AAMC Summary and Analysis
of MedPAC's August 1999 Report on Graduate Medical Education
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Synopsis
The August, 1999 report released by the Medicare Payment
Advisory Commission (MedPAC or the Commission) recommends
a new conceptual framework for governing Medicare's special
payments to teaching hospitals. MedPAC believes that it is
more appropriate to view the costs hospitals incur in educating
residents, currently considered direct graduate medical education
(DGME) costs, as necessary for producing a teaching hospital's
primary output-patient care. Because the indirect medical
education (IME) adjustment also is identified with patient
care costs, it would be more appropriate to incorporate the
DGME costs into the IME financing mechanism. The result would
be labeled as an "enhanced patient care" adjustment
(subsequently changed to "teaching hospital adjustment")
to the Medicare diagnosis related group (DRG) payments that
teaching hospitals receive under Medicare's inpatient hospital
prospective payment system (PPS).
medpac's framework is premised on an economic theory which
would assume that residents incur the cost of their own education
by: a) providing services, and b) accepting compensation that
is lower than they might otherwise be able to earn given their
skill level and extensive educational background in the life
sciences. Medpac then concludes that it is more appropriate
to represent the resident stipends and other education-related
costs currently incurred by hospitals as the "net value
of the patient care services residents provide."
MedPAC believes that Medicare's goal is to ensure access
for its beneficiaries to high quality care. Consequently,
the Commission believes it is appropriate for Medicare to
provide additional payments to teaching hospitals because
these institutions have higher patient care costs that reflect
a number of factors that enhance the clinical care beneficiaries
receive. These additional payments would be paid through the
teaching hospital adjustment to DRG payments.
MedPAC acknowledges in its August Report that the framework
it recommends is a starting point, and additional analyses
and discussions are needed to fully flesh out this new concept.
This notwithstanding, MedPAC's recommendation to eliminate
the distinction between DGME and IME payments would undo a
payment structure that has existed for almost 20 years, since
the beginning of the PPS system. Moreover, while MedPAC's
report recognizes the high quality of clinical care provided
at teaching hospitals, its proposal would essentially eliminate
the explicit recognition of Medicare's responsibility in financing
its share of the costs of residency education-a responsibility
that has been part of Medicare since its inception. It is
this explicit recognition that is, and has been, an important
factor in the significant improvements in the content, structure,
and quality of graduate medical education. Through the initiatives
of teaching hospitals and medical schools, and under the leadership
of accreditation bodies, residency education has become increasingly
rigorous. These current and future efforts-including moving
to outcomes-based education evaluation criteria-strengthen
physician education and ensure that residents remain learners
throughout the residency period, not simply apprentices or
employees who are receiving on-the-job training.
By failing to explicitly recognize these educational efforts,
MedPAC's new framework could go a long way toward eroding
them, which have been fundamental in the development of a
physician workforce universally regarded as the best in the
world.
Current Medicare Payment Methodologies With an Education
Label
To assess MedPAC's recommendations, it is important to understand
Medicare's current teaching hospital payment methodologies.
Medicare makes two distinctive payments to teaching hospitals:
DGME payments and IME payments. Medicare's DGME payments cover
Medicare's share of the costs associated with physician graduate
medical education, including residents' stipends and benefits,
faculty supervisory costs, and allocated overhead costs. IME
payments are intended to cover teaching hospitals' higher
patient care costs. These higher costs reflect a number of
factors, including treating a more complex and sicker patient
population, providing an advanced scope of services, and the
inherent inefficiencies associated with teaching residents.
The DGME payment is a prospectively determined payment that
is based on a hospital's direct teaching costs per resident
in a "base" year (generally 1984), updated for inflation.
This amount is then multiplied by the number of residents
trained by the hospital (subject to a limit, as mandated by
the Balanced Budget Act of 1997 (BBA), and weighted according
to whether the resident is in their initial residency period).
The final payment is determined by multiplying this amount
by Medicare's share, which is the number of Medicare beneficiary
inpatient days compared to the hospital's total patient inpatient
days.
The IME adjustment is a percentage add-on to the DRG payments
that teaching hospitals receive. Each hospital's adjustment
is based on a complex formula that includes an intern and
resident to bed (IRB) ratio and a multiplier set by Medicare.
Because the adjustment is applied only to Medicare cases,
IME payments represent only Medicare's share of teaching hospitals'
overall higher patient care costs.
MedPAC'S Mandate
The BBA required MedPAC to submit a report containing "recommendations
on whether and to what extent Medicare payment policies and
other Federal policies regarding teaching hospitals and graduate
medical education should be changed." (BBA Section 4629).
As part of this overall mandate, the BBA required MedPAC to
make recommendations regarding:
- Possible methodologies for making payments for graduate
medical education (GME) and the selection of entities to
receive such payments. This area should include a discussion
of payments for children's hospitals and pediatric residency
programs, and nursing and allied health training;
- Federal policies regarding international medical graduates;
- The dependence of medical schools on service-generated
income;
- Whether, and to what extent, the supply of physicians
will change over the next 10 years; and
- Methods for promoting an appropriate number, mix, and
geographic distribution of health professionals.
MedPAC discussed many of the above topics at Commission meetings
prior to the August report publication. The August Report,
however, is focused solely on the issue of Medicare payments
for teaching-related activities. The Commission recommends
that Federal policies relating to physician workforce should
be implemented through other Federal programs and not Medicare.
There is no mention of the remaining issues.
MedPAC'S Conceptual Framework
1. Medicare's Goal
MedPAC's recommendations center around a conceptual framework
that the Commission believes policymakers should use when
considering Medicare's payment policies for teaching hospitals.
The starting point for the framework is MedPAC's view of the
Medicare program's principal goal. According to the Commission,
Medicare must ensure that its beneficiaries have access to
high quality care in the most appropriate clinical setting.
At the same time, Medicare's payments must encourage providers
to produce high quality services in an efficient manner. Following
from these goals, the Commission concludes that Medicare should
adjust its payments to teaching hospitals because "the
value of enhanced patient care in teaching hospitals justifies
the higher costs of providing it." MedPAC also states
that similar payment adjustments should be developed in other
settings, such as ambulatory clinics, when the added value
of patient care justifies their higher costs.
Analysis--MedPAC's views about Medicare's goals
focus on the provision of patient care. This position seemingly
rejects a role for Medicare's explicit participation in the
financing of activities-such as GME-that occur within the
context of, and are an integral part of, the provision of
patient care. In other words, such a position appears to reject
a role for Medicare in financing its share of the costs associated
with the education of residents.1
MedPAC's perception of Medicare's role in ensuring access
to care also is narrowly tailored. According to the report,
ensuring access seems to be limited to the settings where
quality care is provided, but does not extend to ensuring
that Medicare patients have access to physicians who have
undergone high quality graduate medical educational programs.
2. MedPAC's New Conceptual Framework
MedPAC's conceptual framework involves rethinking how costs
associated with residency education are viewed. Relying on
economic theory, the Commission believes these costs are more
appropriately thought of as costs associated with providing
patient care, not as educational costs. Thus, they are indistinguishable
from costs that are associated with IME payments.
MedPAC believes that residents bear the cost of their education
by providing patient care services and accepting lower compensation
than they might otherwise be able to earn given their skill
level and extensive educational background in the life sciences.
The costs incurred by teaching hospitals-residents' stipends,
supervisory, and overhead costs-are not education costs, per
se, but rather represent the "net value of the patient
care services residents provide."
The Commission believes that the current distinction between
direct and indirect costs, is an "accounting artifact"
that should not continue to guide Medicare's payments to teaching
hospitals. Under MedPAC's framework, there is no reason for
Medicare to make two separate payments to teaching hospitals.
Instead, Medicare should make a single adjustment to per case
payment rates, which reflects both the direct and indirect
costs associated with teaching hospitals.
Analysis-Consistent with its view of Medicare's
goals, the Commission believes that Medicare payments to teaching
hospitals must be directly connected with access to quality
and efficient patient care. By redefining DGME costs as patient
care costs, MedPAC is able to endorse Medicare payments for
these costs.
While MedPAC appropriately recognizes the valuable patient
care services provided by teaching hospitals, the Commission's
recommendation eliminates an explicit role for Medicare in
helping to fund GME. MedPAC reaches this conclusion because
of its view that residents incur the costs of their own education.
Such thinking represents a sea change in how residency funding
has historically been viewed, yet MedPAC provides almost no
information on its rationale for a need for, or the consequences
of, such a change. For example, there is little discussion
of the perceived flaws in the current framework that necessitate
the change MedPAC has proposed, nor a discussion of why MedPAC's
new framework is the best means of addressing those flaws.
MedPAC also provides no substantive background concerning
labor markets and, more importantly, no discussion of the
application of its economic theory to residency education.
Finally, MedPAC's report does not address the potential consequences
associated with implementing its framework on residency education.
Since its inception in 1965, Medicare has recognized the
important link between residency education and patient care.
DGME payments represent Medicare's explicit role in supporting
the educational portion of this linkage. Yet MedPAC recommends
the elimination of this historical and explicit commitment
apparently based solely on the fact the Commission believes
the payment mechanism is an "accounting artifact."
It seems that a much more reasoned justification should be
required before contemplating a change of this magnitude.
Medicare's role in the financing of GME is important and
appropriate. Moreover, the Association of American Medical
Colleges (AAMC) believes that all health care payers have
an obligation to help finance the residency education portion
of our nation's future physician workforce. Not only should
Medicare pay its share of these costs, but other payers should
also contribute their fair shares. One option to accomplish
this objective is through the creation of all payer trust
funds that would support physician education as well as the
other valued services provided by teaching hospitals.
Even within the confines of its framework, MedPAC's recommendation
is troubling because the premise of the adjustment is that
teaching hospitals provide "enhanced patient care."
While the AAMC agrees that teaching hospitals provide enhanced
care, terms like this that are of a "quality" nature
are difficult to define and quantify. Throughout most of the
report's discussion, the enhanced value of teaching hospitals
is presumed, yet MedPAC never defines the term. Without a
specific definition, the vagueness of this term could be subject
to multiple interpretations, and demands for "proof"
when no one has yet to adequately characterize and measure
"quality" generally.
The focus on enhanced care also raises additional concerns
about the role of education. Abandoning the explicit link
to education might imply that only when patient care
is enhanced, as demonstrated in a direct clinical fashion,
should higher costs be subject to reimbursement by Medicare.2
Yet, part of the higher patient care costs of teaching
hospitals is due to the sheer presence of resident education
programs, without a measurable difference in clinical markers.
Congress recognized that these costs should be recognized
in the IME adjustment:
[T]his adjustment [is provided] in the light of serious
doubts . . . about the DRG case classification system and
the additional costs associated with the teaching of residents.
[These costs] are understood to include the additional tests
and procedures ordered by residents as well as the extra
demands placed on other staff as they participate in the
education process. (emphasis added). (House Ways and Means
Committee Rept. No. 98-25, and Senate Finance Committee
Rept. No. 98-23)
The AAMC believes that the presence of educational programs
in a teaching hospital, in and of itself, represents "enhanced
care." However, because MedPAC provides no definition
of this term, it is unclear whether the Commission endorses
this view.
MedPAC'S Specific GME Recommendations
- Medicare should pay more for patient care in teaching
settings when the enhanced value of that care justifies
its higher costs.
MedPAC recognizes that the higher patient care costs of
teaching hospitals reflect a number of factors that "are
likely to strengthen the clinical care the Medicare beneficiaries
. . . receive." These include undertaking more applied
clinical research, furnishing broader and more technically
sophisticated services, and providing care that is more
complex. The Commission also recognizes that GME and other
educational activities tend to enhance care because the
"team" approach to care strengthens clinical decision-making
and provides additional quality oversight. MedPAC believes
that Medicare should pay for these costs when their benefits
justify the additional costs.
Analysis-In other sections of its report,
MedPAC explicitly states that the "value of the enhanced
patient care in teaching hospitals justifies the higher
costs of providing it." However, in the language of
this recommendation, MedPAC chose to state "when
the enhanced value of that care justifies its higher
costs" (emphasis added). This language is disturbing
because of the difficulties associated with defining and
quantifying "enhanced value." Consequently, as
described previously, a payment adjustment that hinges solely
on a criterion as vague as "enhanced care" is
susceptible to ongoing reinterpretations that could impact
funding level determinations.
- The Congress and the Secretary should improve the diagnosis
related groups to reflect more accurately the relationship
between illness severity and the cost of inpatient care,
thereby making Medicare payments more consistent with efficient
providers' costs.
MedPAC recognizes that, on average, beneficiaries treated
in teaching hospitals are sicker than those treated at nonteaching
hospitals. The DRG system, however, is not sensitive enough
to capture these differences. Consequently, the higher costs
associated with sicker patients are not compensated fully
by the DRG payment rates. These higher costs, however, are
currently captured in the calculation of the IME adjustment.
MedPAC recommends that the DRG system be refined to reflect
illness severity more accurately. Specifically, MedPAC recommends
that the number of DRG categories be expanded to reflect
more fully coexisting conditions and complications, and
that the calculation of the DRG relative weights be modified
to reflect better the relative costliness of cases across
DRGs.
Analysis-The AAMC supports the general tenor
of this recommendation because DRG refinements have the
potential to ensure more appropriate DRG payments to those
hospitals-particularly teaching hospitals-that treat more
complex, sicker patients. At the same time, this initiative
likely would lower the calculated IME adjustment, as it
has historically been calculated, because a portion of the
higher costs reflected in the IME calculation is associated
with case mix differences that are not reflected in the
current DRG structure.
The policy changes associated with the recommendation,
however, merit further discussion and analyses. For example,
MedPAC suggests that outlier payments should be financed
by reducing payments for cases within the DRG to which the
outlier is assigned, rather than the current method of reducing
payments across all DRGs. Such a change, however, has the
potential to penalize hospitals that tend to treat high
cost cases. 3
It also is unclear how long it would take to develop and
implement the changes that MedPAC recommends. The changes
would require significant time to develop. Moreover, several
of the changes require legislation. It also is unclear as
to the level of precision that would be gained by the modifications.
It is unlikely that DRG refinements could account entirely
for differences in patient complexity
- The Congress should revise Medicare's payments to recognize
the higher value of patient care services provided in teaching
hospitals through an enhanced patient care adjustment (subsequently
changed to "teaching hospital adjustment").
The teaching hospital adjustment would combine DGME and
IME payments into a single adjustment that, like the current
IME adjustment, would be applied as a percentage add-on
to a hospital's DRG payments.
According to MedPAC, combining DGME and IME into a teaching
hospital adjustment involves a number of issues. Examples
include whether to reflect current DGME payments or costs
in the calculations; how to handle the time residents spend
in other settings, such as outpatient units; and how to
address a teaching hospital adjustment for hospitals (or
inpatient units) that are exempt from PPS.
Another issue relating to the creation of a new adjustment
concerns the measure that should be used to represent the
extent of the patient care enhancements available at each
teaching hospital. The current IME adjustment relies on
the IRB ratio to determine the payment adjustment. MedPAC
plans to search for alternatives that would capture the
enhanced patient care at teaching hospitals without using
resident counts.
Analysis-Implementing an alternative to the
IRB measure that does not incorporate teaching hospitals'
educational role would further attenuate the relationship
between education and the care provided at teaching hospitals.
MedPAC also expresses the concern that the IRB measure
encourages teaching hospitals to train more residents because
the higher the IRB ratio, the higher the IME adjustment.
There are multiple factors, however, that contribute to
a decision about the number of residents that can be educated
within an institution. It is unclear what, if any, influence
Medicare payment policies have on this decision. However,
to the extent such an incentive might exist, it has been
eliminated by the BBA, which imposed a limit on the number
of residents that Medicare would recognize at each hospital.
- The Congress should phase-in the new payment adjustment
and any related policies that substantially change payments
to individual providers.
MedPAC states that its recommendations are "not intended
to produce large increases or decreases in Medicare spending"
but they would redistribute a substantial amount of Medicare
payments across hospitals. In particular, MedPAC states
that hospitals that have high per resident DGME amounts
could receive lower payments under a single national adjustment,
while hospitals with lower per resident amounts could receive
higher amounts. Because of the redistributive effects, the
Commission recommends a phase-in period. The report does
not specify a time frame or transition mechanism, but says
that such decisions will depend on the estimated impacts
of the changes.
Analysis-MedPAC's recommendation on a transition
seems somewhat premature given that the Commission has yet
to flesh out any details regarding its recommendations,
nor does the report contain any financial impact analysis.
As with any policy change, combining DGME and IME payments
into a single adjustment could redistribute payments significantly.
The actual redistribution amount, however, will depend on
the precise parameters of the adjustment. The AAMC agrees
with the general premise that major Medicare policy changes
should be accompanied by a transition period.
- The Congress and the Secretary should develop payment
adjustments for enhanced patient care in all settings where
residents and other health care professionals train when
the added value of patient care justifies its higher costs.
MedPAC's August Report states that the conceptual framework
it endorses is not limited to the inpatient setting. But,
before an adjustment would be justified in other settings
it would have to meet MedPAC's two-pronged test of a) the
costs of efficiently provided care are higher, and b) the
care being provided is considered more "valuable."
Analysis-MedPAC has spent little time addressing
this topic in its meetings; therefore, it is not surprising
that few details about this recommendation are included
in its August Report. MedPAC, however, recognizes that determining
whether its criteria would be met requires further examination.
One of the difficulties in addressing payment adjustments
for settings outside of the hospital is the lack of available
data concerning education and other costs associated with
nonhospital sites. It also is unclear what information would
be necessary, or for that matter, what criteria would be
used to demonstrate that the care provided in these settings
is more "valuable" and, hence, deserving of an
additional adjustment.
MedPAC also notes that while nonphysician trainees may
contribute to enhancing the care that Medicare beneficiaries
receive in nonhospital sites, there are virtually no data
concerning the quantity and mix of these trainees at the
provider level.
- Federal policies intended to affect the number, specialty
mix, and geographic distribution of health care professionals
should be implemented through specific targeted programs
rather than through Medicare.
In its report, MedPAC states that Medicare policies influence
the workforce, but concludes that payment policy is "too
blunt an instrument to rely on to achieve specific workforce
goals." Medicare is not the best means for addressing
these issues for several reasons, according to MedPAC. First,
even if Medicare policies targeted certain workforce goals,
these goals might not be achieved because people interested
in a physician's career may not have the financial resources
to acquire the education. Second, the educational time required
may result in oversupplies in some specialties and undersupplies
in others. Finally, MedPAC suggests that the demand for
health care professionals in rural or high poverty areas
may not be adequate to support minimum basic services.
MedPAC suggests that other programs that more directly
affect the healthcare workforce may be a better answer to
addressing these issues. MedPAC specifically suggests that
education grants and loans may be one potential option for
addressing access to the profession.
Analysis-The AAMC agrees that Medicare policy
in and of itself cannot address physician workforce issues.
Yet, as the largest single payer of health care services,
Medicare policies can influence the workforce. MedPAC acknowledges
this by noting that Medicare's lack of payments for services
such as palliative care and geriatric assessment may be
discouraging physicians from becoming geriatricians.
MedPAC could play an important role in evaluating the impact
of current Medicare policies on physician supply and specialty
mix. Any time Medicare makes a policy change, it has the
potential to affect the healthcare workforce. One recent
and important example is the BBA's imposition of limits
on the number of residents that Medicare will reimburse.
An assessment of the impact of this change on specialty
mix, supply, and numbers of international medical graduates
in residency positions by an independent entity such as
MedPAC would provide valuable insights.
Financial Impact of MedPAC'S Recommendations
MedPAC's August Report contains no financial impact analysis
of its new framework, although it provides a number of qualitative
observations. In the report's Executive Summary, MedPAC states
that its recommendation concerning a new conceptual framework
is "not intended to achieve budgetary savings. . . ."
Yet in another part of the report, MedPAC writes that the
enhanced patient care adjustment should reflect the "efficient
costs of providing care and "[w]hether this means higher
or lower payments to teaching hospitals depends on how policymakers
resolve [this issue]." As mentioned above, MedPAC believes
its recommendations would redistribute substantial payments
among teaching hospitals and, therefore, supports a transition.
Analysis-Because few details are provided,
it is not possible to quantify the impact of MedPAC's recommendations.
MedPAC states that its recommendations are not intended to
produce savings. However, the unclear nature of how its new
framework might be operationalized could raise a number of
funding issues.
AAMC Summary
MedPAC's conceptual framework is an important contribution
to the debate on the future funding of GME because it squarely
raises the important issue of Medicare's role in funding GME
and the other special missions of teaching hospitals. If one
accepts MedPAC's fundamental premise that Medicare does not,
and should not, participate in the financing of residency
education, MedPAC's new adjustment represents a reasonable
starting point to address how to finance the differential
patient care services provided by teaching hospitals.
However, as discussed above, the AAMC strongly believes that
it not only is appropriate for Medicare, and all other payers,
to recognize and reimburse costs associated with residency
training, but that it is a reasonable and important responsibility,
and in the best interests of the Medicare population and the
nation as a whole. Consequently, we do not believe that the
historical differentiation between DGME and IME is conceptually
flawed.
Because MedPAC chose to address only the fundamental premise
of Medicare's role in financing GME, the report lacks any
recommendations concerning flaws in the system as currently
devised. The AAMC believes that a thorough assessment of the
strengths and weaknesses of the current and MedPAC's recommended
system would be useful to policymakers as they contemplate
future DGME and IME funding policies.
The AAMC will continue to monitor MedPAC's deliberations
on GME and other issues affecting medical schools, faculty
physicians, teaching hospitals, and other residency training
sites.
1. Such a position might also
question Medicare's role in making disproportionate share
(DSH) payments. On this topic, it should be noted that in
preparation for its August Report, the Commission considered
a draft recommendation to address uncompensated care through
specific targeted programs rather than through Medicare payment
policies. This recommendation was never approved, however,
in part because a number of Commissioners expressed reservations
about considering issues that were not directly related to
the mandate of addressing GME.
2. This point is made even
more directly in the section of the report that discusses
whether a teaching hospital adjustment should be available
in ambulatory settings.
3. MedPAC contends that this
change is necessary because these high cost cases increase
the case weight for their respective DRGs, thereby inflating
payments for non-outlier cases. Assuming for the moment that
this premise is correct, it is unclear whether these higher
payments offset the losses hospitals incur when they treat
outlier cases. We believe additional data analysis is needed
before the Commission recommends this specific change, as
well as an overall discussion as to the appropriate policy
for financing outlier cases.
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