Medicare’s reimbursement scheme uses a wage index to reflect the difference in labor costs across the country. The wage index reflects the variation in payment rates to hospitals in a geographic area relative to the national average hospital level. Some experts believe that limited data sources and broad labor market areas skew the wage index, resulting in inequitable payment rates. To address the issue, MedPAC — the Medicare Payment Advisory Commission that advises Congress on Medicare payment changes — presented recommendations to improve the current Medicare wage index in its June 2023 report to Congress.
In 2007, MedPAC recommended an alternative wage index method that would more accurately reflect differences in labor costs across geographic areas and be more equitable across providers, but it was not implemented. Since then, the inaccuracies and inequities have grown, in part because Congress and CMS made additional exceptions to the wage index. In 2022, about two-thirds of hospitals’ wage index values were affected by exceptions, resulting in payments to all hospitals being reduced by 2.2%. On June 15, 2023, MedPAC included an update of its 2007 recommendations on how to change the Medicare wage index in its report.