The University of Pittsburgh Medical Center usually has enough clout to get its way.

But not, at least yet, on the issue of Medicare reimbursements.

Frustrated with a recent slowdown in payments from the federal health insurer, the 19-hospital UPMC tried for several years to have the Pittsburgh health-care market reclassified with Eastern Pennsylvania as a way of boosting the region's average wages -- a key measure used in the calculation of Medicare hospital reimbursements.

When first approached with the idea in 2003 federal officials thought it was "crazy," according to former UPMC lobbyist Jason Altmire, now a congressman. And UPMC, he said, "overplayed its hand" by asking for too much and pressing its case too hard, even after the decision to turn down the request had been made. "The further along the situation went, the worse and worse it got as far as adversarial conversations that were taking place," Rep. Altmire added. "I think UPMC viewed this as money they were owed, and [Medicare] viewed it differently."

The experience of UPMC highlights the local frustration surrounding the Medicare payment process.

The basic idea behind the program is that the government pays a fixed cost for each Medicare patient (65 and older) depending on the nature of the illness. A majority of that reimbursement is meant to cover hospital labor costs, so the higher the wages in a city year-to-year, the higher the Medicare payments, which can range from $4,000 to $6,500.

What hurts the 36 Pittsburgh-area hospitals is that year after year their average wage drops below the national average even as health-care costs continue to rise. In fact, local wages are retreating faster than almost any metropolitan area in the country -- the Pittsburgh "wage index" is down almost 14 percent since 2001 (only Muncie, Ind., has tumbled more). The result is tens of millions of dollars in reduced reimbursements tied to the wage decreases, according to Ernst & Young. The total given up between 2001 and 2007, according to the firm, was $370 million.

The region's aging demographics only intensify this issue. Medicare is typically the single highest source of income for hospitals in southwestern Pennsylvania, a region where the 65-and-older set makes up 17 percent of the population, compared with 12.4 percent nationally. At UPMC, as an example, money from Medicare comprises 42 percent of the system's total patient revenue -- the next largest revenue source is 24 percent from insurer Highmark. The Ernst & Young study shows UPMC losing more than $137 million between 2001 and 2007 due to the Medicare wage adjustments.

That money "moves ... from Western Pennsylvania to other parts of the United States," said Edward Karlovich, chief financial officer for UPMC's academic and community hospitals.

The region's second-largest hospital network, West Penn Allegheny Health System, lost more than $81 million to the Medicare wage reconfigurations since 2001, according to Ernst & Young. West Penn Allegheny vice president of finance, Denis Lukes, said his books showed something slightly different -- a $71 million loss over that time, including $25 million in just the last two years -- and credited the drop to a rise in salaries along the West Coast.

The long-term effect is severe, he said. As the hospitals receive less, they pay people less, which makes it harder to recruit and harder to compete with hospitals in other states.

"It is self-perpetuating," he said.

Added West Penn's vice president for legislative affairs, Peg McCormick Barron, "The whole system needs to be reformed."

St. Clair Memorial Hospital in Mt. Lebanon claims it lost $800,000 between 2006 and 2007 to the wage index drop; while the Ernst & Young study shows St. Clair losing more than $11 million from 2001 to 2007.

"There are winners and losers in this wage index," said Richard Chesnos, St. Clair's senior vice president and chief financial officer. "Clearly Pittsburgh is a big loser."

Individual physician practices also are struggling with the shifting dynamics of Medicare payments. Doctors with their own practices are bracing for a 10 percent average cut in reimbursements come January -- a move that will cost physicians an estimated $274 million statewide, according to the Pennsylvania Medical Society.

The cuts, which vary according to procedure, could be frozen or reversed at the last minute, as they have in years before. If not, doctors will be forced to "make very difficult decisions," said Dr. Alan Yeasted, St. Clair's senior vice president and chief medical officer. "This is an issue that is going to have a very large impact on the economy of this region and the medical care that can be delivered five to 10 years from now."

At the same time, Medicare is looking for ways to better align its payment system with quality incentives. A "pay-for-performance" proposal sent to Congress last month would cut reimbursements to all hospitals by a flat 2 percent to 5 percent. The money saved would be set aside as bonuses for hospitals that meet certain quality standards. Such a measure, if approved, has the potential to squeeze margins of local hospitals even tighter.

Many observers are reserving judgment on the proposal.

"I think the devil is in the details," said Pat Raffaele, vice president of advocacy and communications for the Hospital Council of Western Pennsylvania, which has been studying the reporting of hospital wage data as a way of pinpointing the recent drop in local reimbursements.

Outside Pittsburgh, hospitals around the country are both worried and hopeful about the many changes proposed for Medicare -- in fact, the agency overseeing Medicare has pledged to re-examine the wage index formula next year. Meanwhile, some legislators are still working the system to see if they can change the game for big institutions in their districts.

In a bill passed by the House in August, U.S. Rep. Tim Ryan, a Democrat from Niles, Ohio, was able to insert a cryptic provision reclassifying the Youngstown-area Forum Health and Humility of Mary Health Partners into the Cleveland-Akron-Elyria statistical area -- thereby moving the hospitals into a higher Medicare reimbursement category. The provision did not name the hospitals, but instead referred to institutions in an area with a 2000 population of "at least 500,000, but not more than 750,000" and a loss of at least 10,000 people in the decade prior. The change would have meant $2 million more a year for both hospitals.

The same bill contained special help for other hospitals in Wisconsin; Tennessee; Toledo, Ohio; New Jersey; and upstate New York, with legislators inserting language that moved hospital boundaries to higher reimbursement areas. One hospital near the border of Wisconsin and Upper Michigan was "deemed to be located in Chicago," for example.

The special provisions -- called "rifle shots" -- eventually were stripped out amid complaints from Republican lawmakers. "This was something slipped in in the dead of night," said U.S. Rep. Phil English, R-Erie. "I don't doubt the communities involved deserved some consideration, [but] in Western Pennsylvania we were equally deserving of consideration."

Sometimes, in the search for higher Medicare reimbursements, it helps to be lucky. Sixty-five miles north of Pittsburgh, the Sharon Regional Health System struggled for years to boost its payments and hold its own against hospitals on the other side of the Ohio border. But nothing worked -- not an official request that Medicare reclassify the 1,800-person hospital as part of a larger metropolitan area or an attempt to make that happen through special legislation.

That all changed after the 2000 U.S. Census folded Sharon into the neighboring Youngstown, Ohio, metropolitan area, a higher reimbursement area. The move immediately increased Sharon Regional's annual Medicare reimbursements by millions of dollars, starting in October 2004. Sharon-area hospitals now receive $186 more per case than hospitals in Pittsburgh, despite the fact that Pittsburgh metropolitan area is almost four times as large.

It was "pure dumb luck," said Sharon Regional's chief financial officer, Jeff Chrobak.

For hospitals not as lucky, Congress in 2003 offered $900 million as a way of relieving payment inequities; any hospital could apply for a temporary three-year reclassification to a higher reimbursement area within the same state.

UPMC, Rep. Altmire said, wanted to be reassigned to Philadelphia -- a change that would have meant $90 million for UPMC, or 10 percent of the entire pie made available nationally. UPMC's Mr. Karlovich does not recall if the proposed relocation was Philadelphia or Lancaster but acknowledges that Rep. Altmire had direct conversations with Medicare at the time. UPMC's argument, according to Rep. Altmire, was that it competed with the largest hospitals in the country for talent, and the low Pittsburgh-area wage index made it difficult to do so.

Despite UPMC's lobbying, Western Pennsylvania hospitals were left out of the program. West Penn Allegheny also applied and was denied. UPMC then "spent three years trying to convince [Medicare] to let them in," Rep. Altmire said. But Medicare, overseen by the Centers for Medicare and Medicaid Services, "just doesn't buy the fact that Pittsburgh's costs are the same as Philadelphia's costs, and they are never going to buy it."

UPMC's size and profitability ($618 million in fiscal 2007) also worked against it, the congressman said. With that much profitability, he asked, "How do you make the case you are being underpaid by Medicare?"

After being denied the money, UPMC and West Penn got together for a while and made their arguments about Medicare jointly; that effort is not as active as it was a year ago, Mr. Karlovich said. But, "We have not given up hope of trying to improve the situation for our region," he added. Asked if UPMC wanted a special legislative situation, perhaps grouping UPMC with a higher-paying region, Mr. Karlovich said, "We have gone and talked to folks" and it has "not been a receptive environment."

The fight for the $900 million was too politically motivated, Rep. Altmire said, and, "I don't want to go through that again." Instead, he hopes to "revise the [Medicare] formula and rationalize it" while ensuring that "Western Pennsylvania as a whole gets the reimbursements that they need."

Added Rep. English: "I think we can make a case the whole system is broken and Western Pennsylvania is one of the areas I would consider a loser."