
CMS states that this temporary policy—effective for a minimum of four years, FY2020 through
FY2023—is intended to give hospitals with a low wage index an opportunity to use the higher
Medicare payments to increase employee compensation. If hospitals do so, the higher wages
would be reflected in future hospital wage index reporting and subsequent CMS wage index
calculations and adjustments. As a result, the expectation is that, when the temporary policy
expires, any increases in hospital-paid wages wil be “baked in” to the wage index calculations
going forward. However, hospitals receiving increased IPPS payments resulting from the
temporary policy are not required to increase employee compensation; therefore, the long-term
effects of such a policy are yet to be determined.
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Appendix A. Medicare Inpatient Prospective
Payment System
Medicare pays for most hospital inpatient services furnished in short-term, acute-care hospitals
under the inpatient prospective payment system (IPPS).72 IPPS prospectively determines a fixed
payment amount for each discharge. It accounts for variation in local market conditions
(including wages), the patient’s diagnosis and associated procedures (often referred to as case
mix), and other factors for certain qualifying hospitals.73 (See Figure A-1.)
Medicare’s per discharge payment starts with a national base rate, which is adjusted by (1) a
wage index for the geographic area in which the hospital is located or to which the hospital has
been reclassified and (2) a case mix—the weight associated with the Medicare Severity-Diagnosis
Related Group (MS-DRG) to which the patient is assigned.74 This weight reflects the relative cost
of the average patient in that MS-DRG. The base rate is updated annual y for inflation.
Additional adjustments are made to the IPPS payment for qualifying hospitals. For example,
adjustments are made for extraordinarily costly patients (outliers), indirect costs incurred by
teaching hospitals for graduate medical education, and disproportionate share hospital payments
to those hospitals that serve a certain volume of low-income patients. Some hospitals receive an
adjustment to compensate for the higher incremental operating costs due to a low volume of
inpatients. Additional payments also may be made for a hospital’s use of qualified new medical
technologies.
IPPS payments also may be increased or reduced under certain Medicare quality-related programs
based on a hospital’s performance on quality metrics. These quality-related programs include the
Hospital Readmissions Reduction Program, the Hospital-Acquired Condition Reduction Program,
and the Hospital Value-Based Purchasing Program.
Certain hospitals or distinct hospital units are exempt from the IPPS and paid under an alternative
method. Exempt hospitals or hospital units include (1) inpatient rehabilitation facilities; (2) long-
term care hospitals; (3) psychiatric facilities, including hospitals and distinct part units; (4)
children’s hospitals; (5) cancer hospitals; and (6) critical access hospitals.75

72 As distinguished from, for example, long-term care hospitals, psychiatric hospitals, or pediatric/children’s hospitals.
73 Prior to the inpatient prospective payment system (IPPS), Medicare paid for hospital inpatient services based on a
hospital’s reasonable costs, subject to certain limits.
74 T he IPPS base rate is calculated using costs reported by hospitals on the Medicare cost report for the cost reporting
period that ended during the period October 1, 1982, through September 30, 1983, updated annually. Under the IPPS, a
hospital receives two payments, one for operating expenses and another for capital expenses. T his report describes the
IPPS operating payment only. For more on Medicare Severity-Diagnosis Related Groups (MS-DRGs), see footnote 9.
75 Additionally, other hospitals that are exempt from the IPPS and are reimbursed by Medicare under different methods
include hospitals in Maryland, hospitals in U.S. territories (with the exception of Puerto Rico), and hospitals of the
Indian Health Service.
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Figure A-1. Medicare Hospital Inpatient Prospective Payment System (IPPS) for
Operating Costs

Sources: Congressional Research Service (CRS), adapted from the Centers for Medicare & Medicaid Services
(CMS), Medicare Learning Network, Acute Care Hospital Inpatient Prospective Payment System, March 2020, at
https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/Downloads/
AcutePaymtSysfctsht.pdf; and Medicare Payment Advisory Commission (MedPAC), Hospital Acute Inpatient
Services Payment System, October 2020, at http://www.medpac.gov/-documents-/payment-basics.
Notes: For il ustrative purposes, this schematic addresses the operating portion of the IPPS payment; it does not
address the capital IPPS payment. COLA = cost-of-living adjustment (applicable to the nonlabor portion of the
IPPS base payment for IPPS hospitals in Alaska and Hawai ); LOS = length of stay; MS-DRG = Medicare Severity-
Diagnosis Related Group.
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Appendix B. Legislative History of the Medicare
Hospital Wage Index
Table B-1. Legislative History of the Medicare Hospital Wage Index
Public Law
Summary
Social Security Amendments of 1983 (P.L.
Section 601 established the hospital IPPS, including a wage index that
98-21)
adjusts the standardized reimbursement amounts for area
differences in hospital wage levels “reflecting the relative hospital
wage level in the geographic area of the hospital compared to the
national average hospital wage level.” Required the HHS Secretary
to determine, and periodical y adjust, the proportion of a hospital’s
costs that are attributable to wages and wage-related costs.
Deficit Reduction Act of 1984 (P.L. 98-
Section 2316 directed the HHS Secretary to develop a new wage
369)
index that accounts for ful - and part-time wages.
Consolidated Omnibus Budget
Section 9103 delayed implementation of the wage index to hospital
Reconciliation Act of 1985 (P.L. 99-272)
discharges on or after May 1, 1986.
Omnibus Budget Reconciliation Act of
Section 4005(a) established “Lugar counties” which are counties
1987 (P.L. 100-203)
adjacent to MSAs meeting certain worker commuting patterns that
are deemed urban.a
Technical and Miscel aneous Revenue Act
Section 8403(a) directed the wage index for Lugar counties to be
of 1988 (P.L. 100-647)
calculated separately from the adjacent urban area to avoid a
reduction of the urban area’s wage index values; conversely, it
directed the wage index for the rural area(s) to be calculated as if
the Lugar hospitals were not Lugar to avoid a reduction of the rural
area’s wage index value.
Omnibus Budget Reconciliation Act of
Section 6003(h) created the MGCRB, specified the general process
1989 (P.L. 101-239)
for consideration of reclassifications by the MGCRB, and required
the HHS Secretary to develop guidelines for rendering MGCRB
decisions. Limited the negative effect from reclassifications to 1% or
less in the geographic area to and from which a facility reclassifies
and specified that reclassification may not result in a reduction to
any county’s wage index to a level below the rural wage index of
that state. Required that wage indexes be updated annual y beginning
FY1994.
Omnibus Budget Reconciliation Act of
Section 4002(h) further limited the effect of redesignation on wage
1990 (P.L. 101-508)
index values for non-redesignated facilities in urban areas.
Omnibus Budget Reconciliation Act of
Section 13501(b) prevented a reduction in the wage index for an
1993 (P.L. 103-66)
urban area where the urban area’s index value is below the state
rural wage index value.
Balanced Budget Act of 1997 (P.L. 105-33) Section 4410 established a wage index floor that is not less than the
statewide rural wage index value for hospitals located in urban areas.
Balanced Budget Refinement Act of 1999
Section 401 permitted an urban hospital to be treated as being
(P.L. 106-113)
located in a rural area (i.e., urban-to-rural reclassification).
Medicare, Medicaid, and SCHIP Benefits
Section 304 mandated occupational mix data col ection and
Improvement and Protection Act of 2000
implementation of an occupational mix adjustment effective October
(P.L. 106-554)
1, 2004. Established three-year duration for MGCRB
reclassifications. Al owed a statewide entity to apply to have al
geographic areas in the state be classified as a single geographic area.
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Public Law
Summary
Medicare Prescription Drug,
Section 505 established an “out-migration” adjustment. Section 508
Improvement, and Modernization Act of
created a one-time appeals process for MGCRB decisions for
2003 (MMA; P.L. 108-173)
hospitals that do not qualify for a reclassification based on distance
or commuting patterns; Section 508 reclassifications al ow the
temporary reclassification of a hospital from a low Medicare hospital
wage index geographic area, for reimbursement purposes, to a
nearby geographic area with a higher Medicare hospital wage index,
so that the Section 508 hospital wil receive a higher Medicare
inpatient hospital payment rate.
Tax Relief and Health Care Act of 2006
Section 106 extended Section 508 hospital reclassifications.
(TRHCA; P.L. 109-432)
Mandated MedPAC study of alternative wage indexes. Directed the
HHS Secretary to propose revisions to the wage index, taking into
account the mandated MedPAC study.
Medicare, Medicaid, and SCHIP Extension
Section 117 amended the TRHCA to extend certain Medicare
Act of 2007 (P.L. 110-173)
hospital wage index reclassifications through FY2008. Directed the
HHS Secretary to extend for discharges occurring through
September 30, 2008, the special exception reclassifications made
under Medicare and contained in the final rule promulgated by the
HHS Secretary in the Federal Register on August 11, 2004. Amended
the MMA to provide, for purposes of the reclassification of a group
of hospitals in a geographic area applicable to discharges occurring
during FY2008, that a hospital reclassified under such act shal not be
taken into account and shal not prevent the other hospitals in such
area from continuing such a group for such purposes. Directed the
HHS Secretary, in the case of certain IPPS hospitals, to apply a
certain higher wage index in specified circumstances.
Patient Protection and Affordable Care
Section 3137, as modified by Section 10317, amended the TRHCA,
Act of 2010 (P.L. 111-148)
as modified by other federal law, to extend Section 508 hospital
reclassifications until September 30, 2010, with a special rule for
FY2010. Directed the HHS Secretary to report to Congress a plan
to reform the hospital wage index system. Section 3141 applied the
budget-neutrality requirement associated with certain wage index
reclassifications and adjustments at the national level rather than at a
state-by-state level as proposed by CMS.
Medicare and Medicaid Extenders Act of
Section 102 amended the TRHCA, as modified by other federal law,
2010 (P.L. 111-309)
to extend Section 508 hospital reclassifications through FY2011.
Temporary Payrol Tax Cut Continuation
Section 302 amended the TRHCA, as modified by other federal law,
Act of 2011 (P.L. 112-78)
to extend Section 508 hospital reclassifications for two months,
through November 30, 2011.
Sources: Compiled by CRS from multiple sources, including MedPAC, Congress.gov, amendments to the United
States Code provided by the U.S. House of Representatives Office of the Law Revision Counsel, and previous
CRS reports. Table 1 of “Potential Refinements to Medicare’s Wage Indexes for Hospitals and Other Sectors,”
RTI International for MedPAC, June 2007, at http://www.medpac.gov/docs/default-source/contractor-reports/
potential-refinements-to-medicare-s-wage-indexes-for-hospitals-and-other-sectors.pdf?sfvrsn=0, was used as an
initial source.
Notes: This section summarizes Medicare wage index legislation enacted into law. Summaries highlight major
provisions; this is not a comprehensive list of al amendments. HHS = Department of Health and Human
Services; IPPS = inpatient prospective payment system; MedPAC = Medicare Payment Advisory Commission;
MGCRB = Medicare Geographic Classification Review Board; MSA = metropolitan statistical area.
a. “Lugar counties” applies to the rural-to-urban wage index reclassification summarized in Table 3 of this
report.

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Author Information

Marco A. Villagrana

Analyst in Health Care Financing

Acknowledgments
Steven Weiss made significant contributions to this report as part of a summer internship. Jamie
Hutchinson, Visual Information Specialist, and Jim Uzel, Geospatial Information Systems
Analyst, designed the figures. Michele Mal oy, Research Librarian, prepared the legislative
history in Appendix B. Isaac Nicchitta, Research Assistant, performed data analysis for Table 3.

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
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