Consolidate and Reduce Federal Payments for Graduate Medical Education Costs at Teaching Hospitals

Under Medicare's prospective payment system for inpatient medical services, hospitals with teaching programs receive additional funds for costs related to graduate medical education (GME). One component of that additional funding, direct graduate medical education (DGME), covers a portion of a teaching hospital's costs for compensation of physicians serving as medical residents and for institutional overhead. DGME payments are based on a hospital's 1984 costs per resident (indexed for changes in consumer prices), the number of residents, and Medicare's share of total inpatient days at that hospital. The other component, indirect medical education (IME), is intended to cover teaching-related costs that are not attributable either to residents' compensation or to other direct costs of running a residency program. Examples of IME costs are the added demands placed on staff as a result of teaching activities and the greater number of tests and procedures ordered by residents as part of the learning and teaching process. Teaching hospitals also tend to treat a larger proportion of severely ill patients, which raises costs. Under current law, for every increase of 0.1 in the ratio of full-time residents to the number of beds, the IME adjustment provides teaching hospitals with about 5.5 percent more in payments. However, the Medicare Payment Advisory Commission (MedPAC) has consistently found that the IME calculation overstates the effect of teaching status on incurred costs. In its most recent (March 2010) report to the Congress on Medicare's payment policy, MedPAC estimates that an IME adjustment of about 2 percent more closely reflects the indirect costs that teaching hospitals actually incur.

Teaching hospitals also receive GME payments from both the federal government and the states through the Medicaid program. The Congressional Budget Office estimates that total mandatory federal spending for hospital-based GME in 2010 was about $10 billion--$9.5 billion through Medicare and $500 million through Medicaid.

This option would consolidate all mandatory federal spending for GME into a grant program for teaching hospitals. Total funds available for distribution would be based on the 2011 aggregate payments for DGME and Medicaid GME plus the 2011 aggregate payments for IME reduced to reflect a 2.2 percent IME adjustment. Total funding for the grant program would grow with inflation as measured by the consumer price index for all urban consumers minus 1 percentage point per year. Payments would be apportioned according to the number of residents at a hospital and the portion of the hospital's inpatient days accounted for by Medicare and Medicaid patients.

In CBO's estimation, this option would save approximately $25 billion over the 2012-2016 period and roughly $69 billion over the 2012-2021 period. By 2021, the annual savings would represent about 60 percent of federal spending for GME projected under current law.

If the discretionary funds for graduate medical training currently provided by the Health Resources and Services Administration of the Department of Health and Human Services were also included in the mandatory grant pool, total available funding would rise by an estimated $300 million in 2013. If that component of the funding was also automatically indexed to inflation (instead of remaining subject to annual appropriations), the option would decrease mandatory spending by about $66 billion over the 2012-2021 period.

An argument for reducing the subsidy for GME is that federal payments under current law exceed hospitals' actual teaching costs. As MedPAC's analysis suggests, a smaller subsidy would create savings for the federal budget without unduly affecting hospitals' teaching activities. A smaller subsidy would also remove an incentive for hospitals to have a greater number of residents than may be necessary. If hospitals responded to the reduction in the subsidy by lowering residents' compensation, residents would bear more of the cost of their medical training, which might deter some people from entering the medical profession. However, medical training enables individuals to earn a significantly higher income in the future, and market incentives appear to be sufficient to encourage people to become physicians.

An argument against this option is that reducing the federal subsidy for GME could lead some teaching hospitals to train fewer residents or devote less time and fewer resources to beneficial educational activities. Also, to the

extent that some teaching hospitals use a portion of their additional payments to fund care for uninsured individuals, decreasing those payments could reduce the number of patients that hospitals treat or lower the quality of care that those hospitals provide. Another argument against the option is that states could lose some discretion to direct Medicaid GME payments to hospitals because the federal government would be administering the grant program. Finally, even if payments were initially equal to hospitals' costs, the payments would grow more slowly than inflation and thus might not keep pace with increases in costs.