Effects of Medicare’s wage index on patient access and hospital care quality for older Medicare beneficiaries.

University Of Michigan At Ann Arbor, Ann Arbor MI

Investigators

Abstract

Each year, nearly $350 billion in Medicare spending is distributed across approximately 3,500 acute US hospitals based on a complex set of administrative policies. One important policy is the hospital wage index, which standardizes hospital payments by local labor costs. However, hospitals can obtain exceptions to the wage index formula, resulting in ~$2 billion in additional hospital payments, which are considered by many to be economically unjustified. Compounding these distortionary effects is the policy’s budget neutrality mandate, such that higher spending from increasing numbers of wage index exceptions is offset by lower payments to all hospitals. Together, the exceptions and offsets may either improve or erode some hospitals’ ability to hire staff and provide high-quality care, with implications for sicker and poorer patient populations who may receive poorer quality of care, thus making the policy regressive and harmful. Moreover, hospitals receiving exceptions may use additional revenue to shift existing patients or admit new ones into higher-paying services, thereby shifting the composition of services and potentially restricting access to lower-paying services. We will explore the effects of Medicare’s hospital wage index policy, by examining (1) financial, (2) staffing and quality and health outcomes, and (3) access and costs (because of changes in the mix of hospital services) associated with exceptions and offsets, using 100% Medicare claims and wage index data. Innovation: While of equal or greater impact on hospital revenue, relative to other Medicare payment policies and reforms, the wage index has had limited study. Our econometric analyses can thus offer novel insights beyond current work that primarily consists of reports from contractors and agencies that have not assessed staffing, access, and health, effects of the wage index exceptions and budget neutrality offsets. Impact: While theoretically a reasonable accounting tactic, when coupled with unjustified exceptions, budget neutrality may lead to undesirable and unintended effects related to hospital investments and quality, with important implications for older adults’ health. Fewer or lower-quality services, and lower nursing staffing ratios under these remediable payment distortions could diminish patient safety and increase adverse events. Given the push to address the adequacy of payments to ensure patient care access and quality, and growing understanding that Medicare policies may harm less resourced providers, our work can inform future wage index policy. Policymakers could use our findings to help understand and redirect reimbursements (without wage index exception distortions) to improve access to certain types of care.