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NOV-23-1998 15:22
HCFA
410 786 6730 P.01/18
FAX TRANSMISSION COVER SHEET
ADDRESSEE:
FROM:
(Name, Organization, Address)
(Name,Organization,Address)
Devorah Adler
Peggy Rahn
HCFA-Medicaid Bureau
7500 Security Blvd.
Baltimore, Md. 21244-1850
Phone:
Phone: (410)
FAX: (410)
( )
786-3284
786-3252
TOTAL PAGES:
ADDRESSEE'S FAX NUMBER:
DATE:
(Cover + +17)
(202) 456-5557
11/23/98
REMARKS:
as requested, attached
is the 3/3/97 GAO report
re : Medicaid + GBE payments
NOV-23-1998 15:23
HCFA
410 786 6730 P.02/18
E
LANDY/SPM TEHM
GAO
United States
General Accounting Office
Washington, D.C. 20548
Health, Education and Human Services Division
B-276272
March 3, 1997
The Honorable John R. Kasich
Chairman, Committee on the Budget
House of Representatives
Subject: Medicaid: Graduate Medical Education Payments
Dear Mr. Chairman:
The federal government, primarily through its Medicare program, is the largest
single payer to teaching hospitals for the costs they incur training medical
residents.¹ Medicare makes graduate medical education (GME) payments
based on specific formulas applied uniformly to all qualifying teaching
hospitals. GME payments cover the period of formal clinical training that
follows graduation from medical school during which new physicians-medical
residents-are prepared to practice in a chosen specialty area This training
usually occurs in teaching hospitals and is supervised by faculty physicians. To
operate and maintain such physician training programs, teaching hospitals incur
direct and indirect costs. In fiscal year 1996, Medicare GME payments totaled
an estimated $6.7 billion.
States may also choose to pay for GME through their Medicaid programs, and
these expenses are supposed to be shared with the federal government.
However, unlike Medicare, for which the amount of GME payments is well
documented, not much is known about Medicaid's support of GME. For this
reason, you asked us to provide you with information OR (1) existing studies
that estimate overall Medicaid expenditures for GME; (2) the amount of
Medicaid GME payments for the 10 states with the largest overall Medicaid
expenditures, and the basis for determining these payments; and (3) how
Medicaid and Medicare coordinate their GME payments to avoid duplication.
¹The Department of Veterans' Affairs and the Department of Defense also
contribute to graduate medical education. In addition, while private insurers
usually do not make payments specifically designated for graduate medical
education, part of the amount they pay may, in fact, be used for education.
GAO/HEHS-97-77B Medicaid Graduate Medical Education
NOV-23-1998 15:23
HCFA
410 786 6730
P.03/18
B-276272
To answer these questions, we reviewed available literature on GME and
Medicaid and contacted Medicaid officials from the 10 states with the largest
total Medicaid expenditures in fiscal year 1995. These 10 states accounted for
close to 60 percent of total Medicaid expenditures during this period. We
discussed hospital reimbursement methodologies with officials from the Health
Care Financing Administration (HCFA) and these 10 states. We also obtained
from these states estimates of Medicaid GME payments for the most recently
available time period. Finally, we obtained and reviewed the 10 states'
Medicaid plans and discussed with state and HCFA officials how Medicare and
Medicaid GME programs are coordinated.³ We performed our review between
December 1996 and February 1997 in accordance with generally accepted
government auditing standards.
In summary, although the exact amount of Medicaid GME payments is
unknown, two studies estimated these expenditures at about $1.3 billion and
$2.2 billion in fiscal year 1995. We also found that 8 of the 10 states with the
largest overall Medicaid expenditures in fiscal year 1995 provided support to
teaching hospitals for costs associated with GME These states used different
methods to calculate their GME payments, and their annual estimated
expenditures for GME, which they generally considered rough approximations,
ranged from a low of $17 million to a high of $870 million. Regarding whether
programs coordinate their GME payments, HCFA officials told us that HCFA
does not determine whether Medicaid GME payments duplicate those made by
Medicare. On the other hand, officials from the eight states told us that their
payments were intended to cover Medicaid's share of GME. We could not
independently determine from the documents reviewed if duplication exists
because states' plans often did not contain sufficient detail explaining their
Medicaid GME payment systems.
BACKGROUND
The direct medical education (DME) costs of providing GME include salaries
and fringe benefits for residents and teaching physicians, the cost of conference
and classroom space, the cost of equipment and supplies used for instructional
The states we contacted operate on a variety of calendar and fiscal years.
Therefore, the data they reported often cover different time periods.
Each state operates its Medicaid program under a state plan that HCFA must
approve for compliance with current Medicaid law and regulations. Among
other things, these plans describe how the state reimburses medical providers.
2
GAO/HEHS-97-77B Medicaid Graduate Medical Education
NOV-23-1998 15:24
HCFA
410 786 6730
P.04/18
B-276272
purposes, and allocated overhead costs. Indirect medical education (IME)
costs are the higher patient care costs that teaching hospitals are thought to
incur because of such factors as increased diagnostic testing, increased number
of procedures, higher staff ratios, and increased recordkeeping associated with
training.
Medicare and most state Medicaid programs make payments to teaching
hospitals for GME. Other payers generally agree to pay hospitals a given
amount for each service provided with no explicit recognition of GME.
Hospitals may include the cost of GME when determining their prices for these
services. Medicare DME payments are based on hospitals' fiscal year 1984
identified DME costs, while Medicare IME payments are calculated based on
hospitals' ratio of residents to beds as well as Medicare prospective payment
rates.
In contrast, states are free to design their own Medicaid hospital payment
systems, and significant variation exists among them. As with Medicare, some
states specifically recognize both DME and IME costs in their payment systems.
Other states, while not designating a specific GME payment, base their
payments to hospitals on cost data that reflect GME costs. In these states,
isolating the actual amount of GME payments is often difficult.
Some states also pay managed care organizations a capitated rate for Medicaid
beneficiaries' care. Depending upon how the capitated rate is determined, a
portion of it may be for GME. Determining this amount with precision,
however, is often difficult.
PRIOR ESTIMATES OF TOTAL
MEDICAID GME PAYMENTS
While the total amount of actual Medicaid payments for GME is not readily
available, recent estimates indicate that the combined payments for DME and
IME are substantial. HCFA does not track individual states' or nationwide
Medicaid expenditures on GME. However, the Intergovernmental Health Policy
Project (IHPP) and the National Association of Children's Hospitals estimated
3
GAO/HEHS-97-77B Medicaid Graduate Medical Education
15:24
HCFA
410
786
6730
P.05/18
B-276272
fiscal year 1995 expenditures for Medicaid GME. These estimates differ
considerably: they are about $1.3 and $2.2 billion, respectively.
TOP 10 STATES' MEDICAID
GME PAYMENTS
We contacted the 10 states with the highest overall Medicaid expenditures in
fiscal year 1995 and asked them to provide us with the amount of Medicaid
funds paid to teaching hospitals for GME. We found that eight states
reimbursed teaching hospitals for a portion of their resident training costs; their
estimates of GME payments for their most recently available calendar or fiscal
year ranged from at least $17 million to $870 million. These amounts, however,
typically represented rough estimates, and officials from these states were
often unable to identify their Medicaid programs' total GME expenditures. (The
enclosure that accompanies this letter describes the amounts of, and methods
used for, determining the 10 states' Medicaid GME payments.)
Estimating state-specific or nationwide Medicaid GME expenditures is difficult
for several reasons. First, neither Medicaid law nor regulations requires states
to report the amount paid for GME. Also, a number of states include GME
with other costs when determining their payment rates to hospitals treating
Medicaid patients. Thus, states may be unable to identify the portion of their
payment attributable solely to GME. Further complicating efforts to compile
such an estimate is the fact that some states have recently changed their
Medicaid GME payment systems.
Most of the eight states that paid Medicaid GME based their reimbursement at
least in part OR Medicare GME payment principles. Medicare makes separate
DME and IME payments to teaching hospitals according to uniformly applied
formulas. The Medicare DME payment is calculated using each hospital's fiscal
year 1984 DME cost per resident, adjusted for inflation. The payment is
further adjusted to reflect the hospital's current number of full-time-equivalent
residents and Medicare's share of total inpatient days. The Medicare IME
"An official associated with the IHPP survey characterized its $1.3 billion
estimate as conservative because of the methodology used. Further, neither
estimate includes the amount of GME payments typically made to managed care
organizations as part of their capitated payment
ᵇPayments are determined for the hospital's cost-reporting period beginning on
or after October 1, 1983, but before October 1, 1984.
4
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:25
HCFA
410 786 6730
P.06/18
B-276272
payment is an adjustment to the rates paid under Medicare's prospective
payment system that is based on a formula that includes a hospital's ratio of
total medical residents to total beds.
Several of the states we reviewed modify the Medicare formulas to determine
their Medicaid GME payments. For example, in lieu of using the DME cost per
resident from fiscal year 1984, New York and Michigan use 1981 and 1989,
respectively, as their base years. Similarly, Ohio modifies the Medicare IME
formula by substituting a higher multiplier when calculating its Medicaid IME
payment. This change results in a higher IME payment than if the Medicare
formula were followed exactly. Further, not all states make specific payments
for both types of GME. Seven of the eight states reimburse teaching hospitals
for both DME and IME costs, while one state reimburses these hospitals for
DME costs only.
The two states we contacted that do not specifically recognize GME in their
Medicaid hospital payment methods may support teaching hospitals in other
ways. California's Medicaid program does not make separate GME payments
to teaching hospitals. However, because Medicaid reimbursement rates are
negotiated with each hospital on the basis of its costs, those hospitals that may
have higher costs because of teaching programs could receive higher Medicaid
reimbursements. Also, although Illinois eliminated specific Medicaid GME
payments to hospitals in state fiscal year 1996, it continues to support the
higher costs of teaching hospitals by paying some of these hospitals higher
rates for certain procedures or through lump sum payments for a number of
specialty services.
COORDINATION WITH
MEDICARE GME
Officials from the eight states that paid Medicaid GME told us that their states'
Medicaid payments were intended to pay for Medicaid's share of the costs
associated with training physicians. This is similar to Medicare GME payments,
which are intended to compensate hospitals for Medicare's share of these
costs. Because some beneficiaries qualify for both Medicaid and Medicare,
In 1989, we reported on problems with the IME formula (Medicare: Indirect
Medical Education Payments Are Too High, GAO/HRD-89-33). The Prospective
Payment Assessment Commission has since reported that Medicare IME
payments are still too high.
5
GAO/HEHS-97-77B Medicaid Graduate Medical Education
NOV-23-1998 15:25
HCFA
410 786 6730 P.07/18
B-276272
however, it is possible that they could be counted twice in arriving at the
amount of a hospital's GME payments.
HCFA's review of state Medicaid reimbursement plans does not include a
determination of whether Medicaid GME payments duplicate those made by
Medicare. Rather, HCFA reviews state reimbursement plans that include GME
to determine whether GME reimbursement is reasonable, is linked to Medicaid
services or some other proxy for Medicaid's share of hospital operations, and
remains within certain statutory limitations. Because the state plans we
obtained did not always include sufficient detail about- counting beneficiaries
eligible for both Medicaid and Medicare, we could not always determine
whether Medicaid GME payments duplicated those of Medicare.
AGENCY COMMENTS
We provided a draft of this report to HCFA program-level officials, and we have
incorporated their technical suggestions where appropriate.
As arranged with your office, unless you publicly announce its contents earlier,
we plan no further distribution of this letter until 30 days after its date. At that
time, we will send copies to the Secretary of Health and Human Services and
other interested parties.
If you have any questions about the matters discussed in this letter, please call
me on (312) 220-7600. Staff who contributed to this review include Paul
Alcocer, Susan Thillman, and Daniel Lee.
Sincerely yours,
Joshin z Phonis
Leslie G. Aronovitz
Associate Director, Health
Financing and Systems Issues
Enclosure
6
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:25
HCFA
410 786 6730 P.08/18
ENCLOSURE
ENCLOSURE
STATE ESTIMATES OF MEDICAID GME EXPENDITURES AND RELEVANT
REIMBURSEMENT METHODOLOGIES
CALIFORNIA
California does not make specific reimbursements to teaching hospitals for
GME through its Medicaid program.
7
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998
15:26
HCFA
410 786 6730
P.09/18
ENCLOSURE
ENCLOSURE
FLORIDA
Period Covered: State fiscal year 1996 (07/1/95 to 06/30/96)
Estimated GME Expenditures:
Fee-for-service:
Direct medical education:
No estimate
Indirect medical education:
No estimate
Disproportionate share
hospital program'
$17.9 million
Managed care:
No estimate
Total GME expenditures:
At least $17.9 million
Payment Methodology
The Florida Medicaid program pays six teaching hospitals in the state, which
must meet several qualifying criteria, quarterly payments for GME as part of its
Disproportionate Share Hospital (DSH) program. The total amount these six
hospitals receive is based on legislative appropriations and is allocated among
them according to a statutory formula. In addition, all teaching hospitals are
reimbursed for GME to the extent that direct medical education (DME) and
indirect medical education (IME) costs are included in the daily rates paid to
them by the state. The state, however, has never calculated the GME
component of these rates. Similarly, although GME is included in the capitated
payments the state makes to managed care organizations, the state has never
tracked this amount and is unable to provide an estimate of what the total
GME amount is.
¹Besides payments to reimburse medical providers for services rendered, states
are required under DSH to make additional Medicaid payments to hospitals that
serve large numbers of Medicaid and other low-income patients.
8
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:26
HCFA
410 786 6730
P.10/18
ENCLOSURE
ENCLOSURE
ILLINOIS
Beginning in state fiscal year 1996 (7/1/95), the Illinois Medicaid program
stopped specifically reimbursing teaching hospitals for GME. Previously, the
state had reimbursed teaching hospitals for both DME and IME costs. In its
last year of funding, the Medicaid program reimbursed teaching hospitals an
estimated $165 million for GME. This estimate does not include the amount of
GME payments made to managed care organizations as part of their capitated
payments.
9
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998
15:26
HCFA
410 786 6730 P.11/18
ENCLOSURE
ENCLOSURE
MASSACHUSETTS
Period Covered: State fiscal year 1995 (10/1/94 to 9/30/95)
Estimated GME Expenditures:
Fee-for-service:
Direct medical education:
$25.0 million
Indirect medical education:
$0
Managed care:
No estimate
Total GME expenditures:
At least $25.0 million
Payment Methodology
The Massachusetts Medicaid program specifically reimburses hospitals for DME
costs only. The DME payment is calculated each year using each hospital's
reported GME costs and Medicaid's share of total discharges. The state makes
DME payments to hospitals as per-discharge add-ons. Although the capitated
rates paid to managed care organizations are calculated using historical data
that include GME costs, GME costs have never been distinctly identified.
10
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:26
HCFA
410 786 6730 P.12/18
ENCLOSURE
ENCLOSURE
MICHIGAN
Period Covered: Calendar year 1995
Estimated GME Expenditures:
Fee-for-service:
Direct medical education:
$ 84.3 million
Indirect medical education:
82.0 million
$166.3 million
Managed care:
$45.0 million
Total GME expenditures:
$211.3 million
Payment Methodology
The Michigan Medicaid program reimburses hospitals for both DME and IME,
using an approach modeled largely on the Medicare formulas. The DME
payment is based on 1989 costs, adjusted each year by a hospital market basket
index, and Medicaid's share of inpatient bed-days. DME payment for recipients
with dual Medicaid/Medicare eligibility is specifically excluded. The DME
payment is a cost-settled, add-on that is paid twice monthly to the hospitals.
The IME payment is included in the states' diagnostic-related group (DRG) and
daily payment rates and is approximately 55 percent of the Medicare IME
11
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:27
HCFA
410 786 6730 P.13/18
ENCLOSURE
ENCLOSURE
formula.8 Capitation rates for managed care organizations incorporate all
health care costs, including those for GME.8
⁸Under the state's DRG system, the payment rate is based on each patient's
diagnosis. Each case is classified into one of a number of diagnosis-related
groups.
Michigan has announced an entirely new GME reimbursement system that is to
be implemented on 7/1/97. The new plan, which will abandon cost-based
formulas, will be a prospective payment system with fixed amounts for each
hospital based on costs established in the 1995 cost reports. Separate payments
will be made for primary care training programs, and grant awards will be made
to a consortium of teaching hospitals, universities, and health maintenance
organizations (HMO) for innovative training programs that involve managed
care. Michigan will also "carve out" the GME component from the capitated
rates.
12
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:27
HCFA
410 786 6730 P.14/18
ENCLOSURE
ENCLOSURE
NEW JERSEY
Period Covered: Calendar year 1997
Estimated GME Expenditures:
Fee-for-service:
Direct medical education:
$12.8 million
Indirect medical education:
25.2 million
$38.0 million
Managed care:
$30 million to $40 million
Total GME expenditures:
$68 million to $78 million
Payment Methodology
The New Jersey Medicaid program reimburses all teaching hospitals in the state
for GME. To create the pool of funds from which these Medicaid GME
payments are drawn, New Jersey applies DME and IME formulas to the state's
major teaching hospitals. 10 These formulas are modeled largely on the
Medicare formulas, substituting Medicaid statistics for Medicare statistics.
Funds from this pool are then distributed periodically to all teaching hospitals
in the state on the basis of their respective Medicaid utilization rates and
number of medical residents. These funds are subject to cost settlement each
year. Payment for GME is also included in the capitated rates paid to
managed care organizations, but it is not specifically identified.
¹⁰New Jersey defines a major teaching hospital as having 45 or more full-time-
equivalent medical residents in the 1993 Medicare audited cost report.
13
GAO/HEHS-97-77E Medicaid Graduate Medical Education
HCFA
410 786 6730 P.15/18
ENCLOSURE
ENCLOSURE
NEW YORK
Period Covered: Calendar year 1996
Estimated GME Expenditures:
Fee-for-service and managed care:
Direct medical education:
$370 million
Indirect medical education:
$500 million
Total GME expenditures:
$870 million
Payment Methodology
The New York Medicaid program reimburses hospitals for services on the basis
of a per-discharge rate with an add-on for DME. The DME payment is based
on each hospital's 1981 cost report adjusted yearly to reflect rising costs. The
IME reimbursement is an adjustment to payments for Medicaid services based
on the same formula used by Medicare, with one exception. The state revised
its Medicaid IME formula in 1991 and now determines IME reimbursement on
the basis of the number of residents and interns at each hospital in 1990,
adjusted for the type of medicine they practiced. For example, primary care
specialties are generally assigned a weighting factor of 1.5, while the specialties
of emergency and preventive medicine are assigned a factor of 1.1. New York
also subtracts a GME component from the capitation rates paid to managed
care organizations and pays this amount directly to the teaching hospitals. 11
"On January 1, 1997, New York eliminated its hospital rate-setting system for
Blue Cross, HMOs, commercial insurers, self-insured funds, and private payers.
Under the former system of state-set hospital reimbursement rates, private
payers contributed about $1 billion to GME. The reform essentially halves the
guaranteed contribution of the private payers and creates a pooling mechanism
to distribute these funds. If no further changes are made to the Medicaid
program, its GME payments should remain relatively steady for the next several
years.
14
GAO/HEHS-97-77E Medicaid Graduate Medical Education
NOV-23-1998 15:28
HCFA
410 786 6730 P.16/18
ENCLOSURE
ENCLOSURE
OHIO
Period Covered: State fiscal year 1995 (7/1/94 to 6/30/95)
Estimated GME Expenditures:
Fee-for-service:
Direct medical education:
$52.9 million
Indirect medical education:
$98.2 million
Managed care:
No estimate
Total GME expenditures:
At least $151.1 million
Payment Methodology
The Ohio Medicaid program reimburses hospitals for both DME and IME. The
DME payment is based on each hospital's Medicaid cost report from 1985-86
adjusted yearly to reflect rising costs. The IME reimbursement is an
adjustment to payments for Medicaid services based on the Medicare formula,
except that Ohio maintained a multiplier of 2.0 when Medicare reduced its
multiplier to 1.89. Both DME and IME payments are subject to a test of
reasonableness, adjusted for case mix and then by the DRG relative weight, and
paid jointly as an add-on to the DRG reimbursement amount. Payment for
GME is included in the capitated rates paid to managed care organizations,
although an estimate of this amount was not provided.
15
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:28
HCFA
410 786 6730 P.17/18
ENCLOSURE
ENCLOSURE
PENNSYLVANIA
Period Covered: Calendar year 1996
Estimated GME Expenditures:
Fee-for-service:
Direct medical education:
$42.8 million
Indirect medical education:
No estimate
Managed care:
No estimate
Total GME expenditures:
At least $42.8 million
Payment Methodology
The Pennsylvania Medicaid program reimburses acute care teaching hospitals
for both DME and IME. The DME payment is based on each teaching
hospital's 1984-85 Medicaid medical education costs, subject to annual limits.
The payments are made monthly as prospective payments. Reimbursement for
IME costs is included in the Medicaid rates paid to each teaching hospital.
The state is unable to quantify the IME portion of this rate. Payment for GME
was historically included in the capitated rates the state paid to managed care
organizations. Beginning in calendar year 1997, however, the state has begun
"carving out" the GME portion of the capitated rates and will pay this amount
directly to the teaching hospitals.
16
GAO/HEHS-97-77R Medicaid Graduate Medical Education
NOV-23-1998 15:28
HCFA
410 786 6730 P.18/18
ENCLOSURE
ENCLOSURE
TEXAS
Period Covered: State fiscal year 1995 (9/1794 to 8/31/95)
Estimated GME Expenditures:
Fee-for-service:
Direct medical education:
$38.2 million
Indirect medical education:
No estimate
Managed care:
$0.5 million
Total GME expenditures:
At least $38.7 million
Payment Methodology
The Texas Medicaid program reimburses each hospital for Medicaid services on
the basis of a hospital-specific "standard payment rate," which includes both
DME and IME. The DME payment is determined using similar methods to
those used for Medicare, substituting Medicaid's utilization rate for Medicare's.
IME costs are not specifically identified but are included in the standard
payment rate, which is based on each hospital's reported costs. Also, payment
for GME is included in the capitated rates the state pays to managed care
organizations.
(101527)
17
GAO/HEHS-97-77R Medicaid Graduate Medical Education
TOTAL P.18
NACHRI
1
Children's
$ from
hospitals
Medicare
would be
outpatient
facilities
2
only do
caps reflect
DULE
principles in
BBA(H 330
initial) AS
reflect BBA
Biu young :
cap $ admin
supportive
issues
Dingell
morinan
Kennedy
six
Harkin? N.
Spector 1.
GRADUATE MEDICAL EDUCATION AND CHILDREN'S HOSPITALS
Number of hospitals and distribution of resident FTE.
CHILDREN'S TEACHING HOSPITALS
OTHER TEACHING HOSPITALS
NUMBER OF
57
1,004
HOSPITALS
RESIDENT FTE
4,623
74,851
RESIDENT FTE PER
74.8
74.6
HOSPITAL
RESIDENT FTE PER
0.38
0.19
BED
Total and operating margins by hospital type (1995 HCRIS).
CHILDREN'S TEACHING HOSPITALS
OTHER TEACHING HOSPITALS
TOTAL MARGIN
7.9%
4.7%
OPERATING MARGIN
-6.3%
-3,4%
Formulas currently used by Medicare to distribute GME funds
Direct Medical Education (DME) :
(Per Resident Amount * Resident FTE)(Medicare inpatient days / total number of inpatient days)
Indirect Medical Education (IME):
((1 + (total number of residents/total number of beds) 405 ) - 1)¹.⁶
Kerrey proposal formulas for distribution of GME funds
Direct Medical Education (DME):
(Per Resident Amount * Weighted average of Resident FTE)
Indirect Medical Education (IME):
(Per Resident Rate for IME * Total Resident FTE)
Projected Cost of the Kerrey Proposal
The Kerrey proposal, limits payments to $100 million in FY 1999 and $285 million in FY 2000 through
FY 2002, for a 5 year total of $955 million. This table indicates the impact of the bill without the cap on
expenditures.
DME
IME
PER RESIDENT AMOUNT
$76,817
$70,812
PAYMENTS
$216,854,391
$244,867,896
TOTAL EXPENDITURES
$461, 722, 287
MCAId IME
incentives others? for
block grant mechanism ?
operating margins
Packard
marketplace is sing
Foundation
operating margins 80 low
as relative?
cannot
m
I
endowment income
pediatric
bank on
be DSH
2
DSH
Comm.
July careful
Check
pool of childrens hospitals
jurisdiction
53 eligible
10 specialty hospitals
43 others 58% lose $ pt care
10% total marginslose
Boston
Core
business
pittsburgh
treating
average
hospitals
$5- 6 million/
year DgmE
DME $80-951 M
only.
grant prog them HRSA it's okay
b/c its a
short term
proposal.
DGME= =
(PRA)(FTE)(MCinpetdays)
I
total inp.
days
]
<<< IME 1+ IRB ratio) 405) - 1)1.6
Medicare discharge.
-
HE BALANCED BUDGET ACT OF 1997: ..ONS FOR GRADUATE MEDICAL EDUCATIONtp://www.cmwt.org/taskforc/reute249.html
The Balanced Budget Act of 1997: Implications for Graduate
Medical Education
James A. Reuter, Sc.D. Institute for Health Care Research and Policy Georgetown
University
October 1997
EXECUTIVE SUMMARY
The Balanced Budget Act (BBA) of 1997 has significant implications for Medicare's support for
graduate medical education (GME). The federal government spends more than $7 billion annually to
subsidize the training of physicians and nurses. In 1997 alone, Medicare will pay teaching hospitals
some $6.8 billion for their intern and residency programs. Given the level of support, any marked
changes in Medicare policy will have a major effect on these programs, the institutions that conduct
them, and the makeup of the physician work force.
That care in teaching hospitals is costlier than similar care elsewhere is commonly accepted. Costs
related to the hospitals' training mission are partly responsible. Academic health centers
(AHCs)-teaching hospitals with close affiliations with medical schools-and other teaching hospitals
have long used patient care revenues to finance much of this mission. Traditionally, they have covered
these expenses by charging private insurers more than the actual cost of care.
But that picture is changing. In today's increasingly competitive health care marketplace, health
maintenance organizations and other types of managed care plans are aggressively pursuing lower
payment rates and directing their enrollees to non-teaching, lower-cost community hospitals. The higher
expenses of AHCs and other teaching hospitals put them at a competitive disadvantage in negotiations
with managed care plans. Consequently, they have been losing market share for managed care patients.
So that these hospitals may continue to provide training for the next generation of physicians, many
observers have suggested that support for this activity should be separated from patient care revenues.
By providing a stable source of funding, this change should permit teaching hospitals to compete on a
level playing field with their non-teaching counterparts.
The Balanced Budget Act helps to do just that, phasing out Medicare support for GME from premiums
paid to managed care plans and paying it directly to teaching hospitals that care for Medicare managed
care patients. This policy could be a model for financing graduate medical education that could be
replicated across all types of insurers.
Another major concern addressed in the BBA is Medicare's influence over the numbers and types of
physicians being trained. Despite a broad consensus that there are too many physicians in general and
too many specialists in particular, Medicare support for GME has remained open-ended. By creating
economic incentives for hospitals to expand their training programs, this policy has been a major
contributor to oversupply in the physician work force.
The BBA includes amendments that will change these incentives. One caps the number of residents for
whom Medicare will provide support. Another creates a system of incentive payments that will
encourage teaching hospitals to downsize their training programs.
Finally, the BBA includes various savings provisions that will reduce payments to hospitals. In some
cases, these provisions are focused directly on Medicare's subsidies to teaching hospitals. These include
reductions in the indirect medical education adjustment (IME)($5.6 billion over five years) and
elimination of the disproportionate share and IME amounts carved out of the premiums Medicare pays
to managed care plans ($4 billion over five years), the net effect is to reduce the subsidies that teaching
1 of 2
11/4/98 12:20 PM
I
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III OPTIONS
OPTIONS FOR PROVIDING GRADUATE MEDICAL EDUCATION FUNDS TO
FREESTANDING CHILDREN'S HOSPITALS
NOTE:
All of these options except Option Four will be funded through a capped
mandatory grant program.
Option 1:
Modify the Kerrey proposal to provide reimbursement for those GME costs
associated with providing care to publicly insured patients.
Under the Kerrey proposal, funds are distributed to children's hospitals based
upon a formula resembling the Medicare formula currently used to determine
GME reimbursement. The Kerrey proposal provides the children's hospitals with
DME reimbursement based on a flat per resident amount, without consideration
for the percentage of their expenditures associated with providing care to
Medicare or Medicaid patients. This option would modify the DME formula in
the Kerrey legislation to ensure that the children's hospitals only received
reimbursement for the portion of their DME expenses associated with providing
care to Medicare and Medicaid patients. The Kerry proposal distributes IME
payment as an average payment per resident. Indirect medical education is paid as
a percentage add-on to the payment for a Medicare discharge. Under this option,
we would modify the Kerry proposal to provide an IME adjustment to the
payment made for a Medicaid patient. This option would also have the Secretary
prospectively limit the funds disbursed to the amount appropriated, rather than
recover overpayments retrospectively.
Option 2:
Eliminate IME reimbursement from the Kerrey proposal.
The Kerrey proposal requires the Federal government to provide approximately
$76,000 per resident for DME costs alone. This is as much as we presently
provide to other teaching hospitals for both their direct and indirect medical
education costs. The proposal could be modified to exclude reimbursement for
IME and reimburse for only DME costs. This would provide the children's
hospitals with the commensurate funding they are seeking while making limited
changes to the Kerrey proposal. The proposal would include a provision that
would require the Secretary to prospectively limit the funds disbursed to the
amount appropriated. Funds could be placed in an account that would close when
tapped out, or the Secretary could hold back a percentage of each hospital's funds
to protect themselves from going over the cap and having to recoup funds. This
option would perpetuate the flaw in the DME formula.
Option 3:
Require Medicare to disburse GME funds based on a flat, per resident
amount.
This proposal would provide children's hospitals with graduate medical education
funding according to a flat, per resident amount adjusted for geographic variation
in health care costs that would be determined by HCFA and disbursed through the
current GME reimbursement system used by HCFA. The amount of funding an
institution received would be dependant solely on the number of residents it had
enrolled. There would be a cap on the amount of funds that could be disbursed.
This is a simpler formula than the Kerrey proposal and essentially has the same
distributional effects. However, the children's hospitals may prefer the formula to
resemble the one used to distribute funds to other teaching hospitals.
Option 4:
Create a discretionary grant program to provide GME funds through the
PHS.
This option could use either the Kerrey formula or the flat, per resident
distribution formula. Alternatively, it could require children's hospitals to submit
an application to receive a GME grant. Potential grantees would submit a
summary detailing the extent of their financial need, an overview of their
curriculum and training, and their previous experience in providing graduate
medical education. Based on Federal review of the grant proposal, hospitals could
receive different levels of funding.
JAN 23-99 16:46 FROM:
ID:
PAGE
2/3
National Association of
Children's Hospitals
MEMO
NACH
TO:
Barbara Woolley, Office of Public Liaison
FROM:
Pete Willson, N.A.C.H. Got
DATE:
January 23, 1999
SUBJECT: Background Information on N.A.C.H.'s Federal Advocacy Issues
Barbara, at Ann's request, I am sending to you the attached one page summary of the
different federal policy issues our member hospitals are asking us to work on this
year. I would be happy to provide additional information that you or Mrs. Clinton's
staff might like to have.
In general, our advocacy agenda is organized around legislation that addresses the
four missions of the children's hospitals: clinical care, education, research, and public
health advocacy devoted to children's unique health care needs.
This agenda reflects the issues of our overall membership, of which only about one-
third are children's teaching hospitals with their own Medicare provider numbers.
For that subset of our membership, who will be attending the meeting with the First
Lady next week, GME is unquestionably their top priority. They would be happy to
discuss only that issue with her.
However, if Mrs. Clinton would like to discuss other issues, I would say that the two
of greatest interest are managed care consumer protection standards, specific to
children's unique health care needs, and increasing federal investment in pediatric
research. In particular, N.A.C.H. and the children's hospitals are advocating:
Managed Care Standards for Children Any consumer protection legislation
should include the protections for children in Sen. Reed's and Rep. Morella's
"Children's Health Insurance Accountability Act," which includes access, appeals
and information requirements specific to children's needs. We are encouraged
that a growing number of bills in Congress are including these provisions.
Pediatric Research N.A.C.H. and member hospitals have strongly supported the
"Pediatric Research Initiative Bill," by Sens. DeWine and Kennedy, which would
establish a multi-year authority for the pediatric research initiative in the office of
the NIH director, which the Appropriations Committees created two years ago. Its
purpose is to make pediatric research a higher priority among all institutes of NIH.
401 Wyrhe Street, Alexandria, VA 22314
An Affiliate of the National Association of
(703) 684-1355 Fax (703) 684-1589
Children's Hospitals & Related Institutions
JAN-23-99 16:46 FROM:
ID:
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Summary
1999 N.A.C.H. FEDERAL ADVOCACY AGENDA
Recommended by the N.A.C.H. Public Policy Council
January 1999
#1 Strengthening Children's Health Coverage
Medicaid: Pursue a three-track agenda: (1) continue to oppose reductions in future Medicaid
spending; (2) continue to advocate appropriate implementation of the "Kerrey/Strickland"
amendment that provides protections for children with special needs in mandatory Medicaid
managed care; and, (3) work toward a long-term Medicaid disproportionate share hospital
(DSH) advocacy strategy.
Private Sector Managed Care: Continue to use a children's managed care bill to build
support for improving the health care quality of children as part of any legislation Congress
considers to regulate the quality of care in managed care plans.
State Children's Health Insurance Program (SCHIP): Advocate effective implementation
of and improvements to SCHIP, including improved outreach, enrollment and data collection.
#2 Strengthening Investment in Pediatric Graduate Medical Education
"Interim" Funding: Continue to advocate "interim," commensurate federal GME support -
$285 million annually - for children's teaching hospitals with their own Medicare provider
numbers. Funding would be "interim" until Congress enacts comprehensive GME reform.
Long-Term GME Reform: Continue to advocate for comprehensive GME financing reform
for all teaching hospitals, including commensurate GME support for children's hospitals.
#3 Strengthening Investment in Pediatric Innovation and Research
Pediatric Biomedical Research: Continue to promote increased appropriations for the
NIH pediatric research initiative and other efforts to boost NIH support for pediatric research.
Pediatric Outcomes Research: Continue to advocate for legislation to designate and
increase appropriations for pediatric health services research, including outcomes research.
Pediatric Public Health Research: Advocate additional Centers for Disease Control and
Prevention (CDC) funding for research on pediatric public health, such as infection control.
#4 Strengthening Public Health Protections
Poison Control: Continue to support the development, introduction, and enactment of
$27.6 million in funding for our nation's poison control centers.
Child Abuse and Neglect: Advocate additional resources for prevention activities such as the
Healthy Families America (HFA) initiative and for research and training.
Gun Safety: Advocate firearms safety measures for children, such as mandatory safety clips.
Anti-Smoking Initiatives: Advocate legislation to reduce children's tobacco consumption,
reduce their environmental exposure to tobacco, and target new tobacco tax revenues to
children's health care.
National Association of
Children's Hospitals
N
THE NEED FOR COMMENSURATE FEDERAL GME FINANCING
FOR FREESTANDING CHILDREN'S HOSPITALS
September 23, 1998
Children's Teaching Hospitals at a Glance
Freestanding children's hospitals are hospitals that serve primarily children and do not share a Medicare
provider number for purposes of third party payment with another institution. In 1998. there are 55
such institutions nationwide, consisting of 45 acute care children's hospitals and 10 children's long-
term specialty hospitals. These hospitals include the leading pediatric medical centers in the country.
Like other teaching hospitals and. in particular. academic medical centers. children's hospitals tend to
treat the most severe. costly cases, while supporting high quality research and teaching programs. An
increasingly competitive health care market dominated by managed care tends not to recognize these
differences. Moreover, unlike adult teaching hospitals. children's hospitals have few Medicare patients.
and therefore receive almost no federal graduate medical education (GME) funding for their residency
positions. Caught in a financial vise between the pressures of market competition and the demands of
teaching, research and high quality care programs, some dimensions of the children's hospitals mission
will begin to suffer.
Children's hospitals were established to provide centers for medical care that put the needs of children
foremost. From the beginning. they have provided family-centered care. delivering the full range of
services needed to care for the child and to support the family throughout the child's course of
treatment. They have provided health professionals experienced in the care of children. who recognize
that a child's illnesses, treatments. and health care needs are often significantly different than adults.
And. they have provided regional centers for highly specialized pediatric care. Since few children
require such care. these regional centers are often essential to assuring its availability.
The children's hospitals have assumed three major missions - patient care, research and teaching -- all
devoted to children's unique health care needs. They are committed to providing quality health care for
all children. regardless of their families' ability to pay. Today. on average. almost 50 percent of the
patient care that freestanding children's hospitals provide is for low income children. either those
covered by Medicaid or those who are uninsured. More than 75 percent of the inpatient care provided
by children's hospitals is devoted to children with one or more chronic conditions.
The acute care children's hospitals offer the complete range of patient care services for children, from
inpatient to ambulatory care. They are regional and national referral centers for very sick children, often
serving as the only source for many critical pediatric services. They also serve as the major source of
pediatric care in many of their service areas and are often the largest providers of primary care to
youngsters in their communities. with clinics serving area neighborhoods.
It is their commitment to children and the close tie between their patient care, research and teaching that
truly set these hospitals apart. As major teaching hospitals, they train a substantial portion of our
I
411 Withe Street. Alexandria. VA 22314
An Affiliate of the National Association of
7031 684-1355 Fax (703) 684-1589
Children's Hospitals & Related Institutions
country's pediatric workforce - more than 25 percent of all pediatricians and over half of many
pediatric subspecialists. as well as a substantial number of required pediatric rotations for many other
residency programs. As academic medical centers devoted to children. they have developed "bench to
bedside" research environments that have led to scientific discoveries. which, in turn. have helped to set
the standard for pediatric care and research around the world. The freestanding children's hospitals and
their affiliated pediatric departments account for one-quarter of all National Institutes of Health (NIH)-
sponsored pediatric research.
Current Challenges
The rapid expansion of a competitive marketplace driven primarily by price is posing significant
challenges for all health care providers. Children's hospitals face many of the same problems of other
"safety net" providers and teaching hospitals. They care for a significant portion of the low-income.
vulnerable population that often requires special consideration. They maintain essential community and
critical care services. whose costs are never fully covered. And. they provide a higher level of complex
care to more severely ill patients than other institutions. (See attached "Indicators... ")
The higher costs resulting from the greater staffing and equipment needs of pediatric care make the last
point an even greater problem for the freestanding children's hospitals. For example. a child under age
two can require on average 40 percent more nursing care per hour of an inpatient stay in a hospital than
an adult inpatient will require. These differences in cost are increasingly unrecognized by a more
competitive medical marketplace.
For teaching hospitals. no challenge is greater than their growing inability to recover the costs of GME.
Medicare has become the mainstay of GME funding as Medicaid's moves to managed care have
resulted in fewer states paying even the direct costs of GME. Other, private payers are increasingly
unwilling to support GME costs at all. For the freestanding children's hospitals. with only a very few
Medicare patients - children with end stage renal disease -- the GME financing issue is critical.
Even as children's hospitals maintain, and often increase, pediatric market share. their patient care
revenues are falling short of covering their patient care costs. A significant percentage of this loss, half
or more in many cases. is attributable to unreimbursed GME costs. This is reflected in children's
teaching hospitals' operating margins. which are substantially lower than other teaching hospitals.
According to 1995 Hospital Cost Report Information System (HCRIS) data. children's hospitals'
operating margins were negative 6.2 percent. on average, compared to negative 3.9 percent for other
teaching hospitals. GME losses per hospital run in the millions of dollars per year and cannot be
sustained.
HOSPITAL OPERATING MARGINS
0
-2
CHILDREN'S
PERCENT
-4
-3.9
ADULT
-6
TEACHING
-6.2
-8
Data reported to the National Association of Children's Hospitals and Related Institutions (NACHRI)
suggest that freestanding children's teaching hospitals' net patient revenues in FY1996 accounted for
about 94% of total operating expenses. The freestanding children's hospitals' total margins still remain
2
sound in most cases, because they and their trustees have devoted themselves to building resources to
assure the hospitals' future and missions. However. operating margins that continue at this negative
rate eventually erode endowment income, as increasing proportions of charitable contributions and
endowment income must be diverted simply to cover operating margin deficits.
Endowment income and charitable contributions vary widely among institutions. but their intended
purpose is typically the same:
They support both primary and specialty care services for children who have inadequate or no
health care insurance, as well as related services that often are needed to ensure that children of low
income families have access to the services they need, such as transportation and social services.
They provide the investments in start-up and uncovered indirect costs. which research programs
must have, and they support unsponsored research, which funds new investigations. serving as a
source of funds for creative research topics.
They support essential facilities maintenance and improvements. which often are an important part
of the hospital's overall efforts to remain competitive with other facilities.
They support community services, including services for children for which reimbursement often is
inadequate or non-existent, such as child abuse treatment, child life, and poison control centers.
They make possible many of the hospitals' efforts to promote the health and well-being of all of the
children of the community, not just their patients. such as public education programs for car seat
and seat belt safety, motorcycle and bike helmet safety, immunizations, hot water and pool safety,
firearms safety. children abuse prevention. and more.
Often. these resources are significantly restricted for specific purposes. The demands on this income
have never been greater, particularly at a time when the hospital industry overall is experiencing a
significant decline in philanthropic support in recent years, according to the Association for Healthcare
Philanthropy. And, often, the hospitals possess neither the flexibility nor the capacity to create or
sustain donor or operating income endowments to support GME.
Finding a Solution
The National Association of Children's Hospitals (N.A.C.H.) has long supported a broad-based
financing system for graduate medical education, an approach that could include our nation's
freestanding children's hospitals. If such a broad-based system is not imminent. however, the
children's hospitals must seek an interim solution.
GME PAYMENTS PER RESIDENT
POSITION
76000
80000
DOLLARS
60000
CHILDRENS
40000
20000
400
ADULT
0
TEACHING
1
3
The current system of financing GME has created a serious inequity for these institutions. Competitors
either have no academic missions or they receive federal support for GME through Medicare in
combined direct and indirect medical education payments. Based on the most recent HCRIS data.
teaching hospitals overall receive on average over $76,000 per resident a year from Medicare. while the
freestanding children's hospitals receive less than $400, on average. However unintended it may be,
this huge difference in federal support creates a dramatic competitive disadvantage for these children's
hospitals.
Providing a level playing field for GME for the freestanding children's hospitals would enable them to
remain competitive in an increasingly tight market, allow them to offer a better value for the consumer,
and prevent fragmentation of pediatric services. For some of the freestanding children's hospitals, this
is an issue of immediate, serious financial concern. For others, it is an issue of diverting other critical
resources to GME. For many, decisions to reduce residents are being made.
The field of pediatrics cannot afford the risk of freestanding children's hospitals being forced -- by a
federal GME funding policy tied largely to patients they do not serve -- to reduce or abandon their
academic missions. Not only do they train a significant portion of the nation's pediatric health
professionals, most of whom are in primary care, they provide this training in an environment where
residents can experience the entire range of pediatric care. It takes a substantial pediatric patient
population to provide this range. In addition, the hospitals' academic programs provide the
underpinning of their research programs and contributions to the advancement of pediatric medicine.
Eliminating their teaching programs would fundamentally alter the missions of these institutions.
Because of the significance of this problem, not just for the affected children's hospitals but for the
entire field of pediatric medicine and the future pediatric workforce. the American Academy of
Pediatrics, Association of American Medical Colleges. Association of Medical School Pediatric
Department Chairs, Conference of Boston Teaching Hospitals, Utah Medical Education Council, and
National Association of Children's Hospitals strongly support efforts to provide commensurate federal
direct and indirect medical education support for freestanding children's teaching hospitals. including
interim support until comprehensive GME financing reform is achieved.
Request to The Bipartisan Commission and MedPAC
As the National Bipartisan Commission on the Future of Medicare and the Medicare Payment Advisory
Commission consider their recommendations to Congress on graduate medical education, N.A.C.H.
asks that the freestanding children's hospitals be included in the deliberations. Currently, proposed
bipartisan legislation in the House and Senate, the "Children's Hospitals Education and Research Act,"
H.R.3855 and S.2049. would provide federal GME funding to the children's hospitals on an interim
basis - two to four years -- prior to the achievement of any broad-based reform. (See attachment
"Support for ")
N.A.C.H. would appreciate the opportunity to assist the Commission in assessing both interim and
long-term approaches to equitable GME financing for these institutions.
4
Indicators of Financial Status
of Children's Teaching Hospitals
with Their Own Medicare Provider Numbers
The following data on the performance of freestanding. acute care children's teaching hospitals for FY
1996 were reported to the National Association of Children's Hospitals and Related Institutions
(NACHRI). The reporting hospitals represent the largest of the nation's children's teaching hospitals
with their own Medicare provider numbers.
Safetv Net Service
Because they are devoted to caring for all children, regardless of economic or medical condition.
children's hospitals are major providers of care for children who rely on Medicaid. Over the three most
recent fiscal years for which data are available, children's teaching hospitals on average devoted nearly
half of their care to children of low income families - 42% Medicaid and 6% bad debt/charity. The
balance included 1% Medicare. 2% other government. and 49% commercial/direct employer coverage.
Medicaid, Bad Debt, and Charity:
48% of Gross Revenues
Because of their volume of service to children of low-income families, children's hospitals are often the
recipients of significant Medicaid disproportionate share (DSH) payments. However. even with DSH
payments, Medicaid reimbursement still falls far short of the cost of caring for Medicaid patients.
Medicaid reimbursement, including DSH payments. averaged only 81% of expenses. Without DSH
payments. Medicaid reimbursement averaged only 74% of expenses.
Medicaid and DSH Reimbursement: 81% of Costs
Medicaid without DSH Reimbursement: 74%
Financial Performance
While children's teaching hospitals. on average. operate in the black, they do so only marginally. Total
Net patient revenues fell short of their total operating expenses -- about 94% of total operating
expenses.
Net Patient Revenue/Total Operating Expenses: 94%
Case Mix Intensity
Compared to other hospitals. children's teaching hospitals have significantly greater case mix intensity.
Children's teaching hospitals' case mix index averaged 1.47. compared to 1.29 for all teaching
hospitals, and 0.74 for community hospitals.
Case Mix Index for Children's Teaching Hospitals: 1.47
Case Mix Index for All Teaching Hospitals: 1.29
Case Mix Index for Community Hospitals: 0.74
5
Medicare,and Graduate Medical Education
http://www.cbo.gov/showdoc.cfm?index=17&sequence=l&fron
Medicare and Graduate Medical Education
Section 2 of 8
September 1995
Summary
T
he federal government subsidizes graduate medical education (GME)--the training of medical residents--in amounts
that are expected to exceed $6 billion for fiscal year 1995. The bulk of those subsidies are payments that the Medicare
program makes to teaching hospitals (hospitals with residency training programs). Medicare's GME payments are projected
to grow to more than $7.5 billion in 2000. That annual figure is a substantial amount of money for a controversial
program--or really, a pair of programs--that pay more to a teaching hospital the more residents it has. Given current concerns
about both the federal budget in general and the solvency of Medicare in particular, this is an opportune time to reevaluate
the arguments for and against those GME payments and to consider various policy options.
Types of Medicare GME Subsidies
The Medicare program makes payments for graduate medical education to the approximately 1,200 U.S. teaching hospitals
through two significant programs: direct graduate medical education (DME) payments and the indirect medical education
(IME) adjustment, which is sometimes called the indirect teaching adjustment. DME payments to a teaching hospital are
based on Medicare's share of the hospital's inpatient days, the direct costs per resident that the hospital incurred during a year
in the mid-1980s (those costs have, in general, been updated for inflation), and the number of residents training at the
hospital.
In contrast, IME payments to a teaching hospital are calculated as an adjustment to the payments that Medicare makes to a
hospital for inpatient services provided to Medicare beneficiaries. In other words, if two otherwise identical hospitals each
admit a Medicare beneficiary for the same diagnosis, the teaching hospital will receive a higher payment than the
nonteaching hospital. And the percentage add-on increases as the teaching hospital's ratio of residents to beds grows.
DME and IME payments result in a substantial marginal subsidy for each hospital resident. The Congressional Budget
Office's analysis of data from the Health Care Financing Administration indicates that for hospitals in the middle of the
distribution in terms of subsidies per resident, an additional resident means that the hospital receives between $58,000 and
$102,000 (in 1993 dollars) more in annual payments. About one-fourth of the teaching hospitals receive more than $102,000
annually for adding another resident, whereas about one-fourth of the hospitals receive less than $58,000 for one more. (For
almost all residents who are beyond five years of residency or beyond the minimum number of residency years to be eligible
for specialty board certification, the analogous range is about $47,000 to $86,000.) Clearly, both the absolute size of the
subsidy per resident and the variation in subsidies among hospitals are substantial.
Average stipends for residents range between about $30,000 and $38,000 per year depending on the resident's years of
experience. Fringe benefits add an average of 18 percent to the stipend, resulting in an average range of compensation of
between about $35,000 and $45,000. Thus, the average stipend and fringe benefits of residents are less than the marginal
DME and IME subsidies for more than three-fourths of the nation's teaching hospitals. An additional benefit to the hospitals
from hiring residents is the value of the patient care services that residents provide. Additional costs that hospitals incur can
include the time of the teaching staff that is taken up in training residents, payments to the teaching staff, overhead costs
related to residency training, and the costs of extra tests or slower services because of the use of residents.
Trends in the Number of Residents
The number of medical residents in the United States has generally been increasing. The number of residents grew from
83,000 in 1988 to 102,000 in 1993. Because the number of graduates of U.S. medical schools has remained approximately
constant, much of the growth in the number of residents comes from foreign medical school graduates (FMGs) who fill
hospital residency positions in this country. Between 1988 and 1993, the number of FMGs grew from 14 percent of the total
number of residents to 23 percent. Over 60 percent of the growth in the number of residents can be attributed to increases in
the number of FMGs who are training in the United States. (Previous experience suggests that most FMGs who train here
will eventually practice here.)
Should the Government Maintain the Current GME Subsidies?
I of 3
11/16/98 10:18 AM
Medicare and Graduate Medical Education
http://www.cbo.gov/showdoc.cfm?index=17&sequence=I&trom=l
Whether the federal government should subsidize GME is a controversial issue. At a theoretical level, neoclassical economic
reasoning would lead to questions about the need for government intervention to promote residency training. That line of
argument proceeds as follows. Residents are receiving training and experience that will enable them to become competent,
well-paid physicians. For an economically efficient level of training to result, the individual who will benefit from the
training in the form of higher future earnings should pay the costs of it. In the context of the residency, a trainee pays for the
costs that the hospital incurs by accepting a stipend that is lower in value than the services the resident provides. Whether
costs are "direct" or "indirect" is a superficial distinction--those combined costs can be implicitly paid by the residents in the
form of stipends that fall short of the value of their services. GME subsidies, by increasing the apparent value of residents to
the hospital beyond their actual value in providing services, encourage more training of residents than would otherwise
occur. By that line of argument, valued medical services provided by residents to Medicare beneficiaries should be paid for
by Medicare, but training-related costs should not.
The subsidization of the supply of physicians through GME payments by the federal government seems to be poorly
coordinated with emerging trends in the marketplace. Many experts believe that the growth of managed care in both the
private and government-provided insurance markets will lead to (or perhaps has already led to) a situation in which the
demand for physicians, especially non-primary care physicians, falls relative to the supply. Yet the presence of the subsidies
encourages larger increases in the number of physicians than would otherwise occur.
The arguments in favor of continuing GME payments revolve around the consequences of reducing or eliminating the
subsidies. GME subsidies constitute a significant portion of the revenues of teaching hospitals: for private major teaching
hospitals, GME payments are more than 7 percent of total hospital revenues, and for smaller teaching hospitals, GME
subsidies are about 2.4 percent of revenues. Significant reductions in those payments could bring about a drop in the
activities and services that teaching hospitals provide. Both the number of residents and the years of training of the typical
resident might fall compared with what they would otherwise have been. Services might be curtailed in other areas besides
the training of residents. Research, investment in new technologies, access for Medicare enrollees, medical school resources,
and care for indigent people might all be reduced as a consequence of cuts in GME payments.
Because resident physicians become the trained doctors of the future, GME policy plays a role in determining the future
characteristics of the medical workforce and the health care industry in the United States. Whether and, if so, how GME
policy should be used to manipulate the shape and size of the future stock of physicians is another contentious issue.
Policy Options
Options for changing the financing of GME reflect a variety of policy goals including changing the level of federal
expenditures, altering the future number of primary care (as opposed to more specialized) doctors, encouraging efficient
amounts of training for new physicians, providing sufficient access to care for Medicare beneficiaries, encouraging medical
research and development, and providing for the care of indigent people. Possible options range from modifying payments
within the current structure of Medicare GME subsidies to more radical changes.
Reduce the IME subsidy. This option would more closely align payments to teaching hospitals for inpatient services
provided to Medicare beneficiaries with the costs that are correlated with training residents. However, residency
training would probably be curtailed, and other services of teaching hospitals might decline.
Alter GME subsidies further in the direction of paying teaching hospitals relatively more for primary care residents.
This change would encourage more primary care training. Whether that shift turned out to be an appropriate direction
would depend on the validity of forecasts of a greater demand or need for primary care services.
Form an all-payer GME fund. This approach could maintain revenues for teaching hospitals while decreasing the
amount of money coming from Medicare. However, it amounts to substituting one form of government-imposed
financing for another.
Replace the current structure of the subsidies with a voucher system. This option could lead to greater flexibility in
the site of residency training, which opponents of the present system have argued is biased toward hospital-based
training. The impact of such a sweeping change is highly uncertain.
Set quotas on the number and types of residency positions, and use the potential loss of GME funds as an enforcement
mechanism. This approach could increase the speed with which the medical workforce adjusts to reach the primary
care proportions advocated by some workforce experts. Quotas could, however, lead to a mismatch between the
actual workforce and future demands for physicians' services.
Replace DME and IME payments with subsidies targeted more specifically toward the public goods that the
government wishes to sponsor. This change would reduce the incentive to increase the future supply of physicians but
lessen the possibility that the weight of the declines in GME payments would fall on indigent care, research, or access
to care for Medicare beneficiaries.
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Medicare and Graduate Medical Education
Section 3 of 8
September 1995
Chapter One
Introduction
F
ederal payments related to training resident physicians are expected to exceed $6 billion for fiscal year 1995.(1) The
bulk of those graduate medical education (GME) payments flow directly to teaching hospitals through the Medicare
program.(2) (Teaching hospitals are hospitals that have residency training programs.)
Many occupations involve a period of general training--much of it on the job--in which the young adult pays for the various
costs of that training in the form of low rates of pay or outright tuition payments. What makes medical training unusual is the
substantial amount of federal funds that subsidize the general post-medical school-training of physicians. The vast majority
of graduates of U.S. medical schools receive residency training subsidized by federal dollars. Furthermore, that subsidization
extends to graduates of foreign medical schools--many of whom are foreign citizens--who fill a significant proportion of
residency positions that are supported by federal subsidies.(3)
Questions about the logic behind federal subsidization of residency training and the sheer size of the subsidies have led
observers to suggest that the government review its current GME policy. Such a review appears to be especially relevant in
an era of growing concern over both the fraction of the economy's resources that is devoted to medical care and the fiscal
strains on the federal budget generally and the Medicare program in particular.
Changes in federal policy toward residency training would affect the size and characteristics of the future physician
workforce. Thus, GME policy will necessarily affect the future mix, cost, availability, and quality of medical care. A number
of private-sector institutions and individuals including doctors, hospitals, insurers, managed care organizations, employers,
and consumers will also be affected by GME policy decisions. This study examines trends in the size of the physician
workforce and the distribution of specialties within it and describes the economic forces, including federal GME policies,
that help to determine the workforce's shape. The study also presents options for addressing several health care issues
through changes in GME policy.
Background
Some historical background helps explain why federal subsidization of medical residency training was once so readily
accepted but now is increasingly questioned. In the early 1960s, the medical sector of the U.S. economy bore little
resemblance to the medical sector of today. No large, federally sponsored medical insurance programs covered elderly or
indigent people, and the health care economy as a whole was much smaller.
The mid-1960s was a time of sweeping government intervention in the health care industry. The Congress enacted legislation
creating Medicare and Medicaid, and those programs brought about a large increase in the demand (or willingness to pay) for
medical services. Not only did the government take on a substantial role in subsidizing the demand for medical care, but it
also provided support on the supply side. That support included payments to medical schools for increasing the size of their
classes and an acceptance by the Medicare program that it should pay some share of the costs for residency training. (At that
time, many people held the view that an increase in the number of physicians was desirable.)
As the end of the century approaches, the past 35 years can be characterized as a period of remarkable successes for which
the nation has incurred high costs. Elderly people in the United States are covered by Medicare. Particular groups of
low-income people are covered by Medicaid. Today, the number of fully trained patient care physicians for every 1,000
people is about 1.8, compared with around 1.1 in the mid-1960s.(4) Substantial advances in medical technology have
occurred. But costs have also been noteworthy. National health expenditures are now about 14 percent of the nation's gross
domestic product--more than double their share of 30 years ago, which stood at 5.9 percent. The fraction of the federal
budget that goes toward health care is now almost 20 percent.
A number of questions claim the attention of today's health policymakers. One concern is whether too many of the
economy's resources are being used to provide medical care. Several issues relate to the supply of physicians' services. How
many physicians should be in training? What kinds of physicians, in terms of specialty, should be trained? How can the
distribution of physicians among urban, suburban, and rural areas be altered?
Even critics who have different philosophical and political perspectives may conclude that the number of physicians being
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trained is excessive and that overtraining may be a problem. Arrangements for financing medical residency training
contribute to those views. Critics with a free-market perspective argue that if general training is worthwhile, the benefits,
which will flow to the doctor in the form of higher future income, will outweigh the costs of training, which are paid by the
young doctor in the form of low income during residency and difficult working conditions. (5) Such critics maintain that GME
subsidization distorts market signals by making training appear less costly than in fact it is. According to that line of
argument, it follows that too many doctors receive too much training.
Critics with a planning perspective support targets for the medical workforce based on assumptions about the number of
different kinds of specialists that are required to fill the medical needs of the population. Such critics argue that there are too
many doctors and that they are too highly specialized. Although these critics would reject a free-market approach in the
medical care sector, they too would tend to question the merits of current GME policy. GME subsidization encourages a
greater supply of physicians than would otherwise result. Furthermore, because the Medicare subsidies go exclusively to
teaching hospitals, decisions about the site of training may be distorted by that financial incentive. Critics of current policy
contend that such distortions have kept training away from ambulatory, primary care settings and reinforced its presence in
more specialized and more technologically costly settings. As a result, current GME policy is not consistent with the goals of
a smaller, less specialized physician workforce.
The Physician Workforce
The characteristics of today's workforce of fully trained physicians represent the cumulative decisions of many previous
cohorts of medical residents. The future composition of the workforce depends on the makeup of the pool of physicians who
are already trained and on the decisions made by current medical residents and future cohorts of residents about the
specialties they will pursue. The workforce is also shaped by the characteristics of immigrating physicians.
The Mix of Physicians in Primary Care Versus Non-Primary Care Specialties
The relative balance of physicians in primary care specialties versus non-primary care fields continues to be an area of
concern among health policymakers. Although no clear-cut definition of "primary care" exists, characteristics that tend to be
associated with the concept of a primary care physician include being a point of first contact for a patient with the medical
care system and providing routine examinations and vaccinations. Another distinction that people sometimes make is that
primary care physicians are less oriented toward procedures (such as surgical interventions) than are non-primary care
physicians. Yet another characteristic that is sometimes associated with primary care specialties is the breadth of patient
problems that such physicians handle. Some people might argue that a primary care physician is one who engages in a broad
range of activities, whereas a non-primary care doctor is one who treats only a narrow range of illnesses.
The above set of plausible characteristics for defining primary care is somewhat unsatisfactory because certain physicians
will fit some of the attributes but not others. Nonetheless, a widely accepted view is that general practice, family practice,
general internal medicine, and general pediatrics are primary care specialties; obstetrics and gynecology might also belong in
the primary care category.(6)
Over the past three decades, the general trend has been a decline in the fraction of fully trained physicians who are in primary
care specialties. In 1965, 51 percent of doctors involved in patient care were in the primary care fields of general practice,
internal medicine, and pediatrics. Obstetrics and gynecology accounted for a further 6.3 percent of trained doctors. Surgical
specialties (including general surgery) accounted for 21 percent of the workforce; other non-primary care specialties and
subspecialties of internal medicine and pediatrics accounted for 21 percent as well.(7)
Today, most fully trained physicians do not consider a primary care specialty to be their principal activity. The primary care
fields of general practice, family practice, general internal medicine, and general pediatrics account for 34 percent of all fully
trained physicians who are involved in patient care. Obstetrics and gynecology accounts for a further 6.5 percent. The
remainder of the trained physician workforce is divided as follows: surgical specialties including general surgery, 19 percent;
other non- primary care specialties including anesthesiology and radiology among others, 29 percent; and the subspecialties
of internal medicine and pediatrics, 11 percent (see Figure (8)
The fraction of the stock of fully trained physicians who actually spend some of their practice doing primary care exceeds the
34 percent who categorize themselves as primary care physicians. Physicians are self-categorized based on the specialty in
which they spend the greatest amount of time in their practice; however, some physicians also report practice hours spent in
specialties other than their principal one. In 1992, 47 percent of physicians reported some practice time in a primary care
specialty. (9)
Physicians in some specialties could make a transition into primary care more readily than physicians in others. Doctors who
practice the subspecialties of internal medicine or of pediatrics have done residency training in general internal medicine or
pediatrics and then received further education in a subspecialty area. In principle, those physicians could move into primary
care practice because they have already received formal training in a primary care specialty. But whether subspecialists
reconfigure their practices toward primary care depends on the future marketplace for health care services and whether the
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relative returns from primary care practice rise sufficiently to encourage such changes. Many of these subspecialists already
spend some of their time practicing primary care. Over 75 percent of subspecialists in internal medicine and about 65 percent
of subspecialists in pediatrics report spending some hours of their practice in a primary care specialty.
The degree of concern arising over the relative number of primary care physicians may depend on how rigidly one defines a
primary care practitioner. As Figure 1 indicates, the fraction of physicians with a primary care specialty as their principal
specialty has declined since 1965. If, however, one also includes subspecialists of internal medicine and of pediatrics on the
grounds that they are potential primary care practitioners, the picture looks somewhat different. The combined fraction of
actual and potential primary care practitioners fell from 1965 to 1975 but has since remained approximately constant.
Moreover, the fraction of doctors who spend some time doing primary care significantly exceeds the fraction who call
primary care their principal practice activity.
Figure 1.
Distribution of Fully Trained Physicians Engaged in Patient Care, by Specialty, Selected Years, 1965 Through 1993
Percent
123
11
Ciii specification
"
Burgical becauses
"
Obstatric sire Ornecation
JE
Nations and Patistrict
:1
Card
$
1361
13:0
1371
1581
1981
1335
1533
SOURCE: Congressional Budget Office calculations based on data from American Medical Association (AMA), Distribution of Physicians in
the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975 (Chicago: AMA, 1976), and
Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982, 1986, 1992, and 1994).
NOTES: Data are for fully trained physicians who are actively engaged in patient care; that is, the data exclude residents and those fully
trained physicians who are employed in professional activities other than patient care (for example, administration or medical research). The
specialties of physicians are self-reported and refer to the principal specialty practiced by the doctor. Osteopaths are not included.
Data for 1990 and 1993 are as of January 1. Data for all other years are as of December 31. See Appendix Table A-1.
Most of the growth in the number of fully trained physicians who are involved in patient care has been concentrated in the
non-primary care specialties (see Figure 2). The number of primary care physicians--strictly confined to the specialties of
general or family practice, general internal medicine, and general pediatrics--per 1,000 people grew only slightly between
1965 and 1993. The larger set of doctors that includes subspecialists who have trained in internal medicine or pediatrics grew
somewhat more, from just under 0.6 per 1,000 people in 1965 to 0.8 in 1993.
The Geographic Distribution of Physicians
Although the number of doctors per 1,000 people has risen substantially over time, a number of geographic locales--in rural
and some urban areas--are still characterized as having an inadequate supply of physicians. An extreme example of an
underserved area is a county with no doctor. Since 1976, the fraction of people living in such counties has barely changed. In
1976, 4.3 percent of U.S. counties did not have an active physician providing patient care; the population in those counties
was 0.23 percent of the total U.S. population. In 1993, 4.8 percent of U.S. counties did not have an active physician, and the
population in those counties was 0.22 percent of the 1993 U.S. population.
Figure 2.
Fully Trained Physicians Engaged in Patient Care per 1,000 People, by Specialty, Selected Years, 1965 Through 1993
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Physicians per 1,000 people
2.)
1.1
15
1.3
fir
11
0.1
ill
If
and
0.5
0.)
Prin Cirs
01
ISES
1570
'9'1
1111
1331
1233
1931
SOURCE: Congressional Budget Office calculations based on data from American Medical Association (AMA), Distribution of Physicians in
the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975 (Chicago: AMA, 1976), and
Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982, 1986, 1992, and 1994).
NOTES: Data are for fully trained physicians who are actively engaged in patient care; that is, the data exclude residents and those fully
trained physicians who are employed in professional activities other than patient care (for example, administration or medical research). The
specialties of physicians are self-reported and refer to the principal specialty practiced by the doctor. Osteopaths are not included.
The "Other" category comprises fully trained physicians practicing in the specialties of obstetrics and gynecology, surgery, and other
non-primary care fields.
Data for 1990 and 1993 are as of January 1. Data for all other years are as of December 31. Data are plotted at the intervals shown. See
Appendix Table A-2.
The Path of New Physicians into the Trained Physician Workforce
After graduating from medical school, a new physician typically enters a residency training program centered at one of the
approximately 1,200 U.S. teaching hospitals. The "major" teaching hospitals--those with resident-to-bed ratios of at least
0.25--are less than one-fourth of the teaching hospitals but train about two-thirds of the residents. Besides the approximately
15,500 annual graduates of U.S. medical schools, the cohort of first-year hospital residents includes over 6,500 doctors who
attended a non-U.S. medical school. Some of the latter doctors are U.S. citizens who received their medical education in
another country, but about 80 percent of the foreign medical graduates (FMGs) who train as medical residents in the United
States are foreign citizens. The fraction of medical residents who are FMGs has climbed from 14 percent in the 1988-1989
training year to 23 percent in 1993-1994. Approximately 70 percent to 75 percent of those FMGs are expected to eventually
enter the physician workforce in the United States. (10)
Residency training ranges from three to about seven years depending on the specialty or subspecialty. The primary care
fields have shorter training periods; the surgical subspecialties tend to have longer ones (see Figure 3).
Because of the sequential nature of decisions to enter some fields, a census of first-year residents is not a clear indicator of
that cohort's ultimate distribution among the various categories of medical practice. For example, based on the behavior of
the cohort entering training in 1987, only 36 percent of the residents who spend their first year of residency training in
general internal medicine end their training in that specialty. The other 64 percent of such residents finish their post-medical
school training in a subspecialty of internal medicine, such as cardiology, endocrinology, or gastroenterology, or in another
specialty, such as neurology or ophthalmology. Similarly, only 58 percent of residents who start in general pediatrics end
their training as general pediatricians. Much of the gap is accounted for by those who decide to enter a subspecialty of
pediatrics. In contrast, some fields show a high degree of predictability based on the first-year cohort: for example, 97
percent of those who start in family practice residencies finish their residency training as family practitioners.
Although the fraction of residents training in a primary care specialty or a subspecialty of a primary care specialty appears to
have grown since 1965, several qualifications apply to that apparent trend (see Figure 4). Before 1969, official certification
in family practice did not exist. Today, three-year residency programs in family practice are well established. Thus, the
apparent growth in family or general practice residents between 1965 and 1980 may reflect the introduction of the three-year
family practice option rather than an increased propensity for young doctors to enter primary care. Another point is that
because of data limitations, internal medicine and its subspecialties are lumped together. As a result, it is impossible to isolate
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the fraction of residents who are training in a strictly defined primary care specialty.
Several noteworthy patterns in the shares of residents in different fields have emerged over the past 30 years. Between 1981
and 1993, the fraction of residents in family or general practice has declined, but it was almost constant between 1990 and
1993. The proportion of residents in a much more inclusive group of potential primary care physicians (including internal
medicine and pediatrics and their subspecialties) grew from 41 percent in 1981 to 48 percent in 1993.
Recent Cohorts of Trainees
The cohort of doctors who began their residency training in 1992 is projected to roughly match the current population of
fully trained doctors in terms of their distribution among specialties. If the transition patterns of the 1987 cohort of first-year
residents are repeated in the 1992 cohort (almost all of whose members will have completed their graduate medical education
by 1999), 33 percent will enter the workforce of trained physicians in the primary care fields of either family practice,
general internal medicine, or general pediatrics. (In comparison, in 1993, 34 percent of the workforce of fully trained patient
care physicians had a principal primary care specialty.) Six percent of the 1992 cohort would be expected to enter obstetrics
and gynecology, and the remaining 61 percent would enter non-primary care fields. (11)
Figure 3.
Typical Patterns of Residency Training, by Specialty
Year of Graduate Medical Education
1
2
3
4
5
6 to 7
Family Practice
General Pediatrics
General Pediatrics
Subspecialties of Pediatrics
General Internal Medicine (IM)
General Internal Medicine
Subspecialties of IM
IM
Dermatology
IM
Neurology
Psychiatry
Obstetrics and Gynecology
General Surgery (GS)
General Surgery
Plastic/Colon/Thoracic Surgery
GS
Neurosurgery
GS
Orthopedic Surgery
GS
Otolaryngology
General Surgery
Urology
Pathology
Anesthesiology
Transitional
Ophthalmology
Yearᵃ
Physical Medicine
Radiology
SOURCE: Congressional Budget Office calculations based on National Resident Matching Program (NRMP), NRMP Directory (Evanston, III.:
NRMP, various years); American Board of Medical Specialties (ABMS), ABMS Annual Report and Reference Handbook--1994 (Evanston, III.:
ABMS, 1994); and American Medical Association (AMA), Directory of Graduate Medical Education Programs (Chicago: AMA, various years).
NOTE: These paths are only representative of training patterns for the different specialties, and not all fields are shown. In addition, many of
the specialties above have subspecialties that entail additional years of training but are not included in this illustrative figure.
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a. The transitional year is one during which the resident develops basic clinical skills.
Figure 4.
Distribution of Residents by Specialty, Selected Years, 1965 Through 1993
Percent
121
131
Care Specificant
"
Forget SpecialDes
if
Obstance Generalogy
Patistrics and Paciatric
"
In 111
21
If Medicine
Bahspecialbes
General Practice 301
I
Finily Pratuce
an
1171
1176
1901
1183
IN
1110
1992
SOURCE: Congressional Budget Office calculations based on data for 1965 through 1985 from American Medical Association (AMA),
Distribution of Physicians in the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975
(Chicago: AMA, 1976), and Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982 and 1986); and on data for 1988
through 1993 from the American Association of Medical Colleges.
NOTES: Comparisons between the earlier and later years shown above must be made cautiously because specialties are unknown for a large
proportion of residents in the earlier years and the three-year family practice residency was a new option in the 1970s. In addition, different
data sources were used for the earlier and later years.
The "Unknown" category includes residents in a transitional year (a year of basic clinical training).
Osteopathic doctors in M.D. residency programs are included in the data. Data appear in Appendix Table A-3.
The projected percentages given above may be faulty to the extent that economic incentives alter the likelihood that a
resident who is training in a particular field during a particular residency year will either continue in that field or move to
training in another field for the next year. Such patterns are not fixed, and they are likely to respond to changes in the
economic incentives of teaching hospitals or residents. Those alterations could result from modifications in government
policy or changes in the private marketplace for physicians' services.
The Federal Government's Role in Shaping the Physician Workforce
Federal policies may affect the number of physicians and their distribution among specialties by altering the economic
incentives faced by both the people and the institutions that are or may be involved in medical training. The people include
medical students (those trained in both U.S. and foreign medical schools), medical residents, and potential medical students.
The institutions include medical schools and teaching hospitals as well as health maintenance organizations (which have the
potential to become more involved in training activities). In the context of graduate medical education for physicians,
policies aimed at residency training and policies that affect the economic rewards from practice in the different specialties
can influence the size and composition of the physician workforce. Because the magnitude of the effects of various policies
on the physician workforce is uncertain, this study confines itself to assessing the direction of those effects.
Medicare Payments to Teaching Hospitals
The most apparent federal funding of GME comes through the Medicare program. Under current law, the federal
government, through Medicare, provides about $6 billion per year in subsidies related to the graduate medical education of
physicians. The Medicare subsidy program has two parts: the direct graduate medical education (DME) subsidy and the
indirect medical education (IME) teaching adjustment (see Box 1). The DME payment is based on the number of residents
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training at the teaching hospital, the typical costs that hospital incurred for training a resident physician in a period roughly
corresponding to fiscal year 1984 (adjusted for inflation), and the Medicare patient load of the hospital. DME payments,
which for 1994 amounted to almost $2 billion, are intended to cover Medicare's share of the direct costs--such as residents'
stipends (or salaries) and fringe benefits, salaries for teaching personnel, and overhead--of residency training programs. (12)
The IME teaching adjustment is a subsidy to teaching hospitals in the form of a percentage add-on to the reimbursement for
each Medicare patient admitted to the hospital. The percentage adjustment increases with the resident-to-bed ratio. The
adjustment is approximately 7.7 percent for going from a resident-to-bed ratio of zero to 0.1; however, the marginal
adjustment falls as that ratio continues to rise (see Box 1 for the exact formula). Thus, a teaching hospital that has a
resident-to-bed ratio of 0.1 receives an additional payment equal to 7.4 percent of the Medicare diagnosis-related group
(DRG) payments to that hospital for inpatient hospital services provided to Medicare beneficiaries. (13) A hospital with a
resident-to-bed ratio of 0.2 receives an additional payment equal to 14.5 percent of Medicare DRG payments to the hospital.
These "indirect" medical education payments amount to about $4 billion annually.
Supporters of IME payments view them as an attempt to reimburse teaching hospitals more than nonteaching hospitals
because the costs of teaching hospitals are generally greater. Advocates cite a number of reasons, not all of which are related
to teaching, to justify the payments. The reasons given for teaching hospitals' higher costs include the larger number of tests
ordered by residents and other inefficiencies caused by residents' lack of experience, the greater severity of the cases such
hospitals treat, the need to be at the forefront of technology and research, and the provision of more uncompensated care and
care for indigent people.
The Size of GME Payments in Total Hospital Revenues
GME payments constitute a significant percentage of the revenues of teaching hospitals. For all teaching hospitals, total
GME payments account for almost 4 percent of total revenues (see Table 1 on page 12). (Total hospital revenues include
patient revenues from all sources as well as donations, income from investments, and governmental appropriations.)
How significant GME subsidies are in relation to total hospital revenues varies among different categories of teaching
hospitals. Private major teaching hospitals obtain more than 7 percent of their revenues from Medicare GME payments. In
comparison, public major teaching hospitals get just over 4 percent of their revenues from such payments, and other teaching
hospitals receive only about 2.4 percent. Perhaps the difference between major teaching hospitals and other teaching
hospitals is not surprising since major teaching hospitals have more residents and therefore receive more in GME payments.
Other categories of hospitals for which GME payments constitute at least 4.5 percent of total revenues include
disproportionate share teaching hospitals in large urban areas, teaching hospitals with more than 400 beds, and teaching
hospitals in the New England and mid-Atlantic regions.
Box 1.
Medicare's Subsidies for Graduate Medical Education
The Medicare program provides teaching hospitals with two kinds of subsidies that are based on the size of their graduate
medical education programs. Those payments are called direct graduate medical education (DME) payments and the
indirect medical education (IME) adjustment.
Direct Graduate Medical Education Payments
For its DME payment, a teaching hospital receives an amount equal to the product of three factors: its "Medicare patient
load," its adjusted number of full-time-equivalent (FTE) residents, and its allowed amount per resident.
The hospital's Medicare patient load is the fraction of its total number of inpatient days that Medicare beneficiaries
represent.
The adjusted number of FTE residents is calculated by considering each resident in an approved training program
based at the hospital, calculating the degree to which that resident is in the program full time, and then multiplying
by an adjustment weight. The weight equals 1.0 for residents who are in their "initial residency period" (IRP) and
who have not been in training for more than five years. (Residents in geriatric fellowships may receive a weight
of 1.0 for two additional years.) Other residents receive a weight of 0.5. Graduates of foreign medical schools
must have passed a competency exam to be counted toward DME payments.
The allowed per-resident amount differs among hospitals. It is based on the direct graduate medical education
costs per resident incurred by the hospital in a period roughly corresponding to fiscal year 1984, increased by 1
percent and updated for changes in the consumer price index for urban consumers (CPI-U). For fiscal years 1994
and 1995, only residency positions in primary care and in obstetrics and gynecology receive the CPI-U update.
Indirect Medical Education Adjustment
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The additional amount Medicare pays to a teaching hospital equals the hospital's total Medicare diagnosis-related group
(DRG) payments for inpatient services multiplied by a factor that is calculated according to a specific mathematical
formula:
IME = DRG payments x 1.89 x
(1 + {resident 405 ) - 1].
Under the formula, the hospital's payments increase with the resident-to-bed ratio (the ratio of the number of FTE
residents in approved training programs who work in the hospital to the number of beds). A hospital receives
approximately 7.7 percent more in payments for each 0.1 increase in the ratio of residents to beds. The various
provisions that reduce the weight of many residents in the calculation of DME payments do not apply to the count of
FTEs that is used to calculate the indirect adjustment.
Other Payments
Medicare's payments to hospitals for capital-related costs also include an adjustment that gives larger payments to
hospitals that have more residents. Those payments are quite small in comparison with DME and IME payments and are
not discussed in this study.
Illustrative Examples
The table at right shows the relevant information for calculating the marginal subsidy per resident for three different
teaching hospitals. The marginal subsidies from the DME and IME programs combined appear in columns 7 and 8.
Column 7 shows the additional payments for adding another resident who is in the initial residency period but who has
not exceeded five years of residency training. Column 8 applies to a resident who either is beyond the initial residency
period or has trained for more than five years.
Several interesting points emerge from these actual examples.
The marginal subsidy drops for residents who are beyond the initial residency period (column 8 versus column 7)
because the DME regulations give such residents a weight of 0.5 instead of 1.0. The marginal subsidies fall by
less than half because IME payments make no distinction between residents within or beyond the initial residency
period and those payments constitute a substantial portion of the marginal subsidies.
Hospital 1 has a large marginal subsidy because it has a very large DME per-resident amount, an average
Medicare patient load (Medicare days divided by total days), and average diagnosis- related group payments for a
teaching hospital.
Hospital 2 has a marginal subsidy near the median despite the fact that it has a small DME per-resident amount.
The large Medicare patient load of hospital 2, along with its high level of total DRG payments, which are
probably the result of its sizable fraction of Medicare patients and the fact that it is a large hospital, helps boost its
marginal subsidy.
Hospital 3 has a relatively small marginal subsidy, even though it has a large DME per-resident amount. A small
Medicare patient load and a low level of DRG payments hold down the marginal subsidy for hospital 3. The low
level of DRG payments probably reflects both the small Medicare load and the fact that the hospital is small for a
teaching hospital.
1. The initial residency period is the minimum number of years of residency training to be eligible for board certification in a particular specialty.
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Additional
Additional
DME/IME
DME/IME
Payments
Payments
DME
for
for
Per-
DRG
Another
Another
Total
Resident
Payments
Resident
Resident
Resident
Medicare
Inpatient
Amount
(Thousands
in the
Beyond
Beds
Inpatient
(Dollars)
IRPª
the IRPª
FTEs
Days
Days
of Dollars)
(Dollars)
(Dollars)
Examples
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Hospital 1
310
23
35,098
81,214
106,273
23,761
102,092
79,128
Hospital 2
670
7
78,897
150,202
38,737
53,289
80,877
70,704
Hospital 3
145
26
9,288
32,803
95,912
6,550
58,448
44,870
SOURCE: Congressional Budget Office calculations based on data for 1993 from the Health Care Financing Administration.
NOTES: Payments are figured on an annual basis and in 1993 dollars. Hospital 1 has a marginal subsidy value for residents in the
initial residency period at approximately the 75th percentile of the distribution among teaching hospitals. Hospital 2 has a marginal
subsidy value for IRP residents near the median. Hospital 3 has a marginal subsidy value for IRP residents at around the 25th
percentile.
For residents who have exceeded five years of training (with certain exceptions), the numbers in column 8 rather than column 7 would
apply.
a. This column represents the sum of additional DME and IME payments.
Table 1.
GME Payments as a Fraction of Total Revenues of Teaching Hospitals, 1993 (In percent)
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DME Plus
Category
DME Payments
IME Payments
Percentage of All
IME Payments
Teaching Hospitals
All Teaching Hospitals
1.3
2.6
3.9
100
Teaching Statusᵃ
Major teaching, public
1.2
3.0
4.2
7
Major teaching, private
2.4
4.8
7.2
15
Other teaching
0.8
1.6
2.4
78
Disproportionate Shareb
Large urban
1.6
3.1
4.7
38
Other
0.9
2.2
3.1
26
Non-Disproportionate Share
1.0
2.3
3.3
36
Type of Control
Voluntary
1.3
2.7
4.0
81
Proprietary
0.8
1.6
2.5
7
Government
1.1
2.5
3.5
12
Number of Beds
1-100
0.8
1.2
2.0
7
101-200
0.8
1.4
2.2
21
201-400
1.0
2.1
3.1
44
Over 400
1.5
3.2
4.7
29
Urbanization
Large urban
1.5
3.0
4.5
60
Urban
0.9
1.9
2.8
35
Rural
0.8
1.8
2.6
5
Geographic Regionᶜ
New England
1.7
4.0
5.7
7
Mid-Atlantic
2.1
3.3
5.4
22
South Atlantic
1.1
2.4
3.4
13
East North Central
1.2
2.7
4.0
21
East South Central
0.8
1.9
2.7
5
West North Central
1.0
2.1
3.1
9
West South Central
0.6
1.6
2.2
8
Mountain
0.6
1.6
2.2
4
Pacific
1.7
1.9
2.6
11
SOURCE: Congressional Budget Office calculations based on data from the Health Care Financing Administration (HCFA) for a sample of
almost 1,000 teaching hospitals.
NOTES: Total hospital revenues include patient revenues from all sources as well as donations, income from investments, and governmental
appropriations.
GME = graduate medical education; DME = direct graduate medical education; IME = indirect medical education adjustment.
a. A "major" teaching hospital is one with a resident-to-bed ratio of 0.25 or greater.
b. A disproportionate share hospital is one that qualifies for a payment adjustment because it serves a relatively large volume of low-income
patients.
C. The regions noted here are as defined by the Bureau of the Census.
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Policies That Affect the Demand for Medical Care
In addition to Medicare payments that are linked to residency training, other federal government policies affect the market
for medical residents. Medical residents provide patient care in teaching hospitals; thus, government policies that encourage
the purchase of hospitalization insurance boost the demand for hospital services and hence the demand for medical residents.
Such policies operate both directly (providing hospital insurance through Medicare and Medicaid) and indirectly (subsidizing
the purchase of private hospitalization insurance through the favorable tax treatment of employment-based health insurance
premiums). (14) In addition, Medicare and Medicaid policies on fee schedules and coverage affect the rewards to various
specialties and, in turn, the number of residents who seek to practice in those specialties.
Loan Policies
The payment provisions of student loans may also affect the specialty a resident chooses. The longer a resident who has
obtained a student loan (for either undergraduate or medical school education) is permitted to defer repayment because of
being in training, the greater is the incentive to continue the residency period and move into a non-primary care field.
Evidence indicates that residents with large debts who were permitted to defer repayment throughout their training were
more likely to enter fields with longer residency periods than residents who had smaller debts. In contrast, some residents
with large debts who had to begin repaying loans during their residency tended to choose fields with shorter residency
training. That evidence suggests that repayment provisions may influence the proportion of residents who choose training in
the primary care specialties. (15)
I. In this study, the general term "resident" also includes "interns" and "fellows." In the past, "intern" was used to describe
individuals who were in their first year of training after medical school. The use of the term "fellows" varies among
specialties. In some fields trainees in subspecialty programs are called "fellows"; in other fields they are called "residents."
2. Besides the Medicare subsidies for GME, the Department of Veterans Affairs and the Department of Defense fund
residency programs in federal hospitals. Outlays for those programs were less than $1 billion annually in the early 1990s. At
an even lower level are Public Health Service grants that assist some primary care training programs.
3. Some publications have replaced the term "foreign medical graduate" with the term "international medical graduate."
4. In this study, "fully trained physician" refers to a physician who is no longer a medical resident. A "patient care" physician
is one whose principal activity involves the diagnosis or treatment of patients as opposed to activities like administration or
research. The physician counts reported here are based on American Medical Association counts of doctors of medicine
(M.D.s). Schools of osteopathy, whose graduates receive a doctor of osteopathy degree, produce about 5 percent of a more
broadly defined physician workforce.
5. The term "general training" means that the resulting knowledge and skills will continue to be useful to trainees after they
have left the residency program and the particular institution at which they were residents.
6. Other observers argue that nurse-practitioners and nurse-midwives play an important role in providing primary care
services and could play a greater role in the future. See Linda H. Aiken and Marla E. Salmon, "Health Care Workforce
Priorities: What Nursing Should Do Now," Inquiry, vol. 31, no. 3 (Fall 1994), pp. 318-329.
7. The specialty counts of fully trained physicians are self-reported and refer to the principal specialty practiced by the
doctor. The specialty category was unknown for about 1 percent of the doctors.
8. The specialty category is unknown for the remaining 1 percent of trained physicians.
9. Phillip R. Kletke, "Primary Care Versus Nonprimary Care Physicians: A False Dichotomy?" Physician Marketplace
Report (Chicago: American Medical Association, Center for Health Policy Research), April 1994.
10. See Fitzhugh Mullan, Robert M. Politzer, and C. Howard Davis, "Medical Migration and the Physician Workforce:
International Medical Graduates and American Medicine," Journal of the American Medical Association, vol. 273, no. 19
(May 17, 1995), pp. 1521-1527.
11. These calculations appear in David A. Kindig and Donald Libby, "How Will Graduate Medical Education Reform Affect
Specialties and Geographic Areas?" Journal of the American Medical Association, vol. 272, no. 1 (July 6, 1994), pp. 37-42.
12. In some contexts, "DME" includes payments to hospitals to support training of nurses and other paramedical personnel.
In this study, the term refers only to payments for the training of physicians. The payments for nonphysician training are
many times smaller than the DME subsidies for physicians.
13. The DRG payments are the payments that Medicare makes for inpatient hospital services. Medicare pays a predetermined
rate for each inpatient stay based on the patient's admitting diagnosis.
14. See Congressional Budget Office, The Tax Treatment of Employment-Based Health Insurance (March 1994).
15. See Gloria J. Bazzoli, "Medical Education Indebtedness: Does It Affect Physician Specialty Choice?" Health Affairs, vol.
4, no. 2 (Summer 1985), pp. 98-104.
Previous Page
Table of Contents
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Medicare and Graduate Medical Education
Section 4 of 8
September 1995
Chapter Two
Economic Factors That Affect the
Characteristics of the Physician Workforce
A
variety of economic factors from a number of sources within the health care sector influence the composition of the
physician workforce. The demand for residents' services by teaching hospitals has an effect at the level of the training site.
Farther downstream one finds the demand for the services of fully trained physicians by consumers. These demands originate
with consumers, but they also reflect the type of insurance arrangement that consumers and their employers have, as well as
the coverage and reimbursement policies of government-provided insurance.
Residency training is a time of investment for a young physician, who will be able to earn a higher future income as a result
of those efforts. The residency period adds to the proficiency of the young physician through hands-on patient care under the
supervision of the teaching staff, and it is a requirement for eligibility for board certification in the various specialties. (1)
Some analysts have argued that because residency training is a form of general training that can be useful elsewhere,
employers such as teaching hospitals do not have a financial incentive to absorb the costs of that training. In contrast, the
young doctor does have the incentive to make such an investment. In return for training and a stipend (or salary), residents
provide patient care services for the hospital. Any difference between the value of a resident's services to the hospital and the
stipend (and fringe benefits) that the resident receives can be thought of as a "tuition" payment for the other costs that the
hospital incurs in providing training. Those costs include both direct and indirect costs. (2)
Standard economic analysis suggests that in some sense, residents implicitly pay for the training costs that they impose on
the hospital, regardless of the size of graduate medical education subsidies to teaching hospitals. That implicit payment
equals the gap between the value of the resident to the hospital, which includes the resident's value in patient care and in
GME subsidies, and the stipend (and fringe benefits) paid to the resident. If GME subsidies were increased, teaching
hospitals would seek to hire more residents because their value to the hospital would have risen. Because the increased
demand for residents would put pressure on the market for such trainees, residents' stipends might increase. Nevertheless,
residents would still pay for their training in a certain sense. The training costs (other than the stipends and fringes) imposed
on the hospital (including its direct costs, such as salaries for the teaching staff, and overhead costs, plus any increase in
operating costs related to the use of a less experienced physician) would be "paid for" by the difference between the
resident's value to the hospital (including the value of the subsidy) and the stipend (and fringes) (3) In addition, if GME
subsidies were increased, more residents would be training than if the subsidies were smaller.
The available evidence suggests that the level of Medicare GME subsidies to teaching hospitals is an important factor
influencing the overall number of residents. No rigorous, quantitative analysis of the impact of Medicare GME subsidies per
se has yet been conducted, but an econometric study of the demand for residents shows that teaching hospitals' behavior is
consistent with economic theory. (4) That theory predicts that subsidy formulas like those used to calculate direct graduate
medical education payments and indirect medical education teaching adjustments will result in greater demand for residents
than would otherwise be the case because the GME payments increase the residents' value to the hospitals. Despite the fact
that the number of U.S. medical school graduates has been roughly constant for the past decade, a trend toward an increasing
number of residents is apparent. Such a change can be explained in part by a rise in the number of residents in the United
States who are graduates of foreign medical schools. Another source of change may be an increase in the length of residency
training for the typical medical school graduate.
Effects of Medicare GME Subsidies on the Number of Residents
The available evidence suggests that the incentives to teaching hospitals to hire residents are so strong that the total number
of residents continues to grow (see Table 2). Teaching hospitals typically get much more in Medicare GME subsidies for
hiring another resident than they pay in stipends and fringe benefits to the resident. Among teaching hospitals in 1993, the
annual subsidies for an additional resident varied widely: from about $58,000 at the 25th percentile of the distribution to
about $102,000 at the 75th percentile (see Figure 5) (5) Residents' compensation was much lower. In 1993, stipends for
third-year residents taken from a sample of teaching hospitals ranged from $30,360 at the 25th percentile to $34,760 at the
75th. Adding fringe benefits--typically 18 percent of the stipend--brings the range of residents' total compensation to
between $35,800 and $41,000.(6) And those differences between marginal subsidies per resident and compensation per
resident do not even account for the value to the hospital of the patient care services that residents provide.
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The presence of residency training programs also imposes costs on hospitals besides the stipends and fringe benefits of the
residents. The teaching staff takes time to instruct and oversee residents, for which they may or may not receive a salary. The
hospital may also incur other training-related costs in the form of overhead expenses, additional tests ordered by residents, or
slower provision of services when residents are involved. The net value of a resident to a hospital includes all such benefits
and costs: the value of the services residents provide plus the value of Medicare GME subsidies, minus the various costs of
having residents (including the costs of the stipend and fringe benefits).
Continued Growth of Residency Programs
Over the past several years, residency programs have generally grown, and the level of stipends has risen after adjusting for
inflation. A number of factors including GME subsidies may have played a role in that growth. The number of first-year
residents grew by more than 14 percent between 1988 and 1993. The number of residents in all years of training grew by
more than 23 percent over the same five years.
Table 2.
First-Year and Total Residents by FMG Status, 1988, 1990, and 1993
Category
1988
1990
1993
Number of Residents
First-Year Residents
Non-FMG
17,348
17,634
17,118
FMG
Citizen
1,289
1,427
1,152
Noncitizen
2,204
3,636
5,595
Subtotal
3,493
5,063
6,747
Total
20,841
22,697
23,865
All Residents
Non-FMG
71,235
75,870
78,578
FMG
Citizen
4,329
4,990
5,165
Noncitizen
7,227
10,999
18,592
Subtotal
11,556
15,989
23,757
Total
82,791
91,859
102,335
As a Percentage of All First-Year Residents
Non-FMGs
83.2
77.7
71.7
FMGs
Citizen
6.2
6.3
4.8
Noncitizen
10.6
16.0
23.4
Subtotal
16.8
22.3
28.3
Total
100.0
100.0
100.0
As a Percentage of All Residents
Non-FMGs
86.0
82.6
76.8
FMGs
Citizen
5.2
5.4
5.0
Noncitizen
8.7
12.0
18.2
Subtotal
14.0
17.4
23.2
Total
100.0
100.0
100.0
SOURCE: Congressional Budget Office using data from the Graduate Medical Education Tracking Census of the American Association of Medical
Colleges.
NOTE: FMGs are graduates of foreign medical schools. Osteopathic doctors in M.D. residency programs are included in the data.
The total number of residents for every 1,000 people in the country generally grew throughout the 1965-1993 period and
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especially after 1980 (see Figure 6). The number of general or family practice residents per 1,000 people remained
approximately constant after 1985. But the rather inclusive group of potential primary care practitioners continued to grow
both in absolute terms and in the number of such physicians per 1,000 people.
Foreign Medical Graduates as the Marginal Supply Source
Foreign medical graduates constitute an increasing fraction of medical residents. Since the size of the classes graduating
from U.S. medical schools has been essentially constant, ranging between 15,100 and 16,400 since 1980, the principal source
of additional residents is FMGs. In 1993, FMGs made up about 28 percent of first-year residents compared with about 17
percent in 1988.
The Linkage Between the Markets for Residents and for Fully Trained Physicians
Besides the fact that resident physicians become the trained physicians of the future, another important link exists between
the market for hospital residents and the market for the services of fully trained doctors. Namely, the incomes of trained
physicians provide incentives to young doctors that affect the number of new physicians who choose to enter the respective
specialties. For example, an increase in demand for the services of primary care physicians will increase the income of such
physicians and also increase the number of young doctors who choose primary care residencies. Likewise, the total supply of
new physicians (regardless of specialty) depends on the return from the investment in medical education relative to other
potential careers. Certainly, nonfinancial factors, including differences in individual preferences and abilities, affect the
number of people who choose to become doctors and who choose various specialties. But as long as some individuals place
some weight on financial considerations, the number of entrants into a particular field will increase if the expected income in
that field rises.
Figure 5.
Distribution Among Teaching Hospitals of Marginal Subsidies per Resident from Medicare, 1993
Initial Residency Period,
Beyond Initial Residency Period
Not to Exceed Five Years
or Beyond Five Years
Thousands of Dollars
Thousands of Dellars
120
00
110
110
10
10
611
111
40
40
20
20
0
0
211h Personalle
Redian
110 Percenbia
29th Personal.
Redisn
21th Percendle
SOURCE: Congressional Budget Office calculations based on data from the Health Care Financing Administration.
NOTES: Marginal subsidy refers to the additional annual direct and indirect graduate medical education payments by Medicare that are made
to a teaching hospital for adding another resident.
The initial residency period is the minimum number of years required for eligibility for board certification in a particular specialty.
Figure 6.
Residents Engaged in Patient Care per 1,000 People, by Specialty, Selected Years, 1965 Through 1993
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Residents per 1,000 people
05
0.4
Intere
0.)
0.2
Pediatric he
01
01
Family Pryctica and
1385
13'1
374
1111
1985
1110
1992
SOURCE: Congressional Budget Office calculations based on data for 1965 through 1985 from American Medical Association (AMA),
Distribution of Physicians in the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975
(Chicago: AMA, 1976), and Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982 and 1986); and on data for 1988
through 1993 from the American Association of Medical Colleges (AAMC). The dotted line in the figure indicates the shift from the AMA to the
AAMC data.
NOTES: Comparisons between the earlier and later years shown above must be made cautiously because specialties are unknown for a large
proportion of residents in the earlier years and the three-year family practice residency was a new option in the 1970s.
The "Other" category comprises residents in the specialties of obstetrics and gynecology, surgery, and other non-primary care fields. The
"Unknown" category includes residents in a transitional year (a year of basic clinical training).
Osteopathic doctors in M.D. residency programs may be included in the data.
Data are plotted at the intervals shown. See Appendix Table A-4.
This linkage between the residency market and the market for the services of trained physicians implies the existence of
multiple policy options for reaching the same workforce goals. It also increases the possibility of following contrary policies
in the two markets. For example, a policy that reduced GME subsidization of residency positions in non-primary care
specialties would by itself encourage an increase in the proportion of primary care residents and ultimately an increase in the
proportion of trained primary care practitioners. However, if the Medicare fee schedule was adjusted to increase the relative
compensation for surgical services, that policy by itself would encourage relatively greater entry into non-primary care
fields. The overall effect of the two policies on the future physician workforce would depend on the relative strength of the
counterincentives.
Because the private sector accounts for almost two-thirds of payments to physicians, changes in the patterns of demand in
that sector may outweigh policy adjustments by the federal government. Evidence suggests that the increasing prevalence of
managed care insurance plans, especially the tightly managed forms of health maintenance organizations (HMOs), may be
increasing the relative demand for primary care versus non-primary care physicians.
The Market for Resident Physicians
In this market, teaching hospitals obtain the labor services of resident physicians, who take on greater responsibility for
patient care over the course of their residency training. In return, resident physicians receive training from the teaching staff
of the hospital and a stipend (or salary). The stipends of resident physicians are substantially lower than the typical income of
a fully trained physician. In 1993, the average stipend of family practice residents, who typically undergo three years of
residency training, was about $31,000; the average net income after practice expenses for fully trained general or family
practitioners was $116,800. Likewise, investment in surgical training opens the way for much higher future earnings. In
1993, the average stipend of general surgery residents, who typically train for five years, was about $33,000, whereas the
average income, net of practice expenses, for fully trained general surgeons was $232,700.(7)
Demand Factors. The demand for hospital residents in general and for hospital residents in different specialties is shaped by
the insurance and demographic characteristics of the patient population, epidemiological factors, the equipment and
technologies available at hospitals, the reimbursement policies of private and government payers, the goals of hospitals
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(which may include such objectives as providing care to indigent people or being at the forefront of new medical
innovations), and the subsidies to hospitals for GME. Some of those influences represent private market forces, and others
are governmental in nature.
The aging of the population is a demographic factor that has increased the demand for hospital services and thus the demand
for hospital residents. The effect of the aging population on demand has been further augmented by the presence of the
Medicare program, which provides hospital insurance to almost all of the nation's elderly people. The demand for hospital
residents has probably been amplified still more by the formulas used to calculate federal payments to hospitals for residency
training (see Box I on page 10). Those formulas yield marginal subsidies per resident that exceed $100,000 for a number of
hospitals.
Supply Factors. The distribution of the supply of resident physicians among specialties responds to the incentives to enter
the various fields. Both the salary obtained while a resident and the expected stream of income once one becomes a fully
trained physician have an effect on the number of residents who enter training in a particular specialty (8) Other
characteristics--the expected hours of work, the number of years in training, and the availability and payment terms of
loans--also have some impact. Estimates suggest that a 1 percent increase in the income of fully trained doctors in a
particular specialty (after adjusting for hours worked) relative to average earnings in all specialties will increase the fraction
of residents training for that specialty by between 0.3 percent and 0.6 percent.(9)
The Market for the Services of Trained Physicians
The forces that determine the demand for and supply of the services of fully trained physicians determine the incomes of
trained physicians. In turn, those incomes provide a signal to young physicians about the rewards that they can expect in
various fields. Thus, the demand and supply forces in the market for trained physicians' services affect the distribution of
new residents among the various specialties or among aggregate groups of specialties such as primary care versus
non-primary care.
Grouping specialties as either primary care or non-primary care is convenient, but the demand for particular specialties
within each subset may move in different ways. For example, technical innovations and increases in enrollment in managed
care plans may reduce the demand for inpatient care. As a result, physicians in specialties like anesthesiology may
experience a reduction in the demand for their services and hence a reduction in their income, whereas specialties that have
adopted new outpatient surgical techniques, like orthopedic surgery, may see increased demand for their services. Both of
those specialties are within the non-primary care subset, yet the demands for their services may move in opposite directions.
Demand Factors. The demand for the services of fully trained physicians is shaped by the amount and type of insurance
coverage of the population and its demographic characteristics, epidemiological factors, available technology, and the
reimbursement and coverage parameters of both private and government insurers. An example of a demographic influence
on the demand for certain types of physicians' services would be a decrease in the population of women of child-bearing age.
That decrease would lessen the demand for the services of obstetricians and ultimately reduce the demand for primary care
practitioners who dealt with children, such as pediatricians. Over time, one would see a relative decline in the number of
such practitioners as fewer residents chose such specialties and older practitioners retired.
An example of a governmental influence on the demand for certain types of physicians' services would be an expansion of
Medicaid coverage for pregnant women and children. Unless reimbursement levels were set so low that no providers were
willing to serve the newly covered beneficiaries, such an expansion of coverage would increase the demand for the services
of obstetrician/gynecologists and of pediatricians. Although women and children who became insured as a result of the
Medicaid expansion would obtain more of those kinds of services than they would otherwise, their competing demands for
services would make access to such practitioners more difficult for other consumers. One would also see a strengthening of
fees and income for those practitioners. Over time, those impacts would dwindle as relatively more residents received
training in and ultimately entered the relevant specialties.
Implications of the Growth of Managed Care. The market for private health insurance is experiencing a rapid change from
traditional fee-for-service or indemnity insurance plans to various forms of managed care organizations. That shift toward
managed care represents a demand-side influence that may affect the relative income of physicians in different specialties
and, in turn, the distribution by specialty of future cohorts of trained physicians.
In 1992, approximately 20 percent of privately insured people were in HMOs, which are among the most tightly controlled
of the managed care arrangements. Managed care represents a smaller fraction of the Medicare sector than of the sector for
private health insurance; however, managed care is becoming somewhat more popular among Medicare beneficiaries.
Medicare's risk-based HMO enrollment has grown from less than 4 percent of beneficiaries in 1990 to about 7 percent. (10)
Managed care organizations are generally viewed as less costly than traditional fee-for-service arrangements because they
exercise greater control over the medical expenditures of their enrolled populations through a variety of techniques. Those
mechanisms include selective contracting with providers who agree to accept discounted prices for their services,
reimbursement methods that give doctors less incentive to provide services than under fee-for-service plans, and other
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management techniques that reduce hospital stays and visits to specialists.
Increased use of managed care, as well as technological changes in the direction of less inpatient care, implies a shift in the
relative demands for different types of specialists. Managed care organizations use relatively more primary care physicians
than are represented in the physician population as a whole. One study of staffing patterns found that the fraction of primary
care physicians in samples of several HMOs varied between 41 percent and 48 percent of their total physician workforces. In
contrast, the proportion of primary care physicians in the entire nonfederal population of patient care physicians is only about
36 percent. (11) That study suggests that if 40 percent to 65 percent of Americans were receiving care from a managed care
network in 2000 and everyone had some type of insurance, there would be a surplus of over 150,000 physicians, almost all
of whom would be in non-primary care specialties.
For several reasons, the evidence cited on the implications of managed care for changes in the composition of the workforce
might overstate the magnitude of future changes in demand away from non-primary care physicians. First, the conclusions of
that study depend on assumptions about the extent of managed care in 2000. Other analysts may argue that the growth of
HMOs will not be as great as the study's author has assumed. Second, physicians and consumers who are most comfortable
with HMO staffing patterns may be the first to join HMOs. As HMOs and other managed care plans expand to cover more of
the market, those plans might have to adapt their staffing patterns to become more attractive to consumers who have not yet
joined such plans. In that way, managed care staffing patterns might drift toward the more traditional patterns seen under
conventional insurance. Third, if the expansion of managed care increases the demand for primary care physicians, those
doctors will become more expensive (particularly in the short run), and managed care organizations may desire relatively
fewer primary care doctors than was the case when managed care was less prevalent.
Despite these caveats, if the trend toward managed care continues in either the private or the government-provided insurance
sector, one would expect a relative decline in the income of non-primary care physicians, although the particular
non-primary care specialties may have quite different experiences. (12) Over time, as the supply of newly trained residents
responded to the relatively greater demand for primary care services, the direction of change in relative incomes could
eventually reverse itself as the stock of physicians became oriented more toward primary care.
Working in a counterdirection to those trends is one that seeks to prevent managed care organizations from determining the
shape of their workforce. Some state legislatures have passed laws that may hinder the ability of managed care organizations
to cut costs and also limit the relative shift in demand toward primary care specialties. For example, "any willing provider"
(AWP) laws require a managed care organization to accept into its network any physicians who agree to the plan's terms for
participation. Mandatory point-of-service (MPOS) options require managed care organizations to permit their enrollees to
receive medical care from providers who are outside the organization; some, albeit reduced, payments are made for such
services from the insurance pool. These kinds of laws might reduce an organization's control over the delivery of medical
care to its enrollees and dilute control over the composition of the pool of physicians within the managed care
organization.(13)
Supply Factors. The supply of trained physicians' services depends on the size and composition of the existing pool of
trained physicians, the inflows of newly trained physicians and immigrant physicians, and the outflows of retiring physicians.
Besides outright retirement, some doctors may move to part-time practice or to non-patient care activities such as
administration or research, which would effectively change the available supply of trained physicians' services. In addition to
residency stipends and future expected income, other factors that affect the flow of new physicians and the total supply of
physicians' services include incomes in alternative professions, the size of the population of young adults who could become
physicians, the incomes available from medical practice in other countries, immigration laws, and governmental decisions
about the subsidization of undergraduate and graduate medical training and about loan assistance to medical school students.
These supply-side forces along with the demand-side ones discussed above jointly determine the amount of the different
types of services that are provided as well as the incomes of the various types of physicians. In turn, as discussed earlier, the
residents who choose from among the different specialties respond to those incomes. Hence, a number of different
nongovernmental and governmental factors can influence the number and types of hospital residents and ultimately shape the
future physician workforce. (See Box 2 for a summary of those factors.)
Speed of Adjustment of the Physician Stock
Changes in the relative mix of primary care and non-primary care physicians in the workforce of trained physicians
necessarily take a long time. Each year, the number of newly entering physicians is only about 4 percent of the total stock of
active doctors. As a result, it can take a number of years for changes in the makeup of cohorts of newly trained physicians to
affect the makeup of the total physician workforce.
For example, assume that the fraction of newly trained physicians who would practice in primary care suddenly increased to
66 percent, nearly double the current proportion. A simple calculation, based on the assumptions that the absolute size of the
physician workforce stays constant and the youngest physicians replace the oldest ones, who retire, shows that it would take
more than 12 years for the fraction of trained physicians in primary care to rise from one-third to one-half.
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Some caveats are necessary in regard to that illustrative calculation, however. The calculation might overstate the length of
time the workforce needs to adjust because the example assumes that newly trained residents are the only source of new
primary care doctors. But before their subspecialty training, medical or pediatric subspecialists have typically undergone the
same training as general internists or pediatricians, respectively. If those subspecialists moved into primary care activities,
the fraction of primary care physicians would grow to almost 45 percent. Decisions by some trained subspecialists to practice
primary care, decisions by some non- primary care physicians to retrain in primary care, and changes in the relative
retirement rates of primary care and non-primary care providers are all factors that could speed up the adjustment of the
workforce relative to the calculation discussed above.
Yet despite those qualifications, the calculation holds several general lessons for policymaking in relation to the medical
workforce. If one accepts the argument that the current fraction of primary care physicians is far too small, a large increase in
the proportion of residents in primary care would be necessary to avoid a long period of adjustment to the new goal. Those
observers who favor an activist stance toward the medical workforce might defend such a policy against those who take a
skeptical view of policymakers' abilities to forecast future workforce needs. The activists would argue that even if one aimed
at an inappropriate target for the final composition of the workforce, a workforce imbalance would not appear quickly
because it would take a number of years for any policy to have large effects on the composition of the total workforce. Of
course, the other side of this coin is that if one reaches an inappropriate balance or size of the workforce, it takes a number of
years to correct the error. Yet another tack might be to question the point of activist workforce planning, given both the
potential for error in forecasts of future demand and the long time before such alterations in the cohorts of residents would
have an effect.
Box 2.
Factors That May Influence the Number and Types of Residents
A number of factors may affect the demand for and supply of residents. Likewise, numerous factors may affect the
market for trained physicians' services. Because the supply of residents responds to the incomes they expect as fully
trained doctors, all of the factors that affect the demand for and supply of trained physicians' services will affect the
supply of residents.
Some of those factors are governmental in origin; others are not. In many cases, a factor may evade easy classification
and could be considered both governmental and nongovernmental in nature.
Nongovernmental
Governmental
Factors That Affect the
Size of the population
Medicare's direct graduate medical
Demand for Residents
education payments
Age distribution of the
population
Medicare's indirect teaching
adjustments
Consumers' incomes
Medicare/Medicaid managed care
policies
Consumers' education
Income supplements to subgroups
Other demographic characteristics
of consumers
Epidemiological factors
Provision of insurance including
decisions as to who is covered and
Consumers' and employers'
what services and technologies are
decisions about insurance coverage
covered
Insurance innovations such as
Medicare/Medicaid reimbursement
managed care
schedules
Research activities and
Tax treatment of employment-based
technological advances
health insurance
Laws and regulations that affect the
insurance industry in general and
managed care in particular
Subsidization of biomedical
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research
Factors That Affect the Supply of
Incomes of fully trained physicians
Policies toward FMGs
Residents and the Future Supply
Incomes in other professions
Programs aimed at encouraging
of Trained Physicians' Services
relative to those in medicine
primary care practice
Educational attainment of
Subsidization of medical school
young adults
training
Size of the young adult population
Subsidization of premedical school
training
Number of potential FMGs
Working conditions
Factors That Affect the Demand for
Size of the population
Medicar/Medicaid reimbursement
Trained Physcians' Services
schedules
Age distribution of the population
Medicare/Medicaid managed care
Consumers' incomes
policies
Consumers' education
Income supplements to subgroups
of consumers
Other demographic characteristics
Provision of insurance including
decisions as to who is covered and
Epidemiological factors
what services and technologies are
covered
Consumers' and employers
decisions about insurance coverage
Tax treatment of employment-based
health insurance
Insurance innovations such as
managed care
Laws and regulations that affect the
insurance industry in general and
Research activities and
managed care in particular
technological advances
Subsidization of biomedical
research
Factors That Affect the Current
Current Stock of trained Physicians
Policies toward FMGs
Supply of Trained Physcians'
Services
Number of potential FMGs
Programs aimed at encouraging
primary care practice
Physicians' incomes in other
countries relative to their incomes
in the United States
Working conditions
NOTE: FMG = foreign medical graduate.
Historical Evidence
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The pattern of behavior observed during the late 1960s and the 1970s after the introduction of Medicare, Medicaid, and their
precursor programs illustrates the response of the supply of physicians to economic incentives. (14) The historical evidence is
consistent with the view that the introduction of those government insurance programs brought about a surge in demand for
physicians' services. That surge led to an increase in physicians' income and in the rate of return on medical education from
the mid-1960s to the early to mid-1970s.
To understand the incentives facing potential physicians, economists consider the relationship between physicians' earnings
and the "opportunity costs" of becoming a physician. The opportunity cost of being a physician is calculated by considering
the income that a doctor could have earned had he or she pursued the career of a typical college graduate. In addition, the
total opportunity cost includes the direct costs of tuition for medical school and takes into account the cost of beginning one's
career several years later than a typical college graduate (15)
The income-to-opportunity-cost ratio for physicians began growing in the early to mid-1960s and peaked near 1.5 in 1971.
That strong economic incentive brought about a predictable supply response (see Figure 7). The number of physicians
surged, a response that was amplified by paying subsidies to increase the size of medical school classes. An additional
component of the supply response was pressure for entry by foreign-trained physicians. During the 1971-1981 period, the
returns on investing in medical education began to decline toward their earlier levels as the stock of physicians swelled. (16)
Nonetheless, the income-to-opportunity-cost ratio remained high in comparison with its levels prior to the mid-1960s, which
indicates that medicine continued to be a financially rewarding field. That observation is consistent with the continued entry
of new, young physicians into the workforce and the continued growth in the number of physicians per 1,000 people.
Figure 7.
Relationship of the Ratio of Physician Income to Opportunity Cost and the Number of Physicians per 1,000 People,
1946 Through 1982
Physician Income to Opportunity Cost³
Ratio
2.1
7.P
1.8
1.6
1.4
12
1.t
1348
1950
1354
195%
1967
1966
1570
19/4
197:
1322
b
Physicians per 1,000 People
Number of Physicians
2.2
20
Active and
1.2
Inactive Physicians
1.1
1.4
Active
Physicians
1,7
1.0
1946
1950
1954
1953
1962
1966
1970
1971
1970
1982
SOURCE: The data for the ratio of physician income to opportunity cost were adapted by the Congressional Budget Office (CBO) from Monica
Noether, "The Growing Supply of Physicians: Has the Market Become More Competitive?" Journal of Labor Economics, vol. 4, no. 4 (October
1986), pp. 503-537. The data for the number of physicians per 1,000 people are CBO calculations based on data from American Medical
Association (AMA), Distribution of Physicians in the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the
U.S., 1975 (Chicago: AMA, 1976), and Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1983); and from the Bureau of
the Census.
a. The ratio is the mean U.S. physician income to the total opportunity cost of becoming a physician. The total opportunity cost of being a
doctor is defined as the level of annual physician income that would bring about equality between the present value of net earnings as a
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doctor and the present value of earnings of a college graduate.
b. Resident physicians are included in the data series; osteopaths are not. From 1950 through 1980, data are plotted at five-year intervals.
The growth of the health sector since the mid-1960s appears to have been spurred by the introduction and expansion of the
Medicaid and Medicare programs (and precursors of those programs), which subsidized the demand for medical care. Those
significant demand-side subsidies have been combined with such supply-side subsidies as payments to medical schools for
increasing class sizes and GME payments to teaching hospitals. The number of physicians is probably greater than would
have been the case in the absence of those government policies.
Foreign medical schools provide a pool of graduates who can augment the stock of practicing U.S. physicians beyond the
supply capacities of U.S. medical schools. In 1970, about 14 percent of fully trained physicians in patient care were FMGs.
By 1980, the fraction of such doctors had grown to almost 20 percent, and in 1993 that fraction was almost 23 percent.
Foreign medical graduates represent an increasing fraction of the stock of trained physicians as well as an increasing
proportion of medical residents.
1. Board certification establishes that an individual has met certain training requirements and passed examinations set out by
the respective specialty boards. Board certification is not the same as a legal license to practice medicine. Hospitals may use
board certification, among other criteria, in decisions about whether to extend staff privileges.
2. See William D. Marder and Douglas E. Hough, "Medical Residency as Investment in Human Capital," Journal of Human
Resources, vol. 18, no. 1 (Winter 1983), pp. 49-64.
3. The value of residents to a hospital may go beyond the strictly pecuniary contribution of their services and the GME
payments. For example, if a hospital valued the provision of care to indigent people, then a resident's value to the hospital
would take account of the indigent care he or she provided.
4. See Robert H. Lee and Jack Hadley, "The Demand for Residents," Journal of Health Economics, vol. 4, no. 4 (December
1985), pp. 357-371.
5. The marginal subsidy figures given in the text are for residents in the "initial residency period" and not beyond five years
of residency training (with minor exceptions). For residents who have gone beyond five years of training or beyond the years
required for eligibility for board certification in their specialty, the marginal subsidies are smaller. Among teaching hospitals
in 1993, the marginal subsidies for such residents were $47,000 at the 25th percentile, $67,000 at the median, and $86,000 at
the 75th percentile.
6. See Association of American Medical Colleges (AAMC), Council of Teaching Hospitals: Survey of Housestaff Stipends,
Benefits, and Funding, 1993 (Washington, D.C.: AAMC, October 1993).
7. The resident stipend figures are based on Association of American Medical Colleges, Council of Teaching Hospitals. The
physician income data are from the American Medical Association (AMA), Physician Marketplace Statistics, 1994 (Chicago,
III.: AMA, 1994).
8. Although a given hospital typically pays the same stipend to all residents, regardless of specialty, who are in the same year
of residency training, the average stipend will still differ among specialty categories for several reasons. One is that different
specialties have different training periods and hospitals pay larger stipends to residents who have completed more years of
training. Thus, the typical surgical resident receives a larger stipend than the typical family practice resident. In addition, a
number of hospitals allow program directors to pay residents additional amounts out of departmental funds. Differences
among hospitals in the level of stipends can also be a source of variation in stipends by specialty because hospitals differ in
the mix of their residency positions.
9. See Niccie L. McKay, "The Economic Determinants of Specialty Choice by Medical Residents," Journal of Health
Economics, vol, 9, no. 4 (November 1990), pp. 335-357.
10. Risk-based HMOs are paid a fixed amount per Medicare enrollee. Cost-based HMOs are reimbursed by Medicare on the
basis of the cost report they submit.
11. See Jonathan P. Weiner, "Forecasting the Effects of Health Reform on U.S. Physician Workforce Requirement: Evidence
from HMO Staffing Patterns," Journal of the American Medical Association, vol. 272, no. 3 (July 20, 1994), pp. 222-230.
12. The income decline refers to relative changes in income, not changes in the ordinal rankings of incomes among sets of
specialties. That is, the absolute level of primary care incomes would probably stay below surgical incomes even with shifts
in demand toward primary care. All that would be necessary for some increase in the relative supply of primary care
residents would be an increase in the ratio of primary care incomes to incomes in other fields.
13. Between 1984 and 1994, about a dozen states reportedly implemented some form of AWP or MPOS laws. The states
differ as to whether the laws include HMOs or only apply to looser managed care arrangements.
14. Amendments to the Social Security Act in 1960, 1961, and 1962 provided for matching grants to the states for medical
assistance to low-income elderly people. In 1965, Medicare and Medicaid were enacted.
15. Specifically, the total opportunity cost of being a doctor is defined as the level of annual physician income that would
bring about equality between the present value of net earnings as a doctor and the present value of earnings of a college
graduate.
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Medicare and Graduate Medical Education
Section 5 of 8
September 1995
Chapter Three
Policy Issues and Questions
C
hanges in federal policy regarding graduate medical education may have both budgetary impacts and effects relating to
broad goals of public policy in the health sector. In terms of budgetary impact, direct graduate medical education payments
are almost $2 billion per year and are projected to grow to over $2.5 billion annually by the end of the decade. Federal
payments for the indirect medical education adjustment are about $4 billion per year and are projected to grow to almost $5
billion annually by the end of the decade. The broader goals that GME policy may affect include such issues as sufficient
access to care, the cost-effectiveness of health care delivery, and the support of special activities undertaken by teaching
hospitals.
GME subsidies, rather than directly affecting those broader goals, probably have their impact through several intermediate
outcomes:
The number and specialties of medical residents
The number, specialties, and training background of future fully trained physicians
The incentives for teaching hospitals to treat Medicare beneficiaries
The overall financial resources of teaching hospitals
Opinions may differ concerning the best approach for affecting those outcomes. In addition, critics may disagree about
targets for the outcomes in a world of limited resources.
Differences in opinion on GME policy will depend in part on different views about market incentives. Disagreements may
arise over the degree to which students and young doctors are aware of or will respond to economic incentives. Policymakers
may also disagree about whether the economic incentives transmitted through the marketplace are the proper signals to guide
the allocation of resources.
Access to Care
Concerns about access to care are often raised in regard to particular subgroups of the population. Those subgroups include
Medicare beneficiaries, indigent people, and people who live in geographic regions, such as rural areas or inner cities, that
have few, if any, physicians.
GME policy may affect access to care through several mechanisms. The current formulas for GME subsidies are written in
such a way that they offer incentives for teaching hospitals to both provide more services to Medicare beneficiaries and hire
more residents. Changes in the formulas might alter teaching hospitals' incentives to treat Medicare beneficiaries. In the
longer run, GME policy might affect access to care through its impact on the future supply of physicians. In the shorter run,
policies that affect the number of residents could affect access to care in communities in which medical residents provide a
significant amount of hospital-based patient care. Moreover, because changes in GME policy might affect the revenues of
teaching hospitals, many services that teaching hospitals provide, including care for people who are uninsured and indigent,
could respond to changes in the level of GME subsidies.
Medicare Beneficiaries
The current formulas for GME subsidies encourage teaching hospitals not only to employ more residents than they otherwise
would but also to be more willing to provide services to Medicare beneficiaries. A hospital's DME payment is based on the
product of its Medicare patient load, the allowed amount per resident, and the number of residents. As a result, a hospital's
DME payments increase with its Medicare caseload. The IME formula bases payments on the product of the
diagnosis-related group payments owed to a hospital for Medicare inpatient services and another factor that depends on the
resident-to-bed ratio. Hence, a hospital's IME payments rise with its Medicare admissions (adjusted for diagnoses). It follows
that changes in the DME or IME formula would alter the incentive to admit and treat Medicare patients.
Access to care for Medicare beneficiaries could be at risk if the government insurance program reimburses providers for
services at lower rates than do private insurers. The fees for physicians' services that Medicare pays have been approximately
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two-thirds of the level paid by private insurers.(1) For 1993, the payment-to-cost ratio for hospital services for Medicare
patients is estimated to have been about 69 percent of the ratio for private payers.(2) Although in general, access does not
appear to be a significant problem for Medicare beneficiaries, difficulties could develop if payment rates became sufficiently
low.(3) GME payments may affect access because they provide an incentive for teaching hospitals to treat Medicare patients.
People Who Are Uninsured and Indigent
Providing medical care to poor people who are uninsured and who do not qualify for Medicaid coverage is one of the
activities of teaching hospitals that may be viewed as a public good (see the discussion later in this chapter). Access to care
for uninsured, indigent people may be affected by the level of GME subsidies for two reasons. First, since GME subsidies are
a significant source of revenue for a number of teaching hospitals, changing the level of the subsidies would probably affect
the amount of various services that teaching hospitals provide, including care for uninsured people. Second, to the extent that
care for indigent people is provided by hospital residents, changes in subsidies could affect access for that group by
influencing the number of residents available to provide such care.
Geographic Areas That Are Underserved
Standard economic theory predicts that a physician will locate in an area only if the benefits from living and working there
are at least as great as those to be obtained in a different location. Abstracting from different amenities (for example,
high-quality schools and social and cultural opportunities) available among locales and specific preferences for practicing in
particular areas, one would expect that all communities that have doctors would have sufficient demand (or willingness to
pay) so that each doctor in those communities earned at least a competitive return on his or her investment in a medical
education. Communities will not have doctors if their level of demand is too low for a single doctor to earn an income
equivalent to the income that could be made in locations that have physicians. Communities that have doctors will have
enough of them to bid incomes (or, in economic terms, utilities) down to the level available in other locales that are being
served.
This standard model of physician location makes clear why both general subsidies to physician supply (including GME
subsidies) and more targeted attempts to encourage doctors to locate in underserved geographic areas (such as the National
Health Service Corps) appear to have limited success. According to the model, if the supply of physicians increased, the
number of physicians would increase in all the communities that already had physicians. The increased competition in those
communities would bid down doctor's incomes (or utilities). Some formerly unserved communities would add physicians
only if the incomes (or utilities) available in served communities became sufficiently low that settling in an underserved
community appeared attractive. Therefore, it would not be surprising to find that the counties with the lowest levels of
demand would continue to go without a physician even if the number of physicians in the country as a whole grew.
Indeed, the empirical observation that the number of counties with few or no physicians has been little changed by the
appreciable increase in the physician-to-population ratio in the country as a whole is consistent with the theory. The model
also implies that a policy that directly places a new physician in an area with a low physician-to-population ratio is likely to
be offset eventually by the departure of another physician in that area for another market or by fewer physicians settling in
that area in the future.(4)
An example of a factor other than government policy toward GME or toward physician supply that might affect the
geographic location of doctors is the growth of managed care. Growth in that sector of the health care market might cause a
shift in the distribution of some types of physicians toward less densely populated areas. For that shift to occur, two
conditions must hold: the infiltration of managed care into a locale must squeeze down physicians' incomes in that area, and
the entry of managed care organizations must be greater in more densely populated areas than in less densely populated
ones--which is consistent with the view that scale economies are relevant in the formation of managed care networks. Under
one plausible scenario, the entry of managed care into an area would result in higher incomes for primary care physicians and
lower incomes for non-primary care physicians. Then, if managed care entry occurred to a greater extent in more densely
populated areas, one would expect a tendency for primary care physicians to relocate toward more densely populated locales
whereas non-primary care specialists would diffuse into less densely populated regions.
An approach for reducing the number of medically underserved areas is to raise the demand for medical services high
enough in those locales for physicians to find them economically attractive. To the extent that amenities are fewer in
underserved areas, the financial incentives must be even greater if physicians are to be attracted to practice in them. In areas
with a significant population of uninsured or underinsured people, the government could provide or subsidize health
insurance to increase demand, thereby making the area more attractive to physicians.
One way to subsidize the provision of medical care in such locales would be to offer an additional payment to physicians for
each medical service they provide. The Medicare program already furnishes that kind of bonus payment--10 percent for
services provided in what it terms "health professional shortage areas." The bonus program is relatively new; therefore,
assessing whether the program has had a measurable impact on physicians' decisions about where to practice is premature. It
might be the case that some regions are so sparsely populated, or have such low demand for medical care for reasons such as
low incomes or lack of insurance, or are so lacking in amenities, that extremely large bonus payments would be needed to
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draw a physician to those areas.
Cost-Effectiveness of Health Care Delivery
The cost-effectiveness of health care delivery in the future will be influenced by the size, specialty mix, and training of the
future physician workforce. Today's residents are tomorrow's fully trained physicians; consequently, GME policy--through
its impact on the characteristics of the residency pool--plays a role in cost-effectiveness. At a more subtle level, the style of
practice of future physicians might be altered if GME policy changed in ways that affected the basic model and sites of
postgraduate medical training. In a broader context, not only the physician workforce but also the size and characteristics of
the nursing and allied health workforces will have an impact on cost-effectiveness.
One particular concern is that the current physician workforce is too oriented toward specialty practice to be compatible with
emerging arrangements for managed care insurance. The question then becomes whether an activist policy toward the
physician workforce can forecast future demands well enough to forsake relying on the market to determine the number and
characteristics of physicians. Different philosophical and theoretical perspectives lead to different opinions about the
appropriate policy to follow.
The Appropriate Number of Physicians
Some health policy experts have concluded that the United States has too many physicians.(5) Those claims are based on
opinions about the appropriate number and types of physicians required to fill the basic medical needs of the population.
Some people have also suggested that the growing number of physicians is a cause of rising medical expenditures and that
reducing the number of physicians per 1,000 people would help to contain costs.
Some of the arguments underlying that view of a surplus of physicians are not consistent with a conventional economic
approach to labor supply. The latter approach places more emphasis on the discretion of consumers regarding the desirable
amount of medical care than does the more rigid approach of determining physician requirements. Some economists are
likely to question whether the number of physicians is the fundamental cause of high levels of medical expenditures. Instead,
a reasonable interpretation is that other underlying factors cause both large numbers of doctors and high levels of
expenditures. Those factors include the incentive to use more services when those services are insured, the favorable tax
treatment of employment-based health insurance, the fee-for-service nature of most government-provided insurance, and
federal subsidies directed toward the supply of physicians. Conventional economic analysis would stress that in the absence
of major noncompetitive factors or distortions, the market has the inherent ability to efficiently allocate people to jobs. Thus,
if the number of physicians was excessive, the relative fees and incomes of doctors would fall, the medical profession would
become less desirable to potential entrants, and the excess would be eliminated over time. (6)
Analysts with a medical requirements perspective and analysts with a market-oriented economic perspective work from
widely different underlying assumptions, but both parties would generally conclude that the nation has more than the optimal
number of physicians. The requirements, or planning, approach would base that conclusion on calculations of the number
and types of doctors needed to provide what is viewed as appropriate medical care for the population. The market economics
approach would base its conclusion on the existence of significant demand- and supply-side subsidies that have caused the
medical industry to become larger than it otherwise would be (7) (That is, the distortions that are present appear to work
toward making the medical industry larger than optimal.) The two types of analysts would generally disagree on the proper
policy response. For example, planners might argue for continuing the subsidies and imposing quotas on the number and
types of residency positions. Market economists would argue for eliminating the subsidies and not imposing any legal
restrictions on the number or types of positions.(8)
The Appropriate Mix of Physicians by Specialty
A number of experts have argued that there are too many non-primary care physicians relative to primary care physicians in
the current workforce and that a large decline in the fraction of non-primary care residents is necessary to attain a more
appropriate balance. Two principal arguments appear to underlie the desire to increase the relative size of the primary care
medical workforce. One argument is that more primary care doctors are needed to fill a crucial "gatekeeper" role in managed
care organizations and that such organizations represent the future of health care delivery. A second argument is that primary
care physicians offer a cheaper, less technological, more preventive and holistic approach to the delivery of health services.
As noted earlier, some experts prefer an activist workforce policy and are skeptical of relying on market forces to determine
the size and distribution of the nation's cadre of physicians. In their view, several good reasons support intervention by the
government. Proponents of an activist policy argue that the inherently slow adjustment of the physician workforce makes it
too costly to rely on market signals alone to encourage greater entry into primary care specialties. Another argument against
using market signals is that young physicians are poorly informed about the marketplace for trained physicians. Therefore,
only a minimal change in supply would occur in response to shifts in the demand for physicians' services. Market skeptics
might also question the validity of demands by consumers for physicians' services. If consumers cannot judge what is best
for them, relying on market signals based on consumers' demands for medical services would not tend to yield the
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appropriate number or types of physicians.
However, the experts who argue for a dramatic increase in the relative number of primary care doctors may err for one of
two reasons (or for both): they may be using incorrect forecasts, or they may be making inappropriate judgments about what
consumers want. Some expert opinions depend on forecasts of future increases in the prevalence of managed care, including
health maintenance organizations, in health care delivery. (9) Experts on the other side of the debate point out that previous
forecasts of HMO growth have overestimated the actual rates. Another point of contention concerns the appropriateness of
expert opinions in determining the correct balance of medical care needs. Consumers may prefer more highly technological,
more interventionist, and more specialized medical care than the experts deem suitable.
Market-oriented economists would point out that the distribution of the supply of physicians among the different specialties
will respond to economic incentives, which in turn will reflect the attitudes of consumers about the types of health care
delivery systems that they prefer, given the costs of alternative systems. If managed care organizations that make less use of
the services of specialists carry the day in the consumer marketplace, the incomes of non-primary care physicians will fall
relative to those of primary care physicians, and relatively fewer young doctors will seek non-primary care training.
However, free-market economists would warn that, because experts might either incorrectly forecast market trends or
incorrectly determine what is best for consumers, it would be preferable to follow a neutral government policy regarding the
entry of physicians into various specialties.
Many advocates of a market approach would agree that the government can assist the marketplace by providing information
(to help overcome failures in the market for information). But they would also tend to argue that relying on the demands of
imperfectly informed consumers is preferable to relying on the political process or a commission of experts to determine the
number and types of physicians the country should have. The government could provide information to consumers, medical
students, and young physicians and then allow them to make decisions in a free market.
Empirical evidence suggests that both the total supply of physicians and the distribution among specialties respond to
changes in relative incomes. However, an interventionist policy may still have merit despite the existence of such evidence.
For example, one may accept the view that students, residents, physicians, and hospitals respond to economic incentives;
however, one may also view the response time as too slow or feel that consumers are inadequately informed and therefore
that signals from the marketplace convey inappropriate incentives. Policymakers who subscribe to those views may argue for
intervention by the government to alter the economic incentives. Such alterations might include paying relatively larger
subsidies for primary care residencies than for residencies in other specialties or changing the fee schedule for Medicare to
reward primary care activities relatively more than non-primary care activities.
The Appropriate Site for GME Training
The current system of GME subsidies to teaching hospitals may reinforce the traditional approach to GME centered at the
hospital site--an approach that some experts have questioned. Many of the patient care activities of fully trained primary care
practi-tioners occur in a nonhospital setting. But because non-primary care specialties have relatively more of their services
associated with a hospital setting, the current mechanisms for GME financing may encourage more new doctors to focus on
non-primary care specialties than if GME subsidies were also available to group practices outside of hospitals. Some industry
experts have argued that HMOs find that newly trained primary care physicians have not developed adequate skills to work
in an HMO environment because their training has used the hospital rather than the medical group practice as its principal
focus. (10)
Hospital-based training has many advantages, however, and hospitals might remain the principal site of post-medical school
training even if relative subsidies to the residency programs at teaching hospitals were reduced. The hospital, for instance,
allows a resident to see more difficult and more severe cases and to see a variety of cases and procedures in one venue.
Special Activities of Teaching Hospitals
Because changes in the level of subsidies would affect teaching hospitals' revenues, other activities and services that they
offer besides GME might be altered in response to changes in the generosity of GME payments. Indeed, the special activities
and special services of teaching hospitals are cited as additional reasons for providing GME subsidies.
Economists classify some of those special activities as public goods--goods that, because their benefits cannot be restricted to
those who purchase them, tend to be undersupplied in the absence of subsidies. The special activities of teaching hospitals in
that regard may include engaging in research and development, treating and educating the public about communicable
diseases, and providing care to indigent people.
Other special activities may include funding some medical school education and dealing with more difficult cases than are
seen in other hospitals. A substantial amount of the revenues of medical schools is derived from patient care income
generated at affiliated teaching hospitals; in addition, the facilities of some teaching hospitals are used for education at the
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medical school level. Since GME payments affect the level of revenues of teaching hospitals and subsidize residency
programs whose teaching faculty may also be affiliated with a medical school, the resources of medical schools are probably
affected by GME subsidies. To the extent that some of the activities of teaching hospitals are seen as promoting the public
welfare, policymakers could provide subsidies for those special activities specifically rather than indirectly supporting them
through GME payments.
1. See Physician Payment Review Commission, Annual Report to Congress, 1995, pp. 75-80.
2. See Prospective Payment Assessment Commission, Medicare and the American Health Care System: Report to Congress
(June 1995), p. 21.
3. See David W. Lee and Kurt D. Gillis, "Physician Responses to Medicare Payment Reform: An Update on Access to Care,"
Inquiry (Fall 1994), pp. 346-353; and Physician Payment Review Commission, Annual Report to Congress, 1994, pp.
325-366.
4. See Joseph P. Newhouse and others, "Does the Geographical Distribution of Physicians Reflect Market Failure?" Bell
Journal of Economics, vol. 13, no. 2 (Autumn 1982), pp. 493-505.
5. See the summary in Steven A. Schroeder, "Managing the U.S. Health Care Workforce: Creating Policy Amidst
Uncertainty," Inquiry, vol. 31, no. 3 (Fall 1994), pp. 266-275. The groups that have concluded that there are too many
physicians include the Council on Graduate Medical Education, the Bureau of Health Professions, and the Physician
Payment Review Commission.
6. One theoretical viewpoint that places relatively more emphasis on the notion that the number of physicians is an
underlying cause of higher levels of medical expenditures is the "demand inducement" theory. The basic idea is that doctors
take advantage of consumer ignorance and respond to potential reductions in their own income by providing more services to
their patients than they would otherwise. The empirical importance of demand inducement is controversial among
economists who study the health industry.
7. At one time, it was thought that the number of physicians was being held at an artificially low level to boost physicians'
incomes. Proponents of that view argued that licensing laws and limitations on the number of places in medical schools were
the tools by which those artificial restrictions on supply were enforced. Under such a scenario, a market economist might
have favored subsidizing the supply of physicians to offset the anticompetitive restrictions on that supply. Beginning in the
1970s, the market for the supply of physicians appears to have become more competitive (see Monica Noether, "The
Growing Supply of Physicians: Has the Market Become More Competitive?" Journal of Labor Economics, vol. 4, no. 4
(October 1986), pp. 503-537). If immigration polices were altered to restrict further the entry of foreign medical graduates,
arguments for offsetting anticompetitive restrictions on supply might become more relevant.
8. Market-oriented economists who are concerned with allocating resources efficiently might go even further. They might
argue that if the distortions toward too large a medical industry, which arise from the tax treatment of employment-based
insurance and subsidized government-provided insurance, cannot be eliminated, the distortions could be offset by taxing the
"inputs" used to produce medical care. But it might be difficult and impractical to impose taxes in a neutral fashion across
those inputs.
9. For example, see Jonathan P. Weiner, "The Demand for Physician Services in a Changing Health Care System: A
Synthesis," Medical Care Review, vol. 50, no. 4 (Winter 1993), pp. 411-449.
10. For example, see Robert Gumbiner, "Perspectives of an HMO Leader," Inquiry, vol. 31, no. 3 (Fall 1994), pp. 330-333.
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Medicare and Graduate Medical Education
Section 6 of 8
September 1995
Chapter Four
Policy Options
P
olicymakers have a number of options they could pursue with regard to Medicare graduate medical education policy.
The range of options is fairly broad: from modifying the formulas for the subsidies but maintaining the current basic
structure of direct graduate medical education and indirect medical education payments, to more radical restructuring of
government payments for GME, to ending federal GME subsidies.
All of the options have potentially significant consequences for access, cost-effectiveness, and the special activities of
teaching hospitals, issues that were raised in Chapter 3. In addition, almost all of the options could be tailored to generate a
number of budgetary outcomes, ranging from savings to increased spending. For example, modifying the GME formulas to
encourage relatively more primary care residencies could be done in a budget-neutral fashion by increasing the DME or IME
subsidies for primary care (or both) while decreasing the subsidies for other specialties. Alternatively, policymakers could
produce budgetary savings by maintaining the current subsidies for primary care while reducing them for other specialties, or
by reducing subsidies for all residencies but making the greatest reductions in subsidies for non-primary care. As another
example, the option to end federal financing of GME could yield budgetary savings, but those savings would be smaller if
the Congress enacted additional programs of direct subsidies for public goods produced by teaching hospitals (such as
research and development or care for indigent people).
Modify the Current System of GME Financing
Several options are available for changing the mechanisms for federal financing of GME within the current structure of the
DME and IME payment formulas. Those options all have potential effects on the size and distribution among specialties of
the current pool of residents and on the future workforce of trained physicians. They could have impacts as well on the
incentive for teaching hospitals to treat Medicare beneficiaries and the financial position of such hospitals.
Reduce the IME Teaching Adjustment
The government's Prospective Payment Assessment Commission (ProPAC) has suggested that the current IME subsidy be
reduced to reflect more accurately those increases in teaching hospitals' costs that are associated with larger resident-to-bed
ratios. Based on an analysis of recent data, ProPAC has recommended that the IME adjustment be reduced in phases from its
current rate of about 7.7 percent to 4.5 percent, for a 0.1 increase in the resident-to-bed ratio of the hospital. (1) A decrease in
IME payments would be expected to lead to fewer residents than teaching hospitals would otherwise have trained, although
the effect of such a decrease on the mix of residents among specialties is not clear.
Ultimately, these changes would have some impact on the characteristics of the trained physician workforce. Teaching
hospitals would probably also scale back some activities besides residency training, but predicting the magnitude and nature
of other reductions in services is difficult. Access to care at teaching hospitals might be diminished, especially for hospitals at
which residents provide a significant amount of care. Moreover, because the lower IME payments would have the effect of
reducing what the hospital was paid for providing inpatient services to Medicare beneficiaries, teaching hospitals would have
weaker incentives to serve Medicare patients than under the current formulas.
Change the Relative Subsidization of Particular Specialties
An option that would encourage relatively more residents than otherwise to enter primary care would be to alter the formulas
for the IME and DME subsidies to pay relatively more to hospitals for primary care residents than for non-primary care
residents. Be-cause the subsidies affect the value of residents to teaching hospitals, altering the formulas to increase the
relative reward for filling primary care residencies versus non-primary care training slots would raise the demand by teaching
hospitals for primary care versus non-primary care residents. The option could be implemented in a budget-neutral manner or
as part of a package that would change the total amount of federal GME payments.
Over the long run, if no other changes occurred in the market for physicians' services, tipping subsidies more strongly toward
primary care training would probably have several effects. In terms of access to care, consumers would have more access to
primary care services and less access to non-primary care services. In terms of fees and physicians' income, primary care
physicians would experience downward pressures on their fees and income relative to those of non-primary care physicians.
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Thus, a policy of relative subsidization at the residency level would create some windfall gains for those who were already
fully trained in non-primary care specialties and some windfall losses for those who were already fully trained in primary
care.
All of those effects refer to comparisons with how the market would otherwise be (that is, in the absence of specific policy
action). For example, if the trend toward managed care continued and brought with it an increase in demand for primary care
services, the downward pressure on primary care fees from the subsidization of primary care residencies would be offset by
the increased demand for primary care services. The net change in the income of primary care practitioners would depend on
which influence turned out to be stronger.
The greater subsidization of primary care residencies would bring about a faster transition of the trained medical workforce
to its increased primary care proportions than would otherwise have occurred. Also in evidence would be a lower path of
primary care fees and income relative to non-primary care fees and income. However, during the transition period, primary
care fees and income would grow relative to non-primary care fees and income if the increased demand for primary care
services outstripped the effects on supply of greater subsidization of primary care residencies.
Reactions by the government to changes in demand for various services would also affect the incomes of different types of
physicians and patients' access to different types of doctors. Suppose, for example, that the net effect of changes in the
medical insurance market and favorable subsidization of primary care residencies turned out to put upward pressure on
non-primary care fees as a result of the relatively smaller number of non-primary care practi-tioners. If the fee schedule for
Medicare failed to incorporate the higher fees, increases in the income of non-primary care physicians would be held
down--at the cost of potential problems in access for Medicare beneficiaries, who could experience a shortage of
non-primary care providers. In contrast, if the net effect of changes in the insurance market and government GME policy put
upward pressure on primary care fees, Medicare might have to raise its primary care payments to prevent a perceived
shortage of primary care providers for Medicare beneficiaries.
Other options that would increase the relative number of residents in primary care while reducing federal outlays for GME
include eliminating subsidies for non-primary care positions or ending such payments for residents beyond three years of
training. The primary care specialties have the shortest residencies. Thus, if the IME and DME formulas were altered to pay
hospitals only for residents who were in their first three years of residency training, that change would reduce what hospitals
perceive as the net value of non-primary care residents. Such options, which imply an overall reduction in the extent of the
Medicare subsidies for residency training, would lead to smaller hospital residency programs that were more disposed to
primary care training than would otherwise be the case.
The disadvantages of this approach would be the decline in the number of residents at teaching hospitals, which might lead to
a decline in the availability of medical services at such hospitals or increased costs for those services. It could also lead to a
reduction in other outputs of teaching hospitals including care for indigent people. Some of the impact might be passed on to
residents in the form of reduced stipends. Reductions in either type of GME subsidy would reduce the hospitals' incentive to
treat Medicare patients.
Reduce or Eliminate GME Subsidies for Noncitizens
Yet another strategy to decrease GME payments within the current framework of subsidies would be to reduce or eliminate
payments for residents who are not U.S. citizens. About one-fourth of all current residents graduated from foreign medical
schools; the majority of those foreign medical graduates are not U.S. citizens, although most of them are expected to enter
the trained U.S. physician workforce at some point.
Reducing or eliminating subsidies for noncitizens would probably result in fewer residents than otherwise, with the decrease
primarily the result of fewer noncitizen residents than if the current system remained unchanged. A disadvantage of the
policy is that it might lead to a two-tier residency system with a defined wedge between the stipends of citizens and
noncitizens or to increased segregation of citizens into more desirable programs and noncitizens into less desirable programs.
Again, potential problems with access and reductions in the services provided by teaching hospitals become an issue as they
do under other policies that reduce the overall level of GME subsidies (unless, of course, other grants or payment programs
replace the subsidies). Also, the future supply of physicians in this country would probably be smaller than otherwise, and
FMG physicians might average less residency training than they would if the current policy was maintained.
Establish an All-Payer System to Finance GME
A policy that would continue to subsidize GME yet reduce the funding required for the Medicare program would be the
formation of a GME fund supported by mandated payments from all insurers, both public and private. That approach would
increase the cost of both employment-based and directly purchased health insurance and would probably encourage people,
in a modest way, to buy less coverage. By raising the price of insurance, the policy would reduce slightly the take-home pay
of workers with employment-based insurance. However, it would also allow Medicare to reduce its funding of GME with no
loss in total GME payments to teaching hospitals. The policy would simply shift some of the government-imposed financing
that is required to fund GME subsidies from the Medicare program to purchasers of private insurance and to other public
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insurers.
One effect of an all-payer fund could be to weaken a teaching hospital's incentive to treat Medicare patients. That outcome
could occur if the current subsidy formulas were maintained except for replacing Medicare's inpatient load and
diagnosis-related group payments with the insured inpatient load and insured payments for inpatient hospital charges. In that
case, dollars from the GME fund could be earned on all insured patients rather than on Medicare patients alone, which would
dilute the incentive, inherent in the current system, to treat Medicare beneficiaries.
Payments to teaching hospitals from an all-payer fund would not necessarily have to retain the current or even modified
financing formulas. For example, policymakers could use the all-payer fund to finance the more radical options discussed
below.
Restructure the System of GME Financing
Other options represent more fundamental changes in the mechanisms by which the federal government provides assistance
for GME. Two possibilities that come from different ends of the spectrum in terms of using market incentives to shape
residency training are shifting to a GME voucher system or establishing quotas for residency positions by specialty.
Open Up the Market for GME by Offering Vouchers
One method by which the government could subsidize graduate medical training would be to offer vouchers to medical
school graduates. The young doctor could transfer the voucher to a medical group or hospital as part of a contract in which
the organization would provide training and a stipend to the resident in exchange for his or her services and payments from
the federal government. An advantage of that approach is that it would subsidize post-medical school education at sites that
appeared to offer the mode of training most relevant to the new professional's career. Young physicians would use market
signals and expectations about future changes in the marketplace for physicians to make decisions about the specialty they
wished to pursue and the kind of facility at which they wanted to receive training.
That approach would uncouple GME subsidization from teaching hospitals, which would have to compete with other entities
such as group practices or health maintenance organizations that were willing to start their own training programs. Over the
long run, teaching hospitals might remain the predominant providers of GME. However, if they remained so under a voucher
system, it would probably be because of true advantages in the use of teaching hospitals for GME rather than because of a
federal system that subsidized training only through those hospitals.
It is difficult to predict how specialty boards would react to such changes. The current requirements for board certification
were shaped in a tradition of training centered at teaching hospitals that was reinforced by Medicare GME payments to such
facilities. If the boards were reluctant to consider training at nonhospital sites as equivalent preparation, the GME system
might remain essentially unchanged.
The disadvantages of a voucher approach would include potentially adverse impacts on teaching hospitals from reductions in
their Medicare GME revenues. Another disadvantage would be the loss of the inherent incentives for teaching hospitals to
treat Medicare patients that are built into the current formulas for the GME subsidies. In addition, because the voucher
system is based on responses to market incentives, it depends on reasonably informed decisionmaking. Without adequate
information, changing to a voucher system might result in responses by the workforce that were slower than some
policymakers would find desirable.
Consequently, the argument that the government should provide or assist in providing information may be even more
relevant to the voucher option than to other options. The federal government could inform medical or premedical students
about trends and innovations in the market for physicians' services. Publications could update students on trends in
physicians' incomes, employment opportunities for new physicians by specialty, and other changes in the nature of medical
practice. Increasing the information available to students and residents could yield a faster supply response to changing
conditions in the market than would otherwise occur. That quicker response would address concerns that the market adjusts
too slowly or that participants in the market lack the information needed for relying on the marketplace to allocate the
number and types of physicians.
Policymakers could vary several parameters within a voucher framework. They could set up the program to approximate
current federal expenditures per resident or base the value of the vouchers on some other level of total expenditures. If the
government wanted to influence the balance of the medical workforce among specialties, it could provide vouchers of
different values or vouchers only for particular specialties. Citizenship could be considered a potential requirement for
receiving a GME voucher (but not a requirement for receiving training).
Establish Quotas for Residency Positions
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Quotas that designate the number and types of residency positions have been suggested as a means of increasing the relative
numbers of primary care doctors and reducing the overall supply of physicians. One proposal that has been offered is to limit
the total number of first-year residency positions to 110 percent of the number of annual graduates from U.S. medical
schools and to set specialty quotas allocating half of the residency positions to primary care and half to non-primary care.
Proponents of such measures point out that it takes many years for the composition of the workforce to adjust and that
responses to financial incentives may not be sufficient for meeting their workforce goals. Proponents of letting market forces
allocate the workforce would object to that notion, maintaining that quotas could lead to a workforce that was not configured
according to the underlying desires of consumers or future market realities, which can be forecast only in a limited fashion.
A difficulty with using quotas is assigning the slots. If the number of new medical graduates who wish to enter a particular
field exceeds the quota, the decision as to which graduates obtain the available positions might appear to be arbitrary. Under
quotas, some committee or group would have to allocate the different kinds of specialty slots among the many teaching
hospitals. Those decisions might also appear to be arbitrary, given that some hospitals would not be permitted to offer
positions that otherwise they would offer.
Moreover, unless the quotas were coordinated with changes in the demand for physicians' services, they would lead to an
increase in the relative incomes of fully trained physicians in the rationed fields--which could encourage people to try to get
around the quotas. For example, if policymakers established a quota that effectively restricted the number of non-primary
care residents but the projected shift in demand toward primary care services did not continue as expected, the result would
be an increase in the relative incomes of non-primary care physicians. That situation would lead even more residents to want
to enter non-primary care fields. Another source of pressure might come from fully trained foreign specialists. Such
specialists might immigrate, which would not violate the quotas per se (since the quotas apply to residency positions) but
would partly undo the goals of the quotas.
Another problem with using quotas is that the definitions of various specialties may change or be changed, especially in the
face of economic incentives for doing so. Programs may label themselves in accordance with the quotas, but the actual
content of training may instead resemble the way the market would have looked without quotas. For example, some "internal
medicine" or "family practice" programs might begin to incorporate more subspecialty training if the demand for and returns
from being a subspecialist remained high. In that fashion, the ultimate goals of advocates of quotas might be undone.
A policy restricting the total number of residency positions to limit the total number of physicians could face similar
problems. Rationing of the limited slots could appear to be capricious with apparently qualified young physicians being
turned away from residency training. If no reduction in demand for physicians' services occurred, physicians' incomes would
increase more than they otherwise would have, and that would increase the number of young people competing for the
limited number of slots. In addition, more fully trained foreign physicians would want to immigrate.
A positive or negative view of the immigration of already trained doctors that could result from a quota policy depends on
one's perspective. Potential immigration (or the lack thereof) would be seen in a positive light if one believed that the quotas
that had been set truly reflected the direction of the market in terms of future demand for physicians' services, and that quotas
were needed to speed the adjustment of the workforce to that demand (since adjustment of the workforce would be faster
with immigration than without it). Immigration would be viewed negatively if one supported quotas from the belief that
market forces would not yield the appropriate number or types of physicians in the workforce. (Immigration would tend to
undo movement toward the workforce goals that were the original basis for the quota policy.)
To enforce quotas, policymakers could make the receipt of funds (which could be called GME funds) contingent on a
hospital's remaining within the residency quotas that it received. The financial positions of teaching hospitals could be
maintained by keeping their levels of funding near the current real (adjusted for inflation) dollar values of GME payments.
Alternatively, the policy could alter those funding levels--although in that case, possible effects on the services provided by
teaching hospitals could not be ruled out. For example, the incentives of teaching hospitals to treat Medicare patients could
be influenced by the funding formulas. Because the current GME formulas build in some incentive to treat Medicare
beneficiaries, a change to, say, a lump-sum payment--with the condition that the hospital must remain within the
quotas--would eliminate that particular incentive. The incentive might be maintained by keeping the formulas in current law
but making them conditional on observance of the quotas.
End Federal Financing of GME
Eliminating federal financing of GME is yet another policy option. Estimates indicate that eliminating both DME and IME
payments would reduce federal outlays below what they would otherwise have been by over $7.5 billion for fiscal year 2000
and over $8.5 billion for fiscal year 2002.
One argument in support of this option is that the hospitals that obtain the services of residents and the residents who receive
training would be faced with the true costs and benefits of the services and training. That newfound clarity would lead to
decisions about residency training that more accurately reflected the costs and benefits of providing and receiving it. In that
spirit, Medicare's payment rules for physicians' services could be loosened to allow residents to bill for beneficial medical
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services that they provide to Medicare patients. That policy, however, might introduce new questions about payment levels
and qualification requirements for residents.
Eliminating the subsidies would also address the concern that there will be more physicians than is appropriate if the supply
of physicians continues to be subsidized. If GME subsidies were reduced or eliminated, hospitals would be expected to
demand fewer residents. Many FMGs who would have done residencies in this country and who would probably have
become part of the future U.S. workforce of fully trained physicians might choose not to do so. Also, graduates of U.S.
medical schools might receive less residency training than otherwise. The effects on access in the future to fully trained
physicians in underserved locales would probably be very small for the same reasons that large increases in the total supply
of physicians have caused minimal increases in such areas. However, the number of physicians per 1,000 people in locales
that are already being served would be fewer than they would otherwise have been.
Eliminating GME subsidies (without other, offsetting changes) would significantly lessen the revenues of teaching hospitals
and would bring about a reduction in some of their services. It is difficult to predict the particular impact on different
services. Various public goods--such as providing care for indigent people, conducting research and development, and
undertaking efforts to control infectious diseases --might be cut back in response to reducing or eliminating GME payments.
Because teaching hospitals would have significantly weakened incentives to hire residents, they would attempt to fill fewer
residency positions. Some of the impact would probably include lower residency stipends. Medical schools would also be
affected because of their ties to teaching hospitals. In addition, teaching hospitals would have less incentive to serve
Medicare patients, although easing restrictions on Medicare billings for physicians' services provided by residents might
indirectly diminish that impact. Another alternative that would address reduced incentives to serve Medicare patients and
lower revenues for hospitals would be to allow larger inpatient payments to hospitals that currently receive GME payments
but to dispense with formulas like the present ones that relate additional payments to the number of residents.
To minimize adverse consequences, policymakers could gradually reduce GME payments over time according to a stated
schedule. A gradual drop in the subsidies would allow teaching hospitals to plan and adjust their facilities and services to
lower levels of revenue. Potential medical students would also be able to plan better: they would have the information that
the subsidies were being reduced and the understanding that such reductions would probably result in lower residency
stipends and fewer residency positions, as well as higher future incomes for trained doctors in the respective specialties, than
would otherwise have been the case.(2)
Policymakers could also use more specifically targeted subsidies to encourage teaching hospitals to provide public goods and
to deal with specific issues that now may be indirectly paid for through GME funding. Payments to providers for indigent
care, research activities, and prevention of infectious diseases could be directed specifically toward those activities. If
teaching hospitals indeed receive more difficult cases than other kinds of hospitals, further research could provide a basis for
modifying the DRG system of reimbursing hospital services under Medicare. In addition, the concern that medical students
and residents are uninformed about trends in the medical market could be addressed by increased efforts to provide such
information.
1. Prospective Payment Assessment Commission, Report and Recommendations to the Congress (March 1, 1995), pp. 41-42.
2. The Prospective Payment Assessment Commission has recommended that the reduction it proposes in IME payments,
which does not call for ultimate elimination of the IME adjustment, be phased in and reevaluated over several years.
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Medicare and Graduate Medical Education
Section 7 of 8
September 1995
Appendix
Supplementary Tables
T
his appendix contains tables that present the data used to construct Figures 1, 2, 4, and 6 in the text.
Table A-1.
Distribution of Fully Trained Physicians Engaged in Patient Care, by Specialty, Selected Years, 1965 Through 1993 (In
percent)
Specialty
1965
1970
1975
1981
1985
1990
1993
Primary Care
50.5
42.2
39.3
35.1
34.6
34.4
33.8
Subspecialties of Internal Medicine and of Pediatrics
1.7
4.2
4.8
8.2
9.3
10.2
10.9
Obstetrics and Gynecology
6.3
6.8
6.8
6.8
6.4
6.6
6.5
Surgical Specialties
21.3
22.5
22.6
21.3
20.5
20.0
18.9
Other Non-Primary Care Specialties
19.6
23.0
25.6
27.6
28.1
28.4
29.1
Unknown
0.6
1.3
0.9
0.9
1.1
0.5
0.8
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
SOURCE: Congressional Budget Office calculations based on data from American Medical Association (AMA), Distribution of Physicians in
the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975 (Chicago: AMA, 1976), and
Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982, 1986, 1992, and 1994).
NOTES: Data are for fully trained physicians who are actively engaged in patient care; that is, the data exclude residents and those fully
trained physicians who are employed in professional activities other than patient care (for example, administration or medical research). The
specialties of physicians are self-reported and refer to the principal specialty practiced by the doctor. Osteopaths are not included.
Data for 1990 and 1993 are as of January 1. Data for all other years are as of December 31.
Table A-2.
Fully Trained Physicians Engaged in Patient Care per 1,000 People, by Specialty, Selected Years, 1965 Through 1993
Specialty
1965
1970
1975
1981
1985
1990
1993
Primary Care
0.55
0.46
0.46
0.49
0.53
0.56
0.59
Subspecialties of Internal Medicine and of Pediatrics
0.02
0.05
0.06
0.11
0.14
0.17
0.19
Other
0.52
0.59
0.65
0.79
0.87
0.90
0.96
Total
1.10
1.09
1.16
1.40
1.54
1.63
1.74
SOURCE: Congressional Budget Office calculations based on data from American Medical Association (AMA), Distribution of Physicians in
the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975 (Chicago: AMA, 1976), and
Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982, 1986, 1992, and 1994).
NOTES: Data are for fully trained physicians who are actively engaged in patient care; that is, the data exclude residents and those fully
trained physicians who are employed in professional activities other than patient care (for example, administration or medical research). The
specialties of physicians are self-reported and refer to the principal specialty practiced by the doctor. Osteopaths are not included.
The "Other" category comprises fully trained physicians practicing in the specialties of obstetrics and gynecology, surgery, and other
non-primary care fields.
Data for 1990 and 1993 are as of January 1. Data for all other years are as of December 31.
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Table A-3.
Distribution of Residents by Specialty, Selected Years, 1965 Through 1993 (In percent)
Specialty
1965
1970
1975
1981
1985
1988
1990
1993
General Practice and Family Practice
1.6
2.6
5.6
8.4
9.2
8.6
7.8
7.8
Internal Medicine and Internal Medicine Subspecialties
18.5
19.6
25.2
24.6
26.0
30.8
31.1
31.0
Pediatrics and Pediatric Subspecialties
6.4
7.0
8.3
8.4
8.3
9.0
9.0
9.3
Obstetrics and Gynecology
6.0
4.9
6.3
6.3
6.1
5.6
5.5
5.3
Surgical Specialties
26.1
25.3
24.9
21.6
21.9
19.5
18.7
18.0
Other Non-Primary Care Specialties
24.0
24.1
21.5
18.4
23.4
24.7
26.3
27.2
Unknown
17.4
16.5
8.2
12.4
5.0
1.7
1.6
1.5
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
SOURCE: Congressional Budget Office calculations based on data for 1965 through 1985 from American Medical Association (AMA),
Distribution of Physicians in the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975
(Chicago: AMA, 1976), and Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982 and 1986); and on data for 1988
through 1993 from the American Association of Medical Colleges.
NOTES: Comparisons between the earlier and later years shown above must be made cautiously because specialties are unknown for a
large proportion of residents in the earlier years and the three-year family practice residency was a new option in the 1970s. In addition,
different data sources were used for the earlier and later years.
The "Unknown" category includes residents in a transitional year (a year of basic clinical training).
Osteopathic doctors in M.D. residency programs are included in the data.
Table A-4.
Residents Engaged in Patient Care per 1,000 People, by Specialty, Selected Years, 1965 Through 1993
Specialty
1965 1970 1975 1981 1985 1988 1990 1993
General Practice and Family Practice
a 0.01 0.01 0.02 0.03 0.03 0.03 0.03
Internal Medicine, Pediatrics, and the Subspecialties of Internal
0.05 0.07 0.09 0.09 0.11 0.13 0.15 0.16
Medicine and of Pediatrics
Other
0.12 0.13 0.14 0.13 0.16 0.17 0.18 0.20
Unknown
0.04 0.04 0.02 0.03 0.02 0.01 0.01 0.01
Total
0.22
0.25
0.26
0.27
0.31
0.33
0.36
0.39
SOURCE: Congressional Budget Office calculations based on data for 1965 through 1985 from American Medical Association (AMA),
Distribution of Physicians in the U.S. (Chicago: AMA, 1967 and 1971), Physician Distribution and Medical Licensure in the U.S., 1975
(Chicago: AMA, 1976), and Physician Characteristics and Distribution in the U.S. (Chicago: AMA, 1982 and 1986); and on data for 1988
through 1993 from the American Association of Medical Colleges.
NOTES: Comparisons between the earlier and later years shown above must be made cautiously because specialties are unknown for a
large proportion of residents in the earlier years and the three-year family practice residency was a new option in the 1970s. In addition,
different data sources were used for the earlier and later years.
The "Other" category comprises residents in the specialties of obstetrics and gynecology, surgery, and other non-primary care fields. The
"Unknown" category includes residents in a transitional year (a year of basic clinical training).
Osteopathic doctors in M.D. residency programs are included in the data.
a. Less than 0.005 residents per 1,000 people.
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Medicare and Graduate Medical Education
Section 8 of 8
September 1995
MEDICARE AND GRADUATE MEDICAL
EDUCATION
September 1995
In fiscal year 1995, Medicare will make nearly $6 billion in payments that subsidize the
hospital-centered residency training of physicians. Those payments are projected to grow to more than
$8.5 billion in fiscal year 2002. Given the current strains on the federal budget in general and on the
Medicare program in particular, the time seems right to review Medicare's support of graduate medical
education (GME) for doctors. A new Congressional Budget Office (CBO) study, Medicare and
Graduate Medical Education, summarizes the programs by which Medicare subsidizes training and
discusses recent trends in the size and specialties of the workforce of fully trained physicians and the
pool of residents. The study also lays out various options for federal GME policy.
Two significant types of Medicare payments, direct graduate medical education (DME) payments and
indirect medical education (IME) adjustments, give teaching hospitals an incentive to hire more
residents than they otherwise would. Both the magnitude of the subsidies and the variation among
hospitals in the subsidy they receive per resident are substantial. In 1993, for residents in their first five
years of post-medical school training who had not gone more than one year beyond the minimum
number of training years to be eligible for board certification, the median marginal subsidy among
teaching hospitals was about $80,500 per resident. About one-fourth of such hospitals received more
than $102,000 for an additional resident, and about one-fourth received less than $58,000.
Over the 1988-1993 period, the number of residents grew by more than 23 percent, with most of that
growth attributable to an increase in the number of graduates of foreign medical schools who were
pursuing residency training in the United States. Previous experience suggests that most of those foreign
medical graduates will ultimately practice here as fully trained physicians.
Observers from different vantage points find problems with the current arrangements for financing
GME. Critics from a planning perspective argue that there are too many physicians and that the
physician workforce is out of balance, with too great an emphasis on non-primary care. They point out
that GME subsidies to teaching hospitals may encourage the training of even more young physicians and
may skew that training away from primary care activities. Observers from a free-market perspective
think that the GME subsidies distort the market and result in too much residency training.
The current GME subsidies to teaching hospitals, along with the non-primary care emphasis of the
current physician workforce, may not accord with marketplace trends toward the increased use of
managed care. But whether federal GME policy should attempt to actively "tune" residency training or
remain neutral in terms of the specialties and training sites of residents is a contentious issue.
Medicare GME payments constitute a significant amount of the revenues of teaching hospitals, and
altering the level of the subsidies might have an impact on services other than residency programs. DME
and IME payments combined account for just under 4 percent of the revenues of teaching hospitals,
although the distribution varies among different kinds of hospitals.
The study examines a number of options for changing federal GME financing. Approaches range from
modifying the current financing formulas to more radical restructuring of the financing system.
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