Understanding How the Medicare Wage Index Is Built: What Hospice Providers Need to Know

The Medicare wage index can have a significant impact on a hospice agency’s reimbursement, either helping or hurting the agency depending on where the agency is located. Despite its importance, the wage index is often not well understood.

This blog explains how the wage index works specifically for hospice providers, including how it is built, why CMS applies it only to part of the hospice payment rate, and how the labor‑related share affects hospice reimbursement.

Prospective Payment Systems: The Foundation Behind the Wage Index

To understand the wage index, it is helpful to begin with the broader payment structure Medicare uses. Medicare pays providers through Prospective Payment Systems (PPS), which establish fixed, predetermined payment rates for defined units of care. Instead of reimbursing providers based on their actual costs, CMS sets payment rates using national data, cost reports, market basket updates, and annual rulemaking. Each care setting has its own PPS. Hospitals are paid under the Inpatient Prospective Payment System (IPPS) using Diagnosis‑Related Groups (DRGs). Hospice providers are paid a per‑diem rate for each level of care. Skilled nursing facilities, inpatient rehabilitation facilities, and home health agencies each have their own PPS methodologies.

A PPS payment rate represents the expected cost of providing care, not the actual cost incurred by any individual provider. Once CMS establishes PPS payment rates, it adjusts them for various factors including geography, patient characteristics, and statutory add‑ons. The wage index adjustment applies specifically to the labor‑related portion of a PPS payment rate.

Why the Wage Index Exists

Labor costs vary significantly across the country. Without a geographic adjustment, providers in high‑wage areas would be underpaid relative to their actual costs, while providers in low‑wage areas would be overpaid. To address this, CMS applies the wage index only to the labor‑related share of a PPS payment rate. The non‑labor portion is paid at 1.0, meaning it is not adjusted for geography. This structure ensures that only the portion of costs truly driven by local wage levels is adjusted.

For hospice, this means that only the labor portion of each per‑diem rate is affected by the wage index. The non‑labor portion is paid at the same level regardless of where the hospice is located.

Why Hospice Uses the Hospital Wage Index

Hospice does not have its own wage index. Hospice agencies do not submit wage data for wage index purposes, and CMS does not calculate a hospice‑specific wage index. Instead, CMS bases the hospice wage index on hospital wage data. This means hospice reimbursement is influenced by hospital labor markets, even when hospice labor markets differ.

CMS has explored creating a hospice‑specific wage index using Bureau of Labor Statistics (BLS) data and hospice cost reports but has not adopted such a system. CMS discusses this exploration in the FY 2027 Hospice Wage Index and Payment Rate Update Final Rule (CMS1851F).

Hospice Has Its Own Labor and Non‑Labor Portions

Although hospice uses the hospital wage index, hospice does not use the hospital labor‑related share. Hospice has its own labor and non‑labor portions for each level of care. These portions are published every year in the Hospice Wage Index and Payment Rate Update Final Rule and in the associated Change Request (CR) tables. For 2027, the labor portion of the payment rates are 66.0%, 75.2%, 63.5%, and 61.0% for routine home care, continuous home care, general inpatient care, and inpatient respite care, respectively.

For FY 2027, CMS published the hospice payment rates, labor and non‑labor portions, and wage index values in Change Request 14557 (MM14557). This document includes the official tables showing the base per‑diem rate for each level of care, the labor portion, the non‑labor portion, and the final wage‑index‑adjusted rate. These tables are the authoritative source for hospice providers to understand how much of their per‑diem rate is subject to wage index adjustment.

How the Wage Index Interacts with Hospice Payment Rates

Hospice payments are per‑diem rates with both labor and non‑labor components. The wage index is applied only to the labor portion. For example, if Routine Home Care has a base rate of $200, with a labor portion of $120 and a non‑labor portion of $80, and the hospice’s wage index is 1.15, the labor portion becomes $138 while the non‑labor portion remains $80, resulting in a total adjusted rate of $218.

CMS publishes these values annually in the hospice final rule and in the Medicare Claims Processing Manual updates. For FY 2027, CMS updated the hospice payment rates, cap amounts, and wage index in Transmittal 13924 (CR 14557).

Timing: When Hospice Wage Index Values Are Updated

Hospice follows a regular annual cycle.

Spring: CMS releases the proposed rule.
Late July or early August: CMS releases the final rule.
October 1: New hospice payment rates and wage index values take effect.

Because hospice uses hospital wage data, the hospice wage index is based on the same cost report year as the IPPS wage index. Hospice wage index values are typically based on data that is two to three years old. This lag is normal and is one reason hospice reimbursement may feel out of sync with current local labor conditions.

Where Hospice Providers Can Find Their Wage Index Values

Hospice agencies should consult two official CMS sources each year: the Hospice Wage Index and Payment Rate Update Final Rule (CMS1851F) and the annual Change Request containing Tables 1 and 2. CMS also maintains a consolidated Hospice Wage Index page listing all historical wage index files. These sources provide the exact labor and non‑labor portions and the wage index values applied to hospice payments.

Common Misconceptions Hospice Leaders Can Now Correct

Many misunderstandings persist across the industry. Hospice does not calculate its own wage index; it uses hospital wage data. The wage index does not adjust the entire payment rate; it adjusts only the labor portion. The labor share is not universal; each PPS system has its own labor/non‑labor split. The wage index is not based on cost of living; it is based on hospital wage data. And the hospice wage index is not hospice‑specific, although CMS continues to explore the possibility.

Conclusion: Why Understanding the Structure Matters

The wage index may feel complicated, but its impact is straightforward: it adjusts only the labor‑related portion of the hospice per‑diem rate, and it does so using hospital wage data rather than hospice‑specific information. A better understanding of where the wage index comes from, how the labor and non‑labor portions work, and when CMS updates these values, empowers agencies to navigate Medicare payment updates with greater confidence and accuracy.