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October  2002, Vol. 125, No.10

Using the Employment Cost Index to adjust Medicare payments

Albert E. Schwenk and William J. Wiatrowski

At first glance, a Federal Government statistic designed to measure the rate at which employers’ wage and benefit payments are rising may appear to have very little to do with Medicare, the $200 billion-per-year program of health insurance benefits that covers 40 million mostly older Americans. But such relationships often occur in the world of Federal statistics and Federal benefit programs. For instance, the U.S. Congress has established that Bureau of Labor Statistics data on consumer prices be used to determine annual increases in Social Security payments. Similarly, Bureau data on employee wages are used to determine salary increases for a variety of government employees—including judges and members of Congress—and, since the mid-1980s, the Bureau’s Employment Cost Index (ECI), a quarterly measure of the rate of change in employer costs for wages and benefits, has been used as an input to annual adjustments in Medicare payments to service providers.

ECI data are used as part of a process to determine allowable increases in payments to hospitals, skilled nursing facilities, home healthcare organizations, physicians, and other healthcare providers under Medicare’s Prospective Payment Systems (PPS). The PPS designates the level of payment for Medicare-covered services, based on the diagnosis and geographic location of care. Such payments are adjusted annually based on a number of factors, including changes in compensation for medical and related personnel. ECI data are used for many of these compensation changes. For example,¹

• ECI data account for about 71 percent of the input price index used to determine allowable increases in payments for hospital charges. Thus, a 1-percent increase in the ECI would result in a 0.71-percent increase in hospital payments. In 1999, Medicare inpatient hospital payments totaled more than $85 billion. A 1-percent increase in the ECI would result in an increase of about $600 million in annual hospital payments; a 3.5-percent annual increase in the ECI (typical of the late 1990s) would result in an increase of about $2.1 billion in annual hospital payments.

• ECI data account for about 69 percent of the input price index used to determine allowable increases in payments for charges for skilled nursing facilities. Medicare reimbursed more than $12 billion in skilled nursing facility charges in 1999.

This excerpt is from an article published in the October 2002 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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Footnotes

1 These statistics on Medicare payments are for fiscal 1999. For more information, see 2001 HCFA Statistics, U.S. Department of Health and Human Services.

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Employment Cost Trends

Related Monthly Labor Review articles

The Employment Cost Index: what is it?—Sept. 2001.
Is the ECI sensitive to the method of aggregation?—June 1997.