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Health care costs are a combination of labor costs and capital costs; therefore, health care costs are more expensive in geographic areas that have higher wages (e.g., Boston, San Francisco). There are two common ways to control for geographic variation in cost analyses. The first involves including a dummy variable (fixed effect) for each medical center. The second method is including the Medicare Wage Index in the analysis. Medicare creates the Wage Index to keep track of labor costs in different geographic markets; updated annually, it’s used to calculate prospective payments to hospitals. This method is typically a more accurate way to control for geographic variation, especially if the data has a time dimension because the wage index changes over time within a facility. HERC created a Medicare Wage Index for VA Facilities by linking the Medicare Wage Index to VA hospitals using facility location data from the VHA Support Service Center (VSSC). The wage index for VA facilities is available through 2022 in an excel file on the HERC website. See the guidebook “Medicare Wage Index for VA Facilities” for more information about using the wage index.
