Fact Sheets

FY 2007 HOSPITAL IPPS PROPOSED RULE-GEOGRAPHIC RECLASSIFICATION

On April 12, 2006, the Centers for Medicare & Medicaid Services (CMS) issued the hospital inpatient prospective payment system (IPPS) proposed rule for fiscal year (FY) 2007, which includes a number of provisions relating to geographic reclassification and wage index calculations. 

Geographic Reclassification

Section 508 of the Medicare Modernization Act (MMA) of 2003 required the Secretary to develop a one-time special reclassification procedure that allowed hospitals meeting specified criteria to be reclassified from April 1, 2004 through March 31, 2007 (which includes the first six months of FY 2007).  In the FY 2006 IPPS Final Rule, CMS established procedural rules that would allow hospitals to retain their section 508 reclassification through March 31, 2007 and reclassify only for the second half of FY 2007.  The first and second half of the fiscal year reclassifications permitted under the procedural rules established in section 1886(d)(10) of the Social Security Act have implications for the calculation of reclassified wage indices and the reclassification budget neutrality factor.  In this rule, CMS is proposing the following:

• Reclassified Wage Indexes: CMS is proposing to issue two separate wage indices for affected areas (one effective October 1, 2006 through March 31, 2007 and a second reclassified wage index effective April 1, 2007 through September 30, 2007).   The proposed FY 2007 wage index values are calculated based on the wage data for hospitals reclassified to the area in the respective half of the fiscal year.

• Budget Neutrality: The overall effect of geographic reclassification is required to be budget neutral.   CMS is proposing to calculate one budget neutrality adjustment (0.991727) that reflects the average of the adjustments required for first and second half fiscal year reclassifications, respectively.

CMS is modifying procedural rules to take into account group reclassifications that include hospitals reclassified under section 508, and to allow non-section 508 hospitals to receive either the home wage index or continue a previously approved reclassification for the first half of FY 2007.

Multi-campus Hospitals

In FY 2006, CMS modified the reclassification rules to allow campuses of multi-campus hospitals located in separate wage index areas to support a reclassification application to an area where another campus is located using the average hourly wage data submitted on the cost report for the entire hospital.  This special rule applies for reclassification applications in FY 2006, FY 2007, and FY 2008.  CMS is proposing not to extend the special rule for multi-campus hospital reclassifications past FY 2008 as there is no longer a need for this rule.

Labor Market Areas

CMS has used Metropolitan Statistical Areas (MSAs) designated by the Office of Management and Budget (OMB) to define labor market areas for purposes of the wage index.   The current regulations allow for county-wide group reclassifications to other MSAs within the same Combined Statistical Area.  CMS is proposing to revise the reclassification regulations to also allow for county-wide group reclassifications to other Metropolitan Divisions within the same Core-Based Statistical Area.

Wage Index Calculation

The proposed wage index for FY 2007 is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2002 and before October 1, 2003.  The national average hourly wage increased 5.7 percent compared to FY 2006.  Therefore, the only manner in which to maintain or exceed the previous year’s wage index was to match or exceed the national 5.7 percent increase in average hourly wage.  Of the 3,500 hospitals with wage data for both FYs 2006 and 2007, 1,606 hospitals (or 45.9 percent) experienced an average hourly wage increase of 5.7 percent or more.

Wage Index Transition for Hospitals Moving from Urban to Rural

To help alleviate the decreased payments for urban hospitals that became rural under the new labor market area definitions, for purposes of the wage index, CMS adopted a policy in FY 2005 to allow them to maintain the wage index assignment of the MSA where they were located for the 3-year period FY 2005, FY 2006, and FY 2007.   In this rule, CMS discusses the remaining labor market area transition for those hospitals that were urban under the old labor market area designations and are now considered rural hospitals. 

Out-Migration

Section 505 of the MMA provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county, but work in a different area with a higher wage index.  Hospitals located in counties that qualify for the payment adjustment are to receive an increase in the wage index that is equal to a weighted average of the difference between the wage index of the resident county and the higher wage index work area(s), weighted by the overall percentage of workers who are employed in an area with a higher wage index.  Using CMS’ established criteria, 321 counties and 586 hospitals qualify to receive a commuting adjustment in FY 2007.