ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

Johnson Announces Hearing on
Medicare’s Geographic Cost Adjustors

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on assessing Medicare’s geographic cost adjustors used for Medicare payment.  In addition, the Subcommittee will assess the adequacy of the definition of labor market areas. The hearing will take place on Tuesday, July 23, 2002, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 2:00 p.m.

In view of the limited time available to hear witnesses, oral testimony at this hearing will be from invited witnesses only.  Witnesses will include representatives from the U.S. General Accounting Office, the Medicare Payment Advisory Commission (MedPAC), academia and interested Members of Congress.  However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

Hospitals, skilled nursing facilities, and home health agencies are paid by Medicare under prospective payment systems.  These payments are adjusted to reflect the cost of buying labor and other services across areas, as measured by the wage index.  The wage index is one of the most important determinants of Medicare facilities’ payment.  Thus, its adequacy in accurately capturing geographic differentials in labor costs is critically important.  Data on salaries and fringe benefits (including bonuses) from each hospital in the country are the only information used in calculating the wage index. 

The wage index is estimated by calculating an average hospital wage for each labor market area, and the average for that area is compared to the national average hospital wage.  The labor market areas are Metropolitan Statistical Areas (MSAs), which are defined by the Office of Management and Budget.  Counties not in MSAs are grouped into a single rural area in each State. 

Research by the Prospective Payment Assessment Commission (the predecessor to MedPAC) showed that the current labor market areas are frequently too large.  The MSAs may contain an inner-city core labor market with higher wage costs than those in the surrounding suburban areas.  More recent research (Dalton, et al 2000) suggests that the statewide rural areas typically contain three distinct markets based on the population size in the county.  Consequently, the wage index redistributes payments within labor market areas from the inner city to suburban hospitals and to outlying hospitals in rural pockets within MSAs. Similarly, isolated rural hospitals benefit financially as the wage index is dominated by the higher wages of rural hospitals in large towns. 

However, the historical political county boundaries that define current labor market areas often arbitrarily separate facilities that participate in the same labor market.  To address this problem, the Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) established a process enabling hospitals to reclassify into another labor market if the hospital is close to the area, disadvantaged due to much higher costs than their actual labor market location (eight percent higher for urban hospitals and six percent higher for rural hospitals), and if it had wage costs no more than 18 percent lower for urban hospitals and 16 percent lower for rural hospitals to those in the nearby area.  Under the reclassification provision, 568 hospitals will receive a different and higher wage index in fiscal year 2003.  Geographic reclassification is budget neutral (neither increases or decreases overall expenditures) so that the Centers for Medicare and Medicaid Services estimates that payments for urban hospitals will be reduced 0.5 percent and payments to rural hospitals increased 2.5 percent in fiscal year 2003. 

Although hospitals utilize the reclassification process, a number of hospitals that do not meet the criteria in the law have pursued congressional action to legislatively reclassify hospitals or arbitrarily raise the wage index.  These bills often lack empirical evidence or support from the MedPAC for such changes. 

The geographic practice cost indices used to compute physician payments are conceptually quite different than hospitals.  Separate geographic adjusters apply to three components:  work, practice expense, and professional liability insurance.  The geographic adjuster for work is based on a sample of median hourly earnings of workers in six professional specialty occupation categories and conceptually is intended to measure differences in the cost of living.  The geographic adjuster for practice expense is based on employee wages, office rents, medical equipment and supplies, and other miscellaneous expenses.  The geographic adjuster for professional liability insurance reflects the cost of this insurance.

In addition, the geographic adjustment areas used to calculate physician payments are larger than those used to compute the wage index, and in a number of instances statewide.  The physician geographic adjusters are reviewed, and revised as necessary, every three years, compared to the annual update of the hospital wage data.

 In announcing the hearing, Chairman Johnson stated, “The operation of the wage index is extremely complex.  Not only does it consume an inordinate amount of time to adjudicate changes on a case-by-case basis, we have heard a number of complaints about the huge disparities across regions and apparent inequities between providers who are situated just miles apart.  This hearing will shed some much-needed light on this complex area.”

FOCUS OF THE HEARING:

Tuesday’s hearing will focus on assessing the current Medicare payment geographic adjustor and highlighting suggestions for improvement of the formula and appeals process.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note:  Due to the change in House mail policy, any person or organization wishing to submit a written statement for the printed record of the hearing should send it electronically to hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to (202) 225-2610, by the close of business, Tuesday, August 6, 2002.  Those filing written statements who wish to have their statements distributed to the press and interested public at the hearing should deliver their 200 copies to the Subcommittee on Health in room 1136 Longworth House Office Building, in an open and searchable package 48 hours before the hearing.  The U.S. Capitol Police will refuse sealed-packaged deliveries to all House Office Buildings. 

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below.  Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.

1.   Due to the change in House mail policy, all statements and any accompanying exhibits for printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to (202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a total of 10 pages including attachments.  Witnesses are advised that the Committee will rely on electronic submissions for printing the official hearing record. 

2.  Copies of whole documents submitted as exhibit material will not be accepted for printing.  Instead, exhibit material should be referenced and quoted or paraphrased.  All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.

3.    Any statements must include a list of all clients, persons, or organizations on whose behalf the witness appears.  A supplemental sheet must accompany each statement listing the name, company, address, telephone and fax numbers of each witness.

Note: All Committee advisories and news releases are available on the World Wide Web at http://waysandmeans.house.gov.

The Committee seeks to make its facilities accessible to persons with disabilities. If you are in need of special accommodations, please call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.