Insights: Article

Why It Pays to Assess Your Wage Index

By Eddie Phibbs

January 25, 2016

In an age when reimbursement is becoming more challenging and there is ongoing pressure on the bottom line, health systems and hospitals need to pay attention to every area where revenue may be slipping through the cracks. Medicare’s wage index survey may be one of them.

The wage index is Medicare’s formula for determining payment based on what the cost of hiring is in a specific geographical area (the area where your hospital is located). Salaries, benefits, contract labor—are all comingled to determine your average hourly wage (AHW). Medicare compares the AHW to the national average. If your hospital is below the national average, you’ll be paid less than average. This is revenue that you may be able to recoup by assessing your wage index and trying to increase it.

Medicare groups hospitals into Core-Based Statistical Areas (CBSAs). Depending on your location, you may be one of many hospitals in your CBSA, or you may be the only one in it. If there are multiple hospitals in your CBSA, all of the facilities’ wages and hours will be used to determine the overall average for the CBSA. In this instance, ensuring that your AHW is reported accurately helps to impact the CBSA’s payment rate. Collaborating with the other facilities in your CBSA to take a holistic approach can also help to improve your reimbursement.

If you are the only facility in your CBSA, you have a higher chance of raising the rate and we strongly recommend that you evaluate your wage index every year. Keep in mind that each year you have until the first week of September to report any adjustments in your wage index. So timing is important.

In our work with hospitals, we conduct wage index assessments to examine the following:

  • Salaries. These typically are stable and do not have much room for change, but you would anticipate they increase annually. We review all bonuses to ensure they are treated or reclassified as salaries and any associated hours are removed. We also review all reclassification of salaries and confirm the associated hours have been reclassed in the wage index, as well.
  • Hours. Here is an area where there is substantial opportunity. If the hours can go down, the AHW goes up. We review your payroll report, strip it down to every pay code and category and look for hours that can be removed and/or adjusted. Medicare only requires that you report worked hours.
  • Benefits. Sometimes benefits get buried in departments. We work with the HR Director to make sure that all benefits are being identified and reported correctly and are allocated properly to all areas of the hospital.
  • Contract labor. This is often where the most opportunity lies. Many hospitals don’t have the time or resources to track down detail of hours from their contracted vendors. Also, contract labor can fall into a variety of categories on the General Ledger. Your contracted vendors need to provide a detailed bill with charged hours. Contract labor is typically put into two buckets: “Direct Patient Care” and “Administrative and General” (A&G). A&G can include services such as legal, consulting and audit. Detailed invoices are imperative to capture hours worked. Professional contract labor may have very high hourly rates, which can significantly help improve your AHW. Remember, however, that all contract labor has to be included.
  • Physician Part A. We make sure that anytime a physician is doing administrative work, the hours are included in the wage index. Medical directors spend a lot of time on Administrative time (Part A time) so that should be captured. Time studies or contracts need to be your source documentation for support.

With careful analysis, you can discover opportunities to improve your wage index. This can have a positive impact on your Medicare reimbursement. Regularly evaluating your wage index can pay off in a big way and is one of the few ways a hospital can impact its future Medicare reimbursement.

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