Last week, in conjunction with release of final Medicare payment updates, the Office of the Actuary released their 1Q 2021 update of the model used to estimate future costs. A key component of the Hospital Prospective Payment System, for example, is labor. Labor is estimated based on trending forward the Employment Cost Index into future periods. As you can imagine, it gets the cost of employment right but on a lag and over time.
The facts on the ground are quite different as we know. Labor shortages persist in health care and the result has been higher wages. The design of the model and the way it is applied means the 1Q 2021 update is lower overall then the one produced at the start of the pandemic.
Hospitals are going to be able to paper over these additional costs due to higher acuity. Other provider types, especially those that operate at the lower end of the pay scale like Inpatient Psychiatric Hospitals and Nursing Facilities are probably not going to have that flexibility.
Have a great day.
Emily Evans
Managing Director – Health Policy
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