Principal Investigator: Jun Li
Active Dates: 2025 – 2026
Funding Source: University of Michigan (NIH/NIA)
Description:
Each year, nearly $350 billion in Medicare spending is distributed across approximately 3,500 acute US hospitals based on a complex set of administrative policies. One important policy is the hospital wage index, which standardizes hospital payments by local labor costs. However, hospitals can obtain exceptions to the wage index formula, resulting in ~$2 billion in additional hospital payments, which are considered by many to be economically unjustified. Compounding these distortionary effects is the policy’s budget neutrality mandate, such that higher spending from increasing numbers of wage index exceptions is offset by lower payments to all hospitals. Together, the exceptions and offsets may either improve or erode some hospitals’ ability to hire staff and provide high-quality care, with implications for more socially disadvantaged patient populations who may receive poorer quality of care, thus making the policy regressive and harmful. Moreover, hospitals receiving exceptions may use additional revenue to shift existing patients or admit new ones into higher-paying services, thereby shifting the composition of services and potentially restricting access to lower-paying services. We will explore the effects of Medicare’s hospital wage index policy, by examining (1) financial, (2) staffing and quality and health outcomes, and (3) access and costs (because of changes in the mix of hospital services) associated with exceptions and offsets, using 100% Medicare claims and wage index data. Given the push to address equity in patient care access and quality, and growing understanding that Medicare policies may harm less resourced providers, our work can inform future wage index policy. Policymakers could use our findings to help understand and redirect reimbursements (without wage index exception distortions) to improve access to certain types of care.