Geographic Adjustment in Medicare Payment: Phase I: Improving Accuracy, Second Edition


Report at a Glance

  • Background on Medicare Payment (HTML)
  • Using Commuting Patterns to Smooth Boundaries in Labor Markets (HTML)
  • Comparisons of Data Sources (HTML)
  • Geographic Adjustment in Medicare Payment Infographic (SWF, HTML)
  • Labor Markets and Occupations (HTML)
  • Payment Areas (HTML)
  • Press Release (HTML)
  • Report Brief (PDF, HTML)

Geographic Adjustment in Medicare Payment, Phase I: Improving Accuracy, Second Edition expands on recommendations made in an earlier report for improving how the Medicare program calculates geographic practice cost indexes. The second edition makes four additional recommendations, which are detailed in Chapter 5, on methods to set the work adjustment, calculate labor expenses in the practice expense, and use cost share weights.  All of the recommendations contained in the first edition remain unchanged.

Medicare is the largest health insurer in the United States, providing coverage for 39 million people aged 65 and older and 8 million people with disabilities or end-stage renal disease. Although Medicare is a national program, it adjusts fee-for-service payments to hospitals, physicians, and other clinical practitioners according to the geographic locations in which they practice. This adjustment accounts for differences in the price of doing business that vary between urban and rural areas and by region. There are disagreements about how best to adjust payments based on geographic location. Among other issues, critics cite inconsistencies in the definitions of payment areas and labor markets, concerns about the appropriateness of data used to calculate adjustments, and lack of transparency of the methods for making the adjustments.

After the U.S. House of Representatives called for a study by the IOM in Section 1157 of The Affordable Health Care for America Act, the Department of Health and Human Services and Congress sought advice from the IOM on how to improve the accuracy of the data sources and methods used for making the geographic adjustments in payments to providers. The IOM recommends an integrated approach that includes:

  • moving to a single source of wage and benefits data;
  • changing to one set of payment areas and labor markets; and
  • expanding the range of occupations included in the index calculations.

The IOM also recommends developing a new source of data on the cost of office rent and applying the hospital wage index for facilities other than acute-care hospitals. Taken together, these recommendations would lead to improvements in payment accuracy, including a more streamlined and consistent payment process for a broader range of providers and a reduced burden of cost reporting.