GEOGRAPHIC ADJUSTMENT

IN MEDICARE PAYMENT

Phase I: Improving Accuracy

Committee on Geographic Adjustment Factors in Medicare Payment

Board on Health Care Services

Margaret Edmunds and Frank A. Sloan, Editors

INSTITUTE OF MEDICINE
       OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS
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Committee on Geographic Adjustment Factors in Medicare Payment Board on Health Care Services Margaret Edmunds and Frank A. Sloan, Editors

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, NW Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee respon- sible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract No. HHS P23320042509XI, Task Order No. HHS P23337012T between the National Academy of Sciences and the Centers for Medicare and Medicaid Services. Any opin- ions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the organizations or agencies that provided support for this project. Library of Congress Cataloging-in-Publication Data Institute of Medicine (U.S.). Committee on Geographic Adjustment Factors in Medicare Payment. Geographic adjustment in Medicare payment. Phase I, Improving accuracy / Committee on Geo- graphic Adjustment Factors in Medicare Payment, Board on Health Care Services ; Margaret Edmunds and Frank A. Sloan, editors. p. ; cm. Improving accuracy Includes bibliographical references and index. “This study was supported by Contract No. HHS P23320042509XI, Task Order No. HHS P23337012T between the National Academy of Sciences and the Centers for Medicare and Medicaid Services”—T.p. verso. ISBN 978-0-309-21145-1 (pbk.) — ISBN 978-0-309-21146-8 (PDF) I. Edmunds, Margaret. II. Sloan, Frank A. III. Title. IV. Title: Improving accuracy. [DNLM: 1. Medicare Part A—economics. 2. Medicare Part B--economics. 3. Fee-for-Service Plans— organization & administration—United States. 4. Professional Practice Location—economics—United States. WT 31] 368.4’2—dc23 2012007108 Additional copies of this report are available from the National Academies Press, 500 Fifth Street, NW, Keck 360, Washington, DC 20001; (800) 624-6242 or (202) 334-3313; http://www.nap.edu. For more information about the Institute of Medicine, visit the IOM home page at: www.iom.edu. Copyright 2012 by the National Academy of Sciences. All rights reserved. Printed in the United States of America The serpent has been a symbol of long life, healing, and knowledge among almost all cultures and religions since the beginning of recorded history. The serpent adopted as a logotype by the Institute of Medicine is a relief carving from ancient Greece, now held by the Staatliche Museen in Berlin. Suggested citation: IOM (Institute of Medicine). 2012. Geographic Adjustment in Medicare Payment: Phase I: Improving Accuracy. Washington, DC: The National Academies Press.

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“Knowing is not enough; we must apply. Willing is not enough; we must do.” — Goethe Advising the Nation. Improving Health.

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administra- tion and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering pro- grams aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initia- tive, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sci- ences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.nationalacademies.org

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COMMITTEE ON GEOGRAPHIC ADJUSTMENT FACTORS IN MEDICARE PAYMENT FRANK A. SLOAN (Chair), J. Alexander McMahon Professor of Health Policy and Management, Professor of Economics, and Director, Center for Health Policy, Duke University M. ROY WILSON (Vice Chair), Chair, Board of Trustees, Charles R. Drew University of Medicine and Science, and Chancellor Emeritus, University of Colorado Denver JON B. CHRISTIANSON, Professor and James A. Hamilton Chair in Health Policy and Management, University of Minnesota School of Public Health STUART GUTERMAN, Vice President, Payment and System Reform, The Commonwealth Fund JUDITH K. HELLERSTEIN, Professor, Economics, University of Maryland (resigned from committee service June 2011) CARLOS R. ROBERTO JAÉN, Chair of Family and Community Medicine and Dr. John M. Smith, Jr. Endowed Professor, University of Texas Health Science Center at San Antonio JACK KALBFLEISCH, Professor of Biostatistics and Statistics and Director, Kidney Epidemiology and Cost Center, University of Michigan School of Public Health MERIDEAN MAAS, Professor Emerita and Co-Director of the John A. Hartford Center of Geriatric Nurse Excellence, University of Iowa (resigned from committee service January 2011) MARILYN MOON, Senior Vice President and Director, Health, American Institutes of Research CATHRYN NATION, Associate Vice President, Health Sciences, University of California’s Office of the President JOANNE M. POHL, Professor Emerita, Division of Health Promotion and Risk Reduction, University of Michigan School of Nursing (appointed to committee service June 2011) THOMAS C. RICKETTS III, Managing Director, Cecil G. Sheps Center for Health Services Research, University of North Carolina, Chapel Hill JANE E. SISK, Director, Division of Health Care Statistics, Centers for Disease Control and Prevention, National Center for Health Statistics BRUCE STEINWALD, Independent Consultant DAVID VLAHOV, Dean and Professor, School of Nursing, University of California, San Francisco BARBARA O. WYNN, Senior Policy Analyst, RAND Corporation ALAN M. ZASLAVSKY, Professor, Health Care Policy (Statistics), Harvard Medical School STEPHEN ZUCKERMAN, Senior Fellow, Health Policy Center, The Urban Institute RTI International Consultants WALTER ADAMACHE, Research Economist JUSTINE L.E. ALLPRESS, Research Geospatial Programmer/Analyst KATHLEEN DALTON, RTI Project Director, Senior Health Policy Analyst DEBORAH HEALY, Research Economist BRIEANNE LYDA-McDONALD, Public Health Analyst GREGORY C. POPE, Program Director, Health Care Financing and Payment Program ELIZABETH SEELEY, Health Economist NATHAN WEST, Health Services Analyst ALTON WRIGHT, Public Health Analyst v

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Study Staff MARGARET EDMUNDS, Study Director KATHLEEN HADDAD, Senior Program Officer (August 2010 to November 2011) SERINA S. RECKLING, Research Associate (August 2010 to December 2011) SARA SPIZZIRRI, Research Assistant JOI D. WASHINGTON, Research Assistant (August 2011 to present) ASHLEY McWILLIAMS, Senior Program Assistant (August 2010 to August 2011) JOHN C. BAILAR III, Scholar-in-Residence ROGER C. HERDMAN, Board Director vi

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Reviewers T his report has been reviewed in draft form by individuals chosen for their diverse perspec- tives and technical expertise, in accordance with procedures approved by the National Research Council’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report: ANDREW BAZEMORE, The Robert Graham Center ROBERT BERENSON, The Urban Institute DAVID CUTLER, Harvard University JONATHAN GRUBER, Massachusetts Institute of Technology KAREN HELLER, Greater New York Hospital Association TERRENCE KAY, Centers for Medicare and Medicaid Services KEITH J. MUELLER, University of Iowa JOSEPH NEWHOUSE, Harvard University DOUGLAS REDING, Marshfield Clinic GEORGE STAMAS, Bureau of Labor Statistics DAVID TORCHIANA, Massachusetts General Physicians Organization JAN TOWERS, American Academy of Nurse Practitioners LANCE A. WALLER, Emory University, Rollins School of Public Health Although the reviewers listed above have provided many constructive comments and sug- gestions, they were not asked to endorse the conclusions or recommendations nor did they see the final draft of the report before its release. The review of this report was overseen by Harold Sox, American College of Physicians, and Charles E. Phelps, Rochester University. Appointed vii

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viii REVIEWERS by the National Research Council and the Institute of Medicine, they were responsible for making certain that an independent examination of this report was carried out in accordance with insti- tutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution.

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Acknowledgments T he Committee on Geographic Adjustment Factors in Medicare Payment and the Institute of Medicine (IOM) study staff would like to thank the many individuals and organizations who generously contributed their time, knowledge, and expertise to this report. The following individuals shared their expertise through invited presentations at the two public sessions: James Bentley, Consultant; Dan Black, Professor and Dean of the Harris School of Public Policy, University of Chicago; The Honorable Bruce Braley, U.S. House of Represen- tatives, Iowa; Larry DeGhetaldi, Palo Alto Medical Foundation and Chair of Medicare Com- mittee, California Medical Association; Roland Goertz, President, American Academy of Family Physicians; Karen Heller, Executive Vice President, Greater New York Hospital Association; Michael Kitchell, President of Board of Directors, McFarland Clinic and President, Iowa Medical Society; Mark Miller, Executive Director, MedPAC; Rob Otten, Vice President of Health Policy, American Medical Association; James Potter, Senior Vice President of Advocacy and Govern- ment Relations, American Academy of Physician Assistants; Douglas Reding, Vice President, Marshfield Clinic; Jennie Rhinehart, Administrator and CEO, Community Hospital, Tallassee, Alabama; Elena Rios, President, National Hispanic Medical Association; The Honorable Allyson Schwartz, Pennsylvania; Sherry Smith, Director of Physician Payment Policy at the American Medical Association; Byron Sogie-Thomas, Health Policy Director, National Medical Association; James Spletzer, Senior Research Economist, Bureau of Labor Statistics; Alice Tolbert-Coombs, President, Massachusetts Medical Society; and Jan Towers, Health Policy Director, American Academy of Nurse Practitioners. Additional presentations were made by Dale Baker, Baker Consulting; Tim Bartholow, Wisconsin Medical Society; Edward Bentley, Santa Barbara Gastro- enterology Associates; Craig Boyer, North Country Health Services, Bemidji, Minnesota; Jerome Connolly, American Academy of Family Physicians; and Dario DeGhetaldi, Corey, Luzaich, Pliska, DeGhetaldi & Nastari LLP. Written testimony from the following individuals and organizations is gratefully acknowl- edged: The Honorable Charles Grassley, U.S. Senate, Iowa; Atul Grover, Chief Advocacy Offi- cer, Association of American Medical Colleges; Joanna Kim, Senior Associate Director, Policy, ix

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x ACKNOWLEDGMENTS American Hospital Association; Ellen Kugler, National Association of Urban Hospitals; Brent Miller, Director of Federal Government Relations, Marshfield Clinic; Anne O’Rourke, California Hospital Association; Eneida Roldan, President and CEO, Jackson Health System, Miami; Steve Speil, Senior Vice President, Health and Finance Policy, Federation of American Hospitals; and David Winslow, Vice President, Maine Hospital Association. A commissioned paper by Dobson DaVanzo LLC on the technical approach to the study was also provided. Several others provided valuable information and technical assistance. Phil Doyle, Laurie Salmon, and George Stamos, Bureau of Labor Statistics met with committee members and staff and provided statistical consultations and data for the committee’s consideration. Alex Calgano, Massachusetts Medical Society; Linda Fishman and Don May, American Hospital Association; Atul Grover, American Association of Medical Colleges; Elizabeth McNeil, California Medical Association; Brent Miller, Marshfield Clinic; and Robert Phillips, Director of the Robert Graham Center: Policy Studies in Family Medicine and Primary Care were instrumental in identifying speakers for the public sessions and in providing materials for the committee’s consideration. Several Congressional staff members also provided valuable background information for the study. They include Susan Walden, Senate Committee on Finance; Jennifer Friedman, Geoff Gerhardt, and Tim Gronniger, House Committee on Ways and Means, Subcommittee on Health; Stephen Cha and Anne Morris, House Committee on Energy and Commerce; Christa Shively, Office of Congressman Earl Blumenauer; Mike Goodman, Office of Congressman Bruce Braley; Megan Eidman, Office of Congressman Jay Inslee; Kelly Hall, Office of Congresswoman Allyson Schwartz; Nils T. Tillstrom, Office of Congressman David Wu. The expertise of Jim Jensen, Executive Director of the Office of Congressional and Government Affairs, in facilitating com- munications with Members of Congress and Congressional staff is gratefully acknowledged. Special thanks go to the staff at RTI International, whose statistical analyses and techni- cal consultations were both integral and invaluable to the study: Kathleen Dalton, RTI Project Director; Greg Pope, Program Director; and team members Walter Adamache, Elizabeth Seeley, Deborah Healy, Nathan West, Brieanne Lyda-McDonald, Justine Allpress, Alton Wright, and Bill Wheaton. Several members of the IOM staff offered their guidance and support to the study staff and committee, including Roger Herdman, Director of the Board on Health Care Services; John Bailar, Scholar-in-Residence; Senior Program Officers Jill Eden, Robin Graham, Cheryl Ulmer, and Dianne Wolman and Program Officers Meg McCoy and Rob Saunders. Assistance and project support from Cassandra Cacace is also gratefully acknowledged. Harvey Fineberg, IOM Presi- dent, and Judith Salerno, the Leonard D. Schaeffer Executive Officer of the IOM, also provided valuable advice at key stages of the study. The guidance of Porter Coggeshall, Executive Director of the Report Review Committee, was especially valuable throughout the report review process. The Study Director would like to thank Lauren Tobias, Director of Communications, IOM; Abbey Meltzer, Deputy Communications Director, IOM; Greta Gorman, Editorial Projects Man- ager, IOM; Christine Stencel, Senior Media Relations Officer, Office of News and Public Infor- mation; Marton Cavani, Web Communications Manager, IOM; Jordan Wyndelts, Web Content Assistant, IOM; and Stephen Mautner, Executive Editor, the National Academies Press for their creative approaches to helping the staff plan for report dissemination. The committee would like to commend the IOM staff for their impressive work on this study: Margo Edmunds, Study Director; Kathleen Haddad, Senior Program Officer; Serina Reckling, Research Associate; Sara Spizzirri, Research Assistant; Joi Washington, Research Assistant, and Ashley McWilliams, Senior Program Assistant.

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xi ACKNOWLEDGMENTS Finally, the committee and staff would like to thank the Centers for Medicare and Medicaid Services whose funding made this study possible. We especially thank Jonathan Blum, Deputy CMS Administrator; Marc Hartstein, Acting Director, Hospital and Ambulatory Policy Group; and Judith Richter, Health Insurance Specialist, Division of Acute Care.

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xx ACRONYMS GAF geographic adjustment factor GAO Government Accountability Office GIS geographic information system GME graduate medical education GPCI geographic practice cost index GSA General Services Administration HCERA Health Care and Education Reconciliation Act of 2010 HCFA Health Care Financing Administration HCPCS Healthcare Common Procedure Coding System HHA home health agency HHS U.S. Department of Health and Human Services HIT health information technology HOPD Hospital Outpatient Department HRR hospital referral region HSA hospital service area HSC Center for Studying Health System Change HUD U.S. Department of Housing and Urban Development HWI hospital wage index IDW inverse distance weighting IME indirect medical education IOM Institute of Medicine IPPS Inpatient Prospective Payment System LMA labor market area LPN licensed practical nurse LTCH long-term care hospital MedPAC Medicare Payment Advisory Commission MEI Medicare Economic Index MGCRB Medicare Geographic Classification Review Board MGMA Medical Group Management Association microSA micropolitan statistical area MMA Medicare Modernization Act of 2003 MP malpractice MS-DRG Medicare Severity-Diagnosis Related Group MSA metropolitan statistical area NAICS North American Industry Classification Systems NCS National Compensation Survey NECTA New England City and Town Area OBRA Omnibus Budget Reconciliation Act of 1989 OES Occupational Employment Statistics OIG Office of Inspector General

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xxi ACRONYMS OMA occupational mix adjustment OMB Office of Management and Budget PCSA Primary Care Service Area PE practice expense PFS Physician Fee Schedule PLI professional liability insurance PPIS Physician Practice Information Survey PPS prospective payment system ProPAC Prospective Payment Advisory Commission RBRVS Resource-Based Relative Value Scale RN registered nurse RRC rural referral center RSE relative standard error RUC Relative Value Scale Update Committee RVU relative value unit SCH sole community hospital SE standard error SLMO state labor markets option SNF skilled nursing facility SOC standard occupational classification USPS U.S. Postal Service

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Glossary Accountable care organization (ACO): A network of various health care providers such as hospitals, primary care physicians, and specialists who work together to improve the cost efficiency and quality of health care services administered to local patients, including Medicare beneficiaries (Denvers and Berenson, 2009). Ambulatory surgical center (ASC): A center where patients undergo minor outpatient sur- geries that do not require an overnight stay; ASCs pay per bundle of services (MedPAC, 2007a). Area wage index (AWI): See Hospital wage index. Balance of state areas: See Micropolitan statistical area. Blending: A method recommended by the Medicare Payment Advisory Commission to reduce differences in payments between neighboring hospitals by adjusting the hospital wage index using metropolitan statistical area–level wage data with county-level census wage data. Budget neutrality: A statutory requirement imposed on the Centers for Medicare and Medicaid Services that states that any changes to hospital and physician Medicare payments cannot affect the budget. When one provider receives an increase in payment, another receives a decrease. Circularity (or endogeneity): The ability of hospitals (or physicians) to influence the hospital wage index (and geographic practice cost indexes). This is a result of the hospital wage index being computed from hospital-reported wage data, which is especially problematic in areas with few hospitals. xxiii

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xxiv GLOSSARY Core-based statistical area (CBSA): A geographic area (defined by the Office of Manage- ment and Budget) that the Centers for Medicare and Medicaid Services uses to define the payment areas for the hospital wage index. CBSA is a collective term for metropolitan statisti- cal areas and micropolitan statistical areas. See Metropolitan statistical area and Micropolitan statistical area (OMB, 2000). Cost index: A ratio that measures the variation in actual expenditures, such as wages and benefits, across different areas and over time. Cost-share weight: The portion of aggregate input costs attributable to a single input. For example, the cost share of registered nurses compared with all hospital labor input costs is about 40 percent. Cost shares vary by geographic area. Along with its price, the proportion of a specific input used in production influences the total cost. Critical access hospital (CAH): Hospitals with 25 or fewer beds, most of which are located in rural areas, that are reimbursed on the basis of their actual costs rather than through the Inpatient Prospective Payment System. Medicare pays 101 percent of a CAH’s allowed costs. Geographic adjustment factors do not affect reimbursement to CAHs (MedPAC, 2007a). Current Procedural Terminology (CPT)® codes: Standardized procedural codes that medical professionals use to report and bill medical procedures and services to public and pri- vate health insurers. The American Medical Association develops the codes and updates them annually (AMA, 2011). Diagnosis-Related Group (DRG): A classification system that groups similar clinical condi- tions (diagnoses) and the procedures furnished by the hospitals during the hospital stay. The Medicare Severity-DRG (MS-DRG) takes into account the severity of illness and resource con- sumption for Medicare beneficiaries. Medicare pays for inpatient hospital services on a rate- per-discharge basis that varies according to the DRG to which a beneficiary’s stay is assigned. DRGs are evaluated and updated annually by the Centers for Medicare and Medicaid Services (CMS, 2010a). Disproportionate share hospital (DSH): Hospitals identified by the Centers for Medicare and Medicaid Services that serve a large proportion of low-income patients. These hospitals receive a percentage add-on payment that is applied to the diagnosis-related group-adjusted base payment rate (CMS, 2010a). Exceptions: A process by which a hospital paid under the Inpatient Prospective Payment System can receive additional funds if it meets certain criteria. Exceptions can be regulatory or legislative. Frontier states: States where 50 percent of counties have a population density of less than 6 people per square mile and for which a 1.0 wage index floor for hospitals and a 1.0 prac- tice expense geographic practice cost index floor are provided for physicians. These states are Montana, Nevada, North Dakota, South Dakota, and Wyoming (CMS, 2010d).

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xxv GLOSSARY Geographic information system (GIS): A hardware and software product that enables researches to capture, organize, and analyze data through geographically referenced informa- tion. It is a potential tool that health care researchers can use to define market areas and to program various smoothing techniques (GIS, 2011). Geographic practice cost index (GPCI): An adjustment to Medicare’s practitioner payments to account for geographic differences in the costs of operating a private medical practice that are beyond the providers’ control. The GPCI has three components: physician work, practice expense, and malpractice insurance (CMS, 2010d). Graduate medical education (GME): Additional payments to teaching hospitals for the cost of the Centers for Medicare and Medicaid Services’ approved graduate medical education programs. These payments take into account the number of residents working in the hospital and the number of Medicare patients treated (CMS, 2010c). Home health agency (HHA): An agency that provides care to patients who require skilled nursing or therapy care at home; the Centers for Medicare and Medicaid Services pays HHAs per 60-day episode of care, and payments are determined on the basis of the patient’s condi- tion and treatment (MedPAC, 2008). Hospital cost report: An annual survey conducted by the Centers for Medicare and Medicaid Services that collects information on wages and wage-related costs from acute care hospitals. The Centers for Medicare and Medicaid Services currently uses cost report data from Worksheet S-3 to compute the hospital wage index (Hartstein, 2010). Hospital referral region (HRR): The area from which a tertiary care hospital draws patients. HRRs were developed by the Dartmouth Atlas. HRRs are generally larger than counties and smaller than states, but they can cross state and county lines. Many types of hospitals fall within an HRR, but an HRR must contain at least one hospital that performs major cardiovascular and neurosurgical procedures. The United States currently has 306 HRRs (Dartmouth, 2011). Hospital wage index (HWI): An adjustment to Medicare payments to hospitals, also known as an area wage index, paid under the Inpatient Prospective Payment System; the HWI reflects how the average hourly hospital wages in a specified geographic area (a proxy for the local labor market) compare with average hourly hospital wages nationally. The value of the wage index for any given labor market is the ratio of the average hourly hospital wage in that area to the national average hourly hospital wage (CMS, 2011b). Imputation: A method for assigning a value when actual data are missing or unavailable. Index: A statistic that is designed to compare how the price for a defined group of goods and services varies as a whole over time or between geographic areas compared with an average. This is distinct from a cost index, which measures variation in actual expenditures, such as wages and benefits.

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xxvi GLOSSARY Indirect medical education (IME): A per-case add-on payment under the Inpatient Prospec- tive Payment System to the Centers for Medicare and Medicaid Services–approved teaching hospitals. The IME adjustment reflects that teaching hospitals have higher indirect patient care costs than nonteaching hospitals do (CMS, 2010a). Inpatient Prospective Payment System (IPPS): The system by which the Centers for Medicare and Medicaid Services pays acute care hospitals for operating costs of caring for Medicare patients. Hospitals are paid a predetermined flat rate per discharge, depending on the Medicare Severity-Diagnosis Related Group to which the discharge is assigned (CMS, 2011a). Input cost: A producer’s expenses for labor and other resources used to produce a product or service. In the case of health care, inputs consist of resources such as nursing labor and space costs. The cost of inputs is determined by their market price and the quantity of each input used by hospitals or physicians. Input price: The market-determined value of the labor and resources (inputs) used to provide a medical service. Inputs: All of the resources that hospitals and physician practices use to provide a medical service. Inputs include hospital beds, examining and operating rooms, medical supplies, staff, and patients. Labor: Services performed by workers for a wage. Labor market: A type of market in which workers compete for a common set of jobs and employers compete for a common set of workers. Lugar counties: Rural counties near urban areas in which hospitals are reimbursed at the same rates as nearby urban hospitals (Hartstein, 2010). Market: An area in which buyers and sellers interact to exchange resources (Black, 2010). Medical malpractice geographic practice cost index: An index representing professional liability expenses, which is set at 3.9 percent of the adjustment (CMS, 2010d). Metropolitan statistical area (MSA): An area that consists of one urban core with a popu- lation of at least 50,000. It comprises central counties or counties containing the core and any outlying or nonmetropolitan counties that meet certain commuting requirements (OMB, 2000). Micropolitan statistical area (microSA): A statistical area based around at least one urban core with a population of 10,000 to 49,999. It is comprised of central counties or counties containing the core and outlying or nonmetropolitan counties that meet certain commuting requirements (OMB, 2000). Occupational mix: The specific proportions of various categories of labor (clinical and admin- istrative staff) used by a hospital or physician practice to provide health care services.

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xxvii GLOSSARY Occupational mix adjustment (OMA): An adjustment to a payment area’s hospital wage index that controls for the effect of the hospital’s employment choices. OMA accounts for geographic differences in labor costs rather than differences in types of labor employed by a hospital (CMS, 2010c). Opportunity cost: The most valuable resource(s) that an individual gives up to invest time or money into something else (Bradley, 2008). Outmigration adjustment: An upward adjustment to a county’s hospital wage index if a large percentage of hospital employees residing in the qualifying county are employed in an area that has a higher wage index (Medicare Prescription Drug, Improvement, and Moderniza- tion Act of 2003, P.L. 108-173). Physician Fee Schedule (PFS): The schedule that the Centers for Medicare and Medicaid Services uses to pay practitioners for services rendered under Part B of Medicare. The PFS (or fee schedule) is determined using relative value units (assigned to each procedure or service), a conversion factor, and geographic practice cost indexes (CMS, 2010b). Physician work geographic practice cost index: An index that reflects the time, skill, effort, judgment, and stress associated with providing one service relative to other services. As of 2011, the work geographic practice cost index is set at 52 percent of the geographic adjust- ment (CMS, 2010d). Price index: An index that compares differences in price or quantity for a group of goods or services relative to an average derived from a standard or baseline geographic area or time period. Prospective payment system (PPS): The system that the Centers for Medicare and Medicaid Services uses to pay hospitals with a predetermined, fixed amount on the basis of the complex- ity of the service rendered (CMS, 2011d). Reclassification: A hospital is reclassified by reassigning it to a neighboring payment local- ity with a higher wage index, if that hospital can demonstrate that it competes for labor with providers in the desired payment locality. Relative value unit (RVU): A measure of the relative amount of resources typically used to provide a particular service. Section 1848(c) of the Social Security Act requires Medicare to establish national RVUs for physician work, practice expenses, and malpractice (CMS, 2010d). Rest-of-state (or balance-of-state) areas: The designated payment area for hospitals located in micropolitan statistical areas and areas with populations of less than 10,000 that do not fall into the metropolitan statistical areas within a given state. Each state has one rest-of- state payment area that receives its own hospital wage index (CMS, 2010c).

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xxviii GLOSSARY Rural floor: A term indicating that a wage index applied to a hospital in a metropolitan area cannot be less than a wage index applied to a hospital in a nonmetropolitan area in the same state. Rural hospitals: Any hospital located in a micropolitan statistical area or in a nonmetropolitan statistical area (CMS, 2010c). Rural referral center: Medical centers located in a rural area that have a minimum of 275 beds. At least 50 percent of their Medicare patients have been referred by another hospital or physician, and at least 60 percent of those patients live more than 25 miles away (CMS, 2011e). Rural-urban continuum codes: A U.S. Department of Agriculture (2010) classification scheme that defines metropolitan counties by their population size and nonmetropolitan coun- ties by their degree of urbanization and adjacency to a metropolitan area (USDA, 2010). Section 401 of the Balanced Budget Refinement Act: A provision that classifies certain urban hospitals as rural to qualify for special hospital status, such as a sole community hospital, Medicare-dependent hospital, or rural referral center. Section 508 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: A provision that allows hospitals that did not meet proximity criteria to be reclas- sified under a special one-time-only process. Skilled nursing facility (SNF): A facility that provides patients with skilled nursing care on an inpatient basis, after a hospital stay of at least 3 days. Medicare pays SNFs per day using a Prospective Payment System that covers all costs related to the services provided. The SNF payment rates are adjusted for patient case mix and geographic variation in wages using the hospital wage index (CMS, 2011c). Smoothing: A methodology used to reduce large differences in the hospital wage index between neighboring geographic areas by tapering the indexes in counties close to the pay- ment border (MedPAC, 2007b). Sole community hospitals: The only entities that can make inpatient services “reasonably available” to a given population because of isolation, geographic barriers, weather, or distance (the hospital is at least 35 miles away from the next nearest hospital). Sole community hospitals receive the Inpatient Prospective Payment System federal rate or the updated hospital-specific rate based on fiscal year 1982, 1987, 1996, or 2006 costs per discharge, whichever is highest (CMS, 2010e). Standard occupational classification (SOC) system: A system that federal statistical agen- cies use to classify workers and jobs into occupational categories for the purpose of collecting, calculating, analyzing, or disseminating data. The SOC system is designed to reflect the current occupational structure of the United States. Health care workers are classified into two major categories: health care practitioners and technical occupations (29-0000 codes) and health care support occupations (31-0000 codes) (BLS, 2010).

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xxix GLOSSARY Urban hospitals: Hospitals located in metropolitan statistical areas (CMS, 2010c). Volatility: Large changes in an area’s hospital wage index from year to year. Relative wage rates generally should not change substantially from year to year, other than to reflect unusual circumstances (MedPAC, 2007b). Wage bill: The total cost of wages paid by a hospital. Wage cliff: A large difference in wage index values between two neighboring payment areas (MedPAC, 2007b). Weight: See Cost-share weight. REFERENCES AMA (American Medical Association). 2011. About CPT. http://www.ama-assn.org/ama/pub/physician- resources/solutions-managing-your-practice/coding-billing-insurance/cpt/about-cpt.shtml (accessed January 7, 2011). Black, D. 2010. Adjusting compensation for geographical differences. Chicago, IL: Harris School, University of Chicago. BLS (Bureau of Labor Statistics). 2010. 2010 SOC user guide. Washington, DC: Bureau of Labor Statistics. http://www.bls.gov/soc/soc_2010_user_guide.pdf (accessed February 7, 2011). Bradley, S. 2008. The micro economy today 11th ed. New York: McGraw-Hill Irwin. CMS (Centers for Medicare and Medicaid Services). 2010a. Acute care hospital Inpatient Prospective Payment System. Washington, DC: Medicare Learning Network, Centers for Medicare and Medicaid Services. ______. 2010b. Medicare Physician Fee Schedule. Washington, DC: Medicare Learning Network, Centers for Medicare and Medicaid Services. ______. 2010c. Medicare program; hospital inpatient prospective payment systems for acute care hospitals and the Long Term Care Hospital Prospective Payment System changes and FY2011 rates; provider agreements and supplier approvals; and hospital conditions of participation for rehabilitation and respiratory care services; Medicaid program: Accreditation for providers of inpatient psychiatric services; final rule. Federal Register 75(157):50042–50677. ______. 2010d. Medicare program; payment policies under the physician fee schedule and other revisions for Part B for CY 2011. Federal Register 75(228):73170–73860. ______. 2010e. Sole community hospitals fact sheet. Washington, DC: Medicare Learning Network, Centers for Medicare and Medicaid Services. ______. 2011a. Acute inpatient IPPS: Overview. Washington, DC: Centers for Medicare and Medicaid Ser- vices. http://www.cms.gov/AcuteInpatientPPS/ (accessed February 7, 2011). ______. 2011b. Acute inpatient PPS wage index. Washington, DC: Centers for Medicare and Medicaid Services. http://www.cms.gov/AcuteInpatientPPS/03_wageindex.asp (accessed February 7, 2011). ______. 2011c. Overview: Skilled nursing facilities. Washington, DC: Centers for Medicare and Medicaid Services. http://www.cms.gov/SNFPPS/ (accessed February 15, 2011). ______. 2011d. Prospective payment systems—general information overview. Washington, DC: Centers for Medicare and Medicaid Services. http://www.cms.gov/ProspMedicareFeeSvcPmtGen/ (accessed February 7, 2011). ______. 2011e. Rural referral centers fact sheet. Washington, DC: Medicare Learning Network, Centers for Medicare and Medicaid Services. Dartmouth (The Dartmouth Atlas of Health Care). 2011. The Dartmouth Atlas of Health Care: About our regions. Lebanon, NH: The Dartmouth Altas of Health Care. http://www.dartmouthatlas.org/data/ region/ (accessed February 7, 2011). Devers, K., and R. Berenson. 2009. Can accountable care organizations improve the value of health care by solving the cost and quality quandaries? Washington, DC: The Urban Institute.

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xxx GLOSSARY GIS (Geographic Information Services). 2011. What is GIS? http://www.gis.com/content/what-gis (accessed December 2011). Hartstein, M. 2010. Presentation to the IOM Commitee on Geographic Adjustment Factors in Medicare Payment: Current law and policy. Washington, DC: Hospital and Ambulatory Policy Group, Centers for Medicare and Medicaid Services. USDA (U.S. Department of Agriculture). 2010. Measuring rurality: Rural-urban continuum codes. Washington, DC: Economic Research Institute, U.S. Department of Agriculture. http://www.ers.usda.gov/briefing/ rurality/ruralurbcon/ (accessed October 27, 2010). MedPAC (Medicare Payment Advisory Commission). 2007a. Critical access hospitals payment system. Payment basics. Washington, DC: Medicare Payment Advisory Commission. ______. 2007b. An alternative method to compute the wage index. In Report to congress: Promoting greater efficiency in Medicare. Washington, DC: Medicare Payment Advisory Commission. ______. 2008. Home health care services payment system. Payment basics. Washington, DC: Medicare Pay- ment Advisory Commission. OMB (Office of Management and Budget). 2000. Final report and recommendations from the Metropolitan Area Standards Review Committee to the Office of Management and Budget concerning changes to the standards for defining metropolitan areas. Washington, DC: Office of Management and Budget.