At the 1998 Interim Meeting, the RFS Assembly adopted Substitute Resolution 2, which asked that the RFS Governing Council 1) study the feasibility of residency programs obtaining and disclosing revenues and expenditures related to residency training; 2) report to the Assembly at A-99 on current and proposed methodologies of Medicare Graduate Medical Education (GME) funding; and 3) report to the Assembly on the feasibility of developing accounting techniques to report the annualized value of resident services.

The value of patient care provided by residents is currently being discussed within the context of GME reform. We anticipate that the Medicare Payment Advisory Commission (MedPAC) will provide information on this aspect of GME funding by the end of 1999; we will report on this when the information is available. This report will focus on the first two resolved clauses. It will also describe the progress on GME funding reform.

The Medicare program is the primary source of funding for GME, providing 74% of GME funding. The Medicare Trust Fund is expected to become insolvent within the next 15 years. All of the comprehensive Medicare reform proposals have included recommendations for reforming GME funding.

Before the Medicare program was created, GME was funded directly by hospitals. Residents were provided with a small cash stipend, room, board, and laundry and other services. Hospitals would directly and indirectly recover some of these costs through insurance billing. The current system of GME funding began in 1965, when the Medicare program was created. Congress included payments to hospitals for GME funding in Medicare because it recognized a need for trained physicians and other health care professionals to provide health care to the nation, and acknowledged that educational activities in a hospital enhance the quality of patient care.

Medicare pays hospitals for GME through two payment streams – direct GME payments and the Indirect Medical Education Adjustment. 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. The Indirect Medical Education Adjustment 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.

Before 1985, direct GME payments were un-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 calculations since then. In simple terms, APRA was determined by calculating a hospital’s total direct GME costs related to Medicare and dividing that by the number of full-time residents. In the early 1980’s, hospitals used different methods for calculating their direct GME costs. As a consequence, the APRA number varies widely among hospitals. In 1983-84, APRA ranged from $7,500 to $187,500¹.

A hospital’s total Direct GME payments can be determined by multiplying APRA by:

1. An inflation adjuster,
2. The number of current full-time residents, and
3. The proportion of the hospital’s inpatient days used by Medicare patients.

While each of these factors may seem straightforward, they are not. 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.

It would be possible, but challenging, for a resident to calculate the amount of direct GME funding a hospital receives for his or her training. The biggest challenge would be to get accurate data on the hospital’s APRA, proportion of bed-days, number of residents in an initial residency period, number of residents beyond the initial residency period, and the numbers of primary care and non-primary care residents (needed to accurately calculate the inflation adjuster).

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 separate 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%.

Calculating a hospital’s total income due to IMEA is possible but would be tedious. As with direct payments, one big challenge would be to get all the data. The first step would be to get the IRB and DRG payments for all the Medicare cases at the hospital in one fiscal year. Then you would need to calculate the number of cases by DRG, multiply that number by the DRG payment, add up all DRG payments and multiply that final number by the percent add-on.

The Congressional Budget Office and many independent observers have been forecasting the insolvency of the Medicare Trust Fund for several years. Congress has made several cuts to the Medicare program to delay bankruptcy; some of the cuts in GME funding were mentioned above. However, comprehensive Medicare reform has been successfully avoided by both Congress and the President through the adept use of the subject as a "political football". Some progress was made towards Medicare reform in 1997 with the passage of the Balanced Budget Act. That legislation led to the formation of two governmental bodies, the National Bipartisan Commission on the Future of Medicare and the Medicare Payment Advisory Commission (MedPAC), both of which were directed to review Medicare payment policy, including GME funding, and make recommendations. A third governmental body, the Council on Graduate Medical Education (COGME), has been working on GME funding and workforce policies since 1986.

In March 1999, the National Bipartisan Commission on the Future of Medicare disbanded without being able to forward its recommendations to Congress. The Commission was charged with studying and making recommendations regarding the entire Medicare program.

The Commission’s 17 members were appointed by President Clinton and Congressional leaders. Congress required a supermajority (11 out of 17 votes) on the Commission for any proposal to be forwarded to the House of Representatives; the final proposal received 10 votes. Although the proposal failed, the Commission’s chairs, Senator John Breaux (D-La.) and Representative William Thomas (R-Calif.) have stated that they will rewrite the proposal as legislation and introduce it in Congress. The chairs of the Senate Finance Committee and House Ways and Means Committee said that they will hold hearings on the final proposal.

Although the Commission’s proposal for GME funding was not very detailed, it did recommend that DME payments be carved out of the Medicare Trust fund. It recommended that DME either be funded through a separate entitlement program or through multi-year discretionary appropriations. The Commission’s proposal supported continued Medicare funding of the IMEA. However, the proposal also acknowledged the difficulty of accurately calculating how much higher the operating costs are at a teaching hospital.

Prior to the release of the final proposal, Senator Breaux had released more detailed language regarding GME funding. He recommended that DME payments also be made to teaching institutions, such as children’s hospitals, that generally do not receive Medicare GME funding. In addition, he recommended that the methods for calculating IMEA be revisited to ensure appropriate funding.

As mentioned above, the Commission’s chairs have stated that they would introduce these proposals as legislative bills to Congress.

Congress created MedPAC by combining two existing commissions, the Physician Payment Review Commission and the Prospective Payment Assessment Commission. MedPAC is responsible for reporting on all Medicare payment policies, including payments to teaching hospitals for residency training. It is required to submit reports to Congress annually.

MedPAC is a nonpartisan group with 17 members. The members have expertise in economics, health facility management, health plans and integrated delivery systems, reimbursement, medical practice and other aspects of health services. Members were also selected to provide a broad geographic representation, with a balance between representatives from urban and rural areas. Recipients of Medicare benefits (elderly and disabled patients) are also represented. Transcripts of meetings, testimony and reports are available on MedPAC’s web site at www.medpac.gov.

MedPAC has collected testimony from many groups on GME funding and workforce issues including methods of GME funding, payment for teaching physicians and allied health professionals, the role and funding of international medical graduates, and specialty and geographic distribution of physicians and residents. It is scheduled to submit a report on GME funding and workforce planning by August 1999 but is unlikely to meet that schedule. Many of MedPAC’s documents have not been distributed to the public but the group seems to be considering GME funding at a very fundamental level. As mentioned in the first paragraph, MedPAC is considering the value of patient care provided by residents in its deliberations.

Congress created COGME in 1986 and has authorized and funded the group until 2002. COGME is charged with providing an ongoing assessment of trends in the physician workforce, GME funding policies, and other aspects of residency training. COGME also considers funding for undergraduate medical education (medical school). It is required to make recommendations to Congress and the U.S. Department of Health and Human Services (HHS).

COGME also consists of 17 members. They represent primary care physicians, specialty societies, international medical graduates, medical student and resident associations, medical and osteopathic schools, teaching hospitals, health insurers, business, labor, HHS, and the Department of Veterans Affairs.

COGME has issued 14 reports on a range of topics, including the geographic and specialty distribution of physicians, managed care’s influence on GME, international medical graduates, and women and minorities in medicine. Its reports include recommendations on federal policy and actions by teaching hospitals and medical schools to address future physician workforce needs. Reports and meeting information can be found on their web site at www.cogme.gov.

The AMA Council on Medical Education (CME) held an open hearing on GME funding and physician workforce planning in March 1999 to collect testimony from constituents and other groups. CME has compiled its findings in CME Report 10 (A-99), Policy Options for Support of Graduate Medical Education; that report is attached to this one.

The following is a brief summary of the testimony presented by the RFS at the open hearing:

The compensation that teaching physicians receive should support education. HCFA’s rules for compensating physicians who teach and supervise residents need to be revised. The current rules require teaching physicians to be present during a "key portion" of a procedure and require detailed documentation in the medical record. Several hospitals have been audited and found in violation of these rules. These actions threaten teaching physicians who may respond by performing more procedures themselves. This denies residents valuable training.

Full funding for second residencies should be restored. The current rules limit full funding to the number of years for board certification in the first specialty the resident chooses. These rules are shortsighted and overly restrictive. They reward residents who initially choose surgery or other 5-year specialties. The AMA routinely receives calls from physicians who wish to retrain in a different specialty but are told that there is not enough funding for them. We recently received a call from a surgeon in a rural community who could no longer practice surgery because of an injury. When she tried to apply to primary care residency programs, she was dissuaded from applying because the hospital would not receive full funding for her training.

Young physicians need debt relief. Although this is not a Medicare issue, it is a funding issue and a factor that weighs heavily on a physician’s choice of specialty. We must have student loan relief to allow physicians to choose less lucrative primary care specialties. We recognize that there is little or no sympathy for physician debt in Congress, but we need to educate them about the effects of up to $150,000 of student loan debt. We strongly encourage reinstating the full tax deduction on student loan interest and increasing loan forgiveness and repayment programs for physicians working in underserved areas.

In our testimony, we also mentioned other AMA-RFS policies:

• When discussing physician workforce planning, the government and other concerned groups should consider medical school as well as residency training; most proposals focus on residency.
• We support an all-payer system for funding GME and believe that funds should come from a source more stable and less political than the annual appropriations process.
• We support a voucher system that links funding to the individual resident and not the residency program; it gives residents more flexibility for switching programs.
• We agree with the recommendation that applicants to residency programs should not be discriminated against based on their country of medical education.