Geographic Adjustment Geographic Adjustment Factors Under Medicare: Factors Under Medicare: Current Law and PolicyCurrent Law and PolicyCurrent Law and PolicyCurrent Law and Policy

Marc HartsteinMarc Hartstein

Deputy DirectorDeputy Director

Hospital and Ambulatory Policy GroupHospital and Ambulatory Policy Group

Today’s TopicsToday’s Topics

�� Hospital Inpatient Prospective Hospital Inpatient Prospective Payment System Wage IndexPayment System Wage Index

�� Physician Fee Schedule Geographic Physician Fee Schedule Geographic �� Physician Fee Schedule Geographic Physician Fee Schedule Geographic Adjustment FactorsAdjustment Factors

Hospital Wage IndexHospital Wage Index

�� Statutory Authority: Section Statutory Authority: Section 1886(d)(3)(E) of the Act1886(d)(3)(E) of the Act

�� Requirements:Requirements:–– Adjust proportion of hospital costs for area Adjust proportion of hospital costs for area –– Adjust proportion of hospital costs for area Adjust proportion of hospital costs for area

difference in hospital wage levelsdifference in hospital wage levels

–– Update adjustment based on a survey by the Update adjustment based on a survey by the Secretary of wage and wageSecretary of wage and wage--related costsrelated costs

–– Adjusted for occupational mix based on a Adjusted for occupational mix based on a new survey at least every 3 yearsnew survey at least every 3 years

Labor ShareLabor Share

�� MMA MMA –– Labor share = 62 percent Labor share = 62 percent unless payment is higher with national unless payment is higher with national labor sharelabor share–– In effect: If wage index > 1, labor In effect: If wage index > 1, labor –– In effect: If wage index > 1, labor In effect: If wage index > 1, labor

share=national. If wage index <= 1 share=national. If wage index <= 1 labor share=62 percentlabor share=62 percent

�� Labor share is currently 68.8 percent Labor share is currently 68.8 percent and is rebased from time to time and is rebased from time to time (every 4 years)(every 4 years)

Wage IndexWage Index

�� Adjusts laborAdjusts labor--related share to reflect local related share to reflect local labor market area wages compared to labor market area wages compared to national averagenational average

�� Average hourly wage in an MSA (or rural Average hourly wage in an MSA (or rural area of the state) divided by the national area of the state) divided by the national

�� Average hourly wage in an MSA (or rural Average hourly wage in an MSA (or rural area of the state) divided by the national area of the state) divided by the national average hourly wageaverage hourly wage

�� Data submitted annually for wage index Data submitted annually for wage index through worksheet Sthrough worksheet S--3 of the cost report. 4 3 of the cost report. 4 year lag between cost report and wage year lag between cost report and wage index year. FY 2007 wage data used to set index year. FY 2007 wage data used to set the FY 2011 wage indexthe FY 2011 wage index

Occupational MixOccupational Mix

�� Purpose: Control for the effect of Purpose: Control for the effect of hospital employment choices on wage hospital employment choices on wage indexindex–– Adjust for mix of RNs, LPNs, nursing Adjust for mix of RNs, LPNs, nursing –– Adjust for mix of RNs, LPNs, nursing Adjust for mix of RNs, LPNs, nursing

aides, medical assistants etc…on average aides, medical assistants etc…on average hourly wagehourly wage

�� Data collected every 3 years on Data collected every 3 years on occupational mix of hospital occupational mix of hospital employeesemployees

Payment FormulaPayment Formula

�� Payment = Product of:Payment = Product of:–– National Standardized Amount National Standardized Amount

�� LaborLabor--Related Share (68.8% or 62%) Related Share (68.8% or 62%) adjusted by area wage index plusadjusted by area wage index plusadjusted by area wage index plusadjusted by area wage index plus

�� NonNon--Labor Related ShareLabor Related Share

–– DRG Relative WeightDRG Relative Weight

–– IME Percentage IME Percentage

–– DSH percentageDSH percentage

�� Plus Outlier & New TechnologyPlus Outlier & New Technology

Special Provisions:Special Provisions:

�� Geographic ReclassificationGeographic Reclassification�� Section 508 of the MMASection 508 of the MMA�� Rural/Imputed Rural FloorRural/Imputed Rural Floor�� Lugar/Deemed New England CountiesLugar/Deemed New England Counties�� Lugar/Deemed New England CountiesLugar/Deemed New England Counties�� Rural Referral Centers, Medicare Dependent Rural Referral Centers, Medicare Dependent

Hospitals, Sole Community HospitalsHospitals, Sole Community Hospitals�� OutmigrationOutmigration�� Urban to Rural Urban to Rural RedesignationRedesignation�� Frontier StatesFrontier States�� 1109 Qualifying Hospitals1109 Qualifying Hospitals

Geographic Geographic ReclassificationReclassification

�� Hospitals believe they compete for labor with a Hospitals believe they compete for labor with a nearby labor market area and want that wage indexnearby labor market area and want that wage index

�� Individual ReclassificationsIndividual Reclassifications–– Proximity Proximity -- 15 miles (urban) or 35 miles (rural)15 miles (urban) or 35 miles (rural)

–– Wage data Wage data –– 108%/84% of own/requested area average 108%/84% of own/requested area average hourly wage (urban) or 106%/82% of own/requested area hourly wage (urban) or 106%/82% of own/requested area (rural) until FY 2009(rural) until FY 2009

–– Changed to 108%/86% (urban), 106%/84% (rural) for FY Changed to 108%/86% (urban), 106%/84% (rural) for FY 2010 and 108%/88% (urban), 106%/86% (rural) for FY 2010 and 108%/88% (urban), 106%/86% (rural) for FY 2011 and later in FY 2009 IPPS rule2011 and later in FY 2009 IPPS rule

–– Affordable Care Act changed back to the preAffordable Care Act changed back to the pre--FY 2010 FY 2010 criteria effective for FY 2011criteria effective for FY 2011

Geographic Geographic ReclassificationReclassification

�� Group ReclassificationsGroup Reclassifications–– All hospitals in a countyAll hospitals in a county–– Adjacent to requested areaAdjacent to requested area–– Same combined statistical areaSame combined statistical area–– Same combined statistical areaSame combined statistical area–– Requested area must have a higher wage Requested area must have a higher wage

indexindex–– Must be at least 85% of the requested area Must be at least 85% of the requested area –– Changed to match individual criteria: 86% Changed to match individual criteria: 86%

for FY 2010, 88% for FY 2011for FY 2010, 88% for FY 2011–– Changed back by the Affordable Care ActChanged back by the Affordable Care Act

Special ProvisionsSpecial Provisions

�� Section 508 Hospitals Section 508 Hospitals –– MMA provision to allow MMA provision to allow hospitals that did not meet proximity criteria to hospitals that did not meet proximity criteria to be reclassified under a special onebe reclassified under a special one--time only time only processprocess

�� Rural/Imputed Rural Floor Rural/Imputed Rural Floor –– No urban wage No urban wage �� Rural/Imputed Rural Floor Rural/Imputed Rural Floor –– No urban wage No urban wage index can be below the rural area of its Stateindex can be below the rural area of its State–– All Urban States: NJ and RI. Imputed floor= average All Urban States: NJ and RI. Imputed floor= average

of ratio of lowest to highest wage index in each state of ratio of lowest to highest wage index in each state multiplied by highest wage index in each statemultiplied by highest wage index in each state

–– Budget neutrality:Budget neutrality:�� Applied nationally until FY 2009, 80/20 national/statewide Applied nationally until FY 2009, 80/20 national/statewide

in FY 2009, 50/50 in FY 2010, 100% statewide in FY 2011in FY 2009, 50/50 in FY 2010, 100% statewide in FY 2011�� Affordable Care Act: 100% national in FY 2011 and laterAffordable Care Act: 100% national in FY 2011 and later

Special ProvisionsSpecial Provisions

�� Lugar/Deemed New England Urban Counties: Hospitals Lugar/Deemed New England Urban Counties: Hospitals located in rural counties near urban counties given urban located in rural counties near urban counties given urban wage index and treated as urban for paymentwage index and treated as urban for payment

�� Special Hospital Types:Special Hospital Types:–– Rural Referral Centers: Can reclassify to nearest area and do not Rural Referral Centers: Can reclassify to nearest area and do not

have to meet 106/108 percent testhave to meet 106/108 percent testhave to meet 106/108 percent testhave to meet 106/108 percent test–– Medicare Dependent Hospitals (MDH), Sole Community Hospitals Medicare Dependent Hospitals (MDH), Sole Community Hospitals

(SCH) get special IPPS rates(SCH) get special IPPS rates–– CAHs CAHs –– Small, rural hospitals paid 101% of costsSmall, rural hospitals paid 101% of costs

�� Outmigration: wage index adjustment for hospitals in counties Outmigration: wage index adjustment for hospitals in counties where hospital employees commute to adjacent counties with where hospital employees commute to adjacent counties with a higher wage indexa higher wage index

�� Urban to rural Urban to rural redesignationredesignation to receive MDH, SCH or Rural to receive MDH, SCH or Rural Referral Center Status and treated as rural for payment Referral Center Status and treated as rural for payment

Affordable Care Act Affordable Care Act ProvisionsProvisions

�� Frontier States: Wage index floor of 1.0 Frontier States: Wage index floor of 1.0 for hospitals in states where 50 percent for hospitals in states where 50 percent of counties have a population density of of counties have a population density of less than 6 people per square mileless than 6 people per square mileless than 6 people per square mileless than 6 people per square mile

�� 1109 Qualifying Hospitals: $400 million 1109 Qualifying Hospitals: $400 million for FY 2011 and FY 2012 for hospitals in for FY 2011 and FY 2012 for hospitals in lowest quartile of counties based on age, lowest quartile of counties based on age, sex and race adjusted spending per sex and race adjusted spending per capita under Parts A and B of Medicarecapita under Parts A and B of Medicare

Wage Index ReformWage Index Reform

�� Tax Relief and Health Care Act required Tax Relief and Health Care Act required MedPACMedPAC to submit Report to Congress on the to submit Report to Congress on the Medicare wage index by June 30, 2007Medicare wage index by June 30, 2007

�� Secretary required to consider the Secretary required to consider the MedPACMedPACrecommendation and make “a proposal or recommendation and make “a proposal or recommendation and make “a proposal or recommendation and make “a proposal or proposals” to revise the wage index adjustment proposals” to revise the wage index adjustment for fiscal year 2009for fiscal year 2009–– Changed reclassification criteria and to statewide Changed reclassification criteria and to statewide

budget neutrality for rural/imputed rural floorbudget neutrality for rural/imputed rural floor–– Reversed by Affordable Care ActReversed by Affordable Care Act

�� MedPACMedPAC: Use BLS data, end reclassification and : Use BLS data, end reclassification and occupational mix survey. Likely requires occupational mix survey. Likely requires statutory change statutory change

Affordable Care Act Affordable Care Act RequirementRequirement

�� Report to Congress by 12/31/2011 that Report to Congress by 12/31/2011 that considers:considers:–– 2007 2007 MedPACMedPAC ReportReport

–– Use BLS or other data and methodologiesUse BLS or other data and methodologies–– Use BLS or other data and methodologiesUse BLS or other data and methodologies

–– Minimizes adjustments within and between Minimizes adjustments within and between areasareas

–– Minimize volatility and budget neutralMinimize volatility and budget neutral

–– Consider impact including effect on qualityConsider impact including effect on quality

–– Provide for a transitionProvide for a transition

Physician Fee Schedule Physician Fee Schedule Geographic Adjustment FactorsGeographic Adjustment Factors

�� Statutory Authority: Section 1848(e) of the Statutory Authority: Section 1848(e) of the ActAct

�� Requires Secretary to create an index for Requires Secretary to create an index for each fee schedule area that reflects:each fee schedule area that reflects:–– relative cost of practice expenses (other than relative cost of practice expenses (other than –– relative cost of practice expenses (other than relative cost of practice expenses (other than

malpractice) to the national average (PE GPCI)malpractice) to the national average (PE GPCI)–– relative cost of malpractice to the national relative cost of malpractice to the national

average (MP GPCI)average (MP GPCI)–– ¼ of the difference in the relative value of ¼ of the difference in the relative value of

physician work to the national average (Work physician work to the national average (Work GPCI)GPCI)

Payment FormulaPayment Formula

�� Payment = CF x (Work x (Payment = CF x (Work x (GPCIGPCIww) + (PE x ) + (PE x GPCIGPCIpepe) + (MP x ) + (MP x GPCIGPCImpmp))–– CF=$ Conversion FactorCF=$ Conversion Factor–– Work=Physician Work RVUWork=Physician Work RVU–– Work=Physician Work RVUWork=Physician Work RVU–– PE = Practice Expense RVUPE = Practice Expense RVU–– MP= Malpractice Expense RVUMP= Malpractice Expense RVU

�� Geographic Adjustment Factor (GAF) Geographic Adjustment Factor (GAF) reflects a weighted average sum of the reflects a weighted average sum of the work, PE and MP GPCIs for a given work, PE and MP GPCIs for a given localitylocality

Updates and DataUpdates and Data

�� Updated every 3 years for new data. New GPCIs Updated every 3 years for new data. New GPCIs phased in over 2 yearsphased in over 2 years

�� Current Data Sources:Current Data Sources:–– Work GPCI Work GPCI –– ¼ of the difference in earnings for 6 ¼ of the difference in earnings for 6

professional occupational groups from the 2000 Censusprofessional occupational groups from the 2000 Censusprofessional occupational groups from the 2000 Censusprofessional occupational groups from the 2000 Census–– PE GPCI PE GPCI ––

�� 2000 Census for employee wages2000 Census for employee wages�� 5050thth percentile of residential apartment rental data from HUDpercentile of residential apartment rental data from HUD�� No adjustment for medical equipment and suppliesNo adjustment for medical equipment and supplies

–– Malpractice GPCI Malpractice GPCI ––insurer rate filings of premium data and insurer rate filings of premium data and surcharge for mandatory patient compensation fundssurcharge for mandatory patient compensation funds

�� Comments From Iowa and Other Areas: Source data for Comments From Iowa and Other Areas: Source data for GPCIs flawed and costs do not vary as much as being GPCIs flawed and costs do not vary as much as being adjustedadjusted

GPCI Weights and the GPCI Weights and the Amount of AdjustmentAmount of Adjustment

�� Physician Work Physician Work –– 52.46% but GPCI 52.46% but GPCI only reflect ¼ of variationonly reflect ¼ of variation

�� Practice Expense Practice Expense –– 43.67% but only 43.67% but only 30.86% of total weight is adjusted30.86% of total weight is adjustedPractice Expense Practice Expense –– 43.67% but only 43.67% but only 30.86% of total weight is adjusted30.86% of total weight is adjusted

�� Malpractice Malpractice –– 3.87% weight fully 3.87% weight fully adjusted.adjusted.

�� Total Percent of Fee Adjusted for Area Total Percent of Fee Adjusted for Area Variation in Costs: <48%Variation in Costs: <48%

LocalitiesLocalities

�� Current locality structure developed in 1997. Current locality structure developed in 1997. Consists of 89 total localities:Consists of 89 total localities:–– 37 higher cost areas within States37 higher cost areas within States–– 16 “rest of area” within those same States16 “rest of area” within those same States–– 36 Statewide or territory wide Areas (Puerto Rico and 36 Statewide or territory wide Areas (Puerto Rico and –– 36 Statewide or territory wide Areas (Puerto Rico and 36 Statewide or territory wide Areas (Puerto Rico and

Virgin Islands designated as territory wide localities)Virgin Islands designated as territory wide localities)

�� Locality Issues:Locality Issues:–– California, Louisiana, Texas, Georgia: Counties once California, Louisiana, Texas, Georgia: Counties once

considered part of rural “rest of state” now more considered part of rural “rest of state” now more closely resemble costs of urban areasclosely resemble costs of urban areas

–– CMS contracted with Acumen to study alternative CMS contracted with Acumen to study alternative locality structureslocality structures

Special Adjustments and Special Adjustments and Affordable Care ActAffordable Care Act

�� Floor on Work GPCI of 1.0 from 1/1/2004 Floor on Work GPCI of 1.0 from 1/1/2004 through 12/31/2009through 12/31/2009

�� Alaska Alaska –– All GPCIs = 1.67 for 2004 to 2006 All GPCIs = 1.67 for 2004 to 2006 and floor on work GPCI of 1.5 since 2007 and floor on work GPCI of 1.5 since 2007 (permanent)(permanent)(permanent)(permanent)

�� Affordable Care Act:Affordable Care Act:–– Employee compensation and rent portion of PE Employee compensation and rent portion of PE

GPCI reflects ½ of relative cost difference for GPCI reflects ½ of relative cost difference for 2010 and 2011 with hold harmless2010 and 2011 with hold harmless

–– Floor of 1.0 on PE GPCI in Frontier StatesFloor of 1.0 on PE GPCI in Frontier States–– Extends work GPCI floor through 12/31/2010Extends work GPCI floor through 12/31/2010

Affordable Care ActAffordable Care Act

�� Analysis of practice expense geographic adjustments to Analysis of practice expense geographic adjustments to evaluate:evaluate:–– Feasibility of using survey data from medical organizations Feasibility of using survey data from medical organizations

for office expense including staff and rentfor office expense including staff and rent–– Extent to which office expense occurs in a national or local Extent to which office expense occurs in a national or local

marketmarketmarketmarket–– Weight assigned to each practice expense categoryWeight assigned to each practice expense category

�� By 1/1/2012, Secretary makes appropriate adjustments By 1/1/2012, Secretary makes appropriate adjustments to PE GPCI resulting from analysis and shall consider:to PE GPCI resulting from analysis and shall consider:–– basing office rent and its weight on office expense that basing office rent and its weight on office expense that

vary among areasvary among areas–– Using the American Community Survey or other reliable Using the American Community Survey or other reliable

data for professional and office staff wage adjustmentsdata for professional and office staff wage adjustments

2011 Proposed Rule2011 Proposed Rule

�� Proposed 6Proposed 6thth GPCI Update GPCI Update –– 2006 2006 -- 2008 BLS Occupational Employment Statistics 2008 BLS Occupational Employment Statistics

replaces 2000 Census as data source for work GPCI and replaces 2000 Census as data source for work GPCI and employee compensation component of the PE GPCIemployee compensation component of the PE GPCI

–– Updated data from current sources used for rent Updated data from current sources used for rent component of PE GPCI and MP GPCIcomponent of PE GPCI and MP GPCIcomponent of PE GPCI and MP GPCIcomponent of PE GPCI and MP GPCI

–– Proposed to rebase and revise MEI and match GPCI Proposed to rebase and revise MEI and match GPCI weights to revised MEIweights to revised MEI

–– Work GPCI: 52.466 to 48.266%Work GPCI: 52.466 to 48.266%–– PE GPCI: 43.669 to 47.439%PE GPCI: 43.669 to 47.439%

�� Employee compensation: 18.654 to 19.153%Employee compensation: 18.654 to 19.153%�� Office rent: 12.209 to 8.410%Office rent: 12.209 to 8.410%�� Equipment and supplies: 12.806 to 19.876%Equipment and supplies: 12.806 to 19.876%

–– MP GPCI: 3.865 to 4.295%MP GPCI: 3.865 to 4.295%

QuestionsQuestions