Rural Hospital Wages and the Prospective Payment System Wage Index: 1990-1997

The hospital wage index is used by HCFA to adjust hospital DRG payments for regional variation in the cost of labor. There has been concern among rural policy analysts that the index is biased against rural markets, and that it results in systematic underpayments to rural hospitals. Criticism of the wage adjustment has focused on three issues: 1) accuracy and timeliness of the wage and hour data; 2) arbitrary use of geopolitical boundaries to define labor markets; and 3) failure of the index to separate the effects of pure regional wage variation from those of occupational mix.

Changes in the wage survey instruments have addressed several of the problems regarding accuracy and precision of wage and hour data. Since 1992 the Medicare Geographic Classification Review Board (MGCRB) has reviewed individual hospital cases to address situations where the county boundaries clearly do not conform to economically coherent markets. This study analyzes the index values and individual hospital hourly wage data for a seven-year period, with and without the effects of hospital re-designations, to determine if the incremental changes made since 1990 have improved the precision and equity of the index as a national payment adjuster.

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