An obscure formula that helps determine how much hospitals will be reimbursed for treating Medicare patients is giving Western Pennsylvania hospitals fits.

Over the past eight years, the Medicare Wage Cost Index has gone down 13.9 percent for the region's hospitals, costing them more than $300 million in reimbursement dollars. Hospitals in many other parts of the country have seen increases.

"That's the big question: Why this disparity? Is it the methodology? Is it a math error?" asked A.J. Harper, president of the Hospital Council of Western Pennsylvania.

All hospitals are vying for a share of one finite pot of reimbursement money. When one region's share increases, another region's reimbursement will decrease.

For southwestern Pennsylvania hospitals, the index has sent them on a downward arc -- a "death spiral," Mr. Harper says -- in which the disparity continues to grow.

The index is based on a formula that includes data on salaries of all hospital employees, including physicians in some cases, plus benefits including pensions and other labor costs. If a hospital's labor costs are lower, the reimbursement for Medicare procedures is also lower.

In 2000, the average national salary for hospital employees was $21.18, and $20.41 in Pittsburgh, a difference of 77 cents. For 2010, the national average is $33.54 while Pittsburgh is at $28.86, or $4.68 less.

"You get less and less Medicare dollars every year, so you can't pay those higher salaries. But people who are paying more get more money and they can continue to pay more," said Nancy Bell, senior managing director of health care finance for Stevens & Lee consultants in Reading, Berks County. She has been working with Mr. Harper and the hospital council staff.

This is how the index affects the bottom line: If the national average reimbursement for an appendectomy were $5,000, then Pittsburgh hospitals would get a $4,566 payment from Medicare because of the region's lower wage cost index. For the same procedure, Philadelphia hospitals, which have higher than average wage costs, would receive $5,200, said Ms. Bell.

The falling wage index affects hospital employees the most, said Pat Raffaele, vice president for advocacy and communications at hospital council. "We can't give them the same wage increases as hospitals that have higher wage indexes in areas similar to ours," she said. But it could also affect consumers if hospitals have to cut back services for financial reasons.

Wage costs are lower here, Ms. Bell said, in part because the large number of nursing schools combined with hospital closings have kept salaries down. More than that, "You live in a region of the country where hospitals are operating efficiently and you are making every effort to keep your labor costs down," she said.

"But Pittsburgh is not being rewarded for being prudent."

Two years ago, hospital council officials did a "data scrub" to make sure the region's hospitals were correctly and fully reporting the appropriate costs. That netted an extra $2 million, and another $13.3 million last year.

"Data scrubbing can only do so much," said Ms. Bell. "Thirteen million dollars is a significant amount of money, but not when you're trying to make up $300 million."

Still, the data leads area officials to suspect something is amiss.

According to the wage index, Pittsburgh-area hospitals have lower labor costs than Lawton, Okla., as well as some hospitals in North Dakota.

Two years ago, hospital council officials learned that the now-closed Aliquippa Hospital did not submit wage information, so surveyors simply entered "$10 per hour" as the average wage, bringing down the region's average by $3 million. They got Aliquippa removed from the formula, but still wonder if there are other inaccuracies?

A Centers for Medicare and Medicaid spokeswoman, who asked not to have her name published, said the agency is aware of the region's concerns, but said, "The wage index issues are very much data driven."

Highmark officials handle most of the cost record audits in Pennsylvania, and Mr. Harper believes they do a thorough job. But he wonders if intermediaries in other parts of the country do the same. He said hospitals in some areas never undergo audits.

Highmark spokesman Michael Weinstein said the insurer is not in a position to know what's happening in other regions. "They (hospital council officials) have brought it to our attention and we've tried to be supportive of their efforts, but the ultimate resolution lies with the Medicare program."

One reason Western Pennsylvania hospitals have lower average wages than their counterparts in the eastern part of the state, Mr. Harper believes, is the greater prevalence of outsourcing work in the East in areas such as housekeeping and food handling. Because these are among a hospital's lower paying jobs, their removal from the formula raises average wages in the East.

The government has taken some steps to blunt that influence in recent years, said Ms. Bell, but it still exists.

Western Pennsylvania hospital officials know they could show higher average wage costs if they did more outsourcing, said Mr. Harper, but are reluctant to go that route because of its impact on staff.

"We talk to the CEOs and they say they try to keep as many people employed as they can."