Education
FYI: Medicare Payments for Medical Education
Research Report
Craig Caplan, AARP Public Policy Institute
August 1998
In addition to paying for medical services provided directly to beneficiaries, Medicare makes two types of special payments to support training programs in teaching hospitals for physicians, nurses, and other allied health professionals. This FYI examines issues related to Medicare's payments for direct graduate medical education (GME) and indirect medical education (IME).
- What is the difference between Medicare's direct (GME) and indirect (IME) payments for medical education? GME payments are made to teaching hospitals to help pay for the direct costs of training physicians (i.e., salaries of medical residents and faculty, and hospital overhead expenses). In contrast, IME payments capture the indirect costs that teaching hospitals incur in caring for patients, such as the costs associated with offering a broader range of services; using more intensive treatments; treating sicker patients; and employing a costlier staff mix.
- Why does Medicare make these payments to support graduate medical education? Teaching hospitals provide valuable services to both Medicare beneficiaries and non-beneficiaries. In addition to training physicians and other health professionals, teaching hospitals are central to evolving medical research, developing technological innovations, and caring for patients with low incomes. Medicare's payments to teaching hospitals were designed to create incentives for them to serve Medicare beneficiaries, and to support the training of physicians to meet beneficiaries' medical needs. They were also intended to enhance the financial viability of those institutions.
- How does Medicare make GME and IME payments? These payments are made to teaching hospitals primarily through Part A of Medicare, which covers inpatient hospital care and some post-hospital services. Medicare makes GME payments to each teaching hospital based on the number and specialties of the residents it trains, its historical costs, and its volume of Medicare patients. Medicare's IME payments appear as special adjustments in the program's prospective payment system (PPS), the method Medicare uses to reimburse hospitals for inpatient services. IME payment levels are determined by the number of medical residents per hospital bed, a proxy used to measure the intensity of a hospital's teaching activities.
- How much does Medicare spend for GME and IME? In FY 1997, GME payments totaled $2.2 billion for training physicians, with an additional $0.3 billion for training nurses and other allied professionals. IME payments totaled another $4.6 billion. GME and IME payments accounted for about 3% of total Medicare costs in FY 1997.
- What have been some criticisms of the current GME/IME payment system? How did the Balanced Budget Act of 1997 (BBA) begin to address these concerns? Analysts have identified at least three such criticisms:
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Criticism #1: Because teaching hospitals benefit the entire health care system, not just Medicare beneficiaries, Medicare is paying too high a proportion of the graduate medical education costs. Some analysts believe that policymakers should remove GME/IME payments from Medicare, currently the largest source of federal support for graduate medical education. They propose that these funds come from a broader revenue source, such as federal general revenues or an independent trust fund that includes money from public and private sources. Opponents fear that moving funding for graduate medical education into general revenues could cause these payments to be targets for greater budget cuts, which could result in some teaching hospitals reducing services or closing.
BBA Changes-Criticism #1: The BBA requires the Medicare Payment Advisory Commission (MedPAC) to provide extensive recommendations on long-term payment policies by August 1999; MedPAC's report is expected to address broad questions about Medicare's appropriate role in financing graduate medical education.
Criticism #2: Medicare's teaching hospital payment system has contributed to an oversupply of physicians, particularly specialists, by creating economic incentives for hospitals to increase the size of their training programs.
BBA Changes-Criticism #2: The BBA placed caps on the total number of medical residents reimbursed by Medicare, and established a controversial provision in which teaching hospitals are offered incentive payments to voluntarily reduce the number of residents they train. The BBA also enacted general payment reductions in the IME payment adjustment, to be phased in by FY 2001.
Criticism #3: The graduate medical education payment system has become less stable with the growth of managed care. As the health care market has become more competitive, health maintenance organizations (HMOs) and other managed care plans have tried to direct their patients away from higher-cost teaching hospitals to lower-cost, non-teaching institutions. Teaching hospitals have also been adversely affected by the way that the Medicare program pays for beneficiaries enrolled in managed care plans. Rather than paying hospitals directly for Medicare managed care patients, Medicare implicitly includes GME/IME payments within the formula it uses to pay Medicare HMOs for their Medicare enrollees. However, critics have contended that these extra payments do not necessarily reach teaching hospitals because of the relative infrequency with which some Medicare managed care plans use these hospitals.
BBA Changes-Criticism #3: The BBA phases out Medicare payments for graduate medical education within the formula Medicare uses to pay managed care plans; instead, GME/IME payments are to be made directly to teaching hospitals that care for Medicare managed care patients. The BBA did not address the more general concern about the im-pact on teaching hospitals of low utilization of teaching hospitals by managed care plans.
Sources
Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1999-2008, January 1998;
Congressional Research Service, Medicare Provisions in the Balanced Budget Act of 1997 (BBA 97, P.L. 105-33), Aug. 18, 1997;
Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy-Vol. I, Washington, DC, March 1998; Prospective Payment Assessment Commission, Report and Recommendations to the Congress, Washington, DC, 1997;
Reuter, James A., The Balanced Budget Act of 1997: Implications for Graduate Medical Education, The Commonwealth Fund: New York, October 1997.
Prepared by Craig Caplan, AARP Public Policy Institute
August 1998
©1998 AARP
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Pub ID: FYI