Update on provider input price indexes

The Medicare hospital prospective payment system (PPS), and limits on home health agency (HHA) and skilled nursing facility (SNF) costs, incorporate an inflation factor that reflects the percentage change in the price of a fixed quantity of goods and services purchased in order to furnish care. First adopted in 1979 in connection with the limits on hospital routine operating costs, these measures of provider-specific price inflation are known as input price indexes or market baskets. The definition of each market basket and specific methodology used in its development are referenced in the Federal Register notices that accompany the annual revisions of the PPS, HHA, and SNF cost limits. A description of the current PPS input price index was published September 3, 1986 (Federal Register, 1986). The latest HHA regulatory market basket was published July 7, 1987 (Federal Register, 1987a) and the latest SNF market basket was published October 2, 1987 (Federal Register, 1987b). Costs presently excluded from these input price indexes include capital, medical professional fees, and direct medical education expenses. Although the mix of inputs reflected in each market basket varies with provider production patterns, all of the Health Care Financing Administration (HCFA) input price indexes are Laspeyres or fixed-weight measures constructed essentially in two steps. First, a base period is selected, and the proportion of total expenditures accounted for by designated spending categories is calculated. These proportions are called cost or expenditure weights. In the second step, a price index is selected to measure the rate of price change for each cost category. The rate of price increase is multiplied by the expenditure weight for that category. The sum of these products for all cost categories yields a weighted estimate of price change for a fixed quantity of purchased goods and services relative to the base period. A Laspeyres input price index is described as a fixed-weight index because it answers the question of how much more it would cost at a later time to purchase the same mix of goods and services that was purchased in the base period. The effects on total expenditures resulting from changes in the quantity or mix of purchases made subsequent to the base period are not considered. For example, shifting the site of a particular type of hospital care from an inpatient to an outpatient setting might affect the volume of hospital inputs, resulting in different expenditure weights. However, a Laspeyres market basket would not reflect these changes until the measure is rebased (i.e., revised weights are developed). HCFA's Office of the Actuary (OACT) revises the historical and forecasted rates of change in the input price indexes each quarter. Tables 1-3 present the percentage rates of increase in each cost category for the current hospital PPS, HHA, and SNF regulatory input price indexes for calendar years 1980-86. The corresponding index levels for each market basket are shown in Tables 4-6. Similar tabulations for specific fiscal periods are available from OACT on request. Caution is suggested because the rates of price change contained in these tables were developed from priceindex data available as of November 1987, and may not agree with any corresponding market basket values published previously in the Federal Register.