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November 29, 2018

Flawed data led to $140M in Medicare hospital overpayments, according to HHS' OIG

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    CMS' system for setting Medicare hospital payments has "significant vulnerabilities" that led the agency to overpay hospitals by millions of dollars from 2014 to 2017, according to a report released Tuesday by HHS' Office of the Inspector General (OIG).

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    Report details

    For the report, HHS' OIG conducted 41 reviews of wage data submitted by acute-care hospitals in Medicare cost reports from 2004 through 2017 to evaluate CMS' Medicare Area Wage Index.

    CMS currently uses the Medicare Area Wage Index, which is budget neutral, to adjust hospitals' Medicare payments to reflect the price of local labor. The agency makes such adjustments annually.

    CMS calculates the index using acute-care hospitals' self-reported data on area wages. According to HHS' OIG, Medicare administrative contractors (MACs) conduct limited reviews of the data and have 11 weeks to report any outliers.

    Federal law has set a so-called "rural floor" for the index, under which urban hospitals in a state cannot have a wage index lower than rural hospitals in the state. Federal law also permits hospitals in areas with a lower wage index to reclassify their geographic regions to an area with higher wage index if the hospital meets certain criteria. Both federal law and CMS regulations have "hold-harmless" provisions that aim to protect hospitals from having their wage indexes decrease as a result of a hospital reclassifying to another geographic region.


    HHS' OIG found "material inaccuracies" in the wage data submitted by acute-care hospitals from 2004 through 2017, which CMS used to calculate the Medicare Area Wage Index. According to HHS' OIG, a review of CMS' five latest reports show inaccurate wage data resulted in an estimated $140.5 million in overpayments to 272 hospitals from 2014 to 2017. As a result, other hospitals saw unnecessary payment reductions because the program must be budget neutral, HHS' OIG said.

    The report outlined four primary issues with the Medicare Area Wage Index:

    • CMS does not have the authority to penalize hospitals that submit inaccurate or incomplete wage data—except in the cases of misrepresentation and falsification;
    • Reviews conducted by MACs do not always identify inaccurate wage data because of the reviews' limited scope and depth;
    • The rural floor provision reduces the wage index's accuracy; and
    • The hold-harmless provisions reduce the wage index's accuracy.

    For example, HHS' OIG said Sutter Health's affiliate Alta Bates Summit Medical Center was reclassified from one area to another, and then contributed data to the wage index of two geographic regions as if the medical center had actively participated in both labor markets—which HHS' OIG stated is impossible. HHS' OIG said Alta Bates also submitted inaccurate data, which in FY 2014 resulted in CMS overpaying:

    • $1.85 million to the other 13 hospitals in Alta Bates' original geographic area;
    • $3.4 million to the other 19 hospitals in Alta Bates' reclassified geographic area; and
    • $154,000 to Alta Bates.


    HHS' OIG recommended HHS and CMS revisit plans to comprehensively reform the Medicare Area Wage Index. If HHS and CMS do not completely reform the system, HHS' OIG recommended CMS:

    • Collaborate with MACs to develop a program to conduct in-depth annual audits at a few of the hospitals submitting data that will have a significant influence on the wage index of their areas;
    • Eliminate its hold-harmless policy;
    • Seek authority to penalize hospitals that submit inaccurate or incomplete wage data; and
    • Seek legislation to repeal the federal rural floor and hold-harmless provisions.

    CMS agreed to consider all of the recommendations except eliminating its hold-harmless policy. According to HHS' OIG, CMS said the policy "provides the most accurate and stable measure" for the wage index.

    Implications of reforming the system

    A number of providers, hospital associations, and policy experts have said reforming the system could benefit rural hospitals—particularly if the rural floor is eliminated.

    Christina Campos, Guadalupe County Hospital's administrator, said unless the system is reformed, "[w]e will continue to give money to urban areas, and under a budget-neutral system, rural areas will continue to lose." She said, "The whole idea of not being held accountable around accurate reporting serves to hurt rural hospitals more because of the rural floor."

    However, Paul Ginsburg, director of the USC-Brookings Schaeffer Initiative for Health Policy and Leonard D. Schaeffer chair of health policy studies at the Brookings Institution, said Congress is unlikely to address the rural floor. Ginsburg said, "It's hard to see this getting high in the priority list, which is unfortunate. It's a very valuable report that identified some real broken aspects of the system that clearly need to be fixed" (Kacik, Modern Healthcare, 11/27; Rappleye, Becker's Hospital CFO Report, 11/27; Kacik, "Transformation Hub," Modern Healthcare, 11/27; Roubein, "Pulse," Politico, 11/28).

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