Medicare Economic Index (MEI): How It's Calculated & Impacts Healthcare Payments

Table of Contents#

1. What is the Medicare Economic Index (MEI)?
2. How is the MEI Calculated?
3. Key Components of MEI Calculation
4. MEI and Medicare Payment Updates
5. Recent MEI Trends (2023–2026)
6. Impact of MEI on Healthcare Providers
7. Criticisms and Challenges of MEI
8. Frequently Asked Questions (FAQs)
9. Conclusion
10. References

What is the Medicare Economic Index (MEI)?#

The MEI is an input price index developed by the Centers for Medicare & Medicaid Services (CMS) to measure year-to-year changes in the costs incurred by physicians when delivering services to Medicare beneficiaries. Established under the Social Security Act (Section 1848(e)(1)(A)), its primary purpose was to adjust Medicare Physician Fee Schedule (PFS) payment rates to reflect increases in the cost of physician time, non-physician labor, medical supplies, equipment, and other practice expenses. The MEI was first published in the Federal Register on June 16, 1975, and has been calculated annually since then.

Unlike the Consumer Price Index (CPI), which measures inflation for consumer goods and services, the MEI focuses specifically on the input costs faced by physician practices. This distinction is important: while CPI affects patients' out-of-pocket costs, the MEI was historically used to determine how much Medicare pays physicians for services like office visits, surgeries, and diagnostic tests.

It is important to note that the MEI specifically applies to the Medicare Physician Fee Schedule. Other Medicare payment systems—such as the Hospital Outpatient Prospective Payment System (OPPS), Inpatient Prospective Payment System (IPPS), Home Health Prospective Payment System (HH PPS), and Skilled Nursing Facility Prospective Payment System (SNF PPS)—use their own separate market basket indices to adjust payments.

How is the MEI Calculated?#

The MEI is a Laspeyres-type fixed-weight input price index calculated annually by CMS, using data from the U.S. Bureau of Labor Statistics (BLS). It combines two principal components: physician compensation (general earnings) and practice expenses, each weighted based on their share of total physician revenue and assigned specific BLS price proxies.

MEI Structure and Weights#

Based on the most recent MEI structure (revised in 1991 with 1989 base-year data):

Step-by-Step Calculation Process:#

1. Data Collection: CMS uses BLS data—including the Employment Cost Index (ECI), Consumer Price Index (CPI), and Producer Price Index (PPI)—to measure price changes for each expense category.
2. Weight Assignment: Each expense category receives a weight based on physician practice expense surveys conducted by the AMA and CMS.
3. Price Proxy Application: Each weight is multiplied by its corresponding BLS price index to capture inflation in that category.
4. Productivity Adjustment: The physician compensation component is adjusted (reduced) by the 10-year moving average of economy-wide multifactor productivity (MFP), as calculated by BLS. This adjustment has been part of the MEI since its inception in 1975.
5. Aggregation: The weighted, productivity-adjusted components are summed to produce the final MEI, expressed as a percentage change from the previous year.

Key Components of MEI Calculation#

To fully grasp the MEI, it's important to understand its two core components:

1. Physician Compensation (General Earnings)#

This is the single largest component of the MEI at 54.2% of total weight. It reflects changes in general earnings levels across the U.S. economy, not physician-specific income. The price proxy—average hourly earnings for private nonfarm workers—was chosen by Congress to avoid circularity (linking physician payment increases to physician charge increases). This component is adjusted by the 10-year moving average of multifactor productivity to account for economy-wide efficiency gains.

BLS data sources include average hourly earnings data and the Employment Cost Index (ECI) for benefits.

2. Practice Expenses#

Practice expenses account for approximately 45.8% of the MEI and include all non-physician costs of running a medical practice:

• Nonphysician employee compensation (16.3%): Wages and benefits for nurses, administrative staff, medical technicians, and other support personnel, tracked using the ECI weighted for the occupational mix of nonphysician healthcare employees.
• Office expenses (10.3%): Rent, utilities, and facility costs, proxied by the CPI-U for housing.
• Medical materials and supplies (5.3%): Gloves, syringes, bandages, and pharmaceuticals, measured using the PPI for ethical drugs and surgical appliances.
• Professional liability insurance (4.8%): Malpractice insurance premiums, tracked through CMS surveys of major insurers.
• Medical equipment (2.3%): Durable medical equipment and instruments, proxied by the PPI for medical instruments.
• Other professional expenses (6.9%): Automobile expenses, miscellaneous costs, and other overhead.

MEI and Medicare Payment Updates#

The MEI's role in determining Medicare physician payment has changed dramatically over the decades:

Historical Role (1975–2015)#

From 1975 through 2015, the MEI served as the baseline for annual Medicare physician payment updates. The payment update formula was: the MEI adjusted by an expenditure target system—first the Medicare Volume Performance Standards (MVPS) and later the Sustainable Growth Rate (SGR). Under these systems, if aggregate Medicare physician spending exceeded the target, payment updates were reduced; if spending fell short, updates could increase.

However, the expenditure target systems produced unsustainable payment cuts. By 2015, physicians were facing a 21% payment cut under the SGR formula.

MACRA and the End of MEI-Based Updates#

The Medicare Access and CHIP Reauthorization Act (MACRA) of 2015 eliminated the SGR and fundamentally changed how physician payments are updated. Critically, MACRA removed the MEI from the annual payment update formula entirely. Instead, updates were set by statute at rates widely recognized as failing to keep pace with inflation:

• 0.5% for 2016–2019
• 0% for 2020–2025
• 0.25% in 2026 onward for traditional fee-for-service
• 0.75% in 2026 onward for Advanced Alternative Payment Models (APMs)

As the Medicare Trustees noted in their 2023 report: "the specified rate updates could be an issue in years when levels of inflation are high and would be problematic when the cumulative gap between the price updates and physician costs becomes large. Absent a change in the delivery system or level of update by subsequent legislation, the Trustees expect access to Medicare-participating physicians to become a significant issue in the long term."

The Productivity Adjustment#

The MEI has included a productivity adjustment since its creation in 1975. This adjustment reduces the physician compensation component by the 10-year moving average of economy-wide multifactor productivity (MFP), as calculated by the BLS. The rationale is that physicians, like other workers, benefit from economy-wide productivity gains (e.g., better technology, more efficient processes), and payment updates should not double-count these gains.

The productivity adjustment has been controversial in healthcare because healthcare productivity growth has historically been slower than in other industries. Critics argue this adjustment penalizes physicians for efficiency gains that are difficult to achieve in labor-intensive clinical settings.

The CY 2026 Efficiency Adjustment#

In the CY 2026 Physician Fee Schedule final rule, CMS introduced a new -2.5% efficiency adjustment applied to work RVUs for non-time-based services. This adjustment uses the MEI productivity adjustment percentage over a five-year look-back period and is intended to address longstanding overvaluation of certain procedure codes. Combined with the statutory updates and a one-time +2.5% increase stipulated by Congress, the CY 2026 conversion factors are:

• $33.57 for qualifying APM participants (QPs)—a +3.77% increase
• $33.40 for non-QPs—a +3.26% increase

Recent MEI Trends (2023–2026)#

In recent years, inflation, supply chain disruptions, and post-pandemic economic conditions have significantly impacted the MEI:

• 2022: The MEI peaked at approximately 4.4%, driven by pandemic-era labor shortages and supply cost spikes.
• 2023: High inflation kept the MEI elevated at roughly 3.5–4.0%, though payment updates under MACRA remained at 0% for that year.
• 2024: As inflation moderated, the MEI slowed to approximately 2.5–3.0%. The Consolidated Appropriations Act, 2024 provided a one-time 2.93% update to the PFS conversion factor for March 9–December 31, 2024.
• 2025: The MEI was projected at approximately 2.6%, while the statutory payment update remained at 0%.
• 2026: The MEI is projected at approximately 2.3%. Congress provided a one-time +2.5% increase, and CMS finalized the -2.5% efficiency adjustment.

The Growing Gap#

The cumulative effect of statutory updates falling below the MEI has been a widening gap between physician payment and actual practice costs. According to the AMA and FixMedicareNow.org:

• From 2001 to 2024, Medicare physician payment declined 29% when adjusted for inflation in practice costs.
• From 2001 to 2025, that decline grew to 33%.
• During the same period, payments to other Medicare providers (hospitals, skilled nursing facilities, etc.) increased approximately 60%.

This growing disparity is a central driver of the current Medicare physician payment reform debate.

Impact of MEI on Healthcare Providers#

The MEI and the gap between MEI growth and actual payment updates directly affect provider profitability and ability to deliver care:

• Financial Strain: When payment updates fall below the MEI—as they have consistently since 2001—physicians face a real-terms pay cut. This is especially acute for small practices and rural providers, who have less flexibility to absorb cost increases or shift to commercial payer contracts.
• Access to Care: Declining real payment rates may discourage physicians from accepting new Medicare patients. The Medicare Trustees have warned that continued payment erosion "could be an issue in years when levels of inflation are high" and could affect beneficiary access.
• Practice Viability: Some physician practices have responded to payment pressures by reducing Medicare participation, shifting to concierge or direct-primary-care models, or consolidating with hospital systems—trends that can reduce patient choice and increase costs.
• Pandemic Impact: During the 2020–2021 COVID-19 pandemic, practice costs spiked (e.g., PPE, staffing), but MEI-based updates were not passed through under MACRA's statutory rates, leaving many providers underpaid relative to their actual cost increases.

Criticisms and Challenges of MEI#

The MEI faces several significant criticisms:

• Diminished Relevance Under MACRA: Since MACRA eliminated MEI-based updates, the MEI no longer directly determines physician payment. Critics argue this disconnect between measured cost inflation and actual payment updates undermines the MEI's original purpose and contributes to a growing payment shortfall.
• One-Size-Fits-All Approach: The MEI is a national index, but healthcare costs vary significantly by region. Labor costs in urban areas, for example, are substantially higher than in rural areas. The MEI does not capture these geographic variations, though Geographic Practice Cost Indices (GPCIs) provide some adjustment at the payment level.
• Slow Data Updates: BLS data used in the MEI is often lagged by 1–2 quarters, meaning the index may not reflect the most current cost trends.
• Productivity Adjustment Controversy: Critics argue the economy-wide productivity adjustment is inappropriate for healthcare, where productivity growth is inherently slower than in manufacturing or technology. Applying economy-wide productivity gains to healthcare can lead to permanent underpayment over time.
• Excludes Emerging Costs: The MEI does not fully account for newer practice expenses, such as telehealth infrastructure, electronic health record (EHR) maintenance, cybersecurity, and compliance costs.
• MedPAC Reform Proposals: The Medicare Payment Advisory Commission (MedPAC) has recommended that Congress tie physician payment updates to the MEI minus one percentage point (i.e., MEI - 1%). For 2026, this would yield a 1.3% increase (based on a projected 2.3% MEI). While industry groups have broadly supported linking updates to the MEI, they have expressed concerns about the minus-1% offset.

Frequently Asked Questions (FAQs)#

What is the difference between the MEI and the CPI?#

The MEI measures inflation in the costs of providing physician services (practice expenses and general earnings), while the Consumer Price Index (CPI) measures inflation in consumer goods and services. The MEI uses BLS price proxies such as the Employment Cost Index and Producer Price Index, whereas the CPI uses retail prices. The MEI is specific to physician practices; the CPI reflects the broader consumer economy.

Does the MEI directly determine Medicare physician payment rates?#

Not since 2015. Before MACRA, the MEI was the baseline for annual payment updates. MACRA replaced MEI-based updates with fixed statutory rates (0% for 2020–2025, 0.25% for 2026 onward for non-QPs). The MEI now serves primarily as a benchmark for measuring the gap between cost inflation and actual payment levels.

What is the MEI productivity adjustment?#

The productivity adjustment reduces the physician compensation component of the MEI by the 10-year moving average of economy-wide multifactor productivity (MFP). It has been part of the MEI since 1975, based on the principle that payment updates should not double-count productivity gains that benefit all industries. The adjustment uses private nonfarm business MFP data from the BLS.

How much has Medicare physician payment declined relative to inflation?#

According to the AMA, Medicare physician payment has declined approximately 33% since 2001 when adjusted for inflation in practice costs. During the same period, payments to other Medicare providers (hospitals, SNFs, home health) increased roughly 60%.

What reforms are being proposed?#

MedPAC has recommended tying physician payment updates to the MEI minus one percentage point. Various legislative proposals in Congress have sought to provide automatic inflationary updates based on the MEI. The AMA and other physician organizations advocate for an MEI-based update as the foundation of any payment reform.

Conclusion#

The Medicare Economic Index is a cornerstone of Medicare's physician payment history, but its practical significance has changed dramatically. While the MEI continues to accurately measure the inflation faced by physician practices, MACRA's replacement of MEI-based updates with fixed statutory rates has created a widening gap between physician costs and Medicare payments. The 33% decline in inflation-adjusted physician payment since 2001—while other Medicare providers received substantial increases—underscores the urgency of payment reform.

Ongoing debates about the MEI productivity adjustment, MedPAC's reform proposals, and legislative efforts to restore MEI-based updates will shape the future of Medicare physician payment. As healthcare costs continue to evolve, the MEI will remain a critical reference point for policymakers, providers, and patients navigating the complexities of Medicare's payment system.

References#

• American Medical Association (AMA). (2024). Medicare Basics Series: The Medicare Economic Index. AMA
• Centers for Medicare & Medicaid Services (CMS). (2006). Effect of the Medicare Economic Index (MEI) on the Physician Update. CMS.gov
• Centers for Medicare & Medicaid Services (CMS). (2025). Calendar Year (CY) 2026 Medicare Physician Fee Schedule Final Rule (CMS-1832-F). CMS.gov
• Medicare Payment Advisory Commission (MedPAC). (2025). Report to the Congress: Medicare Payment Policy—Reforming Physician Fee Schedule Updates. MedPAC.gov
• Freeland, M.S., Chulis, G.S., Arnett, R.H. III, & Brown, A.P. (1991). Measuring input prices for physicians: The revised Medicare Economic Index. Health Care Financing Review, 12(4), 61–73. PMC
• U.S. Bureau of Labor Statistics (BLS). The Employment Cost Index and the Impact on Medicare Reimbursements. BLS.gov
• Social Security Act, § 1848(e)(1)(A).
• MACRA (2015), Public Law 114-10.
• FixMedicareNow.org / AMA. (2025). Medicare Updates Compared to Inflation in Practice Costs (2001–2025). FixMedicareNow.org