AAMC Reporter: February 2007

MedPAC Recommends IME Reduction

The teaching hospital community is expressing disappointment over the Medicare Payment Advisory Commission's (MedPAC) recent vote to recommend a potential 1 percent reduction in Medicare indirect medical education (IME) payments, which help offset the higher patient care costs of teaching hospitals. The recommendations will be included in MedPAC's March Report to the Congress.

The recommendation, which would require congressional legislation to be implemented, would lower the IME adjustment from 5.5 to 4.5 percent. However, MedPAC's recommendation stipulates that the reduction should be implemented at the same time as another change—adding a "patient severity" adjustment to the diagnosis-related group (DRG) payment system.

Under the proposed DRG change, hospitals would receive higher Medicare payments when they treat more severe and complex medical cases. Because their patient population tends to contain more acute cases on average, teaching hospitals would likely benefit most from such a change, although whether it would offset the IME reduction, and by how much, is unknown.

"While we appreciate the discussions that MedPAC had throughout the fall about the importance of teaching hospitals, we are disappointed they recommended a cut in the IME adjustment, even if it is premised on prior implementation of a patient severity adjustment to the inpatient payment system," said Robert Dickler, senior vice president of the AAMC's Division of Health Care Affairs.

"We believe that teaching hospitals' total and operating margins demonstrate the ongoing importance of retaining IME payments to fulfill their important societal missions," Dickler said.

Because of their education and research missions, teaching hospitals typically offer the newest and most advanced services and equipment, and often care for the nation's sickest and most complex patients.

Because of their education and research missions, teaching hospitals typically offer the newest and most advanced services and equipment, and often care for the nation's sickest and most complex patients. More recently, major teaching hospitals, defined as those with an intern/resident-to-bed ratio of 0.25 or more, are also preparing to act as front-line responders for potential biological, chemical, or nuclear attacks, and are implementing plans to fulfill that role.

Of course, the financial consequences of fulfilling these missions are considerable. The aggregate total margin for the nation's major teaching hospitals is consistently and significantly below that of other hospital groups.

In some years, margins have hovered near zero. In 2004, the aggregate total margin for major teaching hospitals was only 3.4 percent; half of teaching hospitals had total margins less than 2.4 percent. By contrast, the aggregate total margin for other teaching hospitals was 5.0 percent, and 4.7 percent for nonteaching hospitals.

Ralph W. Muller, M.A., a MedPAC member and chief executive officer of the University of Pennsylvania Health System, said the recommended IME reduction was tied to the DRG change proposal as a means of offsetting any losses.

"As a loyal AAMC member, I know the AAMC has concerns, but I think this is fair," Muller said. "In the past, IME adjustment changes have been negative, but this one was intended to be budgetarily neutral."

Prior to MedPAC's Jan. 9 meeting on the issue, the AAMC sent a letter to the panel encouraging the retention of the 5.5 percent IME level, arguing it was crucial to teaching hospitals and the execution of their missions, and that it was problematic to make a recommendation linked to a change—the CMS' still-in-development severity-adjusted DRG system—that is not yet fully formed. The AAMC plans to discuss the recommendations with key congressional leaders after MedPAC's report.

The AAMC believes regulatory interpretations of the IME as well as direct graduate medical education (DGME) statutes are eroding Medicare support for the various missions of teaching hospitals, particularly that of education. One recent example of these narrowed interpretations is a so-called "clarification" in CMS methodology which prohibits teaching hospitals from including in their IME resident count any time that a resident spends in grand rounds, conferences, classrooms, and other "didactic" activities, regardless of whether it occurs in the hospital or in a nonhospital setting. The financial impact is a de facto cut in IME payments because all residents spend some time in didactic activities.

These narrowed interpretations have sometimes forced teaching hospital leaders to decide between retaining DGME and IME dollars or providing certain types of training for residents, including learning in ambulatory sites, exposure to clinical research activities, and keeping up with scientific and quality developments and initiatives.

According to MedPAC, the extra funds obtained by the government through reducing the IME adjustment should go toward a quality incentive payment system, whereby it would be redistributed to hospitals meeting certain quality criteria. It is unclear how this system might be structured or administered, but some commissioners suggested it would be a way for teaching hospitals to recover some of the IME cut.

—By Scott Harris

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