The Medicare Economic Index: Its Background and Beginnings

Title XVIII of the Social Security Act established the Medicare program to provide health insurance benefits for the aged and disabled. Title XVIII is divided into two sections: Part A, Hospital Insurance (HI) and Part B, Supplementary Medical Insurance (SMI). Part A pays for part of the cost of inpatient hospital care and related health care services provided by skilled nursing facilities and home health agencies. Part B provides coverage for a variety of medical services and supplies furnished by physicians or other health care professionals in connection with physicians' services, outpatient hospital services, and home health services. In response to concerns about rising physician fees reimbursed under Part B of the Medicare Program, Congress mandated that an additional fee limit be included in the calculation of "reasonable" charges. Under Section 224 of the Social Security Act Amendments of 1972, the prevailing charge—an amount equal to the maximum reasonable charge allowed physicians for a specific procedure in a specific locality—could exceed the July 1972-June 1973 prevailing charge only by an amount reflected by an index of changes in physicians' operating expenses and earnings levels. This index, sometimes labelled the Medicare Economic Index (MEI), was first promulgated in June 1975, and became effective as of July 1, 1975. The value of the Index has been updated annually since then. This paper will provide a brief overview of the MEI. It will describe the role of the MEI in the reasonable charge process, the construction and data sources for the MEI, and it will present the statistics used in establishing values for the MEI since its inception.