Rural Hospital Wages and the Area Wage Index

We examined data on hospital hourly wages and the prospective payment system (PPS) wage index from 1990 to 1997, to determine if incremental changes to the index have improved its precision and equity as a regional cost adjuster. The differential between average rural and urban PPS hourly wages has declined by almost one-fourth over the 8-year study period. Nearly one-half of the decrease is attributable to regulatory and reporting changes in the annual hospital wage survey. Patterns of within-market wage variation across rural-urban continuum codes identify three separate sub-markets within the State-level aggregates defining rural labor markets. Geographic reclassification decisions appear to eliminate one of the three. Remaining systematic within-market rural wage differences work to the reimbursement advantage of hospitals in the smaller and more isolated communities.