This Insight is part of our Medicare Cost Report Primers series.
With increased consolidation of healthcare organizations and the rising costs of salaried and contracted labor over the last several years, CMS appears to be conducting more intensive review of the wage index data included on Medicare cost reports and occupational mix surveys. Additional review by auditors from the Medicare Administrative Contractors (MACs) network may increase the burden on already thin accounting or reimbursement departments. Understanding what the MAC auditors are looking to review during a wage index audit will help organizations prepare.
Background: The Importance of Wage Index
An important aspect of Medicare payment methodology around prospective payment systems (PPS) is the wage-related factor used on the labor portion of the standardized payment. Depending on the location of the hospital, the cost of labor can widely vary, which is why wage index factors are a critical factor in Medicare payments. For most hospitals, Medicare is their largest single payer for healthcare services.
In December 2003, the U.S. Office of Management and Budget announced a system of dividing the country’s labor markets into Core-Based Statistical Areas (CBSAs). Each CBSA is assigned its own wage index adjustment factor annually, and the factors are updated based on a survey of wage and wage-related costs of short-term acute hospitals. The wage-related data is pulled from hospital Medicare cost reports (annually filed by providers) and the Hospital Occupational Mix Survey (every three years), along with hospital payroll records, contracts for contracted labor, and other wage-related documentation examined by MACs during a wage index desk review.
Despite the wage index factors being derived from hospital-centered data, these same wage index factors are being used for Medicare payment methodology across the board for providers, including skilled nursing facilities, home health agencies, and hospices, to name a few.
FY25 Hospital Wage Index Development
Hospitals had until September 1, 2023, to submit any revisions to their cost report worksheet S-3 wage index data and CY22 occupational mix data. After the deadline, MACs have approximately 10 weeks to complete their desk reviews of the submitted hospital data, make determinations, and transmit revised wage index data to CMS’s Division of Acute Care (DAC), according to the CMS website.
Between September and November 2023, the MACs will conduct their wage index desk reviews. Providers should be aware of this deadline and prepare for the time it will take to compile the requested supporting documentation for the MAC. Questions will arise during the desk reviews, so providers should be prepared for potential back-and-forth communication with the MAC auditors. The MACs are required to submit their audited schedule S-3 and occupational mix data in electronic format to the DAC by November 15, 2023.
After the MACS have submitted the data, providers should be alert for CMS’s initial release of the public use files (PUFs) that contain wage index data about each hospital’s CMS Certification Number (CCN) by January 31, 2024. Providers should review the PUFs to ensure the MAC has handled the audited data accurately and submit notice of any CMS or MAC mishandling of the wage index data by February 16, 2024.
The final release of the FY25 wage index and occupational mix PUFs on the CMS website is expected to be on April 29, 2024. Read CMS’s complete timetable for the FY25 wage index development.
Part A versus Part B
One of the most confusing aspects of the wage index schedules (S-series of the hospital cost report) is Part A versus Part B costs. These types of costs are related to providers such as but not limited to non-physician anesthetists (Part A/B), physician Part A administrative, physician Part A teaching, physician/nonphysician Part B, contract labor physician Part A administrative, home office physician Part A administrative, and home office and contract teaching physicians Part A.
As with other areas of the wage index schedules, the costs included on these lines must be reasonable, accurate, and most importantly, auditable. The dollars and hours reported on any one of the Part A/Part B lines must be actual labor/wage costs incurred and actual hours worked. One exception for actual hours worked is Medicare-approved time studies.
Wage index auditors’ review of Part A and Part B costs depends on general guidelines provided by CMS regarding appropriate supporting documentation. Each wage index audit can vary based on the simplicity or complexity of the provider’s costs and hours related to Part A and Part B claimed on their cost report.
Below are a few examples of supporting documentation related to Part A and Part B:
- Salaries are to be documented via a contract or employment contract that states the job’s duties and descriptions, payroll reports, invoices and/or general ledger.
- Actual hours worked support documentation may include payroll reports, invoices, or time studies.
- On-call hours are included only when the employee or contractor is working or on-site and available to work.
- Estimates are not acceptable support, unless the provider uses approved Medicare time studies for hours worked.
Home Office Wage Index
Hospital wage index reviews on the S-series of a hospital cost report are conducted independently from the home office (HO) cost report acceptance or desk review (CMS 287-22). For example, a home office cost report may have been accepted, reviewed, or received a Notice of Program Reimbursement (NPR), but the auditing MAC may still request supporting documentation related to an HO cost report as part of their wage index review process. In addition, sometimes the HO is serviced by a different MAC, which does not preclude the hospital’s MAC auditors from requesting additional supporting documentation for the claimed HO wage index costs or hours.
Contracted Labor
As healthcare providers have been forced to increase their use of contracted labor, the contracted labor portion of the wage index has proven to be challenging to manage and track for cost report wage index purposes. This area will face additional scrutiny during the wage index audit, as accurate and appropriate contract labor inclusion may benefit (increase) the overall wage index factor.
As a reminder, contracted labor dollars must be included in the trial balance as an expense (Schedule A, Column 2). If related contract hours cannot be accurately determined, the related contract labor dollars should not be included on the wage index schedule. A general rule of thumb for documentation related to claimed contracted labor on S-3 is the contract itself. If the wage costs, hours, and other non-labor costs are not clearly cited in the contract, the MAC will require additional support for the costs and related hours.
A few examples of appropriate and approved contracted labor dollars and hours that may be included on the hospital wage index are as follows:
- Individuals contracted to provide direct patient care related to nursing, diagnostic, therapeutic, and rehabilitative services
- Contracted pharmacy and laboratory services
- Contracted top-level management services (C-suite)
- Administrative physicians such as contracted medical directors, chiefs of medical staff, or physicians performing administrative roles necessary to run the hospital
- Contracted housekeeping or dietary services
- Administrative and general management functions (e.g., data processing, legal, tax preparation, cost report preparation, or purchasing services)
If your organization needs assistance with wage index reviews or other reimbursement matters, contact PYA’s reimbursement professionals at their emails below or by calling (800) 270-9629.
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