THE CHANGING HEALTH CARE ENVIRONMENT
Recent trends in the health care delivery system have major implications for how GME programs are operated and how they are financed. The most significant financing changes are associated with the growth of managed systems of care and increased competition within health care markets. Teaching hospitals tend to have higher costs that put them at a competitive disadvantage with community hospitals in competing for managed care contracts. In the past, private payers have subsidized the educational and other missions of teaching -hospitals through higher payments. Competitive pressures have eroded these subsidies for public missions. The competitive pressures are evidenced in a decline in the private payer payment-to-cost ratio for teaching hospitals from 1.25 in 1989 to 1.15 and 1.05, respectively, for academic health centers and other major teaching hospitals by 1998.
Recent changes in Medicare and Medicaid funding for GME have added to the financial pressures on teaching institutions. Medicaid managed care growth has reduced Medicaid revenues and payments for serving a disproportionate share of low income patients that public and other safety net teaching hospitals rely on to support their charity care missions. For major teaching hospitals that serve low-income patients, the reduction in Medicaid revenues has been accompanied by an increase in uncompensated care losses. In addition, the Balanced Budget Act of 1997 reduced Medicaid payments for hospitals serving a disproportionate share of low-income patients $10.4 billion over five years. The BBA provisions affecting the Medicare indirect teaching adjustment and the disproportionate share adjustment were estimated to reduce payments to teaching hospitals $5.6 billion and hospitals serving low income patients by $0.6 billion over five years. Other Medicare provisions, such as reductions in the annual updates for inflation and the implementation of prospective payment systems for hospital outpatient services and post-acute care providers will also affect teaching hospital revenues. The Balanced Budget Refinement Act of 1999 (BBRA) restored an estimated $700 million of the Medicare cuts and added $100 million in direct GME payments, a relatively modest amount compared to the total BBA cuts.
The issue of whether Medicare's support should continue at its current levels was debated during consideration of the BBA. The debate centered on concerns over the solvency of the Medicare Part A trust fund and the impact of continued Medicare spending cuts in the face of a competitive health care market. The uncertainties of continued reliance on Medicare, Medicaid and private pay revenues to fund GME have reinforced the conclusions held by COGME and others that major changes are needed in the way GME is financed. The Council's 14th Report (1999b) reiterated COGME's long standing recommendation for an all-payer financing system that would spread the costs of preparing a well-qualified physician workforce equitably across all payers. COGME believes there continues to be value in exploring alternative financing policies that would enhance support for training an appropriate number and balance of physicians who are well-equipped to provide high quality, effective and efficient care.
CURRENT FINANCING OF GRADUATE MEDICAL EDUCATION
As noted above, GME is currently funded through a variety of mechanisms. Medicare and, in most States, Medicaid make explicit payments to teaching hospitals for the costs of GME. An understanding of the GME payment policies used by these programs is fundamental to any discussion regarding how all-payer GME funds should be allocated.
MEDICARE PAYMENTS
In FY2000, Medicare will pay an estimated $2.7 billion (including $200 million for managed care enrollees) in direct GME payments and $5.1 billion (including about $700 million for managed care enrollees) in indirect payments. Payments are linked to services provided to Medicare beneficiaries. There are three overarching concerns that suggest broader based funding is preferable to relying heavily on Medicare payments for patient care services as the only Federal financing mechanism. These issues are:
- Restricting payments to teaching hospitals for educational costs impedes the development of residency programs in non-hospital ambulatory and managed care settings.
- Linking educational payments to services furnished to Medicare patients concentrates Federal support on providers with high Medicare utilization and offers little support to providers with low Medicare utilization such as children's hospitals and Federally qualified health centers (FQHCs). It provides little support for preventive medicine and other residency programs that do not involve direct patient care services.
- Paying for educational costs through patient care payments alone is not an effective mechanism for achieving specific workforce priorities such as improving the specialty and geographic distribution of the physician workforce.
Recent changes in national policy have begun to address these concerns, but COGME believes further changes are in order.
Direct GME Payments
Medicare's payments for direct GME costs are based on the number of residents at the hospital (and ambulatory settings if the hospital assumes substantially all of the training costs), a hospital-specific per resident amount based on 1984 costs updated for inflation, and Medicare's share of hospital inpatient days. Medicare's average per resident payment was $22,350 in FY1997 . Until the BBA, the Medicare law authorized direct GME payments only to hospitals. Beginning January 1, 1998, Medicare may make direct GME payments to other provider entities. The hospital-specific per resident amounts vary widely based on historical accounting practices and financial arrangements between the program sponsor and the teaching sites. The differences do not appear to be related to factors such as cost of living or the quality of the residency programs. The Balanced Budget Refinement Act of 1999 made a modest change to reduce disparities in the Medicare per resident amounts. The provision raises the minimum payment to 70 percent of a national wage-adjusted per resident amount. The annual inflation updates for per resident amounts that are above 140 percent of the wage-adjusted national average are reduced for FY2001-FY2005.
IME Payments
Medicare pays acute care hospitals for inpatient services based on a prospectively determined rate that takes into account average resources required to treat Medicare beneficiaries in the same diagnosis-related group. Medicare makes an indirect teaching adjustment to the standard rate to pay for additional patient care costs attributable to teaching activity that are not captured as direct GME costs. Although based on the hospital's ratio of residents-to-beds, the adjustment also compensates the hospital for higher patient care costs typically associated with other activities provided in conjunction with GME, i.e., clinical research, specialized care for complex patients, and charity care. However, the level of involvement in the other public missions varies across teaching hospitals and teaching intensity is not a good measure to use to support these other public missions.
IME payments are about $1.5 billion higher than the costs attributable to teaching intensity alone. The difference between current IME payment levels and the analytically justified levels represents amounts that could be redirected to support educational activities to increase community-based training capacity or to increase support for uncompensated care. It is important that refinements in the IME payment methodology not adversely affect hospitals that provide charity care. Major teaching hospitals with high uncompensated care costs rely on IME payments to support their charity care. Any refinements in the IME allocation methodology that reduces payments to these hospitals should be offset by higher support for uncompensated care until specific funding for such services is provided.
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