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Leveraging FFY 2025 Medicare Wage Index data to optimize financial performance

March 5, 2024 Article 5 min read
Carolyn Bielawski Bailey Benoit Scott Grenier
Hospitals and health systems need to balance staff retention and compensation with cost control, and workforce-related decisions can have implications on Medicare reimbursement. When reviewing CMS’ occupational mix survey and cost report wage index data, focus on these three areas.
Healthcare staff in hospital working together happily.At the end of January, the Centers for Medicare & Medicaid Services (CMS) released Wage Index Public Use files that contain data used to calculate the wage index values for federal fiscal year (FFY) 2025. These files are essential for healthcare providers to understand the wage index values and make informed decisions about their operations.

It’s crucial to ensure what was reported in your most recent Medicare Cost Report Wage Index and Occupational Mix Survey data is accurately represented in the CMS Public Use Files. Place particular emphasis on the review of the occupational mix survey data, as the occupational mix factor remains in place for the next three years — FFY 2025 through 2027. Reviewing and understanding trends is key for planning and budgeting purposes.

The wage index factor is a primary driver for Medicare reimbursement rates and has a significant impact on health system revenue — ranging from approximately 62 to 67% of Medicare inpatient rates and 60% of outpatient rates. As you review the FFY 2025 Wage Index Public Use files and consider the anticipated Medicare reimbursement impact, be mindful that workforce-related decisions can have far-reaching implications on reimbursement. Taking a siloed approach can end up costing your organization. Stakeholders from various departments, including finance, operations, and human resources, must be part of the decision-making process to solidify a holistic plan for current and future financial stability.

The wage index factor is a primary driver for Medicare reimbursement rates and has a significant impact on health system revenue.

Timing is especially important, despite the end of the COVID-19 public health emergency in May 2023, hospitals and health systems continue to face staffing shortages, immense increases in labor and related benefits costs, and changing regulations regarding nursing ratios. Labor spending and associated costs typically account for 50–60% of annual hospital expenses, and health systems are still struggling to balance staff retention and compensation with cost control.

As you review CMS’ wage index data, pay special attention to operations and labor productivity, benefit structure, and reimbursement optimization, and consider the following actions:

1. Benchmark labor productivity and review operations

Labor productivity benchmarks help your organization identify how your departments’ productivity performance compares to peers within the industry. You can’t manage what you don’t measure, so having benchmark goals at the department level can provide clarity on where your hospital has opportunities for potential labor savings. When evaluating productivity performance, there are two key options to consider: staffing to demand to match the department’s current level of production or increase production to meet the benchmark.

For areas with opportunities to increase production, review operational processes and apply industry best practices to optimize efficiency and increase volume without the need to add more staff. The objective should be to maximize every staff hour worked by minimizing barriers and streamlining processes for your teams. Using benchmarks and monitoring productivity performance can give managers a data-driven tool to flex staff, improve processes to increase volumes, and ultimately help control labor costs.

Also, look at your span of control when considering how to achieve benchmarks and labor savings. Are there opportunities to balance direct reports, reduce management redundancies, combine services, or reduce administrative burdens?

Benchmarking and reviewing operations should be a collaborative process, involving senior leadership, department managers, finance, and operators to make holistic staffing decisions around labor spend.

2. Assess your benefit structure

In addition to looking at operations and labor productivity, review your benefit structure as well. Again, comparison to peers and industry benchmarks are important. Also consider performing compensation reviews. Compensation — including bonuses to support retention and reward your top talent — and benefits should be reviewed on a regular basis. Compensation not only attracts and retains top talent but also prevents added costs associated with turnover, recruiting, onboarding, and training. Given the current landscape of high turnover, proactively managing your overall compensation package is key. Remember that compensation reviews become even more important during and after M&A activity.

Compensation not only attracts and retains top talent but also prevents added costs associated with turnover, recruiting, onboarding, and training.

3. Optimize Medicare cost reporting and reimbursement

As you review operations, labor productivity, and benefit structure, also consider the impact of planned changes on your Medicare reimbursement rate. That doesn’t mean you should make changes solely for the sake of reimbursement; your decisions need to make sense operationally, but understanding the impact changes will have is key to effective planning and budgeting.

Now, with CMS’ release of the FFY 2025 Wage Index Public Use Files, be sure to scrutinize your labor-related data. Look for omitted or incorrect information. Consider whether the data published is consistent with your expectations and reflective of your staffing model for the 2022 calendar year.

Between now and the release of the FFY 2025 IPPS Proposed Rule (scheduled for April/May 2024), consider whether your organization is prepared to hit the ground running to analyze and interpret the data. If not, now is the time to strengthen your systems for monitoring, planning, and reporting — activities critical for budgeting.

Expect continued volatility

Beginning with the FFY 2024 IPPS Final Rule, CMS implemented changes in the calculation of the wage index factor, and many providers’ expectations based on previous years weren’t necessarily realized. COVID-19 also will continue to influence wage-related data at least through FFY 2025. The impact, particularly of contract labor, will still play a significant role in wage index-related reimbursement. Volatility will create risk for some organizations and opportunity for others. It also underscores the importance of ensuring your reporting is correct, that you’re making decisions holistically, and that you remain on top of monitoring, planning, and reporting.

COVID-19 also will continue to influence wage-related data at least through FFY 2025.

The key to success — slow, steady, and intentional

Be sure to devote adequate time and resources to the wage index process since labor accounts for such a large portion of your annual spend. Continue to work with key departments across your organization. Challenges on multiple fronts and no small amount of red tape make it hard for departments to talk to each other, but they must, since operational and labor decisions can have multi-faceted impacts. Ensure your operations, employee benefits, and Medicare reimbursement teams are collaborating to capture and report data correctly — and to identify new opportunities for increased productivity and labor savings for your organization.

We can help you understand wage index values and make informed decisions that directly impact your current and future financial success. Contact us to set up an appointment to discuss how we can help.

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