This is the final working paper for an article that appeared in the January, 1995 issue of Rural Health, The News Magazine of the National Rural Health Association
The Occupational Mix Adjustment - A Billion Dollar Data Glitch
by Tim Size
A History of Policy Wonk GridlockRecommendation #15 of the March, 1994, ProPAC Report and Recommendations to the Congress stated that, "The Secretary should develop and implement improved methods for collecting data on employee compensation and paid hours of employment for hospital workers by occupational category. Once these data become available, the Secretary should implement an adjustment to the hospital wage index under PPS. This adjust-ment would correct the wage index for the inappropriate effects of including geographic differences in the mix of occupations employed."
Say what? The bottom line here is that the failure to adjust area hospital wage data for differences in occupational mix cost rural hospitals and their communities about
$200 million in Federal Fiscal Year 1994, well over a billion dollars since the Medicare DRG payment method was implemented in 1983. (This estimate is based on data in ProPAC's Annual Congressional Medicare Report and in a soon to be published paper on alternative wage models from Tony Wellever at the University of Minnesota.)
On average, rural hospitals would receive more than a two percent increase from Medicare for inpatient services if the wage index was adjusted for area differences in occupational mix--increasingly scarce new dollars that would go directly to each hospital's bottom line. In some particularly disadvantaged areas, the increase would be significantly higher.
ProPAC's rationale is that "hospitals located in large cities tend to employ a substantially more expensive mix of labor than hospitals located in rural areas. Consequently, the current wage index values for large urban areas tend to be too high, while those for rural areas tend to be too low. This results in overpayment for some hospitals and underpayment for others."
"Adjustment of the wage index for occupational mix would substantially improve pay-ment equity among hospitals under the current PPS labor market definitions. . . ProPAC believes an occupational adjustment would reduce variation in wage index values among nearby hospitals and would help the age index more accurately reflect the labor price levels hospitals face."
HCFA's response in the May 27th Federal Register could not have been less encouraging: We are not convinced that an occupational mix adjustment would improve the accuracy of the wage index, as we have discussed most recently (sic) in the 1991 final rule . . . Hospitals would not be compensated for a mix of employees above the standard while hospitals with a mix of employees below the standard would be overcompensated relative to their cost of labor." HCFA continues to offer no explanation or data to sustain their position; they do not reference the existing case mix adjustment that already reimburses those hospitals with more complex cases that may justify a "richer" occupational mix of staff.
What we have here is a traditional ping pong match between two federal agencies with those of us outside the Beltway left hanging on the net. ProPAC is saying that the lack of an occupational mix adjustment causes an under payment of rural hospitals, while HCFA says just the opposite, that its implementation would cause an under payment of urban hospitals. Go figure.
In 1993, HCFA assembled a discussion work group with "representatives" from the hospital industry and "presented ProPAC comments concerning the equity of adopting a method to collect data to assist in the development of an occupational mix. The work group's consensus was that the data required to implement the proposal is not currently available and the likelihood of obtaining such data would be minimal. There seems to be little support among hospital industry representatives for developing a system that in their opinion clearly creates additional reporting burdens with an unproved or minimal impact on the distribution of payments." As the development of an occupational mix adjustment appears to clearly advantage rural hospitals at the expense of urban hospitals and as a rural hospital perspective was probably under-represented or not represented at HCFA's invitational meeting, the alleged "consensus" is, at a minimum, highly suspect.
Shalala's Rural Advisors May Tip the BalanceLast September, Donna Shalala's National Advisory Committee on Rural Health (NACRH) agree to make a recommendation to the Secretary that supports ProPAC's position on the need to standardize wage data by occupational mix. Hopefully, this action will be the beginning of the end of HCFA's stonewalling of the original ProPAC recommendation.
Committee discussion focused on points similar to those raised earlier by ProPAC: The occupational mix adjustment has not been implemented due to problems getting the data. Without this correction, hospitals with a more expensive mix of labor in effect are paid twice; they receive a case mix adjustment to acknowledge their greater proportion of higher paid staff but then get the same adjustment again through the flawed wage index adjustment. Hospitals with a less expensive occupational mix lose on the case mix adjustment and then a second time through the flawed wage index adjustment.
As noted by NACRH in its formal recommendation: "Just as the PPS market basket reflects the costs of purchasing an average mix of inputs, the labor market adjuster should reflect the cost of hiring an average mix of employees. The purpose of the labor market adjuster should be to reflect the difference between the prices in the particular labor market area and national average prices. The actual labor cost in a labor market area needs to be adjusted for differences in occupational mix so that hospital payments reflect these supply differences and do not reflect the results of different hiring decisions made by hospitals in different labor market areas."