The wage Index is complex, obtuse, and yet is vitally important to a hospital’s Medicare reimbursement. The Hospital Wage Index (HWI) is a standardized rate applied to hospital payments to reflect differences in labor costs by labor market areas.

A hospital’s average hourly wage in Manhattan, New York, would be substantially higher than a comparable hospital in Manhattan, Kansas. The Wage Index accounts for those differences when it comes to reimbursement.

Time studies play an essential role in improving the wage index value for a hospital’s labor market by capturing hours worked by physicians for providing administrative support (Part A) to the hospital. CMS defines administrative support as costs incurred for physician services that benefit the general patient population of the hospital (in contrast to time spent on direct patient care). The costs incurred and related hours are included in the wage index worksheet of the Medicare cost report (Worksheet S-3, Pt II) and blended with all other hospital employees.

Here we will take a high-level look at the Wage Index to explain its scope, the effects on hospitals, and how time studies can have a material impact on Medicare reimbursement.

What Is the Wage Index?

CMS established the Hospital Wage Index in 1983 to adjust the labor portion of the standardized reimbursement rate to account for differences in hospital wage levels based on the hospital's geographic region compared to the national average. This information is reported annually by hospitals in the Medicare Cost Report to account for the eligible wages and paid hours incurred for the reporting period. This information for approximately 3,100 acute care hospital facilities is then aggregated to determine a national average hourly wage (AHW).

A labor market area's wage index value is the ratio of the area's average hourly wage to the national average hourly wage.

The Office of Management and Budget (OMB) has established geographic areas called Core Based Statistical Areas (CBSAs) based on the U.S. Census Bureau. CBSAs contain a core urban area (a population of at least 10,000) and adjacent areas with high levels of social and economic integration with that core.

Distribution of FY24 Wage Index Across U.S. Hospitals

The core area is typically a county or counties, but can also include other equivalent entities. For each of the approximately 803 CBSAs, CMS calculates the average hourly wage based on the aggregated wages and paid hours incurred for those hospitals located in the CBSA, including those eligible through an approved geographic reclassification.

The ratio of the CBSA’s average hourly wage to the national average hourly wage determines the wage index factor for that CBSA. For example, if a CBSA is 10 percent higher than the national average, then the HWI for that CBSA would be 1.1000. In the most recent data for federal fiscal year (FY) 2024, the low end of the HWI was 0.2914 and the peak was 1.9333.

It’s important to note that there is a four-year lag between data reporting and the calculation of the wage index factor. For example, the FY 2025 Wage Index factors are based on Medicare cost report data reported during FY 2021.

The higher the wage index, the higher the reimbursement the hospital receives. Even a seemingly small change in a CBSA’s AHW from $59.00 to $59.25 may result in a significant increase in Medicare reimbursement. Since all hospitals within the CBSA share the same wage index factor, there’s a shared interest for all hospitals to properly report eligible wages and paid hours. As we mentioned in Part 2, Physician Part A time has an outsized impact on a hospital’s AHW.

How Does Wage Index Impact Hospital Revenue?

The wage index factor is applied to the labor portion of the standardized payment rates for inpatient and outpatient services provided under Medicare’s Prospective Payment Systems (PPS). The PPS is a method of reimbursement in healthcare where Medicare (or other insurers) reimburse a predetermined, fixed amount for a specific service or treatment and is used to control costs by encouraging providers to manage resources effectively.

Wage Component of Medicare Patient Care

For inpatient services, the labor component represents 67.6% for CBSAs with a wage index factor above 1 and 62% for those with a factor of 1 or less. For outpatient services, the labor component is set at 60% of the standardized payment rate. This wage-index adjustment payment rate is then applied to the relative weight assigned for the respective Diagnosis Related Group (DRG) for inpatient services and Ambulatory Payment Classification (APC) for outpatient services. The compounding effect of the higher wage index value with the relative weight results in increased reimbursement for the hospital.

Add-On Factors to the Standardized Payment Rate

In addition to the standard payment for patient acuity, Medicare provides additional reimbursement under the Disproportionate Share (DSH) program to qualifying hospitals that have a high utilization rate of inpatient days for Medicaid-eligible patients combined together with the ratio of patient days for those patients eligible for both Medicare Part A and Supplemental Security Income (SSI). Additional reimbursement is provided to teaching hospitals for Indirect Medical Education (IME) based on the ratio of allowable FTEs for training interns/residents to available inpatient beds.

Calculating the Importance of Physician Administrative (Part A) Time

Let’s walk through a hypothetical example to illustrate the impact capturing physician administrative (Part A) time can have on the wage index factor.

Part 1 – Hospital’s AHW

Total Wages: The hospital employs 250 physicians with a total annual salary of $90M or $360K per physician with an AHW of $173/hour.
Provider Component (Part A) Hours: Based on the results of tracking their administrative time that via time studies, the eligible administrative percentage is 13.6%.
- Time Study Participation: For this hospital, the participation rate is relatively low at 40% of total hours eligible. Let’s compare this to the total potential hours at full participation:

For every 10% increase in completion, the hospital would be able to add $2.5M at an AHW of $173. By only capturing 40% of eligible physicians, this hospital underreports physician compensation by $7.4M for the wage index.

Low Completion Impact on AHW – If the total reportable wages of non-physician time were $178.8M at an AHW of $55, this is the impact to the AHW:

At 40% Physician Completion: $56.02 AHW
At 100% Physician Completion: $57.52 AHW, or an increase of $1.50/hour

In this scenario, by building a program that captures the maximum of amount of Physician Part A available the hospital’s AHW jumps by $1.50. This illustrates the profound impact that Part A time can have. Now let’s look at what that means for Wage Index.

**BEFORE:** CBSA’s AHW with Hospital A at 40% capture of Physician Part A Time.

Part 2 – CBSA’s AHW

For this hypothetical, let’s imagine that there are four providers that comprise this CBSA. Hospital A will represent the data that we just presented regarding compliance rates. To that we will add the following:

○ Hospital B – $54.81 AHW

○ Hospital C – $55.10 AHW

○ Hospital D – $57.38 AHW

**AFTER:** CBSA’s AHW with Hospital A at 100% of Physician Part A Time.

Now we will look at the impact increasing Hospital A’s compliance rate from 40% to 100%. The “before” scenario, i.e. 40% complaince, yields an AHW of $55.83 for the CBSA.

When we plug in the 100% results shown in the “after” version, the AHW rises by $0.37 to $56.20, or a 1% increase. At first glance, this may not sound significant, but it makes a big difference. Also, this represents just one hospital’s increase. What if the other three followed suit?

Part 3 – CBSA’s Wage Index

In our example above, a single hospital with a more effective time study process could have a notable impact on the overall AHW by 37 cents. If using the data for the FY 2024 Wage Index, this change would have increased the wage index factor for this CBSA from 1.1071 to 1.1106 and resulted in millions of dollars in increased reimbursement for each hospital in this CBSA.

Although the impact of wage index adjustments takes a few years to be effective, it’s important for hospitals to improve their processes now to proactively collect the required data. Without action, the reimbursement gap will continue to grow.

What Can You Do Now?

We’ve shared tips throughout this series to help you create an efficient time study process that reduces the burden on staff.

Here are practical steps you can take now to positively influence your wage index:

1. Benchmark Time Study Performance

To manage a process, first you must measure it. Review your prior Medicare cost reports to determine future opportunities. How much physician administrative compensation was reported? What was the completion rate for physician hours? As our example illustrates, there’s a significant difference between capturing 20% and 70% of Physician Part A time.

Furthermore, determine the reasons for the low completion rates. Complexities, misunderstanding of the opportunity, administrative burden, lack of resources? Pinpoint them to chart a path forward.

2. Forecast the Financial Impact

Once you know what your performance is, you can estimate what it could be. If you find the team members who do report are spending 12% of their time on Part A, then forecast what it would amount to if all eligible physicians were at 12%.

Seeing the results will compel action. Knowing what can be done makes a compelling case for funding improvements through time and investment in processes and technology – actions that will likely pay for themselves many times over.

3. Push Cohort Collaboration

While the other hospitals may be viewed as competition, this is one instance when collaboration is in everyone’s best interest. Communicate with others and invest in sharing best practices. Sharing ideas and driving some friendly competition can pay huge dividends.

Imagine if every hospital improved physician time study completion by 25%. The financial impact would be profound for the hospitals, but mainly for the community that would benefit from the increase in CMS reimbursement and perhaps lead to further investments in staff, technology, and facilities.

Time studies are a simple tool to influence the wage index factor for hospitals. By increasing the participation rate of physicians, hospitals can significantly enhance their Medicare reimbursement. In the financial environment hospitals face today, a well-managed time study process has the potential to support your organization’s long-term success. It’s a foundational strategic asset, not a necessary evil.

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Part 7. Knowing How Time Studies Impact Wage Index