CMS's final inpatient PPS rule for fiscal year (FY) 2005, issued August 11, 2004, contains massive wage index changes resulting from revised definitions of labor markets as well as numerous changes mandated by the MMA and other statutes. 69 Fed. Reg. 48,916 (Aug. 11, 2004). Taken together, virtually every hospital in the country is affected by these changes.

Updated Labor Market Areas
The Office of Management and Budget (OMB) announced new standards for Core-Based Statistical Areas (CBSAs), based on 2000 Census data. OMB identified two such CBSAs: Metropolitan Statistical Areas, based on urbanized areas of 50,000 or more; and Micropolitan Statistical Areas, based on urban clusters of at least 10,000 but less than 50,000, as well as a number of other definitions. CMS decided to adopt some but not all of these definitions for wage index purposes, as follows:

Metropolitan Statistical Areas (MSAs). CMS adopted the new definitions of MSAs to more appropriately reflect current commuting patterns and population trends. These revised definitions created 39 new MSAs, and split numerous existing MSAs. There are now 1,090 counties in MSAs, compared to 848 under the prior definitions. Of these 1,090 counties, 737 are in the same MSA, 65 are in a different MSA, and 288 were not previously designated to any MSA.
Metropolitan Divisions. OMB defined a Metropolitan Division as a county or group of counties within a CBSA that has a core population of at least 2.5 million, plus adjacent counties associated through commuting ties. Because Metropolitan Divisions represent the closest approximation to the Primary MSAs (PMSAs) previously in use, CMS adopted this definition.
Micropolitan Areas. CMS did not adopt the definition of Micropolitan Areas. Had it done so, 373 Micropolitan Areas would have only one hospital, giving these hospitals a wage index based entirely on their own wage data. Other rural hospitals not in a Micropolitan area would have seen significant decreases in their wage indexes. Due to this dramatic effect, CMS decided not to use Micropolitan Areas, and to keep all non-MSA hospitals in one statewide rural area.

Transition Periods for Updated Labor Markets
One-year transition for any hospital experiencing a decline in wage index due to new labor market definitions. CMS will provide a transition period during FY 2005 to those hospitals that would experience a drop in their wage indexes due solely to the adoption of the new labor market areas. These hospitals will receive for FY 2005 a blended wage index, based 50 percent on the wage index of their "new" area and 50 percent on the wage index of their "old" area.

Three-year transition for urban hospitals now classified as rural. CMS will allow those hospitals in the 41 counties that are no longer in an MSA to maintain their assignment to their old MSA for three years (FYs 2005-2007) for wage index purposes only. These hospitals will not be considered urban hospitals for other purposes (e.g., they cannot receive large urban add-on under capital PPS), and wage data from these hospitals will be included in the setting of the rural area wage index.

Occupational Mix Adjustment
CMS is required by statute to implement an occupational mix adjustment (OMA) beginning October 1, 2004. The intended purpose of such an adjustment is to control the effect of hospital employment choices on the wage index, on the theory that a costly mix of employees does not reflect geographic differences in the costs of labor. The expected result of such an adjustment was that funds would be redistributed from urban to rural hospitals and from large to small urban hospitals, but that did not occur as expected. Had the OMA been fully implemented, 36 percent of rural areas would have a decreased wage index, and for other rural areas, the increase was smaller then expected.

Because this year is the first year for an such an adjustment, and there were some shortcomings with the data used to construct the OMA, CMS is applying the OMA to 10 percent of the wage index. In other words, the wage index for each area will be 90 percent unadjusted, and only 10 percent adjusted by the OMA.

New Wage Index Adjustment Based on Out-migration Commuting Patterns
Section 505 of the MMA requires CMS to implement a wage index adjustment effective October 1, 2004 for hospitals located in counties where a high percentage of hospital employees commute to counties with a higher wage index. These adjustments are to be effective for three years.

The criteria for "qualifying counties" are: (1) the average hourly wage for all hospitals in the county equals or exceeds the average hourly wage for all hospitals in the labor market area; (2) at least 10 percent of hospital employees commute to a higher wage index county; and (3) the difference in wage indexes between the resident county and surrounding higher wage index areas must be greater than zero.

Hospitals in qualifying counties will receive an increased wage index, equal to a weighted average of the difference between the wage indexes of the MSA(s) with higher wages and the wage index of the resident county, weighted by the overall percentage of hospital workers residing in the county who are employed in any MSA with a higher wage index. CMS makes these calculations using prereclassified wage indexes.

The out-migration adjustment applies for three years and will remain static during that time. A county will not lose it status as a qualifying county for those three years. However, each year CMS will evaluate and designate new qualifying counties.

Hospitals receiving this out-migration adjustment are not eligible for reclassification. For any hospital that was not otherwise reclassified or redesignated or in receipt of a section 508 adjustment, CMS automatically applied the out-migration adjustment. Hospitals can evaluate year by year whether they wish to receive a reclassification or an out-migration adjustment.

Revision to Labor-related Share
The wage index is used to adjust the labor-related portion of a hospital's costs. CMS has considered 71.066 percent of hospitals' costs to be labor-related. Section 403 of MMA required CMS to use 62 percent as the labor-related share, unless this would lower a hospital's payments.

CMS is modifying its payment system software for FY 2005 to apply wage indexes greater than 1.0 to 71.066 of the standardized amount, and to apply wage indexes of less than or equal to 1.0 to 62 percent of the standardized amount.