Medicare Regional Pay Adjustments Flawed, IOM Says

WASHINGTON -- The data Medicare relies on to adjust for regional variation in reimbursements for hospitals and doctors is flawed and leads to inaccurate payments, concludes a report released Wednesday by the Institute of Medicine (IOM). The Centers for Medicare and Medicaid Services tweaks Medicare payments to hospitals and private practices to account for regional variations in the cost of doing business. For instance, a hospital located in a major city likely pays its workers higher wages to keep competitive with area businesses. In addition, rents are higher in a big city, and other costs incurred by hospitals and individual healthcare practitioners are likely more expensive than a hospital located in a rural area, or even in a suburb. To account for those higher costs of doing business, Medicare will reimburse the city hospital more. Medicare is required to make the adjustments budget-neutral, so any increase in pay for providers in one area must be offset by a decrease in pay to providers in another area. But the new report from the IOM calls into question the accuracy of the data Medicare uses to support such adjustments. The report found that nearly 40% of hospitals had been granted exceptions to how their adjustments are calculated. "The rate of exceptions strongly suggests that the mechanisms underlying the adjustments are inadequate," said the committee that wrote the report. The idea behind "fine-tuning Medicare payments based on geographic variations in expenses beyond providers' control" is a good one and shouldn't be discontinued, the committee said. But "the Medicare program needs more precise and objective tools and methods to assure the nation that the billions being spent are appropriately and fairly disbursed," said committee chair Frank Sloan, an economics professor at Duke University, in a press release. The committee recommended the following changes to help CMS make more accurate regional Medicare adjustments: Use Bureau of Labor Statistics data on salary and benefits in order to calculate wage adjustments for hospitals and private-practice health workers. Use wage data from all types of healthcare workers to calculate median wage data. Currently, Medicare calculates regional wage differences based on data for registered nurses, licenced practical nurses, health technicians, and administrative staff only. Rely on the same regional boundaries for hospitals or private health practices located in the same area. Currently, Medicare breaks hospitals into one of 441 regional areas, and private health practices into 81 regional areas. The report recommends using the same regional areas, since a hospital and a private practice within a few miles of each other are likely competing in a nearly identical labor market. Use commercial rent information to determine the variations of renting office space instead of the data on the median subsidized rents for a two-bedroom apartment in the area where a medical practice operates, which is what Medicare currently uses. There is no source that tracks commercial rent data, so a new source should be developed, the committee recommended. "Taken as a whole, the committee's recommendations are intended to improve accuracy of geographic adjustments to Medicare payment," concluded the Committee on the Geographic Adjustment Factors in Medicare Payment, a panel composed of academics and private and government economists. "Implementation will involve changes in the calculations of the indexes, but in the long run, it will bring the advantages of improved accuracy and greater consistency within the Medicare program." The study was sponsored by CMS and is the first part of a three-part series aimed at improving the accuracy of Medicare payments.