Medicare Market Basket Definitions and General Information

What is a Market Basket (MB)?

The market basket is described as a fixed-weight index because it answers the question of how much more or less it would cost, at a later time, to purchase the same mix of goods and services that was purchased in a base period. As such, it measures "pure" price changes only. A market basket is constructed in three steps. First, a base period is selected and total base period expenditures are estimated for mutually exclusive and exhaustive spending categories based upon type of expenditure. Then the proportion for total costs that each spending category represents is determined. These proportions are called cost or expenditure weights. The second step is to match each expenditure category to an appropriate price/wage variable, called a price proxy. In the third and final step, the price level for each spending category price proxy is multiplied by the expenditure weight for that category. The sum of these products (that is, weights multiplied by proxied index levels) for all cost categories yields the composite index level in the market basket in a given year.

What are market baskets used for?

The CMS market baskets are used to update payments and cost limits in the various CMS payment systems. The CMS market baskets reflect input price inflation facing providers in the provision of medical services.

Is there a Medicare market basket?

No, CMS does not produce a "Medicare" market basket. Individual market baskets are produced for many of the payment systems (inpatient hospital PPS, skilled nursing facility PPS, home health agency PPS, long-term care hospital PPS, inpatient rehabilitation hospital PPS, and physicians fee schedule) to accurately measure the price changes facing each of these providers.

How are quantity and intensity effects held constant in the market baskets?

A market basket measures the pure price change of inputs used by a provider in supplying healthcare services by using price data from the Bureau of Labor Statistics. There are two major components of the market basket: cost weights and price proxies. Cost weights measure the mix (intensity), quantity and prices of inputs used by a provider while the price proxies measure only the price change of the category being measured. Only the price proxies are updated quarterly; the cost weights are held constant, thereby holding quantity and intensity effects constant. In addition, we use price data from BLS for the majority of our price proxies (most notably PPI, CPI, ECI data) and these indexes too are typically Laspyeres indexes and only measure the "pure" price change of the specific commodities they price. Hence, they do not bring quantity and intensity effects into the market basket this way. Therefore, a market basket only measures what it would cost in a later period to purchase the same product and the same mix of products purchased in the base period.

How often are the market baskets rebased?

Rebasing a market basket is mainly dependent upon data availability. Typically, a market basket is rebased every five years to coincide with the update of many secondary data sources, such as the Business Expenditure Survey from the Bureau of the Census and the input-output table data from Bureau of Economic Analysis. We continually monitor the cost weights in the market baskets to ensure they are reflecting the mix of inputs used in providing services. We will update the weights more frequently than every five years if we believe they do not meet this standard.

What sources of data are used for the market basket weights and price proxies?

The primary source of data used in constructing market basket weights is the Medicare Cost Reports. These data are supplied directly to CMS from providers and are the most current and complete data available for use in developing the weights. In all CMS market baskets (excluding the MEI), the Medicare Cost Reports are used to construct the weights of the major cost categories. Other data sources, such as the Bureau of the Census’ Business Expenditure Survey and the Bureau of Economic Analysis’ Benchmark Input-Output tables, are used as secondary sources to derive weights for detailed categories.

The primary data source for price proxies is Bureau of Labor Statistics data and includes Producer Price Indexes, Consumer Price Indexes, and Employment Cost Indexes. Producer Price Indexes (PPIs) measure changes in the prices producers receive for their output. PPIs are the preferable price proxies for goods and services that facilities purchase as inputs since these facilities generally make purchases in the wholesale market. Consumer Price Indexes (CPIs) measure changes in the prices of final goods and services purchased by the typical consumer. We use CPIs only if an appropriate PPI is not available, or if the expenditure more closely resembles a retail rather than wholesale purchase. Finally, Employment Cost Indexes (ECIs) measure the rate of change in employee wage rates and employer costs for employee benefits per hour worked. They are fixed weight indexes that only measure changes in wages and benefits per hour and are not affected by changes in occupational mix, making them an appropriate measure for our purposes. In addition, these data are well-established publicly available series that are published on a regular schedule, are available on a timely basis and reflect an appropriate level of detail necessary for use in our market baskets. These data also measure price changes only and do not reflect quantity or other non-price factor changes.

Are there separate market baskets for inpatient and outpatient hospital PPS?

No, there are not currently separate market baskets for inpatient and outpatient hospital PPS. While the Office of the Actuary has researched the feasibility of creating separate market baskets, we have not done so at this time because we have not been able to separate the cost categories developed from the Medicare Cost Reports separately into inpatient and outpatient services. There is also no secondary data source available to develop detailed weights for inpatient and outpatient services.