1. Wage Index – “The Last Frontier” Wisconsin HFMA 2016 Annual Conference

2. Disclaimer All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 1

3. Wage Index Overview Wage Index reflects the relative hospital wage level for each geographic area compared to the national average Geographic areas are based on the Core Based Statistical Areas (CBSA) defined by the Office of Management and Budget Data used to calculate the wage index is the aggregate of all PPS hospitals located within each CBSA 2

4. Wage Index Overview Sources of data for Wage Index Cost Report Worksheet S-3 Parts II and III Occupational Mix Survey There is a four-year lag prior to wage data being included in the Average Hourly Wage (AHW) FY 2018 wage index based on cost report years beginning in Federal FY 2014 The first day of a cost report period determines what FY it falls into – FY 2014 includes 9/30/14, 12/31/14 and 6/30/15 cost reports 3

5. Wage Index Overview Occupational Mix Survey Adjustment applied to a provider’s wage index to adjust for that provider’s choice of staff 100% adjustment due to court order in 2006 CMS previously applied only 10% of adjustment due to lack of confidence in data Collected every three years New survey covering calendar 2013 was due 7/1/14 – will be applied beginning in FY 2016 4

6. Medicare Payment Methodologies Wage Index Impact Hospital Inpatient Prospective Payment System (IPPS) Paid on a per-case basis Base rate is adjusted by certain factors for each case Wage Index adjustment Disproportionate Share Hospital (DSH) add-on MS-DRG (Medicare Severity Diagnosis Related Group) relative weight Federal fiscal year = October 1 - September 30 CBSA Geographic Reclass 82/84% Rule 106/108% Rule 35 miles for rural 15 miles for urban 5

7. CBSA’s: WISCONSIN 6

8. 2016 Wage Index - Wisconsin The table below displays each CBSA and their associated Wage Index values. 7 *Note: 2017 data is not yet finalized*

9. 2016 Wage Index – Wisconsin The table below displays each CBSA and their associated Average Hourly Wage values. 8 *Note: 2017 data is not yet finalized*

10. How is the Wage Index Calculated? If a hospital had multiple cost reports that began during this period, use the report that covers the longest period, or the most recent if the length of the multiple reports are the same The salary total on Worksheet A is revised to include contract A&G, housekeeping, and dietary as reported on the wage survey A portion of overhead salaries and hours and wage- related costs are allocated to excluded areas such as sub-providers or non-reimbursable cost centers The process of calculating the Wage Index 9

11. Wage Index Calculation Each hospital’s salaries and wage-related costs are adjusted by the occupational mix The occupational mix adjustment factor is based on the national nursing average hourly rate divided by the hospital’s nursing average hourly rate A portion of each hospital’s salaries and wage-related costs are adjusted for the occupational mix, based on the hospital’s nursing category salaries as a percentage of total salaries If a hospital did not submit an occupational mix survey, currently it automatically receives the average adjustment for the other hospitals in the area If no hospitals in an area submit a survey, all hospitals receive an adjustment factor of 1.0 The process of calculating the Wage Index (cont.) 10

12. Wage Index Calculation The adjusted salaries and hours for each hospital in a CBSA are combined to provide the totals for the CBSA, supporting the adjusted average hourly wage for the area The adjusted salaries and hours for every hospital nationally are combined, supporting the national adjusted average hourly wage - $40.19 for FFY 2016 Each area’s adjusted average hourly wage is divided by the national adjusted average hourly wage to provide the unadjusted wage index Each area’s unadjusted wage index then receives the rural floor budget neutrality adjustment to give the adjusted wage index The process of calculating the Wage Index (cont.) 11

13. Wage Index – Frontier States Frontier States Frontier States can not be assigned a Wage Index of less than 1.0000 North Dakota Montana South Dakota Wyoming Concerns that this status may be on the cutting block in the future 12

14. FY 2016 Wage Index 13 Highest:Santa Cruz-Watsonville, CA 1.7779

15. FY 2016 Wage Index 14 Lowest:Guayama, PR.3890

16. Wage Index Tables (Final 2015) Federal Register tables related to wage index: Table 2: Case mix index Wage index and AHW details for every PPS provider Out-migration adjustments by provider Reclassified hospitals Hospitals re-designated as rural Table 3: Current and 3-year AHW for each urban & rural CBSA Wage index for each urban & rural CBSA Reclassified wage index by CBSA States receiving Frontier State floor wage index and urban areas receiving statewide rural floor Note: Tables are consistent from year to year and published on the CMS website 15

17. FFY 2017 Wage Index Timeline May 2015 – Release of Preliminary FY 2017 wage index and occupational mix public use files (PUF) September 2015 – Deadline for Hospitals to request revisions to their Worksheet S-3 Wage Data and OMS October 2015 – Deadline for Hospitals with FYBs on or after August 15 to submit Pension Data to MACs November 2015 – Deadline for MACs to complete desk reviews January 2016 – Posting of February PUF on CMS website 16

18. FY 2017 Wage Index Timeline (Cont.) February 2016 – Deadline for hospitals to submit requests for: Corrections to errors in the February PUFs due to CMS or FI/MAC mishandling of the wage index data Revisions of desk review adjustments to their wage index data as included in the February PUFs (and to provide documentation to support the request) March 2016 – Completion of appeals by MACs and transmission of Final Wage Data to CMS 17

19. FY 2017 Wage Index Timeline (Cont.) Early April 2016 – Deadline for hospitals to appeal FI/MAC determinations and request CMS’ intervention in cases where the hospital disagrees with the FI’s/MAC’s determination Late April 2016 – Release of final FY 2017 wage index and occupational mix data PUFs on CMS Web page May 2016 – Deadline for hospitals to submit correction requests to both CMS and their FI/MAC to correct errors due to CMS or FI/MAC mishandling of the final wage and occupational mix data 18

20. FY 2017 Wage Index Timeline (Cont.) August 2016 – Approximate date for publication of the FY 2017 final rule October 2016 – Effective date of FY 2017 Wage Index 19

21. Why Review Wage Data? Directly impacts reimbursement Generally, the last schedule completed and often not much effort is put into its completion Rules change from filing to actual use Increasingly complex schedule (even more with the new Medicare form 2552-10) Worksheet S-3 is reviewed closely by CMS, the FI/MACs, the OIG, MedPac and Congress 20

22. Areas you can have an impact! The Key is Assessment 21

23. Assessment / Opportunities Wage Index Assessment Process Focus review on paid hours first – review pay categories and mapping on the cost report Verify documentation can be made available quickly for FI audit review Compare current PUF file to prior year final PUF file – analyze and research significant variances Use review techniques and checklist for upcoming cost report period 22

24. Assessment / Opportunities Wage Index Assessment Process (Cont.) Meet with HR and Payroll Managers to confirm all hours and benefits are being properly recorded Convert all hours reported to be based on Payroll data not General Ledger data (assuming they are different) Review all re-classes to ensure all salary re-classes are needed and recorded correctly as well as recording the associated hours Review all pension cost/distributions reported and adjust any of these wage related costs reported to the new methodology provided by CMS Due to the complexity in determining the adjusted payroll hours and determining allowable pension expense – you may wish to consider having an external review of your Wage Index 23

25. Hours Related to Paid Salaries The following paid hours should be included in the payroll file for wage index reporting Regular Hours (Including Paid Lunch Hours) Overtime Hours Paid Holiday Vacation and Sick Leave Hours Paid Time-Off Hours Hours Associated with Severance Pay Jury Duty Bereavement Remember to reclass applicable hours for each A-6 reclass that effects salary 24

26. Hours Related to Paid Salaries The following hours should be removed in the payroll file for wage index reporting On Call Hours (report hours for workers who are contracted solely for the purpose of being on call on appropriate contract labor line) Differential OT hours that are recorded (i.e. if an employee works 1 hour, but the time is recorded at 1.5, then.5 hours should be removed) Bonus Hours Shift Differential Hours Buy/Sell back PTO Buy/Sell back Vacation Hours related to Capitalized Salaries Leave of Absence (unpaid) 25

27. Hours Related to Paid Salaries The following hours should be removed in the payroll file for wage index reporting (cont.) Family Medical Leave (unpaid) Disability (unpaid) Baylor Plan; employees work 36 hours, but get paid for 40 hours – remove 4 hour difference. Seasonal Plan; employees work certain months of the year, but get paid for 52 weeks – remove the time not actually employed. Severance hours; General rule: if severance is booked as a “salary” expense then include hours. If severance is booked as a non-salary expense then do not include hours. Holiday Pay for nurses who work a paid holiday. They could be paid regular pay + holiday pay + overtime – make sure that hours are not being double counted. 26

28. Contract Labor Patient Care Contract Labor (Line 11) Physician Part A Contract Labor (Line 13) A&G Contract Labor (Line 28) Housekeeping Contract Labor (Line 33) Dietary Contract Labor (Line 35) Potential Areas for Contract Labor 27

29. Contract Labor Line is used to report paid services under contract rather than by employees for direct patient care and management services Examples of common contract labor are Nurses, PT, OT, RT, ST, Sleep Clinic, Infection Control, MRI, Cath Lab, Lithotripsy, Pharmacy, Per fusionists and Lab Do not include costs applicable to excluded units reported on line 9 and 10 Line 11 – Contract Labor (Patient Care) 28

30. Contract Labor Line used to report contract labor for Part A Physician services (excluding teaching) to the extent that hours can be accurately determined Do not include the costs for Part A Physicians services from the home office allocation and/or related organizations (to be reported on Line 15) Do not include any contracted interns and residents (to be reported on Line 7.01) Do not include any costs applicable to excluded units if reported on line 9 and 10 Line 13 – Physician Part A Contract Labor 29

31. Contract Labor Line used to report contract labor costs that a hospital incurs in carrying out its administrative and/or general management functions These expenses must be reported on Worksheet A, line 5 and any subscripts Generally this area can have the highest AHW These items normally also will draw a lot of scrutiny from the Fiscal Intermediary so it is critical to have all the data needed to support your amounts reported Examples of the types of contract labor reported on Line 28 Legal Tax Preparation Cost Report Preparation Purchasing Services Information and Data Processing services Audit Line 28 – Administrative & General Under Contract 30

32. Wage Related Cost – Core Benefits Wage Related Costs – need to be allocated between core areas (acute areas) and excluded areas Includes 401(k) Employer Contributions Tax Sheltered Annuity (TSA) Employer contribution Qualified and Non-Qualified Pension Plan Cost Prior Year Service Cost 401(k)/TSA Plan Administration Fees Legal/Accounting/Management Fees – Pension Plan Employee Managed Care Program Administration Fees Health Insurance ( Purchased or Self-Funded) Prescription Drug Plan, Dental, Hearing & Vision Plans Life Insurance (If employee is owner or beneficiary) Accident Insurance (If employee is owner or beneficiary) 31

33. Wage Related Cost – Core Benefits Wage Related Costs (core) cont. Disability Insurance (If employee is owner or beneficiary) Long-Term Care Insurance (If employee is owner or beneficiary) Worker’s Compensation Insurance Retiree Health Care Costs (only current year) FICA – Employers Portion Only Medicare Taxes – Employers Portion Only Unemployment Insurance State or Federal Unemployment Taxes Executive Deferred Compensation Day Care Cost and Allowances Tuition Reimbursement 32

34. Other Wage Related Costs (less common) Line 18 – Other Wage Related Costs Ca feteria Subsidy Parking Lot Subsidy (most likely to meet the 1% Test) Licensing fees for Nurses, Techs, etc. Transportation Subsidy Employee Wellness and fitness center program Salaried Physician Malpractice insurance Employee Service Awards and Banquets Must meet the “1% Test” Each wage related costs other than core must exceed 1% of total salaries from worksheet S-3, Part III, Line 3, Column 4 Other wage related costs must also be allocated between allowable and excluded areas 33

35. Wage Related Cost – Pension Changes for Reporting of Pension Costs Included in FY 2012 IPPS final rule Treatment for cost finding is different than for wage survey Treatment for wage survey The pension cost to be included in the wage index equals a hospital’s average cash contributions deposited to its defined benefit pension plan over a 3-year period, or number of years that the hospital has sponsored a defined benefit plan if less than 3 years 34

36. Wage Related Cost – Pension Changes for Reporting of Pension Costs Treatment for wage survey (cont.) The averaging period is the 36 months ending on the last day of the wage index cost reporting period. (This is a change from FY 2016 Final Rule where the averaging period was the 36 consecutive calendar month period centered on the midpoint of the cost reporting period used for wage index.) For example, the FY 2017 wage index will be based on Medicare cost reporting periods beginning during FFY 2013 and will reflect the average pension contributions made in hospitals’ cost reporting periods beginning during FFYs 2011, 2012, and 2013 Hospitals may determine a “prefunding balance” based on pension contributions made but not reflected in the wage index during certain prior periods 35

37. Wage Related Cost – Pension Changes for Reporting of Pension Costs Find the most current CMS Wage Index Pension Cost Worksheet and Wage Index Prefunding Worksheet at the below link: Details for title: FY 2017 Wage Index Pension Cost Guidelines 36

38. Wage Index – Potential Value Potential Dollar Impact 37

39. Impact of Change in Wage Index 38

40. CMS CMS Wage Index Homepage Link to the Wage Index Homepage on the CMS website. –Wage Index - Centers for Medicare & Medicaid ServicesWage Index - Centers for Medicare & Medicaid Services 39

41. Proposed Changes Most Recent Proposed Changes Never Enacted 40

42. Proposed Changes The Affordable Care Act required that the Secretary of Health and Human Services submit to Congress a plan that comprehensively reforms the wage index applied to the Medicare hospital IPPS HHS Recommends using commuting data to establish a labor market area and wage index value for each hospital (as opposed to labor market areas) as a way to reform the Medicare wage index system 41

43. Proposed Changes Commuting Based Wage Index (CBWI) addresses the goals of broad-based Medicare Wage Index Reform “CBWI is based on actual employment patterns of hospitals and would reduce large wage index differences between nearby hospitals and more accurately reflect the true labor market forces of individual hospitals.” – Kathleen Sebelius – The Secretary of Health and Human Services The 66 page report issued April 2012 discusses 5 issues to consider in moving forward with implementation Available and accurate commuting data Potential for hospitals to change hiring patterns in response to change in the wage index Portability to other Medicare payment systems The need for exceptions Transition 42

44. Proposed Changes Advantages Wage index values that more closely correlate to actual labor costs Eliminate (“Cliffs”) sharp differences in a hospitals wage index just because the nearby hospital is in a different or adjacent CBSA Disadvantages A more up to date reporting system for collecting commuting data from hospitals would have to be established Hospitals that geographically reclass could be impacted If adopted in a budget neutral manner (as the current system) then payments for some providers would increase and others would decrease. Implementation may require both statutory and regulatory changes 43

45. Final “Take Aways” The Wage Index is one of the last areas you can truly impact your future payments and should be reviewed yearly for opportunities to increase dollars and reduce hours Assessment of your Cost Report is the key – prepare adjustments annually if possible to help improve your AHW The process for adjusting Medicare Payments related to wage index continues to be assessed by CMS but currently there are no planned changes though there are numerous concerns 44

46. Questions and Discussion 45

47. Thank You! 46

48. Contact Information Eddie Phibbs Director – Health Care Payment Strategies Eide Bailly LLP 612-253-6680 ephibbs@eidebailly.com Marie White Manager – Health Care Payment Strategies Eide Bailly LLP 612-253-6546 mewhite@eidebailly.com 47