Should Your Hospital Consider Reclassification?

The new interim final rule on Hospital Reclassification, entitled “Modification of Limitations on Redesignation by the Medicare Geographic Classification Review Board (CMS-1762),” was reviewed and approved by the President on April 13, 2021, and will be published in the Federal Register very soon.

Medicare pays hospitals differing rates for inpatient treatment based on the geographic areas where the hospitals are located. The Medicare law gives hospitals the opportunity to adjust how they are classified based on the average hourly wage they pay to their employees.

Each hospital that is paid under the Medicare inpatient prospective payment system (IPPS) is assigned a wage index value based on the geographic area in which it is physically located. The wage index value determination involves four steps:

  1. Defining geographic labor market areas
  2. Determining hospital wages
  3. Adjusting hospital wages for occupational mix
  4. Calculating geographic area wage index values

The wage index is intended to ensure that the Medicare inpatient prospective payment system (“IPPS”) payment for the 3,220 hospitals that are paid under IPPS reflects geographic differences in wages; some hospitals in lower-wage areas have concerns about the fairness of the wage index resulting from the differences between relatively low and high hospital wage areas and the locations from which the hospitals draw employees. To address some of the concerns about the wage index, Congress created a number of exceptions. These exceptions allow qualifying hospitals to reclassify to a higher wage index geographic area or to receive adjustments to their geographic wage index values.

The National Academies of Sciences, Engineering, and Medicine estimated that nearly 40% of IPPS hospitals received a wage index reclassification or adjustment under one or more of these exceptions in FY2011. A comparable percentage of hospitals continue to receive reclassifications in FY2021, as noted in a Congressional Research Office report dated March 3, 2021.

The interim final rule (RIN 0938-AU56) has not been considered to be economically significant by the Centers for Medicare & Medicaid Services. Little is known about the content of the interim final rule, other than its title.

The Medicare Geographic Classification Rule Board (the “Board”) makes determinations on hospitals’ requests to reclassify to a different wage area for purposes of receiving higher payments for treating Medicare patients. The Board requires hospitals seeking to move to a new wage area to apply electronically with supporting documents.

Be on the alert for the publication of the interim final Rule on Hospital Reclassification and consider if your hospital should apply for geographic reclassification.