BOX 1-1
What Is an Index?

An index compares differences in price or quantity for a group of goods or services relative to an average value derived from a standard or baseline geographic area or time period. The data used to derive the index can come from a variety of sources, such as employer or consumer surveys, hospital reports related to staff salaries and benefits, and many others.

A price index is 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.

accurately. Critics of the existing geographic adjusters identify a number of questions and concerns. Among these are problems and inconsistencies with the definitions of payment areas and labor markets and the discreteness of the borders between them; concerns about the appropriateness of the source data for determining wages and other input prices prevailing in an area; questions about how and to what extent variations in the occupational mix used to provide care should be reflected in the hospital wage and physician practice expense adjustments; and the lack of transparency in the construction of indexes and the data used to compute them.

These and other concerns regarding the current system of geographic adjustments are conceptually complex, widely disputed, and often contentious—largely because of the magnitude of the payments distributed by use of the indexes and because of the lack of a definitive measure of accuracy. With a goal of improving this system, the U.S. Department of Health and Human Services (HHS) and the U.S. Congress sought advice from the Institute of Medicine (IOM) on how best to address concerns about the appropriateness of the data sources and the transparency of the methods used for making the geographic adjustments in payments to providers. The IOM was also asked to assess the impact of geographic adjustment on the workforce in metropolitan and nonmetropolitan areas, beneficiaries’ access to care, and the ability of providers to provide high-value, high-quality care.

To assist with the analysis of data accuracy and methodological questions and to model the impact analysis, the IOM engaged RTI International to be consultants to the committee because of its extensive previous work on the HWI and the GPCIs.


The overall goal of this study is to provide recommendations that increase the likelihood that the geographic adjustments reflect reasonably accurate2 measures of input price differences and are consistent with national policy goals of creating a payment system that rewards high-value and high-quality health care.

This is the first of two reports to the Secretary of HHS and the U.S. Congress, which commissioned a 2-year IOM study to assess the accuracy of the adjustment factors and the meth-


2 Throughout this report, the term “accuracy” is used to refer to the degree of closeness of measurement to the true value of whatever is being measured.

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