The IPPS provides incentives for hospitals to operate efficiently by paying a predetermined, standardized amount for an entire inpatient episode of a given type rather than the actual costs incurred in providing the care. CMS calculates IPPS payments through a series of adjustments applied to separate national base payment rates covering operating and capital expenses. Specifically, the agency adjusts the base payment rates for patients in different diagnosis-related groups, assuming that cases falling into a particular grouping address similar clinical problems that are expected to require similar amounts of hospital services.applies an area wage index to account for geographic differences in labor costs. Finally, CMS determines whether supplemental Medicare payments or other types of special treatment, such as those provided to certain rural hospitals, are applicable. CMS adjusts hospital payments under IPPS using the area wage index, to account for variation in labor costs across the country, as these costs are largely beyond any individual hospital’s ability to control. The wage index reflects how average hospital wages in each geographic area compare to average hospital wages nationally, set as 1.0. Thus, Medicare payment to a hospital in an area with lower wages is generally below the national average payment and the payment to a hospital in a higher wage area is generally above the national average. CMS considers each distinct urban area as a single labor market, but it considers all rural areas within a state as a single labor market and therefore assigns them the same wage index. If its wage index does not fully account for its relative labor costs, a hospital may qualify to be reclassified to a higher wage index area in order to receive higher Medicare payments. To request a reclassification to another geographic area, hospitals may apply to the Medicare Geographic Classification Review Board (the Board), an entity established by Congress. Among various criteria for reclassification, a hospital must demonstrate close proximity to the area for which it is seeking redesignation. Medicare reimburses teaching hospitals and academic medical centers for both the direct and indirect costs of their residency training programs. Direct graduate medical education payments cover the direct costs of resident training, such as salaries and benefits. The indirect medical education (IME) adjustment—a percentage add-on to IPPS rates— reflects the higher patient care costs associated with resident education. The size of the IME adjustment depends on the hospital’s teaching intensity, which is generally measured by a hospital’s number of residents per bed. The Medicare disproportionate share hospital (DSH) adjustment generally provides supplemental payments to hospitals that treat a disproportionate number of low-income patients. To qualify for this payment adjustment, a hospital’s disproportionate patient percentage (DPP)—the share of low-income patients treated by the hospital—must generally equal or exceed a specific threshold level determined by a statutory formula.amount of Medicare DSH payment adjustment varies by hospital location and size. Rural hospitals may qualify for special treatment in determining payment rates under IPPS, although some urban hospitals may also qualify, through three programs: sole community hospitals (SCH), rural referral In some centers (RRC), and Medicare-dependent hospitals (MDH).cases, hospitals may qualify for more than one of these rural provider types, allowing them to receive multiple adjustments to their IPPS payment rates. We identified 16 statutory provisions enacted between 1997 and 2012 that modified Medicare payment for inpatient services in a way that benefitted a subset of hospitals. These provisions allow hospitals to receive adjustments to their wage index, alter classification criteria for supplemental payments or other special treatment, or exclude hospitals from the IPPS. Most of the provisions we identified targeted rural hospitals for increased payment. We identified seven statutory provisions that have enabled hospitals to receive Medicare payment under a higher or nearby wage index. Some provisions moved hospitals in specific, named counties into different wage index areas, or set a minimum wage index for hospitals meeting certain criteria. Other provisions allow hospitals to reclassify from an urban to a rural area. Still others enable rural hospitals near urban areas to qualify for the higher wage index of the nearby area. Section 4410 of BBA established a rural floor by requiring that the area wage index for a hospital in an urban area of a state could not be less than the area wage indexes for hospitals in that state’s rural area. The provision applied to patient discharges beginning in fiscal year 1998, and specified that the implementation of the rural floor must be budget neutral—that is, any changes in the wage index for hospitals subject to the floor may not increase or decrease aggregate Medicare payments for the operating costs of inpatient services. Initially, this upwards adjustment only applied in states with at least one rural IPPS hospital. The rural floor provision increased the wage index for hospitals in urban areas that had been paid under a lower wage index than the rural areas of that state. In order to compensate for the increased wage indexes of urban hospitals receiving the rural floor, CMS initially applied a nationwide budget-neutrality adjustment to account for the additional payment to these hospitals. In fiscal year 2009, CMS changed this policy and began phasing in a revised rural floor budget-neutrality adjustment that would be calculated and applied on a state-by-state basis instead of on a nationwide basis. To do so, the agency blended the nationwide and state-by-state budget neutrality formulas for fiscal year 2009 and fiscal year 2010.within each state, some hospitals’ wage index increased, while other hospitals’ wage index decreased, in order to ensure that total Medicare payments to hospitals in that state remained the same. As a result, Section 3141 of PPACA reversed this policy by requiring that any adjustments to the wage index must be applied on a budget-neutral basis through a uniform national adjustment beginning in fiscal year 2011. The application of the national budget-neutrality requirement has resulted in a transfer of Medicare payments from hospitals in states where no hospitals qualified for the rural floor to hospitals in states where at least one hospital qualified for this adjustment. (For information on the impact of this provision by state, see app. I.) In fiscal year 2012, the effect of this PPACA provision was that hospitals in seven states (Alaska, California, Colorado, Connecticut, Massachusetts, New Hampshire, and New Jersey) and Puerto Rico received increased hospital payments; hospitals in Massachusetts received the largest increase in payments—nearly $275 million—five times greater than New Jersey, the next largest recipient; to pay for the rural floor in these states, hospital payments in other states were adjusted downward by as much as 0.5 percent, with a median state reduction of $7.3 million; and hospitals in five states saw declines of over $20 million: New York ($47.5 million), Texas ($34 million), Florida ($29 million), Illinois ($26 million), and Michigan ($21 million). Specific County and Area Reclassifications (Expired) Section 152 of BBRA reclassified hospitals in seven named counties or areas, deeming them to be located in specifically named large metropolitan areas, thus enabling them to qualify for the wage index of that area. This provision benefitted hospitals in these counties that competed for labor with nearby hospitals in higher wage areas. The BBRA limited this reclassification to discharges during fiscal year 2000 and fiscal year 2001. Hospitals in the following specified counties were reclassified: Iredell County, North Carolina, was deemed to be located in the Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina metropolitan statistical area (MSA); Orange County, New York, was deemed to be part of the large urban area of New York, New York; Lake County, Indiana, was deemed to be located in the Chicago, Lee County, Illinois, was deemed to be located in the Chicago, Illinois Hamilton- Middletown, Ohio, was deemed to be located in the Cincinnati, Ohio-Kentucky-Indiana MSA; Brazoria County, Texas, was deemed to be located in the Houston, Chittenden County, Vermont, was deemed to be located in the Boston-Worcester-Lawrence-Lowell-Brockton, Massachusetts-New Hampshire MSA. Section 401 of BBRA allowed certain urban hospitals, beginning January 1, 2000, to request to be reclassified as rural hospitals for payment purposes under the IPPS. Generally, these hospitals may seek a lower wage index in a rural area in order to receive higher payments as a rural provider type, such as an SCH. According to CMS, the provision benefits hospitals that are within an urban area, but are isolated from the metropolitan core by distance or physical features. Under the BBRA provision, to qualify for this reclassification, a hospital must submit an application and meet one of the following criteria: be located in a rural portion of an MSA or an area defined as rural by be designated as a rural hospital by the state; would qualify as a rural, regional, or national referral center, or as an SCH if the hospital was located in a rural area; or meet other criteria established by CMS. By fiscal year 2013, 46 urban hospitals, comprising 1.3 percent of IPPS hospitals, had been reclassified by CMS as rural under this provision. Seven states—California, Florida, Missouri, New York, Pennsylvania, Texas, and Virginia—had more than two qualifying hospitals. Section 505 of MMA required that HHS establish a process, beginning in fiscal year 2005, by which the agency may increase the wage index for hospitals located in counties where potential employees commute to higher wage index areas. The provision benefits hospitals located in counties where a higher than average percentage of hospital employees reside in that county but work in another county that has a higher wage index. Hospitals in qualifying counties receive an average of the differences between the higher and lower wage indexes, weighted by the percentage of hospital workers in the qualifying county who work in the higher-wage areas.