Moving to a Single Set of Labor Markets and Payment Areas
The current system of geographic adjustment for hospitals uses one set of 441 markets based on Metropolitan Statistical Areas (MSAs). MSAs represent local labor markets where people live, work, and commute.
The geographic adjustment system for physician payment uses a different set of 89 payment areas to represent labor markets. These include 55 large metropolitan areas and 34 statewide areas that combine urban and rural areas. This inconsistency raised questions among committee members about whether defining entire states as labor markets was accurate.
Providers in a given geographic area tend to function within the same local labor markets. Therefore, rather than using two separate sets of payment areas, the committee recommends using the same payment areas for geographic adjustments to Medicare payment for hospitals and physicians.
The payment areas should be defined using MSAs and statewide non-MSAs. When there are significant differences in the indexes near the MSA boundaries, the adjustments should take into account commuting patterns of healthcare workers. The committee believes that smoothing the boundaries will decrease the need for reclassification, a process that currently allows almost 40 percent of eligible hospitals to be paid according to a wage index from a labor market outside of their physical location.
Metropolitan Statistical Areas (MSAs) in the United States
The current geographic adjustments use wage data from different sources, some directly from providers (for example, hospital cost reports, physician surveys) and others that are more independent, such as Census data. While no data source is perfect, the committee recommends using Bureau of Labor Statistics (BLS) health care industry wage data to allow the adjustments to reflect the actual price of labor, indicated by the prevailing wage in each labor market for each occupation. From the perspective of the committee, BLS wage data is considered more accurate than Medicare provider data on labor costs, because Medicare data reflect business decisions about the occupational mix of employees and their compensation packages.
Expanding the Range of Occupations Used in Computing the Indexes
Currently, a limited number of occupations are included in the computation of the physician practice expense for administrative and clinical staff compensation and the hospital wage index. The committee recommends using BLS data from all occupations in the healthcare workforce because these data will more accurately reflect the geographic variations in labor markets, staffing patterns, and occupational mix. The expansion of occupations also will reflect the increasing integration of care in hospitals, outpatient clinics, office-based practices, and other clinical settings.
Taken as a whole, the committee’s recommendations are intended to improve accuracy of geographic adjustments to Medicare payment. Implementation will involve changes in the calculations of the indexes, but in the long run, it will bring the advantages of improved accuracy and greater consistency within the Medicare program. Any major transition should be managed strategically by phasing it in over time and communicating clearly with stakeholders at every step. Only then can the long-term policy goal of helping to create an equitable payment system that rewards high-value and high-quality health care be met.