Geographic Adjustment in Medicare Payment Phase I: Improving Accuracy (2012) / Chapter Skim
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2 Labor Markets and Payment Areas
2 Labor Markets and Payment Areas
Pages 37-60
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From page 37... ...
Because of this, the committee considers local labor markets to be the conceptual and empirical foundation of geographic adjustment. This chapter provides a brief overview of labor markets: what they are and how they work.
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From page 38... ...
Moreover, because hospitals and physicians use the same types of labor inputs drawn from all employers in a similar geographic area, the committee proposes the use of one labor market definition for both sets of providers. The physical boundaries of these markets define the extent of geographic variations in input prices so that the same adjustment can be made to the payment made to all hospitals and physicians within the market boundaries (see Box 2-1 for an explanation of how the geographic adjustments work)
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From page 39... ...
The implication for operationalizing payment areas is that providers facing similar labor input prices should be grouped together within labor markets and receive the same adjustment, based on the prevailing wages in those markets. There is also an implication for determining which industries' wage data should be used to calculate the wage index.
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From page 40... ...
Labor markets can be defined across many dimensions, such as occupation, industry, geography, and sector. In the case of hospitals and physician offices, where nurses, doctors, medical technicians, food service workers, janitors, and other types of employees come together in a physical location to provide personal health care services, it makes sense to define the labor market geographically.
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From page 41... ...
A large, overly broad labor market definition will fail to identify differences in the prevailing wages faced by hospitals and physician practices, and it will contain providers with true wage indexes that vary widely. In contrast, markets that are drawn too narrowly will separate providers that do compete for the same workers and pay the same wages for a given occupation.
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From page 42... ...
Northern Dutchess Hospital in Rhinebeck, New York, and Kingston Hospital in Kingston, New York, are 4 miles apart, and although their close geographic proximity should mean that they compete against each other for labor, they have different wage indexes because they are classified as operating in different labor markets. The index for Northern Dutchess Hospital is 1.14, whereas the index for Kingston Hospital is 0.91.3 Of course, any set of administrative market boundaries, especially boundaries set according to a national formula, will be imperfect.
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From page 43... ...
The current ver sion of this file identifies 392 MSAs, including Puerto Rico but no other territories (Wage Index and Capital Geographic Adjustment Factor [GAF] for Acute Care Hospitals in Urban Areas by CBSA and by State -- FY 2011)
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From page 44... ...
Since Medicare moved from cost-based to prospective payment in 1983, the Centers for Medicare and Medicaid Services (CMS) has used MSAs and statewide non-MSAs to delineate areas whereby Medicare payment to hospitals should be adjusted for geographic differences in wages.
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From page 45... ...
. At the inception of Medicare, CMS did not attempt to design these areas as representations of labor markets or even wholly on the basis of provider cost variation.
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From page 46... ...
COMMITTEE ASSESSMENT OF EXISTING PAYMENT AREAS Hospital Payment Areas The MSA geographic classification system is a reasonable method for determining hospital labor markets because MSAs are defined according to where people work. The definition has inherent logic for the challenging task of drawing geographic labor market boundaries.
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From page 47... ...
Single statewide labor markets are likely to contain wage gradients, particularly in large western states where hospitals within the same statewide area can be separated by hundreds of miles yet receive the same wage index. Within an MSA, hospitals in core metropolitan areas 7 These wage indexes are on the basis of FY 2011 HWI data (downloaded from the CMS website)
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From page 48... ...
Wage Data So far, discussion of labor market definitions has focused on the geographic component. The selection of industries from which wage data are used to construct each area's wage index is also critical to the definition of a labor market and its performance.8 To properly reflect the prevailing wages faced by hospitals in an area, the wage data used to create the HWI should come from all employers that compete for hospital workers.
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From page 49... ...
. In 1990, Wright and Marlor proposed testing the product markets and labor markets developed by the U.S.
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From page 50... ...
In addition to respecting the fundamental definition of a labor market, use of data from non-hospital workers helps to solve the practical problems of volatility and circularity in the HWI. "Volatility" is the term used to describe sharp year-to-year fluctuations in the wage index after, for example, a sudden change in the local supply of certain occupations or hospital adoption of a new union contract that raises wages significantly.
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From page 51... ...
As with hospitals, physician payment areas should group physician practices that face similar input prices. Analyses to examine how well a geographic classification system performs are complicated by two factors: (1)
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From page 52... ...
The committee discussed the use of aggregated geopolitical units defined by input markets or by consumer consumption of health care and ways of defining labor markets using hospitalspecific factors. The alternatives were assessed on the basis of various criteria: the number of payment areas created (a greater number of payment areas may increase not only accuracy but also the number of boundaries and the opportunity for wage cliffs)
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From page 53... ...
The committee acknowledges problems with using the rest-of-state areas as labor market proxies, particularly in areas adjacent to MSAs; county-based smoothing methods based on cross-MSA commuting of hospital workers, as discussed in Chapter 4, are designed to resolve many of these issues. County-based smoothing would raise the wage index for hospitals in rest-of-state counties that compete for workers living in adjacent counties located within an MSA.
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From page 54... ...
Indeed, the labor market for hospital and physician practice TABLE 2-3 Overlap in Occupations Used in Physician Practices and Hospitals Share of Physician Share of Office Labor Hospital Labor Top 10 Occupations in Physician Practices (%)
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From page 55... ...
1,809 106 NOTE: MSA = metropolitan statistical area. The county level, the locality level, and MSA actual geographic adjustment factors (GAFs)
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From page 56... ...
Total 180 MSA 130 Statewide non-MSA 41 Rest of State 9 NOTE: The county level, the locality level, and MSA actual geographic adjustment factors (GAFs) were derived from county level 2012 fully transitioned geographic practice cost indexes (GPCIs)
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From page 57... ...
Since hospitals and physicians draw labor from essentially the same pool, the same labor markets should be used for both the hospital wage index and the geographic adjustment factor. There is little economic justification for using the 89 current physician payment areas.
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From page 58... ...
This ensures that labor markets are updated and relieves CMS of the administrative burden of redefining labor markets in response to claims that they are outdated. Recommendation 2-2: The data used to construct the hospital wage index and the physician geographic adjustment factor should come from all health care employers.
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From page 59... ...
Using data from the industries in which employers compete for workers and workers compete for jobs is fundamental to the definition of labor markets for the geographic adjustment of Medicare payment. Wage data are discussed in more detail in Chapter 3.
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From page 60... ...
M., 1987. Improving the definition of hospital labor market areas and wage indexes.
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