Despite the importance of the nursing profession for healthcare delivery, costs, and quality, there is relatively little research on how provider payments to hospitals affect the labor market for nurses. This study deals with the hospital wage index (HWI) adjustment to Medicare hospital payments, an area-level adjustment intended to compensate hospitals in high-cost labor markets. Since the HWI adjustment is based on hospital-reported labor costs, some argue that it incentivizes hospitals in concentrated markets to pay higher wages to nurses and other workers (the "circularity" critique). We investigate this critique using market-level data on the relative wages reported by nurses and hospital-level data on the average hourly wage for healthcare workers. For identification, we exploit a 2005 change in the geographic area used to define labor markets, which resulted in exogenous changes in the ability of some hospitals to influence their area's wage index. We find that worker-reported relative nurse wages and hospital-reported healthcare worker wages are higher in some locations where hospitals experienced increased opportunities to game the circularity of the wage index, but these effects appear to be driven by pre-existing wage growth. Medicare's HWI adjustment method does not appear to suffer from inefficiency due to circularity.
Keywords: Hospitals; Medicare; Nurse wages.