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Last Modified: 11/26/2021 Location: FL, PR, USVI Business: Part A

Wage index overview

Section 1886(d) (3) (E) of the Social Security Act (the Act) requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts "for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level." This adjustment factor is the wage index. CMS currently defines hospital geographic areas (labor market areas) based on the definitions of Core-Based Statistical Areas (CBSAs) established by the Office of Management and Budget (OMB) and announced in December 2003. The wage index also reflects the geographic reclassification of hospitals to another labor market area in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act.
The Act further requires that we update the wage index annually, based on a survey of wages and wage-related costs of short-term, acute inpatient prospective payment system (IPPS) hospital cost reports.
Wage index periods follow the federal fiscal period of October 1- September 30. If a hospital has more than one cost report beginning during the wage index period (for example, a hospital has two short period cost reports beginning on or after October 1, through September 30 of a given year), a desk review is required on only one of the reporting periods. The longest period shall be selected. If there is more than one period of that length, the latest period shall be selected.
CMS excludes from the wage index the wages and hours and occupational mix data for all critical access hospitals (CAH), even if the hospital was paid under the IPPS. For the FY 2017 wage index, (MACs should not perform a desk review on any current CAH or those designated as a CAH by the time the MAC desk reviews the hospital’s wage data.”
The hospital wage index occupational mix survey, hospitals' payroll records, contracts, and other wage-related documentation. In computing the wage index, CMS derives an average hourly wage for each labor market area (total wage costs divided by total hours for all hospitals in the geographic area) and a national average hourly wage (total wage costs divided by total hours for all hospitals in the nation). A labor market area's wage index value is the ratio of the area's average hourly wage to the national average hourly wage. The wage index adjustment factor is applied only to the labor portion of the standardized amounts.
Source: Wage Index external link on the website
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