The Employment Cost Index and the Impact on Medicare Reimbursements
Since the mid-1980's, the Bureau of Labor Statistics Employment Cost Index (ECI) has been a major source of data used by the Centers for Medicare and Medicaid Services (CMS) to determine the annual adjustment to Medicare reimbursements for health care service providers. CMS issues reimbursement guidelines under Medicare's Prospective Payment Systems (PPS), determining reimbursement rates (subject to approval by Congress) for Medicare-covered products and services to over one million health care providers. The PPS designates the level of payment for Medicare-covered products and services, adjusted annually, based on a number of factors including labor cost changes. The ECI measures the change in labor costs which CMS uses (in part) to determine annual adjustments to Medicare reimbursements made to health care providers in nine payment categories, resulting in an almost $5.5 billion reimbursement increase for 2020.1 (See Table 1.)
The PPS Hospital Price Index is a "market basket"2 used for three payment provider categories (hospital inpatient and acute care, hospital outpatient care, and hospice), resulting in an increase in reimbursements of over $4.0 billion based on ECI. The remaining six payment provider categories accounted for over $1.4 billion in reimbursement increases based on the ECI.
The example below provides information on how increases in a specific payment provider category are estimated using various ECI components.
Estimated Payment Example (using December 2020 ECI)
The PPS Hospital Price Index uses several ECI components to make annual adjustments to payments for various Medicare hospital-related payment provider categories. For example, Medicare reimbursements for hospital inpatient and acute care were approximately $149 billion, according to 2020 CMS data. Approximately 76.0 percent of the Medicare update for the payment provider category is based on the ECI. Thus, a 1-percent increase in the ECI would result in a 0.760-percent increase in hospital payments. (See Table 2.)
Applying the total ECI-related weight (76.0 percent) to the calculated percent change using the December 2020 ECI (1.73%), would result in an approximate $2.6 billion increase in Medicare payments for hospital inpatient and acute care.
The PDF version of The Employment Cost Index and the Impact on Medicare Reimbursements factsheet for 2020 is also available.
(1) The estimated reimbursement is a hypothetical example and does not factor in any changes to payments based on other patient or provider specific characteristics.
(2) Medicare Program Rates & Statistics: Market Basket Data provide quarterly index levels and 4-quarter moving average percent changes for the market baskets.
See the articles Using the Employment Cost Index to adjust Medicare payments (PDF) by Albert Schwenk and William Wiatrowski, October 2002, Monthly Labor Review, and The Employment Cost Index and the Impact on Medical Reimbursements (PDF) by Jeffrey Schildkraut, October 26, 2009, Compensation and Working Conditions for data and information on how Medicare adjustment calculations are made.NOTE: Current physician Medicare reimbursements are based on the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA).
Last Modified Date: November 10, 2021