A Miserable Index: Knoxville Hospitals Under-Reimbursed for Medicare Costs at $50 Million per Year

It costs more to hire a nurse in New York than it does in Knoxville.

That's why something called the Medicare Wage Index was invented. It is supposed to recognize the differences in costs to hospitals and it determines how much hospitals get in reimbursements for Medicare patients.

Under the flawed rules as they now work, Knoxville's hospitals are being under-reimbursed by an estimated $50 million a year. And it's getting worse. Despite being an urban area, Knoxville has the same wage index of rural hospitals in Tennessee, which rank 42nd in the 50 states.

The Medicare Wage Index is set by the Center for Medicare and Medicaid Services within the Department of Health and Human Services.

The first thing wrong with the Medicare Wage Index is that it penalizes efficiency and hospitals that control costs. The more money you spend, the more money you get reimbursed. Knoxville hospitals are penalized for efficiency.

The second thing wrong with the index is that local rates are influenced by (gasp) politics.

It is a zero-sum game in that there is a pool of money and those who get a higher reimbursement rate are taking money from those with less political clout. California, Chicago, New York, and Massachusetts, with huge Congressional delegations and members on health and finance committees, get much higher rates than they should.

Knoxville ranks in the bottom 3 percent of the 434 "Core Based Statistical Areas" in which rates are set. A study in 2010 found that Knoxville trailed such areas as Chattanooga, Nashville, and Asheville by double digits. It estimated then Knoxville was being under-reimbursed up to $42 million. And the trend line was going down and local hospital executives say it has gotten worse since then.

You can argue about the different rates between Knoxville and New York. But Chattanooga? And rated as having the same wage costs as Scott County?

An example of the screwy way reimbursements are set: Urban hospitals cannot get less that the "rural rate" within a state. Massachusetts used an exclusive expensive hospital on Nantucket Island to establish the state's "rural" rate. Thus all the hospitals in Massachusetts got a substantial windfall that has meant billions of dollars more in reimbursements.

There is an effort being made to organize the majority of the states now being underpaid to get federal legislation that reforms the way the wage index is computed. There was a time when money could be moved around within a state by changing rates. But under Obamacare, money can shift around among all the states. So some big states have been taking even more. (See Massachusetts example above.) Or powerful committee chairs are upping the rate for their states.

The last in-depth study of Knoxville's wage index shortcomings that I could find was done by a CPA for Catholic Healthcare Partners (former owners of St. Mary's) in 2010. Local hospital administrators tell me that the situation has just gotten worse. A more recent study, which I have yet to examine, puts the annual loss to Knoxville hospitals in excess of $50 million.

Knoxville needs to be reclassified to reflect that it is not a rural area, but an urban one and that its reimbursement rate should be raised accordingly.

The medical community in Knoxville, in total, ranks as one of our top five employers. Aside from the impact on the economy, the safety and viability of our hospitals is even more important.

I know local industrial development people have an orgasm when they locate a cardboard box plant with 30 minimum wage jobs. But they might look at how they could work with local hospitals and help convince our congressional delegation to sign on to the effort to reform the wage index. Pumping and extra $50 million into the health care industry in Knoxville would have a major economic impact.

If Knoxville doesn't get its share, the money goes somewhere else.