Alabama hospitals struggle with Medicare reimbursement system
by Patrick McCreless
Oct 14, 2012 | 7577 views |  0 comments | 10 10 recommendations | email to a friend | print
Nurses Valerie Kilpatrick, left, and Herwinna Doss scrub their hands and arms as they prep for surgery at Regional Medical Center. According to the Centers for Medicare and Medicaid Services, which administers the Medicare program, the lowest hospital wage index among all states is in Alabama. (Anniston Star photo by Trent Penny)
Nurses Valerie Kilpatrick, left, and Herwinna Doss scrub their hands and arms as they prep for surgery at Regional Medical Center. According to the Centers for Medicare and Medicaid Services, which administers the Medicare program, the lowest hospital wage index among all states is in Alabama. (Anniston Star photo by Trent Penny)
Two elderly Medicare patients are admitted for heart surgery, one at a California hospital and the other at Regional Medical Center. Teams of doctors and nurses spring to action at both facilities. Both teams have the exact same skill sets.

However, when the procedures are completed, the federal government pays the California hospital more money for the procedure than it does RMC.

That’s because wages are higher in California than in Alabama.

RMC officials say the current reimbursement system is unfair. And there are other Alabama hospitals and health experts who agree.

The causes

Like many other hospitals across the state, RMC has factored new Medicare reimbursement cuts into its 2013 budget, forcing it to tighten its belt during an already tough economic climate. The issue lies in how the federal government determines how much Medicare money is paid to hospitals for patient services.

Medicare, the federal program that funds health care for millions of elderly and disabled patients every year, uses hospitals’ expense reports to determine average hourly wage and that wage index is used to adjust payments within the system. Lower index numbers mean lower reimbursement. The wage index is intended to make adjustments in payments based on geography, but does not always work out that way, said David McCormack, CEO of RMC.

“The system is very flawed,” McCormack said.

Ingram Haley, chief financial officer and senior vice president of the Alabama Hospital Association, says that in reality, many hospitals can get better reimbursements because of wide discrepancies in wage indexes.

According to the Centers for Medicare and Medicaid Services, which administers the Medicare program, the lowest wage index is in Alabama at 0.7247 while the highest is in California at 1.6989. Ever-decreasing Medicare reimbursements have been a part of operating a hospital in the state for many years — so much so that Alabama consistently ranks as the state that receives the lowest Medicare reimbursement per hospital, according to the Alabama Hospital Association.

“Alabama’s hospitals tend to have a lower wage index so all other things being equal would tend to be paid less,” wrote Lee Millman, spokeswoman for the Centers for Medicare and Medicaid in an email to The Star.

And since Alabama is currently at the bottom of the range of wage indexes across the country, even if wages across the country are increased, Alabama’s reimbursement does not increase much, if at all. Instead, it often decreases since the appropriations are budget neutral; meaning extra spending in Medicare must be balanced by cuts elsewhere.

“You’re being compared to hospitals across the country,” said Rosemary Blackmon, executive vice president of the Alabama Hospital Association. “Alabama is already at the bottom of the formula …and we’re being compared to a state like California … unless they drop in wages significantly, we won’t go up much.”

Haley said political exemptions also play a part in which hospitals get the best reimbursements.

“It depends on who is in political power to get that fix and get you a higher wage index,” Haley said.

McCormack agrees with Haley about the problem of political influence.

“The states up north get paid the most and that’s where most of the votes are,” McCormack said.

The Medicare Payment Advisory Commission — an independent federal body established to advise Congress on issues affecting the administration of Medicare — in a 2007 report advised Congress to repeal the existing hospital wage index statute, including reclassification and exemptions and establish a new wage index system due to flaws in the current system.

“When a patient has a colonoscopy or something through Medicare … for the exact same treatment … we get much less in reimbursement than a hospital across the border in Georgia,” said Barry Keel, CEO of Stringfellow Memorial Hospital in Anniston, which like RMC, will see a decrease in Medicare reimbursements in 2013. “It’s a very skewed system we’ve been trying to work on for years.”

The cost

A survey by the Alabama Hospital Association indicates that six more Alabama hospitals dropped in the wage index between fiscal year 2011 and 2012, resulting in a loss of $26.5 million to the state in Medicare reimbursements. The drop in revenue is compounded by the fact that 40 percent of Alabama’s patients are covered by Medicare.

McCormack said Medicare money accounts for about 55 percent of RMC’s funding, meaning any reimbursement cuts are keenly felt.

“That’s a big hit for us,” McCormack said.

Millman wrote that most of Alabama’s hospitals will see further drops in their wage indexes for fiscal 2013. She noted however, that due to overall rate increases, reimbursements to certain Alabama hospitals will go up despite drops in wage indexes. But still, any Alabama increase will be lower than the national average.

“We’ve estimated total operating payments to providers in Alabama to increase by 1.6 percent from fiscal year 2012,” Millman wrote. “Nationally, operating payments are estimated to increase by $2.4 billion or 2.3 percent from fiscal year 2012.”

McCormack and Keel said the cuts to their hospitals’ reimbursements will not mean a reduction in services. Instead, the hospitals will strive to become more efficient and lower costs, which, ironically, compounds the wage index problem.

Haley said that because Alabama hospitals receive less money, many are forced to lower wage costs and other costs to make ends meet, becoming more efficient in the process. However, lowering wage costs in turn lowers the wage index, which in time means even less in Medicare reimbursements.

“It’s kind of a vicious cycle,” Haley said. “You trim costs and that trims future payments.”

Due to decreasing revenue, RMC froze employee wages for the past three years.

“Now we’re getting punished for that,” McCormack said.

RMC did include a slight increase in wages in its 2013 budget.


Efforts are currently under way to change the current wage index system to level the playing field among hospitals. Earlier this year, Kathleen Sebelius, secretary of the Department of Health and Human Services, submitted a plan to Congress to reform the wage index system. The plan, required under the Affordable Care Act, would institute a new system that, “takes into account hospital hiring patterns in calculating the wage index by using commuting data to establish a labor market area and wage index value for each hospital.”

The changes would theoretically create a wage index that would more closely correlate with actual labor costs.

In a June letter to the Centers for Medicare and Medicaid, the Medicare Payment Advisory Commission reiterated its general support of the HHS plan’s efforts to change the wage index system.

“The flaws of the existing hospital wage index system continue to erode the accuracy of Medicare’s hospital payment system,” the letter stated.

However, the commission also noted flaws in the HHS proposed plan, such as a misunderstanding of the role of the wage index. The proposed plan has not yet been approved.

“We need a more equitable calculation of the wage index,” Haley said. “Wages are definitely higher in other regions of the country … we need a more equitable adjustment that reflects reality.”

Keel agreed, adding that it’s not about getting more money than other states.

“We just want equitable payments across the stage — we don’t want more than what other people are getting,” Keel said. “But Alabama right now, it’s getting the short end of the stick.”

Star staff writer Patrick McCreless: 256-235-3561. On Twitter @PMcCreless_Star.

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