A vacant hallway at Vaughan Regional Medical Center in Selma, AL, Tuesday, Sep. 3, 2024 in Selma, Ala.Alabama hospitals say that Medicare’s wage reimbursement index isn’t keeping up with their needs. (Will McLelland for Alabama Reflector)
SELMA — An entire section of the third floor of Vaughn Regional Medical Center sits empty.
Demand is not the issue, said David McCormack, the hospital’s CEO. Vaughn Regional sees patients from every surrounding county, and if they opened the empty ward, they’d have more room in the emergency room, where some rooms may be routinely taken up by non-emergency patients.
“The majority of people who come to the emergency room aren’t going to be admitted, but we do have to take care of them, get them medicine and get them home or fix up what’s ever wrong,” McCormack said. “But right now they’re having to wait because half the emergency room has in-patients in it, so we can’t use it for the ER patients.”
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The issue, McCormack said, is Medicare, which McCormack said is the hospital’s largest payer.
Vaughn, like other hospitals, gets paid through a formula known as the Medicare reimbursement wage index. Because the wage index is calculated on wages from the previous three years, there is a lag in the wages the hospital can pay, McCormack said.
“If we raise our wages today, we will not get credit for it until three years, and if we go three years with higher wages, we won’t be able to — we’ll actually go under. We won’t be able to pay the bills. So the way the system is designed, it forces us to keep lower wages, because we don’t have any money to pay the higher wages,” McCormack said.
Vaughn Regional Medical Center CEO David McCormack talks about how the hospital manages its funding efficiently at Vaughan Regional Medical Center in Selma on Tuesday, Sep. 3, 2024 in Selma, Ala. (Will McLelland for Alabama Reflector)
If McCormack could hire just 10 more nurses, he said, he could open the empty ward. With nursing pay significantly rising post-pandemic, that would take about $1 million yearly, not including other support staff.
The hospital has to employ travel nurses because they can’t find local nurses to hire. McCormack said they are paying travel staff three to four times more than before the COVID-19 pandemic, while they have not gotten a raise in reimbursements.
“The hospital has to take the bite of that, because we’ve got to pay them more to get them to come here than to go to other places. That wears on the hospital to try to fund that,” he said.
Hospital survival
Vaughan Regional Medical Center in Selma, AL, on Tuesday, Sep. 3, 2024 in Selma, Ala. Vaughn, like many of Alabama’s rural hospitals, is struggling with a low Medicare reimbursement rate. (Will McLelland for Alabama Reflector)
Rural hospitals across Alabama have been caught in a cycle of financial instability, partly driven by the state’s low Medicare reimbursement wage index. This issue, which McCormack said is an outdated model that has overwhelmed hospitals for decades, threatens the survival of health care facilities in some of the state’s most underserved regions.
The Medicare wage index, a complex formula used by the Centers for Medicare & Medicaid Services (CMS), adjusts hospital payments based on the local cost of labor. Its implementation has had severe consequences for Alabama, a state with historically lower wages and economic activity compared to more urban states like California and Massachusetts.
The wage index for rural Alabama for the fiscal year 2025 is 0.65 — the lowest among the 50 states and only higher than Puerto Rico and the U.S. Virgin Islands — which means that Alabama gets paid 65% of the service cost. California’s rural wage index is 1.26 for the same fiscal year, meaning California gets paid 26% more to cover labor costs. If a service costs $100, for example, an Alabama rural hospital would get paid $65 while a Californian rural hospital would get $126.
Dr. Scott Harris, state health officer for the Alabama Department of Public Health, called the system “frustrating.”
“If you’re a hospital in Alabama and you have a patient with this diagnosis and you give him great care and they get better and go home — if only he had done that across the state line in Tennessee or Georgia, they would have gotten a higher reimbursement for the same exact services,” Harris said.
We’re having a hard time keeping the lights on, much less working to increase salaries, which we desperately need to be able to do.
– Danne Howard, deputy director of the Alabama Hospital Association
The U.S. Secretary of Health and Human Services is required to adjust hospital payments based on regional wage differences, CMS spokesperson Gregg Ross said in a statement. This is done by applying a wage index, which compares a hospital’s local wage levels to the national average.
“This adjustment factor is the wage index. We currently define hospital geographic areas (labor market areas) based on the definitions of Core-Based Statistical Areas (CBSAs) established by the Office of Management and Budget. The wage index also reflects the geographic reclassification of hospitals to another labor market area,” Ross said.
With no Medicaid expansion, rural Alabama hospitals struggle
The Centers for Medicare & Medicaid Services (CMS) must update the wage index annually using data from sources such as the Medicare Cost Report and hospitals’ payroll records, according to Ross. The index is calculated by dividing a region’s total hospital wage costs by the total hours worked, and comparing it to the national average.
Haneen Ali, an associate professor and health services administration program director at Auburn University, describes the situation as a “vicious cycle.” Low wages lead to lower Medicare reimbursements, which in turn prevent hospitals from raising wages, thereby perpetuating the cycle.
“Having a lower wage index in Alabama means that our hospitals receive a reimbursement payment less than other hospitals that do provide the same service,” Ali said. “This has a direct impact on the financial status of hospitals that can lead to bigger challenges, that could also lead to hospital closures in the long term run.”
The causes
A hallway at Vaughan Regional Medical Center in Selma, Alabama on Tuesday, Sep. 3, 2024. Alabama hospitals say that Medicare’s wage reimbursement index isn’t keeping up with their needs. (Will McLelland for Alabama Reflector)
Fewer economic opportunities in Alabama and other rural states lead to lower wages across various sectors, including health care. That means fewer high-paying jobs and a lower wage index.
Ali said that the cycle not only affects the hospitals but also exacerbates health care disparities in rural areas. When hospitals have financial pressure, they need to decide on what services they can provide. And when that happens, Ali said, hospitals tend to focus on immediate care and not preventative, which Ali said is important in managing chronic diseases. She said this could lead to higher long-term health care costs, poorer health care outcomes for the population, and a more ill population in general.
“The combination of lower reimbursement rates and the challenges of providing care in rural areas can widen the health disparities, particularly for low-income patients, for elderly patients, and chronically ill patients,” she said.
It’s not as easy as raising Alabama’s reimbursement rate. The program must be budget neutral. If Alabama were to receive a rate increase, other states would have to have their rates decreased.
Local health officials say the system, initially intended to reflect varying labor costs across states and designed to adjust for regional cost-of-living differences, disproportionately harms low-wage states like Alabama.
“The premise itself makes sense,” said Danne Howard, deputy director of the Alabama Hospital Association, adding that part of the formula should account for the cost of living and wages paid depending on the state.
She said the problem stems from “manipulations” over the years regarding how the wage index is calculated for rural areas.
Hospitals in these less rural states have significantly raised wages, even for non-clinical staff, to boost Medicare reimbursement. Alabama, struggling to keep its hospitals financially afloat, cannot afford to raise wages similarly.
“We’re having a hard time keeping the lights on, much less working to increase salaries, which we desperately need to be able to do,” Howard said, adding that if Alabama hospitals could have more competitive salaries, they may not have as much of a workforce shortage.
One example of the wage index’s flaws is known in health policy circles as the “Bay State Boondoggle,” in which case a hospital in the affluent Nantucket Island region of Massachusetts — the only rural hospital in the state — manipulated the system to boost wages artificially, raising Medicare reimbursement rates across the state. Hospitals across Massachusetts benefited from higher wage index rates for years, overpaying their hospitals by $133.6 million.
Howard said this type of payment manipulation comes at the expense of hospitals in states like Alabama because federal law requires these changes to be cost-neutral. When states like Massachusetts and California raise hospital wages, their Medicare reimbursements go up, causing states like Alabama to get less.
“It’s a death spiral for our hospitals. It has been for decades. despite our efforts for a congressional fix, and the acknowledgement of CMS and others that the formula is flawed and should be reformed — nothing changes,” Howard said.
Ali said that Alabama lack the ability to engage in the same payment manipulation as other states because it lacks the same resources needed to invest in hospitals.
“California is a rich state, right? So they do have the resources, which we don’t in Alabama. There are two important factors, the funding, the money, right, and the political will or desire or action. I think the main issue we have is the funding in the state of Alabama,” Ali said.
U.S. Rep. Barry Moore, R-Enterprise, said that “these other states are fighting” to keep their wage indexes the same.
“Certainly, there’s going to be a battle about the wage index to try to keep this thing neutral in the budget, and it’s hard to get people to give up money,” Moore said in a recent appearance in Montgomery. Moore did not say whether any direct action has been taken on the issue in Congress other than advocating for change.
‘Nobody got raises for two years’
A newly added Catheterization Lab at Vaughan Regional Medical Center seen on Tuesday, Sep. 3, 2024 in Selma, Alabama. Vaughn has invested $3 million in the equipment. (Will McLelland for Alabama Reflector)
McCormack said that while Vaughn Medical Center has managed to maintain the quality of care, it has come at the cost of overburdening staff and delaying necessary upgrades to medical equipment.
“We just have to look at every dime we spend, and how can we operate without spending it,” he said. “We don’t waste money, is my point.”
The hospital also invested about $3 million in a cath lab, or cardiac catheterization laboratory, a hospital room with imaging equipment used to examine and treat heart chambers and arteries. McCormack said it’s the only cath lab in the surrounding area, and the hospital routinely sees people from other counties that need its cath lab. McCormack said sacrifices had to be made so they could afford it.
“Nobody got raises for two years. Now, that wasn’t just because of that piece of equipment. That was just because of the difficulty– you know, you only got so much money to go around,” McCormack said.
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