Area Wage Index Litigation

A final rule issued by the Centers for Medicare & Medicaid Services (CMS) significantly changes its area wage index calculation, which adjusts Medicare hospital payments to reflect geographic differences in labor costs. The changes CMS has made to its area wage index policy impact approximately 297 CHA member hospitals and health systems. CHA will be pursuing litigation to remediate this situation and, moving forward, will use this web page to share important updates and key information. 

Important Dates

January 31: Return FFY 2021 Engagement and Provider Representative Letters


On August 2, 2019, the Centers for Medicare & Medicaid Services (CMS) adopted its federal fiscal year (FFY) 2020 inpatient prospective payment system (IPPS) final rule, which included several changes to how the area wage index (AWI) is determined. The AWI is a factor used by CMS in adjusting payments for geographic differences in labor costs for IPPS hospitals. The AWI changes outlined in the FFY 2020 IPPS final rule include two key issues: a reduction to the standardized IPPS payment amount to fund an AWI increase for hospitals in the lowest quartile, and the exclusion of hospitals located in urban areas that have reclassified as rural hospitals from the determination of the rural wage index and the related rural floor.​

CHA strongly opposed CMS’ “rob Peter to pay Paul” approach, which represents a dangerous precedent: that CMS can choose to increase payments to one group of hospitals by decreasing payments to another group. To remedy this situation, CHA’s Executive Committee directed CHA to coordinate, organize, and finance challenges to these policies on behalf of impacted member hospitals for FFY 2020. CHA, not its members, will be responsible for the fees incurred in the AWI Provider Reimbursement Review Board (PRRB) process and subsequent litigation (collectively, “AWI litigation”). Because these issues are important to the overall welfare of all California hospitals, decisions about the AWI litigation will be made by CHA’s Executive Committee. 

To that end, CHA has engaged Hooper, Lundy & Bookman, P.C. (HLB) to lead the legal challenges to the AWI policies. HLB has engaged Toyon Associates, Inc. (Toyon) to further assist with organizing and filing the necessary administrative appeals in the AWI litigation. CHA’s legal challenge to the FFY 2020 policies is ongoing; however, action is required to challenge the policies carried forward into FFY 2021.

Litigation Update

FFY 2020 AWI Legal Challenge

For FFY 2020, CHA’s sponsored litigation challenges two specific policies:

(1)    A reduction to the standardized IPPS payment amount to fund an increase in the AWI for hospitals with an AWI in the lowest quartile. This reduction affects all California general acute care IPPS hospitals and resulted in a loss of approximately $22 million in FFY 2020. 

(2)    The exclusion of hospitals located in urban areas that have reclassified as rural hospitals from the determination of the rural wage index and the related rural floor. The IPPS rates of hospitals that are located in an urban area with an AWI that is lower than the state’s rural floor are computed using the rural floor rather than the AWI for the urban area. As a result of this policy, IPPS payments to about one-half of California’s IPPS hospitals were reduced by an estimated $123 million in FFY 2020. 

Earlier this year, HLB entered into separate engagement agreements with California hospitals and hospital systems that chose to participate in the litigation. For FFY 2020, the hospitals and hospitals systems could choose to participate in the litigation for either Issue 1 or Issue 2 (if applicable), or both. HLB filed appeals with the PRRB for each independent hospital or hospital system that elected to participate in the litigation, separately for each issue. Expedited judicial review was subsequently granted by the PRRB for the lead case for each issue, and complaints have been filed in the United States District Court for the Central District of California.

The complaint for Issue 1, Kaweah Delta Health Care District, et al. v. Azar Case No. 2:20-cv-06564 CMB (SPx), was filed on July 23, 2020. The complaint for Issue 2, Enloe Medical Center, et al. v. Azar Case No. 2:20−cv−09278 CBM (SPx), was filed on October 8, 2020.

FFY 2021 AWI Legal Challenge

In the FFY 2021 IPPS final rule, CMS carried forward its AWI policies. As stated in the FFY 2020 final rule, CMS intends to keep the reduction in the standardized amount in effect for a minimum of four years (FFYs 2020-23); and the rural floor policy was finalized permanently. To preserve appeal rights for each year that the policy is in place, subsequent appeals must be filed with the PRRB. For FFY 2021, all appeals are due within 180 days of issuance of the final rule, which is March 1, 2021. 

For Issue 1, CHA estimates an approximate $25 million loss for California’s hospitals in FFY 2021. CHA continues to strongly oppose this “rob Peter to pay Paul” approach, and CHA’s Executive Committee has approved CHA sponsorship of an appeal to the continuation of this policy in FFY 2021.

However, for Issue 2, unlike in FFY 2020, the exclusion of data from reclassified urban hospitals increased the rural floor in FFY 2021. This results in an estimated increase of $81 million for California’s hospitals. As a result, CHA will not sponsor a challenge to this policy in 2021. In addition, HLB will modify legal arguments related to the FFY 2020 challenge to seek a remedy that would not negatively impact payments for future years, including FFY 2021, where the exclusion of data from reclassified urban hospitals increases the rural floor.  For more information about the modifications of the legal arguments for the FFY 2020 Issue 2 litigation, please contact HLB.

Next Steps

Action Required for FFY 2021 Legal Challenge 

CHA member hospitals and health systems that are participating in the FFY 2020 legal challenge to Issue 1 will be contacted by HLB to execute a new engagement letter for legal services from HLB related to the FFY 2021 challenge. This letter must be returned to David Vernon at [email protected] no later than January 31, 2021. Your engagement of HLB for the FFY 2021 AWI litigation will be effective only when HLB signs the engagement agreement and returns it to you.

Please note that HLB will evaluate whether it has a conflict of interest in representing your organization after receiving a signed engagement agreement. If there is a conflict, HLB will represent your organization in the AWI litigation only if the conflict may be waived and both your organization and any other applicable party agree, in writing, to waive the conflict. HLB will work with you to obtain any necessary waivers.

As previously noted, pursuing this challenge to the FFY 2021 IPPS final rule requires appeals by hospitals and hospitals systems to the Medicare PRRB and subsequent litigation in federal court. Toyon Associates will work with HLB to assist hospitals in filing those PRRB appeals. HLB will reach out to secure an engagement letter for legal services from HLB, and a provider representative letter to authorize PRRB appeal services from Toyon. HLB’s and Toyon’s services will be paid for by CHA as part of its funding of this FFY 2021 Issue 1 legal challenge.

In summary, CHA members interested in participating in the AWI litigation for FFY 2021 are asked to: 

  1. Carefully review the engagement letter and provider representative letter that will be sent to you by HLB.
  2. Enter the name of your organization where indicated in the engagement letter, which will be:
    1. an individual hospital, in the case of a hospital that is not a member of a hospital system or is the only member of the system that is participating; or
    2. a hospital system’s parent organization, in the case of a hospital system that participates with at least two hospitals.
  3. Enter the name and title of the individual signing on behalf of your organization.
  4. Have an authorized individual sign the engagement agreement.
  5. Print the provider representative letter on hospital/health system letterhead and have an authorized individual sign the provider representative letter.
  6. In your email with the signed agreement and provider representative letter, include the name, phone number, and email of the current contact individual for your organization on this matter.
  7. Return the signed agreement and key contact information to David Vernon at [email protected] by January 15, 2021. 

Due to the complexity of the PRRB process and the rules of litigation, we understand that health systems — particularly those with hospitals located outside of California — must consider a number of factors before proceeding. CHA welcomes the opportunity to discuss any questions or concerns in one-on-one calls with health system teams. To schedule those conversations, please contact Megan Howard, CHA vice president, federal policy, at [email protected].   

If your hospital/health system does not wish to participate in the FFY 2021 litigation, please notify Megan Howard at [email protected] 


Key Contacts

With general questions about CHA’s next steps, contact:

Megan Howard 
Vice President, Federal Policy
California Hospital Association
(202) 488-3742
[email protected] 

With questions related to HLB engagement letters, contact: 

David Vernon
Hooper, Lundy and Bookman
(202) 580-7713
[email protected]

With questions related to the provider representative letters, contact:

Kathleen Giberti
Director, Appeals Services
Toyon Associates
(925) 685-9312
[email protected]

With questions related to the financial impact on your facility, contact:

Ryan Sader
Senior Manager, Wage Index Services
Toyon Associates
(925) 685-9312
[email protected]