Medicare Hospital IPPS FFY 2022 Final Rule: Finalized Changes to Wage Index

Based on the CMS finalized rates for FFY 2022, the occupational mix-adjusted national average hourly wage is estimated to be $46.47, representing an increase of 2.74% from the prior year.

Continuation of Prior Year Wage Index Policy Changes

CMS proposed and finalized a policy in FFY2020 to reduce wage index high-to-low disparities by increasing the values for low wage index hospitals below the 25th percentile, which for FFY 2022 was finalized at a Wage Index Factor (WIF) of 0.8437. Consistent with the finalized policy in FFY 2020 and 2021, in FFY 2022 CMS will “fund” this policy by applying a uniform budget neutrality adjustment. The finalized low wage index hospital policy budget neutrality factor is 0.998035 (compared to 0.997970 in FFY 2021).

Also, in FFY 2020, CMS proposed and finalized a change to the rural floor calculation by removing urban-to-rural reclassifications from the statewide rural floor. CMS finalized its proposal to continue this policy in FFY 2022 (as it did in FFY 2021) so that state rural floors would be calculated without including the wage data of urban hospitals that have reclassified as rural. 

Lastly, in FFY 2021, CMS proposed and finalized changes to specific Core-Based Statistical Areas (CBSAs) based on updated census data as released by the Office of Management and Budget (OMB) in its OMB Bulletin No. 18-04 dated September 14, 2018. In unprecedented fashion, CMS incorporated the revised OMB delineations to CBSAs impacted in FFY2021, which included new CBSAs, urban counties that became rural counties, rural counties that became urban counties, and existing CBSAs that were split apart. CMS finalized its proposal in FFY 2022 to continue to use the OMB delineations adopted beginning with FFY 2015 and updated most recently in OMB Bulletin No. 18-04.

As a result of the policy changes noted above, in FFY 2020 and FFY 2021 CMS finalized a “transition” policy which included a cap of 5% on the decrease of any hospital’s wage index from the prior year. For instance, in FFY 2021, a hospital could not receive a final wage index that was less than 5% of what it received in FFY2020. While this transition policy was set to expire in FFY2021 and CMS proposed to not include a transition policy in FFY 2022, CMS finalized an extension of the transition policy for FFY 2022. Specifically, for hospitals that received the transition in FFY 2021, CMS is continuing a wage index transition for FFY 2022 where it will apply a 5% cap on any decrease in a hospital’s WIF compared to its WIF for FFY 2021. In accordance with CMS, the transition policy is intended to mitigate significant negative impacts of, and provide additional time for hospitals to adapt to, CMS policy changes described above, specifically the revised OMB delineations. CMS finalized this transition policy on a budget-neutral basis consistent with FFY 2021. The finalized wage index transition budget neutrality factor for FFY 2022 is 0.99987.

Click here for a comparison of current and prior WIFs for each hospital as well as a comparison to the Proposed Rule. In addition, CMS Table 2 includes the bottom quartile wage index adjustment as well as where the transition policy cap of 5% applied.

Toyon’s Take

Please refer to our FFY 2022 Proposed Rule brief for further discussion on the continuation of the policy changes implemented by CMS as proposed and finalized to continue in FFY 2022. The FFY 2022 Final Rule update relates to the transition policy extension that was not otherwise extended in the Proposed Rule. Despite its good intentions, the extension of the wage index transition policy came with a limitation applied. By limiting the transition cap of 5% to only those hospitals that received it in FFY 2021, the number of hospitals that benefit from the transition cap is minimal (less than 30 hospitals across the country compared to well over 100 in FFY 2021). This is primarily a result of the inclusion of the imputed rural floor for “all-urban” States in FFY 2022. For instance, hospitals in the New Jersey market that were significantly impacted by the revised OMB delineations were “protected” in its wage index reduction to the inclusion of the FFY 2022 imputed rural floor for New Jersey hospitals. See further discussion below on the imputed rural floor for “all-urban” States. On the contrary, with a uniform budget neutrality factor of 0.99987 reducing standardized rates by less than 0.02%, the impact to hospitals not receiving the wage index transition cap is negligible.

Occupational Mix Adjustment using Calendar Year (CY) 2019 Survey Data

CMS provides for the collection of data every three years on the occupational mix of employees for each short-term, acute care hospital. In 2016, CMS collected survey data to compute an occupational mix adjustment for the FFY 2019, FFY 2020, and FFY 2021 wage indexes. For FFY 2022, a new measurement of the occupational mix was required using data from CY 2019. CMS finalized its proposal to utilize this data using the same methodology as prior years to calculate an occupational mix adjustment factor. The final unadjusted national average hourly wage is $46.52 compared to the occupational-mix adjusted national average hourly wage of $46.47.

Reincarnation of the Imputed Rural Floor in “All-Urban” States

In FFY 2005, CMS adopted an imputed rural floor policy as a temporary 3-year regulatory measure to address concerns from hospitals in all-urban States that argued they were disadvantaged by the absence of rural hospitals to set a wage index floor for those States. After extending the imputed rural floor policy eight times since FFY 2005, the policy expired and was not renewed in FFY2018 and has not been included in FFYs 2019 through 2021. 

However, as required by Section 9831 of the American Rescue Plan of 2021 enacted on March 11, 2021, CMS is finalizing permanent reinstatement of the imputed rural floor wage index calculation for hospitals located in “all-urban” States, which refers to States without designated rural areas. In accordance with the American Rescue Plan of 2021, “For discharges occurring on or after October 1, 2021, the area wage index applicable under this subparagraph to any hospital in an all-urban State…may not be less than the minimum area wage index for the fiscal year for hospitals in that State.” CMS is required by the statute to reinstate the previous imputed rural floor methodology, and this rate cannot be less than the imputed rural floor CMS calculated for such States in FFY 2018. Unlike FFY 2018 and prior, the new statute specifies that the adjustment pertaining to the imputed rural floor policy shall not be applied in a budget neutral manner, which means that any increase to the wage index for these all-urban States will not be offset by a decrease to the standardized amount or applied to wage indexes.

While not in the Proposed Rule, CMS finalized the imputed rural floor adjustment into the rate-setting, calculation of the wage index and tables of the Final Rule in a non-budget neutral manner. CMS Table 2 (link above) includes the imputed rural floor WIFs for those hospitals that received it in Connecticut, Rhode Island, Delaware, New Jersey, and Washington D.C. (Note: Puerto Rico hospitals are also subject to an imputed rural floor, but no hospitals received the imputed rural floor in FFY 2022.)

Other Proposed Changes Impacting Wage Index

• CMS proposed to make two changes to the timing of a hospital’s request to cancel a previously granted reclassification from urban to rural, which would in effect lock a hospital into its rural status for a longer period. CMS acknowledges that these changes are necessary to address the practice of applying for and canceling rural reclassification to manipulate a State’s rural wage index, which is “detrimental to the stability and accuracy of the Medicare wage index system”. The proposed two changes are described below.

  • First, CMS proposed that requests to cancel rural reclassifications be submitted to the CMS Regional Office no earlier than one calendar year after the date when the reclassification became effective, and

  • Second, CMS proposed to replace an existing rule, which requires cancellation of reclassification no later than 120 days prior to the end of Federal Fiscal Year to be effective at the beginning of the next Federal Fiscal Year, with a requirement that cancellation requests become effective in the Federal Fiscal Year that begins in the calendar year after the calendar year in which the request was submitted.

CMS finalized its proposed policy for the cancellation of rural reclassifications to be effective until no earlier than one calendar year after the date when the reclassification became effective, which will be reflected in the corresponding regulation – CFR §412.103(g)(4). However, CMS delayed the proposal to require cancellation requests to be effective in the Federal Fiscal Year that begins in the calendar year after the calendar year in which the request was submitted. CMS stated that it will delay this proposal to revise it further in order to assure the policy effectively targets the form of wage index manipulation it intends to deter.

• For all IPPS hospitals whose wage indexes are greater than 1.000, CMS finalized its proposal in FFY 2022 to apply the wage index to the proposed labor-related share of 67.6% of the national standardized amount, compared to 68.3% in FFY 2021.

Please contact Ryan Sader at Ryan.Sader@toyonassociates.com with any wage index questions.