Geographic classification of hospitals: alternative labor market areas

Health Care Financing Review, Winter, 1992 by Nancy De Lew

Evaluation of criterion 4 - The impact of each alternative labor market area in a single-rate system was assessed in a payment simulation model described in a separate article in this issue of the Review (O'Dougherty et al., 1992). Compared with the current labor market areas, all of the alternative labor market areas improve equity in a single-rate system (Table 3). County population brings the ratios close to 1.00 for both high- and low-wage areas followed closely by adjacent county, adjacent-population, and city population.

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Column 2 of Table 3 shows the payment-to-cost ratios under FY 1995 current law, for statewide rural hospital labor market areas, after elimination of the separate rural amount. Column 3 shows the ratios under a single rate PPS without changing any other adjustments (i.e., the current rural and urban labor market areas are used). Last, column 4 shows the ratios using alternative labor market areas with a single PPS rate; four separate payment simulations were run, employing each of the four alternative rural labor market areas.

Discussion

On balance, after evaluating the four alternative rural labor market areas across the four criteria, the county population alternative is preferable. It is second only to adjacent-population in terms of increase in explanation of wage variation and it yields reasonably sized labor market areas across the country. Although it is more vulnerable to differences in county size than the city population alternative, it outperforms city population in terms of explaining wage variation and improvement in payment equity. Moreover, the U.S. Bureau of the Census updates population estimates for rural counties every year, permitting a redefinition of rural labor market areas on a timely basis.

Urban labor market areas

Four alternative urban labor market areas were examined. Each divides MSAs into two units based on proximity to the core of the MSA using various geographic criteria (such as population density and county or city boundaries). The hypothesis is that urbanization is associated with an increased cost of living in general and hospital labor costs in particular. To the extent that the cost of labor for urban hospitals varies significantly within an MSA in relation to these criteria, labor market areas based on them should improve the ability of the wage index to accurately reflect wage variation.

The alternatives are based on the simplifying assumption that an MSA is a circle with the most urban area at the center surrounded by concentric rings that are less urban as distance from the center increases. This model of an MSA may be more applicable in some parts of the country (such as older MSAs with a downtown core and smaller, more suburban towns on the periphery) than others. Some MSAs (without a single downtown core such as Los Angeles or Houston), do not follow this pattern of urbanization and may have several "mini" downtowns throughout a large metropolitan area. The extent to which the alternatives accurately distinguish between urban core and suburban ring areas of MSAs, and presumably high and low-wage hospitals, may vary depending on the configuration of each MSA. The four alternatives examined are as follows: