Fixing Medicare’s Flawed Geographic Adjustment System

February 4, 2022 Christopher Holt

Last Fall, AAF’s Jackson Hammond took a deep dive into the world of Medicare geographic payment adjustments, finding that Medicare’s attempts to tweak hospital payments for geographic cost variation “suffer from limited data and decades-old assumptions.” Following up on that paper, Hammond  this week penned a second piece reviewing proposals for improving geographic adjustments. But while proposals from MedPAC and others would potentially improve upon the existing system, they could also worsen reimbursement discrepancies for some regions. 

Unsurprisingly, the bulk of Medicare’s fee-for-service spending is payments to providers. To ensure these payments account for variations in underlying cost, Medicare adjusts them by geographic area. Medicare uses the Hospital Wage Index (HWI) and the Geographic Practice Costs Indices (GPCIs) to account for these regional variations in the price of labor, but there are a number of problems with both the sourcing and occupational mix of HWI and GPCI data, leading to inaccurate payment outcomes. Both MedPAC and the Institutes for Medicine (IOM) have, in the past, recommended changing the data source for the HWI, using the same geographic boundaries in setting the payment regions for both the HWI and GPCI factors (the factors currently use two sets of regions), altering the GPCI formula, and adjusting the occupational mix in both adjustment factors. Hammond provides detailed explanations of each potential change so we won’t travel too far down the rabbit hole here, but the bigger point is that these proposed solutions are insufficient on their own, and it is likely they could actually worsen payment discrepancies in some regions. Further, the payment changes that would result from these policy shifts are oddly divergent. 

For example, the two worst Medicare margins (the percent of costs that Medicare payments cover) for short-term care hospitals in the country under the current system of geographic adjustment are in the San Francisco (-41.2 percent) and Seattle (-27.7 percent) areas. Both regions also get insufficient adjustment via the HWI. While San Francisco hospitals might see a Medicare margin deficit over four times the national average (currently around -10 percent), its HWI bump is just under two times the national average, and Seattle hospitals have an HWI adjustment that barely surpasses the national average. Now, if the proposed changes to the HWI were implemented to better account for labor costs, San Francisco would see further decreases in the HWI (-21.59 percent) that would lead to even worse reimbursement and margins, while Seattle would see a slight increase (2.12 percent) and a slightly higher reimbursement. There is no obvious reason for these disparate outcomes, and other high-cost regions would see similarly divergent impacts with decreases for New York City (-13.02 percent), Boston (-10.85 percent), and Los Angeles (-7.98 percent), but an increase for Washington, D.C. (4.45 percent). 

What should policymakers take away from all of this? First, the HWI and GPCIs have serious flaws leading to inequitable payments to some providers that do not always adequately adjust for regional differences in the price of labor. Second, the few solutions that MedPAC and the IOM have proposed date back over a decade, before both the Affordable Care Act and repeal of the Medicare Sustainable Growth Rate, and need to be reviewed. Third, based on Hammond’s analysis, these proposals are imperfect, creating divergent outcomes and in some cases worsening under-reimbursement. Fourth, while Medicare’s finances face increasing pressure going forward, and accuracy in reimbursement is crucial to making decisions about the program’s future, policymakers should not rush to implement a flawed fix. Developing workable solutions will require further study and much more comprehensive data. Fifth, a one-time fix is unlikely to be sufficient. Medicare would benefit from regular review and updating of these payment adjustments. Policymakers, providers, and patients need updated solutions, better data collection, and a system of periodic review. 

Disclaimer

https://www.americanactionforum.org/weekly-checkup/fixing-medicares-flawed-geographic-adjustment-system/#ixzz7KHoXevd1
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