Core Based Statistical Areas
and the Medicare Wage Index
February 2004
Background
This document discusses the potential impact of the new Office of Management and
Budget (OMB) statistical area standards on the hospital wage index and Medicare
payments to rural providers. In the spring of 2003, OMB released new statistical
area standards based on county population from the 2000 census. Within these
standards there are two classifications of counties or county aggregates that are
considered “Core Based Statistical Areas” (CBSA); the former definition of
metropolitan statistical areas (MSA) (with very slight revisions) is retained, and a
new statistical reporting area classification is added—“micropolitan,” for counties
with a core urbanized area of 10,000-49,999 persons. The remaining non-CBSA
counties have urbanized populations of less than 10,000.
While 94% of counties that were classified as part of an MSA in 1999 remain so in the
new standards, there has been substantial reclassification of non-metropolitan
counties (Figure 1).
Twelve percent are now part of MSAs, and 28% have been classified as micropolitan
CBSAs. As would be expected, given the population definitions of micropolitan
areas, the creation of this new category has resulted in a much larger shift in the
number of people who now reside in a statistical reporting area. Among the
population that reside in places that were non-metropolitan in 1999, 17% are in
counties that are now part of MSAs, and 47% reside in micropolitan counties
(Figure 2).
Counties
New Designation:
1999 Designation Non-CBSA Micropolitan Metropolitan Total %
Non-Metropolitan 1,371 630 285 2,286 73%
Metropolitan 6 44 805 855 27%
Total 1,377 674 1,090 3,141 100%
Percent 44% 21% 35% 100%
Figure 1: County Classification Changes from 1999 to 2003
Medicare’s prospective payment systems (PPS) for hospitals, nursing homes and
home health agencies are all adjusted by a geographic wage index that reflects
differences in average hospital wages paid across local labor markets. Since 1983,
the labor markets have been identified by the OMB’s metropolitan statistical area
assignments, with each MSA representing a single market and with non-metropolitan
counties being grouped to single state-level “rural” labor markets.
Labor markets are currently based on the 1999 classifications, but the Center for
Medicare and Medicaid Services (CMS) has indicated that revised labor market
definitions could be proposed as early as May 2004, for the FY 2005 payment year.
Depending on how the new micropolitan groups are treated, CBSAs have
substantial potential to alter the wage index values, and therefore the distribution of
PPS payments, to rural and urban providers. Among current PPS hospitals located
in counties defined as non-metropolitan in 1999, 11% are in counties now defined as
metropolitan, and 44% are in counties now defined as micropolitan (Figure 3).
New Designation:
1999 Designation Non-CBSA Micropolitan Metropolitan Total %
Non-Metropolitan 19.8 25.9 9.4 55.1 19%
Metropolitan 81%
Total 100%
7% 10% 83% 100%
Population (in millions)
288.3
0.1 233.2
19.9
3.3 229.8
29.2 239.2
Percent
New Designation:
1999 Designation Non-CBSA Micropolitan Metropolitan Total %
Non-Metropolitan 680 673 166 1,519 38%
Metropolitan 3 64 2,460 2,527
Total 683 737 2,626 4,046 100%
17% 18% 65% 100%
Hospitals
62%
Percent
Figure 3: Hospital Classification Changes from 1999 to 2003
Figure 2: Population Classification Changes from 1999 to 2003
2 Core Based Statistical Areas and the Medicare Wage Index
For hospitals in 1999 metropolitan areas the shifts are much smaller—only three PPS
facilities are in counties that are non-CBSAs in 2003, and 64 are in counties that are
now considered part of a micropolitan area.
A substantial number of hospitals located in 1999 non-metropolitan areas (33%) take
advantage of the opportunity to be reclassified into a neighboring labor market,
which is available to facilities that meet certain criteria (Figure 4).
In such cases, the PPS rates of reclassified rural hospitals are adjusted by the wage
index of the market to which they requested reclassification, although their wage
data continue to be used in the computation of the index for the labor markets in
which they are physically located. Decisions made by CMS regarding the grouping
of micropolitan counties into labor markets will affect not only the wage index values
in each new labor market, but also the extent to which hospitals can reclassify, as the
average hourly wage (AHW) of both the market in which they are located and the
one to which they are requesting reclassification will have changed.
Options for New Wage Index Market Definitions
Because the wage index is intended to adjust for market circumstances, not
individual hospital costs, labor markets need to encompass multiple hospitals within
an area that constitutes a viable geographic or economic unit. Under the current
system, each 1999 MSA is its own labor market, and all non-metropolitan areas in
each state are aggregated into a single state-wide non-metropolitan market. The
addition of the new micropolitan classification raises the question of how these areas
will be handled for labor market purposes. Although the new micropolitan county
areas could theoretically be treated similarly to metropolitan areas, they appear to be
too small to be treated as individual labor markets; the majority only contain a single
hospital (Figure 5).
Figure 4: Hospital Reclassifications
New CBSA Designation:
1999 Designation
Non-CBSA Micropolitan Metropolitan Total
Non-Metropolitan 680 673 166 1,519
% reclassified 16% 48% 40% 33%
Metropolitan 3 64 2,460 2,527
% reclassified 0% 2% 4% 4%
Total 683 737 2,626 4,046
% reclassified 16% 44% 7% 15%
Hospitals
Core Based Statistical Areas and the Medicare Wage Index 3
4 Core Based Statistical Areas and the Medicare Wage Index
In the remainder of this document, we explore three other possible options for
defining labor markets using the 2003 classifications. They are:
Option 1:
- Each MSA is its own labor market (as is the case currently).
- All other non-metropolitan areas within a state (micropolitan and non-CBSAs),
are combined into a single, state-level aggregate market.
Option 2:
- Each MSA is its own labor market (as is the case currently).
- All micropolitan areas are combined into a single, state-level aggregate
micropolitan market.
- All non-CBSAs are combined into a single, state-level aggregate non-CBSA
market.
Option 3:
- All MSAs are combined into a single, state-level aggregate MSA market.
- All micropolitan areas are combined into a single, state-level aggregate
micropolitan market.
- All non-CBSAs are combined into a single, state-level aggregate non-CBSA market.
Using the FY 2004 Hospital Wage Survey File and PPS Impact File, we have
computed three hypothetical wage indexes, corresponding to the three options
outlined above for the group of hospitals paid under PPS during FY 2004. These
index values are compared to the index values from the 1999 MSA-based markets
prior to reclassification (Figure 6).
0
100
200
300
400
0 1 2 3 4 5
number of hospitals within area
number of micropolitan areas
Figure 5: PPS Hospital Frequency Within Micropolitan Areas
In Figure 6, hospitals are grouped according to the Rural-Urban Continuum Code
category that they were assigned to prior to the new CBSAs. For each group of
hospitals, the mean change in wage index value under each of the three options is
graphed. For any individual hospital, the index value may be different across these
options even if that hospital’s labor market designation has not changed, because
the overall mix of hospitals in that market may have changed. Alternatively, a
hospital’s index value may be different across options because that hospital is
grouped in a different labor market. For any given RUCC group in Figure 6, the
mean change in the index value reflects the combined effects of these two factors.
For example, many of the hospitals in the group that was previously >=20,000 and
adjacent to Metropolitan areas are now classified as micropolitan, and so under
Options 2 and 3, where micropolitan counties are separated from the rest of non-metropolitan
counties, their index value increases because they are now grouped
with hospitals in other relatively large non-metropolitan counties. At the same time,
under Options 2 and 3, the index values for the less populated rural places decreases,
because the larger and usually higher wage non-metropolitan hospitals have been
removed from the calculation.
-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
MA
central,
pop>1m
(n=146)
MA fringe,
pop>1m
(n=146)
MA, pop
.25-1m
(n=765)
MA,
pop<.25m
(n=359)
>=20k
adj
(n=209)
>=20k
nonadj
(n=177)
2.5-20k
adj
(n=497)
2.5-20k
nonadj
(n=527)
<2.5k adj
(n=42)
<2.5k
nonadj
(n=112)
County Rural-Urban Continuum Code (1993)
mean change in index values
Option 1: Individual metropolitan; state all other
Option 2: Individual metropolitan; state micropolitan; state other
Option 3: State metropolitan; state micropolitan; state other
Metropolitan(1999)
Non-metropolitan(1999)
Figure 6: Change in Wage Index by Rural-Urban
Continuum Code Hospital Groupings
Core Based Statistical Areas and the Medicare Wage Index 5
The impact of creating a state-level aggregate micropolitan labor market differs
dramatically according to CBSA designation (Figure 7).
Almost all of the hospitals located in non-CBSAs would have a decrease in their
index value, while almost two thirds of those in micropolitan counties would have
increases. As can be seen in Figure 6, the least disruptive course of action is Option
1, which retains the labor market definitions of individual metropolitan areas and a
single state-level non-metropolitan (micropolitan and non-CBSAs combined) area.
There are several problems associated with Options 2 and 3, both of which divide
the group of non-metropolitan counties into two state-level aggregate markets.
First, as shown in Map 1 on the opposite page, states would be divided into
geographically incoherent groups, causing a “swiss cheese” effect. Second, although
the hourly wages are more similar for hospitals within each of these two groups, this
may reflect operational rather than market characteristics—on average the hospitals
in non-CBSAs are smaller facilities with lower acuity patients than the hospitals in
micropolitan areas (Figure 8).
2003 CBSA Designation
Median Values
# Acute Beds Average Census Hourly Wage Case Mix Index
Non-CBSA 44 15 $18.35 1.02
Micropolitan 86 35 $20.15 1.17
Metropolitan 164 94 $23.31 1.33
2003 CBSA Designation:
Non-CBSA Micropolitan Metropolitan Total
Percent hospitals with
at least 1 percent point
increase
1% 60% 18% 23%
Percent hospitals with
little change (-.01 <
change <+.01%) 2% 20% 67% 47%
Percent hospitals with
at least 1 percent point
decrease
97% 20% 15% 30%
6 Core Based Statistical Areas and the Medicare Wage Index
Figure 8: Characteristics of PPS Hospitals by CBSA Status
Figure 7: Impact of Adding Aggregate State-level Micropolitan
Labor Markets
Map 1. Core Based Statistical Areas and Wage Index Reclassification
Defining labor markets along lines that reflect operational differences, yet lack integrity as
geographic or commercial units would be less consistent with the underlying rationale
governing PPS rate setting, wherein payments are adjusted for market-level cost drivers (such
as input prices) that are outside of individual providers’ control.
Finally, many metropolitan areas and even state-level aggregate areas no longer have
enough hospitals in them to serve as a basis to measure market-level wage variation. This
has occurred for several reasons. First, the creation of micropolitan areas has diminished
metropolitan areas in some states. Second, the exodus of small rural hospitals from PPS into
the critical access hospital program has left some states with very few hospitals in non-metropolitan
counties that still participate in PPS. One way to address this problem would
be to stop using hospitals’ hourly wage data for the index, and substitute other government
wage data (e.g. county-level data collected by the Bureau of Labor Statistics). Another
option might be to move to a single, occupation-mix adjusted index for all Medicare Part A
providers, constructed from the combined wage survey data collected on the cost reports for
hospitals, skilled nursing facilities and home health agencies.
Limitations of this Analysis
There are a number of factors that are directly relevant to wage index models that cannot be
taken into account in this analysis because information is not available. First, the extent to
which individual hospitals can qualify for geographic reclassification will change when the
relative wage position of non-metropolitan hospitals changes within their own markets.
Also, there is no reason to assume that the criteria used to allow reclassification will remain
the same. In addition, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 has loosened the criteria for critical access hospital eligibility, and there will
likely be further movement of small rural hospitals from PPS. Although this will tend to
raise the index values for remaining non-metropolitan PPS hospitals, it may also decrease the
proportion of those hospitals that qualify for geographic reclassification. Finally,
CMS should be implementing an occupation-mix adjustment to the computation of
hospital hourly wages in the near future, and this adjustment should reduce the gap
between rural and urban index values. While the effect of this could not be factored into
our analysis, it should help reduce any impact that hospitals in non-CBSAs will feel if CMS
decides to create separate, state-level micropolitan markets.
Produced by the North Carolina Rural Health Research and Policy Analysis Center,
Cecil G. Sheps Center for Health Services Research, 725 Airport, CB#7590
The University of North Carolina at Chapel Hill, Chapel Hill, NC 27599-7590
http://www.shepscenter.unc.edu/research_programs/rural_program
This work was funded by the Federal Office of Rural Health Policy,
Cooperatve Agrement Number 6U1CRH00027-04
