CMS Flip Flops on Rural Reclasses and Rural Floor

In 2019 Medicare released the following statement:

“It appears that hospitals in a limited number of states have used urban-to-rural hospital reclassifications to inappropriately influence the rural floor wage index value,” the Centers for Medicare & Medicaid Services (CMS) recently said in a fact sheet.

“To address the unanticipated effects of rural reclassifications on the rural floor and the resulting wage index disparities created by urban-to-rural hospital reclassifications, CMS will remove urban-to-rural hospital reclassifications from the calculation of the rural floor wage index value beginning in FY 2020.”

Following recent public feedback, CM) is considering flip-flopping on its wage index policies. These changes would affect hospitals that have transitioned from an urban to rural classification according to section 1886(d)(8)(E) of the Social Security Act, implemented as per regulations at §412.103.

In response to this feedback, and after revisiting relevant court rulings and the statute itself, CMS is proposing a reinterpretation of section 1886(d)(8)(E). Under this new interpretation, hospitals that have been reclassified as rural would be treated identically to inherently rural hospitals when calculating the wage index.

This proposed change, intended to be implemented from fiscal year (FY) 2024 onwards, would mean that hospitals reclassified under §412.103 would be included in rural wage index calculations alongside geographically rural hospitals. Consequently, the data from all hospitals reclassified under §412.103 would contribute to the wage index calculation for the state’s rural area, and also to the wage index floor for the state’s urban hospitals.

Under existing law, the wage index for a hospital in an urban area cannot be lower than the wage index for hospitals in rural areas within the same state. This is a provision known as the ‘rural floor.’ The proposed changes would uphold this rule.

Since wage index is a “zero-sum” game, winners include urban hospitals with low wage indexes that will see a rise in the rural floor. Losers then will include urban hospitals that do not reclassify if the average hourly wage in that MSA falls when the reclassified hospitals are removed from that MSA. 

We should remember that most of the hospitals doing urban to rural reclassifications did it to increase Indirect Medical Education (IME) payments and that the increase in these payments exceeded a reduction in the wage index.