As it does every year in conjunction with the final rule for the Inpatient Prospective Payment System (IPPS), CMS made changes to the wage index for fiscal year 2007. This time, the major change in fiscal year (FY) 2007 wage index concerned the occupational mix adjustment, driven by the April 3, 2006 decision of the Second Circuit in Bellevue Hospital Center v. Leavitt, 443 F.3d 163 (2d Cir. 2006). That decision caused a delay in the calculation of the final wage index numbers.

Although the final IPPS rule for FY 2007 went on display on August 1, 2006, and was published in the Federal Register on August 18, 2006 (71 Fed. Reg. 47,870), the actual wage index numbers were not posted to the CMS Web site (http://www.cms.hhs.gov/ AcuteInpatientPPS/downloads/cms-1488-n.pdf) until September 29, just two days before their effective date on October 1, 2006. (This notice was published in the Federal Register on October 11, 2006. 71 Fed. Reg. 59,886.) This delay also resulted in delayed calculations of the final relative diagnosis related group (DRG) weights, the final standardized amount, the final outlier threshold, and budget neutrality factors.

CMS insists that, despite the delay, it met the statutory requirement that the final rule be published by August 1, even though the final numbers were not published until late September. (Pub. L. 105-33, § 4644(a), amended 1886(d)(6) of the Act to require publication in the Federal Register by August 1.) CMS contends the statute only requires publication of “a description of the methodology and data,” not the actual rates, by August 1. 71 Fed. Reg. 48,018.

Occupational Mix Adjustment
The Medicare statute requires the collection of data every three years on the occupational mix of employees for each short-term acute care hospital, to construct an “occupational mix adjustment” (OMA). Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. No. 106-554, § 304(c), amending 42 U.S.C. § 1395ww(d)(3)(E)(i). The purpose of the OMA is to control for the effect of hospitals’ employment choices.

The theory is that if the hospital chooses to employ, for example, more registered nurses (RNs) and fewer licensed practical nurses (LPNs), this is a reflection of hospital management decisions rather than the geographic differences in the cost of labor, which is what the wage index is designed to measure. By using an OMA to, for example, lower the wage index for an area employing a mix of more highly paid and skilled labor than the national average, CMS believes the wage index should more accurately reflect geographic differences in labor costs.

By statute, CMS was to develop the OMA “for application beginning October 1, 2004.” Id. To implement the statutory mandate, CMS initially developed an occupational mix survey for hospitals to complete. Data collection began in January 2004 and was completed in April 2004.

CMS had reservations about the data it collected, however, due to the short period of time covered in the survey, the fact that the data were not audited and there was no baseline against which to evaluate the data for errors, and because the results were unexpected. While the OMA was expected to benefit rural hospitals, in actuality, one-third of the rural hospitals saw their wage indices decline, while several large academic medical centers and other urban hospitals ended up with higher wage indices.

CMS called this result “counterintuitive” and believed it was due to errors in the data. 69 Fed. Reg. 49,047–48. Therefore, CMS decided to apply the OMA to only 10 percent of the wage index beginning in FY 2005 (October 1, 2004). For the FY 2006 wage index, CMS used the same data and continued to apply the OMA to 10 percent of the wage index. CMS initially proposed to use the same methodology in the FY 2007 proposed IPPS rule. 71 Fed. Reg. 23,996, 24,075–79 (April 25, 2006).

In the Bellevue Hospital case, a group of 76 New York hospitals filed suit to challenge CMS’s decision to implement the OMA at only 10 percent, contending that it should have been applied to 100 percent of the wage index. (The plaintiffs also challenged the Department of Health and Human Services Secretary’s use of the 2003 definitions of metropolitan statistical areas.) The district court held, and the court of appeals affirmed, that the statute unambiguously required CMS to implement the OMA “in full” on October 1, 2004.

The district court granted the plaintiffs’ proposed remedy of immediately applying the OMA in full, based on the data already collected. 2005 WL 486686 (S.D.N.Y.) at 7; Medicare and Medicaid Guide (CCH) at ¶ 301,594. The Second Circuit modified that remedy, finding that it would be irrational to apply the admittedly flawed survey data from 2004 to 100 percent of the wage index. The court of appeals, therefore, ordered CMS to immediately return to the data collecting process, to collect and assess occupational mix data that are “sufficiently robust” by September 30, 2006, to permit a full (100 percent) application of the OMA on October 1, 2006. 443 F.3d at 179–180. The court determined this was consistent with the statutory mandate that the agency complete its second round of data collection (once every three years) by that date.

The New OMA Survey
In the meantime, prior to the appeals court decision, on February 10, 2006, CMS had already instructed hospitals to submit new occupational mix data covering a six-month period, from January through June 2006, intending to use the new survey data for the FY 2008 wage index. See 71 Fed. Reg. 7,047 (Feb. 10, 2006. (Hospitals could collect the data by pay periods, which could begin as early as December 25, 2005, and end between July 1–9, 2006.) While the prior survey in 2004 had included seven categories of occupations, with 19 subcategories, the 2006 survey focused on the nursing category.

The 2006 survey data included five nursing subcategories—RN management personnel; RN nurses or clinicians; LPNs; nursing aids, orderlies and attendants; and medical assistants—with all other hospital occupations to be reported in an “all other” category. Only the nursing category was to be used for the OMA. The data was to include both patient-related and non-patient-related contract labor and to exclude home office costs and overhead associated with excluded areas.

As a result of the Bellevue decision in April 2006, CMS had to accelerate the new data gathering. To meet the requirement that the OMA be fully implemented by October 1, CMS required hospitals to report the new occupational mix data for a three-month period, January through March 2006, by June 1, 2006. Joint Signature Memorandum, JSM-06412, April 21, 2006; Proposed Rule, 71 Fed. Reg. 28,644 (May 17, 2006). CMS published this data on its Web site for review, and hospitals had until July 13, 2006 to submit requests for changes.

This three-month set of data had not been thoroughly reviewed by CMS by the time it published its final FY 2007 rule on August 1. As a result, the final FY 2007 rule contained no wage index tables. In addition, it only had estimated, not final, DRG weights, outlier thresholds, and standardized amounts. These final factors were released by CMS on September 29, 2006, just prior to the beginning of the fiscal year.

The Effect of the Fully Implemented OMA
So, did a 100 percent application of the OMA, based on more robust 2006 survey data, result in significant changes, compared to the 10 percent OMA adjustment using the “flawed” 2004 survey data? Apparently not. The greatest gain still goes to some urban hospitals, and nearly one-third of rural hospitals still have a decrease in wage indices.

According to CMS, when comparing the FY 2006 wage index (using 2002 wage data and a 10 percent OMA) with the FY 2007 wage index (using 2003 wage data and a 100 percent OMA based on 2006 data), all tolled, 40 urban hospitals will have a wage index increase of 5 percent to 10 percent, and 15 will have a greater than 10 percent increase. No rural hospital will have greater than a 5 percent increase, but 790 rural hospitals will have increases of less than 5 percent, down to zero.

On the other side, 79 urban hospitals will experience wage index declines from 5 percent to 10 percent, with 8 urban hospital wage indices to decrease greater than 10 percent. (71 Fed. Reg. 59,886, 59,895–96.) The greatest benefit goes to hospitals located in urban New England, where payments are estimated to increase 1.1 percent, while rural hospitals in the West South Central region will see a 0.9 percent increase. Id. Hospitals in Puerto Rico fared the worst, with an estimated 1.4 percent decrease in payments. Id.

Comparing the FY 2007 unadjusted wage indices (no OMA) with the 100 percent OMA-adjusted wage index, 29.8 percent of rural areas and 52.1 percent of urban areas show a decrease and in wage index values, while a corresponding 70.2 percent of rural areas and 46.9 percent of urban areas show an increase. Id. at 59,887.

Thus, while a larger percentage of rural areas (29.8 percent) benefit than urban areas, almost one-third of rural areas continue to have a decrease from the OMA. This is not very different than how they fared when CMS used the prior survey for an OMA, when 36.2 percent of the rural areas experienced a decline in wage indexes. Id.

The final wage index, with the fully implemented OMA, changed the DRG relative weights very little from the tentative DRG relative weights published in the August 1 final rule. No DRG weight changed by more than 1 percent. Id. at 59,895. The standardized amount decreased by $4.00 (see CMS Fact Sheet, www.cms.hhs.gov/ apps/media/press/release.usp?Counter=2028) and the outlier threshold increased by $10, from $24,475 to $24,485. 71 Fed. Reg. at 59,890.

Effect on Geographic Reclassification
The court-imposed requirement to fully implement to OMA for FY 2007 affected hospitals that receive an out-migration adjustment under section 505 of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA). In applying this adjustment, CMS identifies “qualifying counties” where a relatively high percentage of hospital workers commute to one or more counties that have a higher wage index.

When the proposed rule for FY 2007 was published, CMS determined newly qualifying counties using a wage index that had a 10 percent OMA. Application of the 100 percent OMA required CMS to reevaluate which counties were newly eligible for the out-migration adjustment. Id. at 28,650.

In addition, the delay in finalizing the wage index numbers caused by the Bellevue decision also disrupted the usual process for hospitals withdrawing or terminating their three-year reclassifications. Ordinarily, hospitals must make such requests within 45 days of the publication of the proposed rule. This year, however, hospitals had 15 days from the August 1 display date of the final FY 2007 rule to notify CMS whether they wished to definitively maintain, terminate, or withdraw a reclassification, even without seeing the final 100 percent OMA-adjusted wage index. If a hospital made no such indication, CMS then attempted to place hospitals in the area with the highest wage index among available options, taking into account Lugar hospitals, out-migration adjustment, and the one-time reclassification requests under section 508 of the MMA. Id. at 59,887.

Once CMS published the final wage index numbers in late September, it then gave hospitals 30 days, until October 30, to notify CMS whether they wish to change the choice made by CMS and choose another option for which they are eligible. Id. These hospital determinations will not result in any wage index recalculations (including rural floor recalculations).

Also, because applications for reclassification for FY 2008 had to be filed with the Medicare Geographic Classification Review Board by September 1, 2006, the delayed publication of the final wage indices meant hospitals could file supplemental information to their applications by October 30. Id. at 59,888–89.

On the Horizon: The FY 2008 Wage Index
Under the revised timetable for the new occupational mix survey caused by the Bellevue decision, hospitals had to submit data for the second three months of the survey period (April to June 2006) by August 31, 2006. The full six months of survey data will be used in the FY 2008 wage index.

The wage data correction process for the FY 2008 wage index is underway. The preliminary files were released on the CMS Web site on October 6. Hospitals were to notify their intermediaries of any revisions by December 4, 2006. This includes requesting any revisions to the OMA survey data from the first six months of 2006.

After desk review by the fiscal intermediaries, CMS published the revised wage index and occupational mix files on February 23, 2006, and hospitals were to notify fiscal intermediaries of revisions due to fiscal intermediary/CMS errors by March 12, 2007. Hospitals must follow this process for requesting corrections to their wage data, or else risk losing the ability to appeal these wage data issues to the Provider Reimbursement Review Board (PRRB).

Other wage index items to be discussed in the FY 2008 proposed rulemaking include the following:

CMS will consider penalties for hospitals that do not comply with submission of occupational mix survey data.
CMS will determine whether to extend the imputed rural floor (currently effective for FYs 2005 through 2007).

This article originally appeared in the December 2006 issue of Dennis Barry’s Reimbursement Advisor (Aspen Publishers).