Insights from Ludi

How Physician Alignment Strategy Can Impact CMS Reimbursement

Posted by Dan Garvy on Sep 19, 2017 2:00:47 PM

Navigating the CMS cost report- how physician alignment strategy can impact CMS reimbursement for hospitals & health systems-1.png

Any hospital organization’s physician alignment strategy is a major driver of its mission and clinical agenda. As such, the hospital’s cost to pay physicians for their work represents a significant portion of it’s operating budget. This investment in the physicians’ services and expertise is a cost that directly and indirectly affects the quality of care the hospital delivers to patients, which CMS recognizes by reimbursing hospitals directly and through multiple incentives related to a hospital’s reported physician costs.

A hospital’s clinical agenda can affect CMS reimbursement through three categories of physician cost: direct graduate medical education (GME), indirect medical education (IME) and area wage index (AWI) calculation. Expenses related to GME (i.e., salaries, wages & benefits for teaching physicians, interns and residents) are directly reimbursed, while IME and wage index factor indirectly into a hospital’s reimbursement at the Medicare claim level.

Graduate Medical Education (GME)

Hospitals are reimbursed directly for the cost of medical education activities on a standard per-resident amount or alternatively by reporting the amount of allowable costs of an approved medical education program. CMS publishes what it considers as allowable costs in chapter 4 of CMS’ Medicare Provider Reimbursement Manual. Cost-based reporting involves a more tedious, but potentially more profitable reporting methodology if the hospital can reconcile costs with required documentation. In many ways this method is similar to a US resident choosing to itemize deductions of approved expenses instead of taking the standard deduction for their filing statuses. In both cases, you need receipts and proof of to whom, for what and when a payment was made that could be considered an allowable expense.

Indirect Medical Education (IME)

To account for the increased costs a hospital incurs that indirectly result from the presence of an academic medical program, CMS pays an additional IME adjustment on reimbursement that is calculated annually as a function of the medical program’s number of residents, beds and a Congress annual adjustment factor.

This category of reimbursement from medical education is complicated and not one the hospital can control.

Area Wage Index (AWI)

The portion of hospitals’ Medicare reimbursement that factors into AWI calculation can fluctuate significantly, especially in provincial and scattered markets. A hospital’s wage index is calculated at the area level and is an average of all staff and contract salaries and wages for all area hospitals divided by the national average rate (i.e., a hospital that pays the national average of approx. $40.2554/hr in 2016 would have a wage index of 1.000). US hospital wage indices range from .3389 to 1.8163 and are applied as a factor to the all-DRG operating amount for each Medicare claim.

Based on analysis of CMS Wage Index Files publicly available data 2014-2017, any individual hospital’s area wage index fluctuates on average by 1.59% across all CMS hospital reporting entities. The average across the middle one-third is about 1.15%. How much that fluctuation can affect any given hospital’s total Medicare reimbursement is difficult to determine, as the wage index adjustment is calculated before case-mix DRG weight is applied. Perhaps a close comparison, though, could be the Meaningful Use Incentive, which provides for 1.2% incentive to eligible hospitals that implemented EHR system and report quality measures to CMS. A hospital’s fluctuation for any given year could be attributable to changes in the level of physician expenses for that reporting period, or a hospital’s ability to sufficiently document, reconcile and report physician costs.

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Documentation requirements for reported physician costs are specified in CMS’ Medicare Provider Reimbursement Manual. While any individual hospital’s IME reimbursement is static, accountability of physician salaries, wages and hours for GME and AWI could significantly affect reimbursement for those categories. Careful documentation of payment according to the terms of agreement between the hospital and physicians is required. Any agreement that specifies variable compensation could require interval time study documentation including approved signature and date that reflect the agreement’s expectations of time and payment. Without that, a Medicare intermediary may not be able to reconcile costs related to variable compensation contracts.


Physician compensation is key driver of a hospital’s mission and clinical agenda. The organization’s ability to leverage that investment strategically relies on detailed documentation of physician compensation for various stakeholders. For large hospitals and health systems, documentation requirements are best managed with software automation and reporting tools that can standardize, automate, maintain and report on their physician payment relationships.

Did you know that when compliance is out of sight and out of mind, real repercussions can rise to the forefront and cost hospitals millions. Take a look at some of the surprising figures and consequences of faulty compliance, and some easy-to-address inefficiencies that may surprise you.

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Topics: physician alignment