To amend title XVIII of the Social Security Act to provide for payment of hospitals under the DRG prospective payment system on the basis of a blend of hospital-specific rates and a national rate, depending on the degree of variation of costs within specific diagnosis-related groups.

Amends title XVIII (Medicare) of the Social Security Act to determine the payments to be made to hospitals under Medicare's prospective payment system on the basis of a blend of hospital-specific rates and a national rate, depending on the degree to which costs vary within specific diagnosis-related groups. Eliminates the urban or rural classification of an area as a consideration in hospital payment determinations.

Requires the Secretary of Health and Human Services to: (1) identify relevant labor markets for hospitals; (2) establish a methodology to determine the proportion of hospital costs which are wage-related and compare the hospital wage level in each labor market with the national average hospital wage level; and (3) take into account differences among hospitals in part- and full-time employment patterns.