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The deadline for submitting data used to set the wage index — which has a significant impact on hospitals’ Medicare reimbursement — is quickly approaching.

Navigating health reform

Retain Medicare Dollars by Examining Wage Index Data

  • 8/6/2015

The deadline for submitting data used to set the wage index — which has a significant impact on hospitals’ Medicare reimbursement — is quickly approaching. Diving into the reporting of wage index data is essential to keeping your Medicare dollars, and most facilities across the nation are closely examining this information.

Organizations must submit Medicare cost report and occupational mix data, which will be used to set the federal fiscal year 2017 wage index values, by September 2, 2015.

Organizations must submit Medicare cost report and occupational mix data, which will be used to set the federal fiscal year 2017 wage index values, by September 2, 2015.

The cost report data will come from applicable inpatient prospective payment system (IPPS) hospitals’ Medicare cost reports which began between October 1, 2012, and September 30, 2013.


Wage index is the mechanism used to adjust Medicare reimbursement between labor market areas referred to as Cost-Based Statistical Areas (CBSAs) and geographically defined by the Centers for Medicare and Medicaid Services (CMS). It is used in a budget neutral fashion to reflect the hospital wage level in a particular CBSA to the national average. The Social Security Act requires wage index values to be updated annually based upon a survey of wages and wage-related costs of short-term, acute care hospitals reimbursed under the IPPS.

The historical purpose for reporting this data was to set the wage index values for IPPS hospitals’ adjustment to the labor-related component of the standardized amount of the prospective payment system (PPS) for inpatient services. CMS has largely moved away from cost-based to PPS-based reimbursement systems, and it now uses the hospital data to set wage index values across the health care continuum, including outpatient, senior living, home health, post-acute, and psychiatric facilities and services.

Data reported on Worksheet S-3, Parts II and III of each IPPS hospital’s Medicare cost report is audited annually by the applicable Medicare administrative contractor (MAC). The occupational mix survey is submitted once every three years, but can be revised in future years if errors are discovered.

Impact of the wage index

The table below illustrates the impact that an understated wage index value can have on a sample hospital’s Medicare reimbursement. As reflected in this example, a 5 percent error equates to lost Medicare reimbursement of just over $1.5 million annually.

  Current Wage Index 5 Percent Increase Wage Index
CBSA 33460 1.09540 1.15017
Labor-related component (full update) 3,784.75 3,784.75
Total labor amount 4,145.82 4,353.11
Non-labor component 1,653.10 1,653.10
Base rate 5,798.92 6,006.21
Average case mix 1.5000 1.5000
Medicare discharges 5,000 5,000
IPPS operating payment 43,491,864 45,046,544
Difference in operating payment   1,554,681

Common errors

Each line on the Medicare cost report Worksheet S-3, Part II should be closely examined to ensure that the data reported is accurate and inclusive. A higher average hourly wage generally results in a higher wage index value (with certain exceptions). The wage index for a CBSA is comprised of data from several different hospitals that are located in a certain geographic area. Because of this, reimbursement information is the most accurate when all hospitals in a CBSA carefully examine the underlying data that makes up their respective wage index.

There are many categories in wage index data reporting where errors commonly exist, including paid hours, contract labor, and home office reporting of dollars and hours. Here are just a few key areas which will require close scrutiny in most hospitals.

Paid hours

  1. Run a payroll report for dates paid during the cost reporting period under review. No accruals are utilized in reporting hours, but are included for reporting salary expenses.
  2. When running the payroll report, analyze each pay code. Management should discuss pay codes with payroll, human resources, and other applicable departments to ensure hours are properly reported. For instance, any hours recorded for non-worked tracking purposes, on-call, low census, and Baylor plan should not be included in total hours.

Contract labor

  1. Contract labor should be tracked by vendor, transaction, type of service provided, labor amount, labor hours, and general ledger account recorded.
  2. Contract labor for excluded units is considered non-allowable and therefore cannot be reported.
  3. Medicare will most likely request invoices for contract labor, so be sure to keep invoices to support the submitted amounts. Unsupported amounts and other issues could be deemed errors by Medicare and extrapolated against the entire contract labor population, thereby negatively impacting the overall wage index.
  4. Contractual arrangements with legal, audit, consulting, and clinical service vendors are recommended, if possible, to ensure that labor dollars and hours are included on all invoices.

Home office

  1. In most cases, what is allowable for hospital wage index is allowable for home office reporting of dollars and hours. The home office data reported can include a portion of the home office’s salaries, contracted labor, benefits, etc., which relates to an individual hospital on its wage index data. Therefore, take similar steps to ensure proper reporting of data. Home office costs should include core wage-related costs, and can include other costs which meet the 1 percent test and are allocated to appropriate components of the home office.
  2. Total costs should include contract labor with dollars and hours allocated to appropriate components of the home office.

Wage index data integrity is not just a hospital concern

Wage index values are calculated with IPPS hospital data, which is used for outpatient prospective payment hospital services, skilled nursing facilities, home health agencies, hospices, long-term care hospitals, inpatient psychiatric hospitals/units, and inpatient rehab hospitals/units. Therefore, inaccurate reporting of wage index values could affect the reimbursement values for all health care providers in a certain region.

All facilities whose wage index values are set by IPPS hospitals should understand the measures that these hospitals in their CBSA are undertaking, since it will impact their bottom line. Many hospital associations have a region-wide approach to ensure their hospitals receive the proper piece of the Medicare pie. Similarly, non-hospital facilities, long-term care associations, and other parties which represent non-hospitals have done the same, especially those located in frontier states that do not receive the benefit of the hospital’s minimum wage index value.

How we can help

Proper reporting of wage index data in the Medicare cost report and via the occupational mix survey will have a significant impact on Medicare reimbursement across the health care continuum. Revisions to this data are due to your applicable MAC on September 2, 2015. CLA can help your organization accurately report data so that facilities which rely on this information receive the correct amount of Medicare reimbursement.