Medicare is the largest health insurer in the United States, providing coverage for 39 million people aged 65 and older and 8 million people with disabilities, and reaching more than an estimated $500 billion in payments in 2010. Although Medicare is a national program, it adjusts fee-for-service payments according to the geographic location of a practice. While there is widespread agreement about the importance of providing accurate payments to providers, there is disagreement about how best to adjust payment based on geographic location. At the request of Congress and the Department of Health and Human Services (HHS), the Institute of Medicine (IOM) examined ways to improve the accuracy of data sources and methods used for making the geographic adjustments to payments. The IOM recommends an integrated approach that includes moving to a single source of wage and benefits data; changing to one set of payment areas; and expanding the range of occupations included in the index calculations. The first of two reports, Geographic Adjustment in Medicare Payment: Phase I: Improving Accuracy, assesses existing practices in regards to accuracy, criteria consistency, evidence for adjustment, sound rationale, transparency, and separate policy adjustments to reform the current payment system. Adopting the recommendations outlined in this report will mean a change in the way that the indexes are calculated, and will require a combination of legislative, rule-making, and administrative actions, as well as a period of public comment. Geographic Adjustment in Medicare Payment will inform the work of government agencies such as HHS, the Centers for Medicare and Medicaid Services, congressional members and staff, the health care industry, national professional organizations and state medical and nursing societies, and Medicare advocacy groups. Table of ContentsFront MatterSummary1 Introduction and Overview2 Labor Markets and Payment Areas3 Hospital Wage Index4 Smoothing the Borders of Labor Markets and Payment Areas5 Geographic Practice Cost Indexes6 TransitionsAppendix A: Committee and Staff BiographiesAppendix B: Public Committee Meeting AgendasAppendix C: List of Contributors and ParticipantsAppendix D: Statistical Reliability of the Bureau of LaborStatistics (BLS) Wage DataAppendix E: Comparison of the Medicare Payment Advisory Commission(MedPAC) and Institute of Medicine (IOM) Proposals for AlternativeHospital Wage Indexes (HWIs)Appendix F: Description of Three Optional Sources for Facility WageIndex DataAppendix G: RTI Analysis Data SourcesAppendix H: S-3 WorksheetAppendix I: Physician Work AdjustmentIndex