Health care costs are more expensive in geographic areas that have higher wages (e.g., Boston, San Francisco). Because labor is a major input into the health production function, this geographic variation can confound cost analyses. There are two common ways to control for geographic variation. The first involves including a dummy variable (fixed effect) for each medical center. The second method involves including the Medicare Wage Index in the analysis. Medicare creates the Wage Index to keep track of labor costs in geographic markets. HERC linked the Medicare Wage Index to VA hospitals using the station (sta3n) and substation (sta6a) identifier.
Last updated: February 15, 2022