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What Impacts Wage Index?

What Impacts Wage Index?

Thu, Aug 10, 2017  -  Comments (0)  -   Posted by Deanna Moore

In my last blog post on the 2018 wage index I firmly established that wage index is the “it” thing right now. If you have not read this fine piece of literature, I encourage you to stop what you’re doing right now (after bookmarking this “What Impacts Wage Index” blog post, of course) and treat yourself to some of the finest blogging on Northeast Ohio wage index you will find anywhere. However, for those of you who like shortcuts and don’t have time to pamper yourself with witty wage index-isms from the past, here is a concise summary of the information you will need to know from that blog post in order to understand this blog post.

“CliffsNotes” from Wage Index Prophesies Blog Post

1. Thanks to The Center for Health Affairs wage index initiative, Northeast Ohio hospitals will see an adjustment in their average hourly wage from $37.64 to $38.05. This adjustment means millions of extra dollars in Medicare reimbursement that the region would have otherwise foregone.

2. Despite this positive adjustment, the region’s average hourly wage is increasing less than the national hourly rate, which means the wage index factor for the region will decline for FY 2018.

3. Jerrod Miller, a partner at Comprehensive Reimbursement, Inc., a principal of the Reimbursement Alliance Group and the lead consultant for The Center’s wage index initiative is to blame for these wage index blog posts because he’s the one who feeds me the information.

What Impacts Wage Index?

With these key facts now under your belt, and with the sinking feeling that descended upon you when you saw that the region’s wage index factor will decline in FY 2018, you are likely now asking yourself, “What impacts wage index?” First, let me reassure you that a declining wage index factor is not the end of the world. (Seriously, go back and read my last blog post if you are having heart palpitations. It will put your mind at ease.) That said, there are certain operational decisions hospital leaders can make that will affect the region’s wage index. The one I’m going to talk about today is pension funding.

Pension-Related Costs

When the folks at CMS determine wage index for a region they use a lot of information related to wages to make that determination, including pension-related costs. That makes sense, right? Pension costs are related to wages and so they should be taken into account when formulating wage index. Yet, this is a cost that can vary quite a bit year to year for hospitals. To try to smooth out these variations and prevent wage index values from fluctuating dramatically, CMS uses a three-year average of pension funding to determine the allowable amount to report as pension expense. For calculating FY 2018 wage index, for example, CMS used the three-year average cash basis pension funding for 2012, 2013 and 2014 and compared that pension funding average to the defined pension costs reported in 2014 for financial statement purposes.

This is where an operational hospital decision can make an impact on the region’s wage index. Annually, hospitals must determine how much to contribute to fund their pensions. Contributing a lot means more dollars will be accounted for when considering pension-related costs for wage index ‒ and possibly, a higher regional wage index. Contributing a little possibly means the opposite – a lower regional wage index. This decision is not an exact science. Obviously, enough must be contributed so that assets meet liabilities; however if the plan performed well in the market over the past year, a lower contribution will be required to fund the plan. Conversely, if the plan performed poorly in the market, a higher contribution will need to be made to fund the plan. Considering both operational financing issues and future wage index in this calculation is necessary.

While there is some flexibility in the amount a hospital can contribute to fund its pension, it’s important to remember that pension funding is a decision with limitations. Typically, management works with an actuarial firm involved with the pension plan to determine the range of funding that should take place to stay in compliance with the parameters established in the plan. In other words, there is not indefinite flexibility in the funding decision. Management can only vary funding amounts within the parameters dictated by the plan.

Today’s Lesson

People working on our member hospital finance teams have a tough job. Not only do they need to understand the effect operational decisions have on the income statement, they must also understand what impacts wage index, since it plays such a significant role in a region’s Medicare reimbursement. If they’re only thinking about the income statement, making the decision to minimize the contribution to fund the pension may seem like the right move; however, down the road it may have the unintended consequence of lowering the region’s wage index.

Posted in Hospital Finance
About the Author

Deanna Moore

In Cleveland you hear a lot about how competitive the region’s hospitals are. As vice president of corporate communications at The Center for Health Affairs, one of the things I love most about my job is the collaboration I see among these competitors every day. Our healthcare sector comes ...

See other articles by this author and view full bio »


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