Health system optimizes Medicare reimbursement rate by reclassifying hospitals

Client background  

An integrated health system that provides inpatient and outpatient care to urban and rural communities in more than 45 counties. The health system operates 10 hospital campuses with more than 1,400 beds and employs more than 24,000 individuals. 

The business challenge  

The Medicare Wage Index is one of the factors that drives hospital payments from the Centers for Medicare & Medicaid Services (CMS). More specifically, regulations surrounding Medicare reimbursement requires hospital payments to be adjusted for the geographic differences in labor costs based on the labor market in which a hospital resides. To do this, Medicare utilizes core-based statistical areas (CBSA) assigned to a hospital based on its geographic location to compute the Medicare Wage Index factor. This factor is applied to both Medicare inpatient and outpatient services to adjust payments to hospitals. 

However, Medicare regulations allow hospitals to reclassify to a different CBSA to obtain a higher Medicare Wage Index. Various regulations govern the criteria and circumstances if a hospital qualifies for reclassification and to where it can reclassify. To do this, CMS computes two separate Medicare Wage Index factors that may apply to a hospital for payment: 

1. For all hospitals geographically located in the area 
2. For all hospitals reclassifying into the area 

For this health system, the company had five hospitals with current Medicare Wage Index reclassifications in place that yielded a higher payment than they would receive had they not reclassified at all. The health system reclassified their hospitals to CBSAs based on which ones had the highest geographic Medicare Wage Index factor. However, by following this logic, two of the hospitals were leaving revenue on the table.  

The Baker Tilly approach  

Baker Tilly used various algorithms to locate the CBSA that would yield the highest reimbursement to the health system permitted by CMS regulations; we also calculated the Medicare Wage Index to model the reclassification’s impacts. Through this analysis and by calculating the reclassified Medicare Wage Index, we were able to determine that better opportunities existed to optimize their Medicare reimbursement than their current situation. 

The business impact  

Because Baker Tilly helped reclassify these hospitals to different CBSAs for the CMS fiscal year, the health system received approximately $5.5 million more in Medicare reimbursement versus remaining with their current scenario.  

For more information on this topic, or to learn how Baker Tilly’s specialists can help with Medicare Wage Index reclassifications analytics and Medicare Wage Index applications, contact our team.