Section 1886(d)(3)(E) of the Social Security Act requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts “for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.” This adjustment factor is the wage index. We currently define hospital geographic areas (labor market areas) based on the definitions of Core-Based Statistical Areas (CBSAs) established by the Office of Management and Budget and announced in December 2003. The wage index also reflects the geographic reclassification of hospitals to another labor market area in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act.
The Act further requires that we update the wage index annually, based on a survey of wages and wage-related costs of short-term, acute care hospitals. Data included in the wage index derive from the Medicare Cost Report, the Hospital Wage Index Occupational Mix Survey, hospitals’ payroll records, contracts, and other wage-related documentation. In computing the wage index, we derive an average hourly wage for each labor market area (total wage costs divided by total hours for all hospitals in the geographic area) and a national average hourly wage (total wage costs divided by total hours for all hospitals in the nation). A labor market area’s wage index value is the ratio of the area’s average hourly wage to the national average hourly wage. The wage index adjustment factor is applied only to the labor portion of the standardized amounts. Note that in the FY 2012 IPPS final rule, CMS finalized a policy that allows a Lugar hospital that is eligible for and accepts the outmigration adjustment to automatically waive its urban status for the 3-year period for which the outmigration adjustment is effective.