In a report released last week, the Institute of Medicine (IOM) recommended that changes be made to increase the accuracy of Medicare’s geographic adjustment.  Medicare is a nationwide program, but the payments made to health service providers vary across regions in order to account for differences in overhead costs, which are typically higher in metropolitan areas.  Geographic adjustments for hospitals are determined by the hospital wage index (HWI), whereas adjustments for physicians' offices are determined by the geographic practice cost index (GPCI).  The IOM believes that geographic adjustment should be modified to make it more accurate.  The adoption of these recommendations would increase Medicare payments in some areas, while decreasing the amount of payments in others.

Currently, the geographic divisions used to adjust payments differ for payments made to a hospital versus payments made to a physician.  The Institute of Medicine found this distinction to be unwarranted, and it recommended that one set of geographic divisions be used for both hospitals and physicians.  The report also recommends that the index used to adjust payments to hospitals and the index used to adjust payments to physicians use health sector data from the Bureau of Labor Statistics.  For both hospitals and physician offices, the report recommends that a wider range of occupations in the healthcare industry be included in their respective indexes.  The different occupations would be weighted for the hours worked by that occupation and the occupation-specific weight would be consistent nationwide.  As a result, the Institute of Medicine believes that the index will reflect the price, rather than the reported cost of labor.

There presently may be large differences in the adjustment under either the HWI or the GPCI on either side of a border between two geographic adjustment areas.  The report makes an effort to smooth out the borders by taking commuting patterns of employees into account.  The “smoothing of borders” is intended to replace the current system of geographic reclassifications and exceptions.

The IOM’s recommendations are intended to increase accuracy and to be budget neutral. If the recommended changes do affect the total amount of payments made to healthcare providers, the report instructs the Centers for Medicare and Medicaid Services to re-calibrate the payments to maintain budget neutrality.  For a copy of the report, click here.