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IOM on Medicare Geographic Payment Adjustments

By June 7, 2011Commentary

Medicare’s reimbursement for physicians and other individual providers and for hospitals and other institutions is currently adjusted geographically to account for differences in the cost structures they face in different areas.  These adjustments are based on the Hospital Wage Index, and three Geographic Practice Cost Indexes for physicians–malpractice insurance, rent and staff salaries and benefits.  Many have pointed out flaws in the adjustment methodology and the Institute of Medicine was asked to look at the current formula and make recommendations for changes.  It recently issued the first of three reports on the subject.   (IOM Report)

The IOM laid out several general principles, including the appropriateness of still having a geographic adjustment; the need to use input prices and improve the data sources for those prices; use of area-wide input prices for labor for all employers (based on a strong correlation between health care and non-health care labor price trends); use the same geographic markets for all providers (currently hospitals have 441 and doctors 89); a sound rationale was needed for the formula; the formula and data should be fully transparent; and the geographic adjustment should not be used for other policy purposes.

The committee made the following specific recommendations:  use the same geographic area for all providers and make it the hospital one; use the Bureau of Labor Statistics health sector data on labor prices and benefits and use all occupations applicable to health care; adjust the Hospital Wage Index for other institutional providers to reflect their actual occupational mix; where workers commute across geographic areas, use smoothing; for physicians, also use BLS data and all occupations; and find a new rent data source for the rent GPCI.  It is unclear whether a new formula will cost or save money, but obviously any geographic adjustment should be as accurate as possible and understanding the real input prices for providers can help focus on ways for them to more painlessly lower their costs and hopefully their unit prices.

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