the Medicare Physician Fee Schedule (PFS, or fee schedule) all employ geographic adjustment factors (GAFs).

Although there is widespread agreement about the importance of providing accurate payments to providers, there is considerable and long-standing disagreement in the provider community and among policy makers about how best to adjust payments based on geographic location. In two public sessions, the committee heard testimony from critics of the existing geographic adjusters who identified a number of questions and concerns and who believe that the current adjusters are not treating them fairly. Among their stated concerns are problems and inconsistencies with the definitions of payment areas and labor markets, concerns about the relevance and accuracy of the source data for determining area wages and other input prices, questions about the occupational mix used to create the hospital wage and physician practice expense adjustments, and criticisms about the lack of transparency of index construction.

These and other concerns regarding the current system for geographic adjustment are conceptually complex, widely disputed, and often contentious. 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 to best address concerns about the accuracy 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.


This is the first of two reports to the Secretary of HHS and the U.S. Congress. This report focuses primarily on accuracy of measuring input prices for fee-for-service Medicare Part A and Part B payments. It includes a review of the data sources used to calculate the HWI and the GPCIs and for defining the payment areas used for each index, but it does not include a review of the accuracy of payments to facilities other than short-term acute care hospitals, such as skilled nursing facilities (SNFs) or home health agencies (HHAs).

In its phase 2 report, scheduled to be released in the spring of 2012, the committee will consider the role of Medicare payments in addressing matters such as the distribution of the health care workforce, population health, and the ability of providers to produce high-value, high-quality health care.

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


After evaluating its charge (see Box S-1), the committee developed a framework with a series of research questions to help guide its work and decision-making. Understanding that its recommendations must be objective, well-supported by empirical evidence, and understandable to stakeholders, the committee undertook a systematic review of current and alternative data sources and methods for making geographic adjustments. This included:

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