AAMC Reporter: February 2009

Overview: Medicare Direct Graduate and Indirect Medical Education Payments

How is Medicare involved in financing graduate medical education (GME) and the other missions of teaching hospitals?

The Medicare program is the largest explicit financial contributor to GME through its payments to teaching hospitals. Because teaching hospitals incur significant costs as a result of their educational and other missions, lawmakers devised two Medicare methods to assist with their added financial burden: direct graduate medical education (DGME) and indirect medical education (IME) payments. In fiscal year 2008, total DGME and IME payments were approximately $2.7 billion and $5.7 billion, respectively.

The DGME payment helps compensate teaching hospitals for costs directly related to resident physicians' education, such as trainee stipends, supervising physicians' costs and benefits, and administrative costs associated with running GME programs. Medicare pays for its share of teaching hospitals' direct costs; the remaining DGME expenses are financed by other sources, such as state Medicaid programs, philanthropies, and hospital and faculty practice plan revenues.

As part of the Medicare prospective payment system developed in the early 1980s, lawmakers developed the concept of IME payments to help offset the additional Medicare patient care costs that teaching hospitals incur. In previous years, researchers had found that teaching hospitals had higher costs than their non-teaching counterparts, even after removing direct GME costs from the equation. Some indirect costs stem from the fact that, on average, teaching hospitals treat more severely ill patients who require specialized care. In addition, complex, expensive medical research takes place at these training centers. Teaching hospitals must pay for occasionally used "standby" services, such as burn units, and incur expenses from treating patients transferred from other facilities and those with rare, expensive conditions. As entities where education occurs, teaching hospitals must contend with the slowdowns that result from the time involved in training residents and other health professional students. Unlike DGME costs, IME costs are subsumed in inpatient care costs that cannot be quantified specifically but only estimated through statistical analysis. As part of this work, investigators found that an increase in a hospital's "teaching intensity," measured as a ratio of interns/residents to hospital beds (IRB), was associated with higher patient care costs at teaching hospitals.

What determines how much DGME and IME funding teaching hospitals receive?

DGME and IME payments are determined by very different payment methodologies, although both rely partly on the number of residents the hospital trains. DGME payments are based on a "per-resident amount" (PRA), which reflects a hospital's direct GME costs per resident in 1984 updated annually by an inflation factor. This amount is then multiplied by the number of residents (up to a certain number) and the hospital's ratio of Medicare inpatient days (the period of time a Medicare patient is in the hospital) to the number of total inpatient days for all patients in the hospital. In general, DGME payments for residents training in subspecialties are half what is paid for other residents. PRAs for primary care residents are slightly higher than for residents training in other specialties because the PRAs for the latter group were not updated for inflation in 1994 and 1995. Hospitals receive payments from the Medicare program periodically, often every two weeks.

By contrast, the IME payment is a percentage add-on that is applied to every Medicare "per case" payment. The add-on is based on a formula that incorporates a policy adjustment set by Congress and each hospital's IRB ratio. A short-hand way of thinking about the current IME payment formula is that teaching hospitals receive an approximate 5.5 percent increase in Medicare per case payments for every 10 residents per 100 inpatient beds.

Over time, Congress has periodically reduced what is now the 5.5 percentage adjustment. This action has resulted in IME payment cuts. The adjustment has been reduced by nearly 30 percent since 1997.

What is the Medicare "freeze" on resident counts?

In recent years, a significant change related to IME and DGME payment methodologies has been the imposition of a "cap" on the number of residents that can be counted by teaching hospitals for purposes of receiving Medicare IME and DGME payments. The Balanced Budget Act of 1997 imposed a freeze on resident counts based on the number of residents hospitals had reported to Medicare in 1996. In general, teaching hospitals receive no additional IME or DGME payments for the number of residents they train that exceeds the cap. Eliminating or modifying the resident caps is an important legislative priority for the AAMC because of evidence projecting a physician workforce shortage, and medical school initiatives that are increasing the number of graduates who will be entering residency programs.

How could the new presidential administration change the course of GME payments?

President Obama has expressed a strong interest in health care reform in general and strengthening the Medicare program. Among his leadership nominations is Peter Orszag, Ph.D., for head of the Office of Management and Budget. In his job as director of the Congressional Budget Office, Orszag has been outspoken about controlling rising health care costs and Medicare expenditures, which could drive administration policies.

—By Elissa Fuchs