Besler Consulting


Impact of Proposed Occupational Mix Adjustment

By Tina Ford

The Aug. 1, 2006, issuance of the final rule for the FY07 inpatient prospective payment system (IPPS) has created quite a buzz. The new rules calls for some of the most widespread changes to the IPPS since its creation in 1983, including a new diagnosis-related group (DRG) weighting methodology and 20 DRG changes that recognize severity of illness.

However, the issuance of the May 17, 2006, proposed rule for the occupational mix adjustment (OMA) in the wage index calculation somewhat overshadows the DRG revisions. This is due, in part, to the fact that the proposed OMA changes result from litigation. The Centers for Medicare and Medicaid Services (CMS) has been ordered by the Court of Appeals for the Second Circuit (Bellvue Hosp. Ctr. v. Leavitt) to implement the OMA at 100 percent, effective with the federal FY07 (Medicare discharges on or after Oct. 1, 2006, through Sept. 30, 2007).

According to CMS, the purpose of the OMA is to control for the effect of hospitals’ employment choices on the wage index data. The agency further clarifies that the varying labor costs associated with these hospital employment choices reflect hospital management decisions rather than geographic differences in the costs of labor.

According to CMS, the purpose of the OMA is to control for the effect of hospitals’ employment choices on the wage index data.

For years, many rural health associations have said there is an inequity in the current wage index calculation due to hospital employment choices. More specifically, these groups have felt that rural healthcare providers have been underpaid by the wage index calculation due to hospital employment choices and that an OMA would rectify this inequity.

Congress heard their cries. As part of the Benefits Improvement and Protection Act of 2000, Congress mandated the OMA be implemented for federal FY05.

Although the OMA is mandated by statute, the Secretary of Health and Human Services has broad authority in determining the methodology to implement the OMA. To date, CMS has chosen to implement the OMA at only 10 percent. The aforementioned court order forced CMS to implement the OMA at 100 percent and to implement a new OMA one year earlier than proposed in the April 2006 regulations.

What’s at Stake?

The answer is Medicare revenue. Why is there concern about the 100 percent implementation? The intent of the OMA was to benefit rural hospitals; however, to date, one-third of rural hospitals have been negatively affected by the OMA and approximately one-half of the urban hospitals have been positively affected. Therefore, CMS had limited the implementation to 10 percent for FY05 and FY06, citing that implementation at 100 percent would have a redistributive effect on Medicare payments to IPPS hospitals. Also, many analysts agree that the OMA proposed changes and new DRG weighting methodology, will all have a redistributive impact on Medicare payment to hospitals.

Preparing for OMA Implementation

Approximately six weeks after issuance of the proposed OMA regulations on May 17, 2006, CMS had the data it needed to calculate the OMA to be used in the FY07 wage index. What happened in those six weeks?

Hospitals gathered and reported data from the first quarter of 2006 in a format similar to the construction of the wage index data reported on the Medicare cost report (minus the wage-related benefits and including certain contracted labor for services not directly related to patient care) and sent the data to their respective Medicare intermediaries. Intermediaries had three weeks to review the data and submit it to CMS. CMS then published the first quarter of 2006 OMA raw data via a public-use file on June 29, 2006.

OMA Reimbursement Impact Prior to Final Rule

This public-use file gives us a first look into the preliminary impacts of the newly gathered OMA data. Although this is raw data with all of the errors and quirks still intact and is considered preliminary, initial findings can be determined.

In an analysis of the data in the table entitled Positive and Negative Occupational Mix Adjustment Impact, a positive OMA impact to a particular Core-Based Statistical Area means the collective average hourly wages for all hospitals within a CBSA were less than the national average hourly wage for certain defined occupational categories. And a negative OMA impact means the collective average hourly wages for all hospitals within a CBSA were greater than the national average hourly wage for certain defined occupational categories. The table shows the impact of combining 2006 OMA data with the most recent wage index public use file for FY07, and utilizes the proposed methodology as outlined in the May 17, 2006, Federal Register. (EXHIBIT 1)

It is interesting to note that the overall results shown in the table are similar across certain sections of hospitals when compared with OMA impacts calculated for FY05 and FY06. However, the redistribution among individual hospitals and CBSA may vary, as illustrated in Top 10 “Winners” by State and Top 10 “Winners” by CBSA. (EXHIBITS 2 and 3) The tables indicate that there has been some shifting among individual hospitals resulting in differences by CBSA and overall state impacts based upon the new data and the new proposed 100 percent methodology for the OMA.

Of course, the actual payment impacts under the new OMA methodology will not be known until some time between the publication of the final rule and the end of September 2006. Since the wage index is budget neutral, CMS will need additional time beyond the issuance of the final rules to recalculate all of the FY07 IPPS rates.

One additional wrinkle introduced in the FY07 final rule was a revision to the OMA methodology implemented by CMS. CMS made what it referred to as “a minor adjustment” whereby nursing salaries instead of nursing hours are utilized in one of the steps in calculating the OMA. Please note that impacts data presented in this article are based upon the methodology under the proposed May 17, 2006 OMA regulations. It will be interesting to see if the minor change to the OMA methodology results in further redistributive impacts on Medicare payments.

What Can Hospitals Do Now?

Aside from calculating the preliminary impact of the OMA effective Oct. 1, 2006, hospitals should also consider the next steps in preparing for future OMA implementation:

  • Watch for the issuance of final rates for FY07. Compare the OMA impacts under both the proposed and final OMA methodology for FY07 and determine if the minor change in methodology mentioned above resulted in a minor change in Medicare reimbursement impact for your hospital. Investigate alternatives if your hospital experienced a material decrease to the wage index as a result of the minor change in OMA methodology.
  • Watch for pending legislation related to OMA that may affect the impact to your hospital as well.
  • Watch for further OMA instructions/clarifications that may be published subsequent to the FY07 IPPS final rule.
  • Review in detail or consider having a third party review all subsequent OMA data submissions to ensure amounts are reported accurately and in accordance with the most recent CMS instructions.

The OMA impact combined with any potential impact from the proposed DRG weight changes and/or severity DRG could make for a material adjustment on the bottom line for FY07 and subsequent years.

Bio:

Tina Ford is senior manager, reimbursement, Besler Consulting, LLC, North Brunswick, N.J.

 

Reprinted from Revenue Cycle Strategist, copyright Healthcare Financial Management Association. Used with permission.