Just as you suspected: Medicare's geographic adjustments aren't very accurate

If you’ve ever wondered why the hospital down the street received a different Medicare geographic adjustment than your practice, you might find a recent Institute of Medicine (IOM) Report fascinating reading. The report calls for several fundamental changes to the way Medicare calculates the adjustments and specifically criticizes the current system that uses one data set to determine hospital payments and a different one to determine practitioner adjustments.

Congress and the Department of Health and Human Services asked the IOM to study how Medicare could improve the accuracy of its adjustments to fee-for-service payments to providers based on the location of their practices. In its first report, “Geographic Adjustment in Medicare Payment, Phase I: Improving Accuracy,” the IOM recommends an integrated approach using consistent, current, and expanded data sources.

Historically, the adjustment for physicians used a set of 89 payment areas to represent labor markets, while the adjustment for hospitals used 441. Recognizing that providers in the same geographic areas typically draw on the same labor pool, IOM proposes using metropolitan statistical areas (MSAs) and statewide non-MSAs for all providers, with some smoothing out at the boundaries to reflect common commuting patterns.

To date, the geographic adjustment has relied on wage data from a number of sources of varying quality and objectivity, including hospital cost reports, physician surveys, and census data. The IOM advocates adopting instead the more impartial and uniform Bureau of Labor Statistics (BLS) healthcare industry wage data.

In addition, the report recommends expanding the number of occupations included in the staffing expense calculations for physician practices and the hospital wage index. Using all the healthcare occupations in the BLS wage data will better approximate the actual variation in staffing and labor by market and reflect the increasing integration of care between physician practices and other clinical settings, according to the IOM.

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