medicare-wage-indexThe CMS “wage index” remains a vital (and controversial) component of how hospitals receive payment for services to Medicare beneficiaries. CMS recognizes that labor costs vary from one area to the next. So, as a part of the methodology for determining IPPS (inpatient prospective payment) reimbursement, standardized amounts are adjusted for area differences in facilities’ wage levels by what the industry commonly refers to as the wage index adjustment factor.

How it works

The wage index adjustment is the average hourly wage of all IPPS hospitals in a labor market (Cost-Based Statistical Area or “CBSA”) divided by the average hourly wage of all IPPS hospitals nationwide. The computed wage index is then further adjusted by an occupational mix adjustment (OMA). The OMA is used to mitigate any differences in a hospital’s staffing mix. The IPPS wage index not only affects IPPS hospitals but also helps determine reimbursement for OPPS (outpatient prospective payment) services, skilled nursing, home health, long term acute care hospitals, psychiatric, and rehab services.

There are even opportunities for hospitals to receive wage index adjustment factors greater than the geographical area in which they are located—through a reclassification to a higher wage index area.

Far too often, this component of the cost report doesn’t get the attention it requires to ensure the highest level of reimbursement in the future.  A facility’s wage index can radically affect its reimbursement. According to CMS, “a hospital in a rural community could receive a Medicare payment of about $4,000 for treating a beneficiary admitted for pneumonia while a hospital in a high wage area (urban areas) could receive a Medicare payment of nearly $6,000 for the same case, due to differences in their wage index.” (

Areas for improvement

The Medicare cost report is the source document used by CMS in determining the wage index adjustment factor. Mistakes commonly occur in the reporting of the following areas:

  • Paid hours: hours reported should exclude any non-worked hour like shift differentials or on-call.
  • Contract labor: contract labor should only include hours and dollars associated with the labor provided and exclude any “excluded units.”
  • Wage related costs: employee benefits, if not directly assigned, are often over-allocated to “excluded units.”
  • Pension costs: expense for defined pension plans are only allowable to the extent the provider actually incurred the expense. For wage index purposes, pension expense must convert to a cash basis.

Why leave dollars on the table? Contact CRI and let our healthcare reimbursement team assist you in providing accurate information to CMS. We can also help you in requesting an exemption to your current wage index through reclassification, if appropriate.

Contact CRI’s reimbursement team to help you ensure your wage index is accurately reported and to prevent any incorrect adjustments proposed during desk reviews.