Medicare now pays hospitals for GME through two payment streams – direct GME payments and the Indirect Medical Education Adjustment (IMEA).

Direct payments compensate a teaching hospital for overhead costs related to GME, and salaries and fringe benefits for residents, teaching physicians and GME administrative staff.

Before 1985, direct GME payments were not capitated, and could be increased if a hospital’s direct GME costs increased. Since then, the payments have been capitated and are now linked to a "per-resident"amount. The average per-resident amount (APRA) was calculated in 1985 and has been adjusted for inflation in all subsequent calculations.

A hospital’s total direct GME payments can be determined by multiplying APRA by: an inflation adjuster, the number of current full-time residents, and the proportion of the hospital’s inpatient days used by Medicare patients. These factors are not as straightforward as they initially may appear. As Congress has looked for ways to save money from the Medicare program, it has modified this formula and the factors in the formula. For the years 1994 and 1995, the inflation adjuster was "frozen" for all non-primary care specialties. As a result, there are now two inflation adjusters – one for primary care specialties and another for other specialties.

A second important change relates to the number of years a resident has been in training. When a resident is in his/her initial residency period, which is defined as the minimum number of years required for initial board eligibility in the first specialty the resident entered (maximum of five years) the resident is counted as 1.0 Full Time Equivalent (FTE). After the initial residency period, the resident is counted as a .5 FTE, reducing hospital’s direct reimbursement for a resident by 50%. Medicare makes an exception for combined residencies involving primary care specialties such as internal medicine, pediatrics, family practice, and preventive medicine.

Finally, the formula for calculating the proportion of Medicare bed-days to total bed-days needs special considerations as well. Patients in Medicare managed care plans can be counted in the total number of bed-days but not in the number of Medicare bed-days. As more Medicare patients enroll in managed care plans, the proportion of Medicare bed-days is reduced, and therefore, the total direct reimbursement is reduced.

The Indirect Medical Education Adjustment (IMEA) compensates teaching hospitals for higher operating costs associated with the presence of a residency program such as more complicated cases, additional tests ordered by residents as part of the learning process and reduced patient care productivity by all staff members.

Calculating the Indirect Medical Education Adjustment (IMEA) is more complicated than calculating the direct payments because the factors in the calculation are more complicated. This report will not explain all the factors that go into IMEA calculations; it will attempt to provide a general understanding of the calculation methodology. IMEA formulas are based on statistical estimates because indirect costs cannot be quantified accurately. For example, it is difficult to quantify how much patient care productivity is lost while hospital staff are engaged in supporting the training program.

The following methodology is only used for hospital departments that receive Medicare payments. If a hospital or department with a residency program is exempt from the Medicare program or has limited involvement in caring for Medicare beneficiaries (e.g., pediatric, rehabilitation, or psychiatric hospitals or hospital departments), the methodology for calculating IME payments is done separately from the Medicare program.

IMEA is a percentage add-on to Medicare payments for patient care. Medicare classifies patients into Diagnosis-Related Groups (DRGs) and sets a standard amount for all patients in a particular DRG. The standard DRG payment is then adjusted for each hospital by considering how overhead, wages and types of cases vary based on the hospital’s location (urban hospitals tend to have higher costs and more complicated cases). These calculations are done for both teaching and non-teaching hospitals.

As mentioned above, IMEA is calculated by adding a percentage to each DRG payment at a hospital. The first step in calculating this percent add-on is determining the hospital’s ratio of individual residents-to- beds (IRB). When counting the number of residents, a hospital can only count their full-time equivalent residents who are working in the hospital’s inpatient or outpatient department. In some cases, residents assigned to physicians’ clinics can be counted in this ratio. When counting the number of beds, a hospital must exclude beds in Medicare-exempt departments but include neonatal intensive care and intermediate care beds.

Once the IRB is determined, the percent add-on can be calculated. In 1996, the formula was Percent Add-on = 1.89*[(1+IRB)0.405 – 1]. The IMEA for each case can then be calculated by multiplying this factor by the DRG payment. This formula gave hospitals an average add-on of 7.65% for every 10% increase in the IRB. In the Balanced Budget Act of 1997, Congress modified the formula to cut Medicare spending. The current average add-on is 6.5% for every 10% increase in the IRB; by 2001, it will be 5.5%.

The Balanced Budget Act of 1997 reduced the level of the adjustment, but maintained the unitary concept of the IMEA. In 1997, teaching institutions received $4.6 billion from the IMEA.