Section 131: A Lifeline on Its Last Breath

Summary

This analysis examines the hospitals that have elected to participate in graduate medical education (GME) reimbursement reset policies under Section 131 of the Consolidated Appropriations Act (CAA), 2021. Section 131 temporarily corrected an unintentional flaw in Medicare reimbursement policy that penalized hospitals when they inadvertently triggered permanent funding caps. Findings show that in the early years of the program, 23 out of 219 eligible hospitals started new GME programs. Nearly 90% of eligible hospitals were not yet able to utilize the program’s intended benefits within the narrow eligibility window, highlighting a policy opportunity for congressional action to extend the legislation before its Dec. 26, 2025, expiration.

Background

The expiration of Section 131 of the CAA, 2021, may jeopardize the ability for many hospitals, including those in rural and underserved areas, to have an opportunity to create or expand GME programs.1 Section 131 allowed certain hospitals to increase their GME funding by resetting low full-time equivalent (FTE) Medicare GME caps and low or zero per resident amounts (PRAs), correcting an unintentional Medicare program flaw that had penalized hospitals for accidentally triggering a funding cap. Historically, rural hospitals and hospitals in traditionally underserved areas were disproportionately impacted by this issue as they often accepted resident rotators as a physician recruitment strategy, an approach that inadvertently triggered low Medicare payment caps, and qualified them to reset low FTE caps and/or PRA under Section 131.2

Unfortunately, Section 131 has only a five-year eligibility window (Dec. 27, 2020, to Dec. 26, 2025) which does not provide all eligible hospitals with adequate time to create new GME programs.1 It can take years for hospitals that qualify for Section 131 to reset PRAs and FTE caps due to the complicated labyrinth of statutory and regulatory policies surrounding new program development and Medicare GME payment.3 Extending or making permanent the Medicare GME provisions in Section 131 would enable eligible hospitals to correct mistakes made in the past and open their ability to operate GME programs.

Nationally, it is projected that there will be a deficit of 86,000 physicians by 2036.4 Because physicians often practice near where they train, limiting GME development in a small community hospital can negatively impact the physician workforce in areas with acute access to care challenges. This analysis focuses on the significant legislative changes provided by Section 131, specifically, the FTE cap and PRA resets that are available between Dec. 27, 2020, and Dec. 26, 2025. It also offers a snapshot of Section 131 eligibility and use to measure the impact of the expiring provisions and provides recommendations for future policy development.

Medicare GME Reimbursement Fundamentals

The number of residency positions that Medicare will reimburse, referred to as FTE “slots,” is capped, generally based on the number of residents training in a hospital in 1996.5 Only hospitals with an FTE cap may receive Medicare GME reimbursement. A hospital that did not train residents in 1996 and does not have an FTE resident cap can establish an FTE cap through a five-year cap-building period.6 The Centers for Medicare & Medicaid Services (CMS) determines an FTE cap based on the number of FTE residents trained at the hospital in new residency programs at the end of the fifth training year.

Many institutions that took a small number of resident rotators did not anticipate the implications to permanent reimbursement determinations, such as a PRA or FTE cap.7 The defect has impacted small and rural hospitals, which often served as training sites for residents from larger academic medical centers, inadvertently setting low Medicare reimbursements.

Reset Policies Under Section 131 of the Consolidated Appropriations Act, 2021

Section 131 has two distinct “reset policies” that are commonly conflated or confused. One policy allows certain hospitals to undergo the process for a PRA reset and another policy allows certain hospitals to reset its established FTE caps. While these are two distinct policies, a hospital may undergo both an FTE cap and PRA reset. Within the PRA and FTE cap resets are two sets of hospitals that qualify for resets, based on when the PRA or FTE cap was set. Both policies are of equal importance, but with time and data constraints, this analysis evaluated only FTE cap resets. The following discussion explains both the PRA and FTE cap reset policies.

The resets apply to two categories of hospitals, those that established a PRA or FTE cap based on less than 1.0 FTE prior to Oct. 1, 1997, and hospitals that established a PRA or FTE cap based on 3.0 or fewer FTEs on or after Oct. 1, 1997, and before Dec. 27, 2020, (the date of enactment of the CAA, 2021). These are referred to in this paper as Category A (Cat A) hospitals and Category B (Cat B) hospitals, respectively. Cat A hospitals are eligible to reset their respective PRA or FTE caps when they train at least 1.0 resident FTE, and Cat B hospitals are eligible when they train greater than 3.0 FTEs.

Table 1 delineates small differences between PRA and FTE cap reset eligibility. Hospitals that are Cat A or Cat B trigger a PRA reset when they train the requisite number of FTEs in a cost reporting period that begins on or after Dec. 27, 2020, and before Dec. 26, 2025. The cost reporting period in which the hospital trains the requisite FTEs is treated as the new PRA base year. The PRA will be adjusted to the lower of either the actual costs incurred by the institution in the new base year, or the geographic average of PRAs in the hospital’s geographic region.9

A Cat A or Cat B hospital will trigger an FTE cap reset when it trains the requisite number of FTEs in a new residency training program.10 The CMS has specific rules for what constitutes a new medical residency training program, so the hospital’s ability to reset FTE caps has more contingencies than a PRA reset. A hospital’s adjusted cap is based on the number of new program FTEs at the hospital at the end of the fifth training year when residents in a new program first begin training at the hospital.11 The new FTE cap is added to the current FTE cap, ensuring that a hospital does not lose the previously established FTE cap with a reset.

Section 131’s Prospective Policy: 1.0 FTE Floor and Reporting Requirements

Before the CAA, 2021, the CMS’ policy did not place a minimum floor on the number of residents required to establish a PRA. Even a fraction of an FTE, such as one or two rotating residents, would result in the CMS assigning the hospital a PRA. Similarly, any number of new program residents would initiate the hospital's cap building window. Hospitals that did not anticipate this risk often ended up with low PRAs, or FTE counts, limiting their overall Medicare GME reimbursement.

In addition to PRA and FTE cap resets, Section 131 has one prospective policy meant to provide hospitals with a buffer before setting a PRA or FTE cap. Nonteaching hospitals that have not previously hosted resident rotators will trigger a PRA when it participates in an affiliated group agreement or when it trains at least 1.0 FTE. A hospital will trigger the cap building window when at least 1.0 new program resident FTEs are captured on the cost report. This policy is meant to protect hospitals from inadvertently setting artificially low PRA or FTE caps. Section 131 also requires hospitals to report any residency training on the CMS cost report that amounts to a cumulative 1.0 FTE or more.

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Study Methodology

Determining Cat A and Cat B hospital eligibility and reset use for FTE caps

For Cat A and Cat B determination, we used cost report data from fiscal year (FY) 1995 to FY 2020 available on the CMS Section 131 website.12 To examine whether these hospitals started new residency programs after enactment date, we used publicly available CMS cost reports from FY 2020 to FY 2023, including partial FY 2024 reports from the most recent July 2025 cost report release.13 We identified hospitals that met Table 1 criteria for Section 131 eligibility based on the number and timing of reported FTEs. To limit our analysis to only hospitals that are eligible to use Section 131, we excluded (a) hospitals that were terminated by December 2024 and (b) hospitals that serve as nonprovider sites, such as Critical Access Hospitals.

We identified cap resets using either of two criteria for Cat A and B hospitals during the eligibility window starting Dec. 27, 2020: (1) reporting new residents in a cost reporting period that overlapped with the eligibility window, or (2) evidence of being a site for a new residency program that began during the eligibility window. For the latter criterion, we matched hospital site by name and address to new accredited programs according to publicly available data from the Accreditation Council on Graduate Medical Education.

We stratified our findings by hospital type in multiple categories: (1) Cat A or B status, (2) rurality according to the Federal Office of Rural Health Policy (2024),13 and (3) Sole Community Hospital status according to the provider type in the most recent FY 2026 Inpatient Prospective Payment System Final Rule Impact File.

This study has limitations. Cost reports are submitted on a lagged basis and not all data for the full qualifying period through Dec. 26, 2025, is currently available. A full picture of Section 131 results might not be available until 2027 or later. The Section 131 data we used from the CMS website had limitations that are worth noting. First, we included CMS hospital cost reports with reporting periods of at least nine months to ensure representativeness of annual operations and to maintain comparability across hospitals. Hospitals with cost report periods fewer than nine months were excluded from the analysis. Second, the CMS posted the Section 131 data from the Sept. 30, 2021, quarterly update; however, the CMS allowed a window of opportunity to dispute PRAs or resident caps, with a deadline of Nov. 18, 2022.15 Some hospitals may have submitted disputes during that later time period and subsequently qualified as Cat A or Cat B hospital, making them eligible for PRA or cap reset. As a result, our current analysis may not fully capture hospitals that successfully pursued these adjustments.

Third, to account for potential errors or fluctuations in reporting, we excluded for eligibility identification only hospitals that twice reported greater than 3.0 FTEs, rather than reported greater than 3.0 only once, a “first and second maximum” approach to determine Cat B eligibility. For example, if a hospital reported a DGME or IME FTE count or cap of more than 3.0 in one or more years, on or after Oct. 1, 1997, and before Dec. 27, 2020, (considering the first maximum during eligibility period) and also reported a value of less than or equal to 3.0 in another year within that period (the second maximum), we flagged the second maximum and categorized the hospital as Cat B.

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Results

Table 2 describes the 219 eligible hospitals. Table 3 shows the 23 hospitals, mostly Cat B hospitals, that reset FTE caps during the Section 131 eligibility window for which we have data. Only 10.5% of the eligible hospitals have reset FTE caps. Of the total 23 hospitals with new programs, 13 reported at least a portion of their new FTEs by the end of FY 2021, increasing incrementally each fiscal year thereafter. Sole Community Hospitals constitute 14.2% (n=31) of the total eligible hospitals, and four started new programs. Rural hospitals made up 20.1% of the total eligible hospitals. Out of 44 eligible rural hospitals,14 only two started new programs making them eligible to reset hospital FTE caps under Section 131.

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Discussion

Section 131 has enabled providers to course correct and reset artificially low PRAs and FTE counts that otherwise could have precluded them from starting residency programs.

Section 131 Success Story

Two of the hospitals that have undertaken an FTE reset are located in rural areas and were able to reset their FTE caps, which has enabled new GME development. Watauga Medical Center, a Sole Community Hospital in Boone, North Carolina, had historically hosted resident rotators to attract physicians to the rural community and inadvertently triggered a low PRA and FTE cap, leading to its Cat B status.

In 2019, this rural hospital received a $750,000 grant through the Health Resources and Services Administration Rural Residency Planning and Development (RRPD) program to establish a new rural residency. The RRPD start-up grant and simultaneous technical assistance helped facilitate the development of the Mountain Area Health Education Center Rural Boone Family Medicine residency that began training residents in 2021. Section 131 unlocked necessary funding for this rural hospital to train a complement of 18 resident physicians, and since opening, has produced eight graduates with seven still practicing in rural North Carolina.

Our results show that for most hospitals, the five-year window proved to be challenging for a reset opportunity, as 89.5% of eligible hospitals were not able to start new programs or host the requisite number of resident rotators to qualify for a reset in the first three years of the program. If Congress were to extend this program, these 196 hospitals, 42 of which are in rural locations, may become eligible to remedy their Medicare financing and participate in GME.

There is a significant allocation of resources necessary to facilitate a reset, which includes the development of new infrastructures within the hospital to either attract residency programs as a new rotation site and capture the associated costs for a PRA reset or start new residency programs for an FTE cap reset. Residents are trainees and require supervision by attending physicians that must also care for patients. Attending physicians are expected to be the primary educators for residents, preparing them for future independent practice. Hospitals, especially in more resource-limited settings, spend multiple years planning for an accredited residency program and developing the required infrastructure.3 Implementing these reset opportunities requires buy-in from the institution, partnership with multiple training sites, curriculum design to meet community and learner needs, recruitment of faculty and staff, attainment of accreditation, matriculation of residents, as well as in-depth financial planning and reporting.

Even with the potential for increased reimbursement from Section 131, institutions often make significant financial investments to adequately capture DGME costs or launch new training programs. For instance, a 2018 U.S. Government Accountability Office report estimated the cost for starting new residency programs at a nonteaching hospital could be anywhere between $2 million and $8 million.15 In the case of Watauga Medical Center, a RRPD federal start-up grant helped offset the costs and expedite the development phase. Importantly, the RRPD program has awarded 103 grants to create new rural residencies in 36 states and one territory.16 As of October 2025, the program has established 62 accredited residencies with over 750 approved new resident positions in rural areas, with 40 more rural programs in development.

Legislation extending or making permanent Section 131 could build on its success in addressing the long-standing gap in the Medicare program, enabling rural and other hospitals to expand resident training. Congress enacted this legislation in response to deficiencies in the policies that led to artificially low PRAs and FTE caps. These policies have restricted GME development across the country and have impacted the communities where these hospitals are located. An extension would unlock the potential for the 196 hospitals that have not yet launched new programs, a renewed opportunity to establish training pathways in areas that need physicians. While five years may have initially seemed sufficient when legislation was drafted, the reality of building infrastructure and capacity to train residents is a multiyear process, especially for hospitals without a history of residency training.

Beyond extension of the Section 131 sunset, consideration could be given to other policy proposals to course-correct future funding for hospitals that have not in fact housed GME programs. A comprehensive review of this policy may yield more resident positions in rural and underserved communities. For instance, allowing any hospital that has not hosted resident rotators in the past 10 years the ability to reset a PRA or FTE cap could prospectively eliminate the need for programs to undergo the hasty and burdensome ramp-up necessary for Section 131. A more flexible policy could allow hospitals to strategically plan resets for those institutions, irrespective of meeting the Cat A or Cat B criteria.

In conclusion, extending or removing the reset window would enable many more institutions to engage in training now and in the future. There is value in reviewing available data to better understand the population of hospitals affected by these low PRAs and FTE counts. A preliminary review of the hospitals that have triggered a reset gives policymakers an idea of utility of the program and illustrates the potential impact of keeping this policy in place beyond Dec. 26, 2025.

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Acknowledgements

The study team would like to acknowledge Chris Francazio, MBA, of PKFHealth for his support in study design and Molly Benedum, MD, with Mountain Area Health Education Center Boone Rural Family Medicine Residency for sharing her case example.

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