CMS Pub. 100-04, ch. 3, § 140.2.5.1

To adjust payments for area wage differences, CMS first identifies the labor-related

portion of the prospective payment rates which is published annually in the Federal

Register. The labor-related unadjusted Federal payment is multiplied by a wage index

value to account for area wage differences. CMS uses the inpatient acute care hospital

wage data to compute the wage indices on the basis of the labor market area in which the

acute care hospital is located, but without taking into account geographic reclassification

under §§1886(d)(8) or (d)(10) of the Act and without applying the “rural floor” under

§4410 of the BBA. The wage data excludes the wages for services provided by teaching

physicians, interns and residents, and nonphysician anesthetists under Medicare part B,

because these services are not covered under the IRF PPS. For IRF PPS discharges

occurring before October 1, 2005, the IRF PPS utilizes labor market area definitions based

upon new statistical area definitions issued by the Office of Management and Budget

(OMB). The new labor market area definitions include new definitions of Metropolitan

Statistical Areas, Micropolitan Statistical Areas, and Combined Statistical Areas, more

commonly referred to as Core-Based Statistical Areas (CBSAs). CBSA-based

designations reflect the most recent available geographic classifications and more

accurately reflect current labor markets. The OMB also established New England City and

Town Areas, which are similar to the previous New England MSAs. CMS uses the

county-based areas for all MSAs in the Nation, including those in New England. Adopting

county-based labor market areas for the entire country creates consistency and stability in

the Medicare payment program because all of the labor market areas, including New

England, are defined using the same system (that is, counties), rather than different

systems in different areas of the country, and minimizes program complexity. CMS uses

the Metropolitan Divisions where applicable under the new CBSA-based labor market

area definitions to determine urban areas. Micropolitan Areas are treated as rural labor

market areas under the IRF PPS. To calculate the statewide rural wage index for each

State, CMS combines all of the counties in a State outside of designated urban areas along

with all Micropolitan Areas.

Beginning in FY 2023 a five percent cap will be applied on any decrease to a provider’s

wage index from that provider’s final wage index in the prior fiscal year. For subsequent

years, a provider's wage index would not be less than 95 percent of its wage index

calculated in the prior FY. A new IRF will be paid the wage index for the area in which it

is geographically located for its first full or partial FY with no cap applied, because a new

IRF will not have a wage index in the prior FY.