Hospital reclassification is a strategic and often underutilized tool that can significantly enhance Medicare reimbursement. By understanding how the process works and how it ties into the Medicare Cost Report, health care providers can make informed decisions that align operational realities with regulatory frameworks.

Reclassification matters not just as a paperwork exercise—but as a lever to improve financial sustainability and accurate payment for services delivered.

What is Hospital Reclassification in the Context of the Medicare Cost Report?

Hospital reclassification refers to a formal process by which a hospital requests to be considered part of a different geographic labor market for Medicare reimbursement purposes. This process is administered by the Centers for Medicare & Medicaid Services (CMS) through the Medicare Geographic Classification Review Board (MGCRB).

Geographic classifications are based on Core Based Statistical Areas (CBSAs), which are determined by the Office of Management and Budget (OMB) to delineate metropolitan areas from each other. In essence, communities within a CBSA share a common regional economy and job market, making it possible to compare one area to another.

CMS uses these CBSAs to determine a hospital’s wage index—a key factor in determining Medicare payments. If a hospital believes its current classification does not reflect its actual labor costs, it may apply for reclassification into a neighboring or more appropriate CBSA.

Ultimately, reclassification affects the hospital’s reporting in the Medicare Cost Report, as it can adjust how the wage index is applied to operating payments, and in turn, impact total reimbursement amounts.

Why Would a Hospital Reclassify?

Hospitals pursue reclassification primarily to improve reimbursement. Most hospitals reclassify when their actual labor costs are significantly higher than those of their current geographic area. Common scenarios that could prompt a hospital to seek reclassification include:

• Border location. A hospital is classified as rural but located near the border of a metropolitan area.
• Hiring patterns. A hospital is regularly hiring from a neighboring labor market with higher wages.
• Wage growth. A hospital operates in a region with rapidly increasing wages that aren’t yet reflected in their current CBSA assignment.

By requesting a reclassification, the hospital is arguing that its workforce economics align more closely with a different geographic area’s wage index.

What are the Benefits of Hospital Reclassification?

The main benefit of hospital reclassification is the potential increase in Medicare reimbursement. Because a portion of Medicare’s inpatient and outpatient payments is adjusted for local wage levels, via the wage index, reclassifying to a higher-wage area can boost that adjustment factor. Other benefits include:

• Improved financial stability. This is particularly true for small or rural hospitals facing tight margins.
• Increased competitiveness. Hospitals that can offer wages aligned with their labor market may find it easier to recruit and retain staff.
• Strategic planning advantage. Being classified correctly can help in long-term budgeting and resource allocation, particularly as the labor market changes.

How Does Hospital Reclassification Impact Reimbursement?

Reclassification can have a substantial impact on a hospital's Medicare reimbursement, especially for facilities heavily reliant on federal payors. A higher wage index increases the adjusted base rate, directly boosting reimbursement for Medicare discharges and outpatient services. This primarily impacts:

• Inpatient Prospective Payment System (IPPS) payments
• Outpatient Prospective Payment System (OPPS) rates
• Disproportionate Share Hospital (DSH) payments indirectly, depending on calculated operating margins

Additionally, the reclassification is reflected in the Medicare Cost Report in Worksheet S-3, where wage-related data must align with the reclassified CBSA to ensure compliance and consistency.

Key Takeaways

Hospital reclassification is a strategy hospitals can leverage to improve Medicare reimbursement by aligning their geographic wage index with more favorable labor markets. Understanding how and why reclassification occurs helps providers maximize financial viability and compliance. Reclassification can offer financial benefits, but hospitals should carefully consider the following:

• The administrative effort required to apply and maintain reclassification status
• Potential increased scrutiny from CMS during the review process
• Eligibility requirements, including geographic proximity, commuting patterns, and minimum wage comparison thresholds

Balancing these factors is an essential step in determining whether to reclassification is the right strategic move.

We’re Here to Help

For more information, or to explore how your facility may benefit from a hospital reclassification, contact your firm professional.

Additional Resources

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• Provider Reimbursement Services