Draft AWI Task Force Report and Recommendations


AHA Medicare Area Wage Index Task Force 2011-2012

Executive Summary

The Medicare hospital inpatient prospective payment system (PPS) is designed to pay hospitals for services provided to Medicare beneficiaries based on a national average payment amount, adjusted for two factors that affect hospitals' costs: the patient's condition and related treatment strategy and market conditions in the hospital's location. One of the significant adjustments in the inpatient PPS is an adjustment for market conditions, or the area wage index (AWI). The AWI is intended to measure differences in hospital wage rates among labor markets; it compares the average hourly wage for hospital workers in each metropolitan statistical area (MSA) or statewide rural area to the nationwide average.

In 2011, the AHA Board of Trustees created a Medicare AWI Task Force to identify and evaluate the strengths and weaknesses of the current hospital AWI; develop a set of principles by which to evaluate various proposals to modify the hospital AWI, including review of AHA's existing principles; evaluate proposals and studies to change the hospital AWI; and make recommendations to improve the accuracy, fairness and effectiveness of the hospital AWI. Since that time, the Task Force has engaged in an extraordinary amount of education, analysis, and discussion about the AWI system.

The Task Force members overwhelmingly agree that the current system is greatly flawed in many respects and that its fundamental problems warrant a full and comprehensive re-evaluation. Specifically, they identified five major issues that must be addressed to improve the AWI system: accuracy and consistency; volatility; circularity; reclassifications and exceptions; and labor markets.

Taking these and other important concerns into account, the Task Force held broad discussions aimed at deriving principles for the hospital field to use in evaluating and recommending for changes to the AWI.

They agreed to nine principles, for example, that comprehensive reform is necessary, but must be implemented in a transitional and budget-neutral manner. They also agreed that the wage index should be as accurate as possible, but the data and methodology should also be as consistent, easy to administer, transparent and as understandable as possible; that the wage index system should minimize volatility and circularity; that the current system of reclassifications and exceptions is unacceptable; and that labor markets should reflect hospitals that compete with one another for labor, but cannot realistically be defined as hard boundaries.

Finally, the Task Force made recommendations to reform the AWI. The members agreed that it is unlikely that any set of recommendations would completely “fix” the wage index system for the hospital field. However, they felt very strongly that there are specific recommendations that would categorically improve the system for the field as a whole. Their seven recommendations help address the five major concerns outlined above, and follow from the nine principles identified by the Task Force. Specifically, they recommend improving the wage index by eliminating the current system of reclassifications and exceptions and replacing it with commuting and smoothing adjustments based on up-to-date data. Doing so balances the need to eliminate the burdensome, confusing and sometimes anomalous reclassification system with the need to acknowledge that labor markets cannot realistically be defined as hard boundaries. Their recommendations also seek to improve the consistency of the wage index data, limit the amount of volatility in the improved system, ensure that there is an adequate transition from the current to the improved system, and decrease the problem of circularity.


© 2012 American Hospital Association

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