Geographic classification of hospitals: alternative labor market areas

Medicare hospital payments are adjusted to reflect variation in hospital wages across geographic areas by grouping hospitals into labor market areas. By only recognizing the average wage in an area, Medicare encourages hospitals to contain costs. Labor market area definitions have recently received renewed attention because of their impact on hospital payments. Alternative labor market areas were evaluated using several criteria, including ability to explain wage variation and impact on payment equity. Rural labor market areas can be improved using county population size; however, further research on urban labor market areas is needed.