GME is currently funded through a myriad of sources, including payments from Medicare, commercial insurers and managed care plans, state and local appropriations, patient care revenues, foundation and federal government grants, the Veterans Health Administration, and the Department of Defense8. Individual teaching hospitals therefore receive a majority of their GME funding from patient care revenues9.
Private Insurers
Private insurance payers traditionally pay higher rates to teaching institutions for physician and hospital services; portions of these additional payments subsidize GME as well as charity care provided by the teaching institution9. The higher rates may result from a number of factors, including a perception that teaching hospitals provide a more valuable service than non-teaching hospitals, the constraint on private payers that occurs when teaching hospitals are the sole providers of specific services, and the natural monopoly that may occur in certain markets because of the expense of investing in the necessary infrastructure10. Payments from private insurers are therefore difficult to quantify, since payments allocated toward GME are neither specifically negotiated nor separately assigned. Nevertheless, a 2006 report estimated that annual GME contributions from private insurers totaled $7.2 billion in 200310. This estimate was derived by combining a previously published estimate that teaching hospitals’ costs for their education-related mission totaled $16.8 billion in 2003 with another estimate (based on an American Hospital Association survey) that private insurers paid 43% of teaching hospitals’ costs in the same year (i.e., 43% of $16.8 billion equals $7.2 billion)10,11.
The Veterans Health Administration and the Department of Defense
The Veterans Health Administration funds the training of approximately 8900 residents in all fields, or an estimated 10% of all residency positions in the United States9. In addition, the Department of Defense funds the GME of over 3000 trainees in its military hospitals across the United States12. Combined, this represented approximately 15% of all residents in 20009.
State Funding
State funding of GME through Medicaid contributions has decreased over the past few years. In 2005, forty-seven states provided $3.78 billion in support for GME through their respective Medicaid programs, but by 2009 only forty-one states provided $3.18 billion of support13. Furthermore, nine of these forty-one states had considered ending payments to teaching hospitals altogether. Payments in 2009 varied from $500,000 in Alaska to $1.5 billion in New York14. A substantial portion of Medicaid (57%) is federally funded, however, and recent legislative proposals would have prohibited federal support of Medicaid's contribution to GME on the basis that GME is not a health service explicitly authorized in Medicaid's statute13,15,16. These proposals were ultimately overturned, and states continue to decide on an individual basis whether to use Medicaid to fund GME17,18. When doing so, the Medicaid GME funding must be part of payments for medical services, and it is usually incorporated as a supplement to inpatient hospital payment rates16.
Additional state-level funding appropriations, separate from Medicaid, are also directed toward training grants for family medicine residency and toward state-operated medical schools. These totaled approximately $185 million in 20009.
Medicare
The largest portion of GME funding continues to come from Medicare (Table I). Such Medicare funding is provided to teaching hospitals that operate residency training programs recognized by the Accreditation Council for Graduate Medical Education (ACGME). In 2006, 1095 (28.6%) of the 3824 hospitals that admitted Medicare patients were considered teaching hospitals, and 243 of these were considered “major” teaching hospitals that had at least one resident per four beds19. In total, Medicare supported the training of approximately 90,000 of the 109,482 residents who were in ACGME-accredited programs in 200820. Not all residents are supported by Medicare because Medicare has set a cap on the number of reimbursable residency positions that each teaching hospital was allowed. This cap, which is based on the number of positions at each hospital in 1996, was instituted in 1997 because of fears of an oversupply of physicians8.
In 2007, Medicare provided teaching institutions with $8.8 billion to support GME activities through payments for both direct and indirect costs15. DME payments cover the direct costs of physician training, including a portion of resident stipends, the salaries of teaching faculty, and other allowable expenses. IME payments are designed to offset the inherent increase in costs that is associated with graduate medical training, and these payments take the form of a surcharge that is added to Medicare reimbursements to the hospital. Although this surcharge has progressively decreased as a result of Medicare cost-cutting measures, it totaled $5.8 billion in 2008—an estimated average of $14 million per major teaching hospital. The IME payments, however, do not exclusively cover GME activities but also concomitantly reimburse academic centers for higher Medicare inpatient operating costs (such as the greater illness severity that is characteristic of teaching hospitals)8.
The amount that is paid by Medicare to support an individual hospital's GME programs is inherently dependent on that hospital's proportion of Medicare patients. DME calculations take this into account by incorporating the hospital's ratio of Medicare inpatient days to total inpatient days, whereas IME calculations do so by manifesting as a surcharge added to each individual Medicare reimbursement. Details of these calculations are described below.
Federal Government and Foundation Grants
Various federal grants contribute additional funding for GME. For example, Title VII of the Public Health Service Act helps to fund residency education in general pediatrics, internal medicine, and family practice. However, this funding was cut by $154.3 million in 2006, and by 2008 it amounted to only $48 million21,22. The Children's Hospital Graduate Medical Education Payment Program also provides funding to free-standing children's teaching hospitals, which receive very little Medicare GME funding because they inherently treat few Medicare patients (predominantly children with end-stage renal disease). These hospitals were appropriated $297 million in 200621. Grants from various organizations such as the Robert Wood Johnson Foundation also exist9.
Founded in 1811, Massachusetts General Hospital (MGH) is a 900-bed academic medical center located in Boston, Massachusetts. As the largest teaching affiliate of Harvard Medical School, MGH receives funding to support GME from various payers and coordinates the funding among its numerous GME programs.
Like other teaching hospitals, MGH receives GME funding from both implicit and explicit sources. Implicit sources are those that are not specifically intended for educational purposes but are utilized by the hospital to maintain its educational programs. At MGH, the large majority of such funding is derived from private patient care revenues, with much smaller amounts derived from the Veterans Health Administration, the Department of Defense, and other federal and state programs. Explicit sources are those sources that are traditionally associated with public funding of GME, and the largest of these is Medicare. The Massachusetts Medicaid program has also historically contributed to GME funding at MGH, but these funds were reduced in 2009 and eliminated in 2010, resulting in a reduction of approximately 15% in total explicit funding.
Medicare Funding of Graduate Medical Education
Medicare GME funding at MGH consists of both DME and IME funding.
Direct Medical Expenses
DME funding, which amounted to 31% of the Medicare GME funding that MGH received during the 2009 fiscal year, is calculated on the basis of the number of residents and fellows in programs recognized by Medicare. The number of residents and fellows is converted into the number of Full Time Equivalents (FTEs). Each resident in a specialty-specific Initial Residency Period (e.g., the first five years of training in orthopaedic surgery or the first three years of training in internal medicine) is counted as 1.0 FTE, and each trainee who is pursuing additional training beyond this Initial Residency Period is counted as 0.5 FTE. In orthopaedic surgery, this additional training would represent the year of fellowship that is commonly pursued after five years of residency.
Each hospital, including MGH, has a predetermined federal cap on the FTE value that is eligible for Medicare GME funding. The caps were set in 1997 by the Balanced Budget Act and effectively limit hospital reimbursement for teaching supported by Medicare contributions. The caps were based on actual 1996 counts of trainees and were initiated in response to a transient concern regarding an excess of physicians in the United States. The caps were readjusted in 2002 and 2005 on the basis of a national redistribution formula, and they are allocated to each hospital without any requirements regarding their distribution among specialties. Neither dental nor podiatry programs are included under this cap. The number of residents and fellows at MGH currently exceeds its cap, and as a result a substantial number of trainees at MGH are not considered reimbursable under the Medicare payment system despite their enrollment in programs that are recognized by Medicare and accredited by the ACGME.
Once totaled, the FTE value is multiplied by a numerical Per Resident Amount (PRA) that is specific to MGH, as it is to other teaching hospitals. This PRA value was established in 1984 and has historically been adjusted upward annually for the national inflation rate. However, inflation is not wholly responsible for rising educational costs at teaching hospitals, since GME costs also increase because trainees function in a broader health-care system marked by growing expenditures on patient care. The use of a PRA value based on 1984 patient care expenditures has therefore resulted in a disconnect between actual educational costs and hospital reimbursement.
The PRA value is not equal across all medical specialties. In an effort to create an incentive for training primary care practitioners, the Centers for Medicare & Medicaid Services increased the PRA value during 1994, 1995, and 1996 only for primary-care-oriented specialties, including family medicine, general internal medicine, general pediatrics, geriatric medicine, and obstetrics and gynecology (OB-Gyn). The PRA value for surgical specialties (other than OB-Gyn), including orthopaedic surgery, was frozen during this three-year period, resulting in a disparity in the PRA value among medical specialties. Thus, MGH is reimbursed 5.5% more through DME payments for a primary-care-focused resident than for a resident in another specialty, and similar scenarios exist at all teaching hospitals. Recent legislative initiatives to further incentivize primary care specialties may increase this discrepancy15. Of note, the PRA value for MGH and all other teaching hospitals was lowered in 2009 by approximately 0.5% compared with its value during the preceding year; this was the first reduction since PRA values were instituted.
The product of the FTE value and the PRA value is finally multiplied by a Medicare Utilization Ratio, which represents MGH's ratio of Medicare inpatient days to total inpatient days. Thus, teaching hospitals with a higher percentage of Medicare patients receive a proportionally higher reimbursement through DME payments. The final product, which incorporates the number of trainee positions allotted by Medicare (FTE), the reimbursement per position (PRA), and the proportion of Medicare patients (Medicare Utilization Ratio), ultimately determines the total Medicare DME contribution toward GME programs.
The amount of reimbursement per resident through DME payments varies among hospitals; in 1995, it ranged from $10,000 to $240,000 per resident, with a median value of $65,00024. Although the Balanced Budget Act of 1997 capped the number of reimbursable resident positions, in part because of a transient concern regarding an oversupply of physicians, the variability in the amount reimbursed per resident persisted25. Therefore, beginning in 2001, the federal government created a floor and ceiling for resident reimbursements based on national averages8. Hospitals whose DME payment per resident was <70% of the national average received an increase in their PRA value to reach the floor of 70%, thus increasing reimbursement. Hospitals whose PRA value was >140% of the national average received a reduction in their PRA value to reach the ceiling of 140%, thus reducing reimbursement. In 2002, the floor was raised to 85%. Of note, these DME payments are made to the teaching hospitals rather than directly to training programs, and hospitals are not explicitly required to demonstrate that these payments support resident education.
Indirect Medical Expenses
IME funding, which amounted to 69% of the Medicare GME funding that MGH received in the 2009 fiscal year, is designed to compensate teaching hospitals for the inherently higher patient care costs at academic centers. Some of these expense increases, such as increased laboratory and radiographic testing as well as lower productivity, are linked to GME programs. However, costs at academic centers are also inherently higher for other reasons, including increased patient complexity that is not captured by the Diagnosis Related Group (DRG) hospital reimbursement system and non-income-generating requirements such as standby capacity8. IME funding is therefore not specifically earmarked for educational purposes, and hospitals have a wide degree of latitude in how it is allocated. Like DME funding, the total amount of IME funding is subject to a hospital's predetermined FTE cap, although IME funding does not distinguish between residents who are still within their Initial Residency Period and those who have exceeded this time period. Furthermore, specific eligibility criteria for inclusion in the FTE count frequently exclude trainees in a research or other non-provider setting.
The total IME funding paid by Medicare is calculated with use of a curvilinear formula that takes into account the ratio of interns and residents to beds as well as a cost multiplier percentage that represents the increase in Medicare reimbursement to teaching hospitals (Table II). The ratio of interns and residents to beds is equal to the total number of trainees divided by the number of inpatient beds; for example, a 1000-bed hospital with 600 trainees would have a ratio of 0.6. This ratio is then inserted into the formula, which utilizes a cost multiplier that is set nationally for all hospitals by Medicare and was equal to 5.5% at the time that this article was written. A higher ratio of interns and residents to beds results in increased IME reimbursement, and in the aforementioned example the IME payments would amount to a 29.3% increase in Medicare reimbursement per DRG.
The increase in Medicare reimbursement under the IME program can also be grossly estimated by multiplying the ratio of interns and residents to beds by ten and then by the cost multiplier percentage (5.5%). In the aforementioned example, the teaching hospital's ratio of 0.6 would therefore result in an increase in Medicare reimbursement per DRG of approximately 0.6 times ten times 5.5%, or 33%. Although the actual IME funding at MGH (a 29.3% increase) was somewhat lower than the rough estimate, this calculation underscores the degree to which IME reimbursement is directly correlated with teaching intensity under the current payment model.
Given that the formula is curvilinear, proposals to reduce the cost multiplier by half would decrease IME payments by approximately 60%. These proposals are based on regression analyses suggesting that, although increased costs at teaching hospitals directly correlate with teaching intensity, a cost multiplier of 5.5% may overestimate these costs.
Of note, DME payments that are received by the hospital from Medicare are aggregate in nature, whereas IME payments are imbedded in Medicare reimbursement on a patient by patient basis. Furthermore, the allocation of Medicare's contribution to GME at the level of individual hospitals is ultimately determined by senior hospital leadership.
Massachusetts General Hospital GME Funding
The fundamental question is whether Medicare payments to reimburse hospitals for teaching are commensurate with expenses. DME costs are easier to quantify and include the salaries and benefits of residents, teaching faculty, and administrative personnel in GME offices as well as certain overhead costs and other “Medicare allowables” such as portions of facility maintenance and depreciation costs8. IME costs are harder to quantify because they are, by nature, embedded in the costs of inpatient care and can only be estimated through statistical analysis.
A review of MGH data for the 2009 fiscal year shows that the hospital was reimbursed by the Medicare DME program for only 56% of its expenditures on the salaries and benefits of trainees and the portion of the salaries and benefits of faculty devoted to teaching. If GME overhead, such as the salaries of administrative staff and maintenance of the physical plant, is also included, MGH was reimbursed by the Medicare DME program for only 45% of its expenses. Thus, MGH must rely on IME payments and on implicit reimbursement mechanisms, which are largely patient care revenue, to fill the gap in direct teaching expenses, and MGH is therefore unable to fully allocate IME funds toward their intended purpose, the aforementioned expenses inherently associated with academic centers.
Sufficiency of Funding
The MGH data suggest that academic institutions are not reimbursed for their teaching mission at a level commensurate with their actual educational expenditures. Furthermore, the increased cost of patient care at academic medical centers compared with their non-teaching counterparts has been linked to teaching intensity26. Nevertheless, the equation becomes less clear at the level of individual specialties. For example, a study examining total knee replacement in orthopaedic surgery showed a 22% increase in resource consumption (including all labor costs associated with the procedure) on a teaching service compared with a private service; most of this difference was attributable to an increase in the time spent in the operating room (both anesthesia and operative times)27. On the other hand, another study showed that resident involvement in patient care on an internal medicine service at a community-based teaching hospital resulted in higher costs but also higher payments and profitability28. Similarly, hospitalists on the teaching service at a large academic center were found to have higher clinical productivity compared with their non-teaching counterparts29. Another study estimated that it would cost a community teaching hospital between $210,000 and $315,000 annually to replace a single surgical resident30. Ultimately, it is clear that the cost of resident education is offset to some extent by the services that they provide to an academic center31. Nevertheless, Medicare funding of GME is also intended to subsidize other initiatives inherent to the mission of academic centers, including the provision of charitable and tertiary care, the treatment of patients with increased illness severity, and the maintenance of standby capacity for low-volume services8,32. Thus, a question at the heart of the debate involves the degree to which the education of future physicians and the sustainability of teaching hospitals is a public good that should, accordingly, be publicly funded. At the level of individual teaching institutions such as MGH, concrete funding choices exist, and an increased contribution toward GME necessarily comes at the expense of other priorities.
Financial Implications of Residency Work Hour Restrictions
Recent initiatives to curtail resident work hours have had immediate financial implications for teaching institutions. In July 2003, the ACGME limited resident work hours to eighty hours per week, citing changes in the health-care delivery system including an increase in the illness severity of patients, concerns about patient safety, and concerns about residents’ education and clinical performance in the context of sleep deprivation33. It has been estimated that the transfer of enough resident workload to midlevel providers to fully comply with the work hour restrictions would cost $1.1 billion annually34. Some of this cost would be offset by a purported reduction in the medical error rate, but although the change would be cost-neutral for the public if errors were reduced by 8.5%, it would become cost-neutral for teaching hospitals only if errors were reduced by 30.9%34. Studies examining the reduction in the medical error rate after institution of the resident work hour restrictions have yielded equivocal results, and it is unlikely that the results have indeed been cost-neutral35-37. A more recent report by the Institute of Medicine (IOM) recommended a further reduction in work hours38. Compliance with these additional restrictions would cost an estimated $1.6 billion annually, or approximately $3.2 million per hospital39. Again, although some cost savings may result from error prevention, studies suggest that academic centers are likely to incur substantial financial losses39,40.
Faculty Distraction
As academic medical centers become increasingly dependent on clinical income to support their academic mission, including education, there are concerns that the emphasis on reimbursement will pose a “distraction” that interferes with faculty participation in educational activities41. An ongoing decision must therefore be made at the level of the individual teaching institutions regarding the degree to which teaching by faculty members is incentivized and viewed as a reimbursable activity rather than merely viewed as an altruistic venture inherent to academic positions.
Note: The authors thank Sally Mason Boemer, Chief Financial Officer, Massachusetts General Hospital; Anthony Santangelo, Director of Government Revenue, Partners Healthcare System; and Julie Doherty, Senior Reimbursement Analyst, Partners Healthcare System, for their invaluable contributions to this review.
Disclosure: None of the authors received payments or services, either directly or indirectly (i.e., via his or her institution), from a third party in support of any aspect of this work. One or more of the authors, or his or her institution, has had a financial relationship, in the thirty-six months prior to submission of this work, with an entity in the biomedical arena that could be perceived to influence or have the potential to influence what is written in this work. No author has had any other relationships, or has engaged in any other activities, that could be perceived to influence or have the potential to influence what is written in this work. The complete Disclosures of Potential Conflicts of Interest submitted by authors are always provided with the online version of the article.