The Employment Cost Index and the Impact on Medicare Reimbursements

Employment Cost Trends

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 $6.0 billion reimbursement increase for 2019.¹ (See Table 1.)

Table 1. Approximate increases in Medicare payments based on December 2019 ECI
Provider category	CMS Medicare reimbursements (in millions) ^[1]	Percent of update based on ECI ^[2]	Percent change in Medicare payments due to ECI	Increase resulting from change in ECI (in millions)
Home healthcare	20,407	87.52%	2.39%	$488.52
Inpatient psychiatric facilities	4,119	78.86%	2.03%	$83.66
Hospital inpatient and acute care	153,598	76.41%	1.94%	$2,972.48
Hospital outpatient care	61,889	76.41%	1.94%	$1,197.71
Hospice	22,888	76.41%	1.94%	$442.93
Inpatient rehabilitation facilities	9,166	74.80%	1.88%	$172.72
Skilled nursing facilities	29,183	71.63%	1.45%	$423.37
Long term care facilities	3,631	70.10%	1.76%	$63.87
End stage renal disease	10,103	44.29%	1.17%	$118.11
Total ^[3]	314,984	N/A	N/A	$5,963.37
Footnotes: ^[1] Source: Centers for Medicare and Medicaid Services, Office of the Actuary reimbursement estimates provided for President’s 2021 budget. ^[2] Table ordered by percent of update based on ECI. ^[3] Estimates may not add to total due to rounding.

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 $4.6 billion based on ECI. The remaining six payment provider categories accounted for over $1.3 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 2019 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 $154 billion, according to 2019 CMS data. Approximately 76.4 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 0.764-percent increase in hospital payments. (See Table 2.)

Applying the total ECI-related weight (76.4 percent) to the calculated percent change using the December 2019 ECI (1.95%), would result in an approximate $3.0 billion increase in Medicare payments for hospital inpatient and acute care.

Table 2. Impact of ECI on Medicare reimbursements, hospital inpatient and acute care, December 2019
ECI Component	Weight	12-month percent change	Percent change in Medicare payments due to ECI
Civilian, hospital, wages	43.4%	2.5%	1.09%
Civilian, hospital, benefits ^[1]	12.4%	2.8%	0.35%
Private, professional and related occupations, compensation	11.9%	2.1%	0.25%
Private, financial activities occupations, compensation	3.0%	3.0%	0.09%
Civilian, installation, maintenance, and repair occupations, compensation	2.4%	2.1%	0.05%
Private, service occupations, compensation	2.3%	3.7%	0.08%
Private, office and administration support occupations, compensation	1.0%	2.8%	0.03%
Total ^[2]	76.4%	N/A	1.94%
Footnotes: ^[1] The 12-month percent change is an unpublished estimate from the Bureau of Labor Statistics, National Compensation Survey. ^[2] Estimates may not add to total due to rounding.

End notes

⁽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: September 11, 2020