Medicare's Hospital Wage Index Exceptions Grew By Nearly 60% From 2016 To 2024

The hospital wage index standardizes Medicare hospital payments for labor cost differences, paying otherwise equivalent hospitals more when they operate in areas with higher labor costs than in areas with lower labor costs. However, because of a plethora of exceptions, labor costs are commonly disconnected from the originally assigned wage index, and policy makers have expressed concerns that exceptions are not justified. Using publicly available wage index and Centers for Medicare and Medicaid Services impact files, we found that wage index exceptions increased by nearly 60 percent from 2016 to 2024 and were highly prevalent, with more than 70 percent of hospitals receiving exceptions by 2024 (compared with 46 percent in 2016). Growth was disproportionate across states and hospital types. Two exceptions-geographic reclassifications and rural floor adjustments-increased annual hospital revenues by an average of $650,000 and $930,000, respectively. Growth in costly exceptions distorts wage index accuracy and impedes the policy's intended goal of calibrating payments to actual labor costs.