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CMS Changes Wage Index Reclassification Rules

In a new interim final rule with comment period, the Centers for Medicare & Medicaid Services (CMS) revises the rules for certain hospitals seeking a wage index reclassification with the Medicare Geographic Classification Review Board (MGCRB).

Specifically, hospitals with an urban-to-rural reclassification for Medicare payment purposes will be able to compare their average hourly wages to the average hourly wages in the rural geographic area of the state, instead of the hospitals’ urban core–based statistical area (CBSA), to apply for a wage index MGCRB reclassification.

Section 1886(d)(8)(E) of the Social Security Act and section 412.103 of the Medicare regulations allow geographically urban hospitals that meet certain criteria to apply to reclassify as rural for Medicare payment purposes (known as section 412.103 reclassifications). Separately, hospitals can apply with the MGCRB to reclassify their wage index if they meet certain criteria, which differ for urban and rural hospitals. CMS uses a hospital’s wage index, which reflects the expected differences in labor costs based on a hospital’s labor market, to adjust the hospital’s base Medicare payments.

Before the issuance of the interim final rule, a hospital that reclassified to rural under section 412.103 could subsequently apply for a wage index reclassification, but the MGCRB would compare the hospital’s average hourly wages to the average wages in the hospital’s urban CBSA in determining eligibility for a wage index reclassification. That is, a hospital had to demonstrate that its average hourly wages were 106 percent of the average wages of other hospitals located in the hospital’s urban CBSA. The interim final rule will allow hospitals with a section 412.103 reclassification to compare their average hourly wages with other hospitals in the rural area of the state, instead of in the urban CBSA where the hospital is located. Additionally, the rule allows hospitals to receive a wage index reclassification as long as the new area’s wage index is higher than the wage index for the rural area of the state. Because rural hospitals tend to have lower wage costs, this change will result in a lower threshold for wage index reclassifications by section 412.103 hospitals and aligns CMS’ policy with a 2020 federal district court decision, Bates County Memorial Hospital v. Azar.

The changes are effective for wage index reclassifications for fiscal year (FY) 2023, for which applications are due Sept. 1, 2021. CMS also will apply the new policy to appeals of reclassification decisions for FY 2022 that were made under the old policy. Comments on the interim final rule are due June 28.

Contact Senior Director of Policy Erin O’Malley at or 202.585.0127 with questions.


About the Author

Shahid Zaman is a senior policy analyst at America's Essential Hospitals.

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