Lower Medicare reimbursements, overnight hospital stays that insurers pay at an outpatient rate, and patients with high deductible plans forgoing elective surgeries all have put financial pressure on hospitals everywhere.
But Western Pennsylvania hospitals have an added burden most people don’t know about — one that played a notable role in last week’s news that more than half the region’s hospitals are operating at a loss.
It’s called the Medicare Wage Index, a calculation the Centers for Medicare and Medicaid Services uses to adjust the wage component of provider reimbursements based on prevailing wages in different geographic areas.
And this region is consistently at the losing end of that calculation.
“Pittsburgh has the lowest wage index of any major metropolitan area in the U.S.,” said Denis Lukes, CFO for the Healthcare Council of Western Pennsylvania in Warrendale, who estimates the index rating has cost the area $2 billion over the last 15 years.
“The bottom line is that our region’s hospitals don’t have as much money to do things that other regions do.”
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The “index” itself is based on the ratio of the area’s average hourly wage to the national average. Hospitals and physicians in metropolitan areas where wages are higher get paid a little bit more, and areas where wages are lower get paid less. It’s a zero-sum game in which a reimbursement gain by one area means a loss for another.
Pittsburgh-area hospitals currently have a rating of 0.8501, with a 1.0 rating representing the national average. That means that hospitals here would receive about 15 cents less on the dollar for the wage component of Medicare’s reimbursement than a hospital with a 1.0 wage index.
By comparison, Philadelphia’s wage index is 1.0977 and Cleveland’s is 0.9284. At the top nationally, Mr. Lukes said, is Santa Cruz, Calif., at 1.771, which means its wage component reimbursement is more than double that of Pittsburgh hospitals. The wage component typically represents more than half of the total Medicare payment.
The low ranking “clearly has a negative impact on hospital revenues and what hospitals are then able to pay employees,” making other markets more attractive for health care workers, said John Krah, executive director at the Allegheny County Medical Society, a professional association of local physicians.
“It hurts in recruiting physicians to southwestern Pennsylvania, and the low ranking is suppressing health care workers pay, which affects the broader regional economy as well.”
Because areas such as Santa Cruz receive more, they also can offer their workers larger salary increases, Mr. Lukes added, further raising their index “so the disparity increases as each year passes.”
Different groups have proposed changes to the index but Mr. Lukes said they have not gone anywhere.
A spokeswoman for CMS wrote in an email Wednesday that the Medicare statute requires CMS to adjust payments “for geographic variation in hospital wage costs. We group hospitals according to their metropolitan statistical area designation and calculate a wage index based on hospital-reported costs as required by law.”
Healthcare Council President A.J. Harper said, “A number of national reports and studies from multiple government and national agencies have recognized that the wage index is an issue. We need a level playing field to address this issue in our region and others.”
While it may sound reasonable that hospitals and physicians in areas with a higher cost of living should be paid more, Mr. Lukes said the index has become self-perpetuating. Because hospitals are paid less, it’s harder for them to offer staff significant raises, which pushes the region further down the index the following year.
Exacerbating that, he added, commercial insurers use the Medicare index as a benchmark for negotiating contracts as well, and the combination delivers a direct hit on hospital operating margins. “Just think what this market could have done with $2 billion more over the last 15 years,” Mr. Lukes said
Steve Twedt: firstname.lastname@example.org or 412-263-1963.