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Testimony on Graduate Medical Education by Bruce C. Vladeck, Ph.D.
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Committee on Finance
March 12, 1997


Mr. Chairman, thank you for inviting me here today to talk about the President's FY 1998 graduate medical education training proposals and the recently announced New York Graduate Medical Education (GME) demonstration project. It is an opportunity I welcome, since I have been involved in discussions of these issues for the last 20 years, as a charter member of the New York State Council on Graduate Medical Education, as a. member of the Prospective Payment Assessment Commission, and in many other roles. After all these years of discussion, it is gratifying to believe that this may finally be the year in which some of these reforms come to fruition.

Medicare payments are designed to adequately pay for care provided to Medicare beneficiaries, including the direct and indirect costs of medical education. However, there is broad consensus that there is an oversupply of physicians. In addition, with the increase in enrollment in managed care and treatment in outpatient settings, many believe there is a distributional problem, with too many specialists and not enough primary care physicians in areas where they are needed. Despite the national consensus on oversupply, Medicare currently provides hospitals with financial incentives to increase the number of residents they train.

The high-quality research and medical education that occurs in our academic health centers is internationally recognized, and is something we should take pride in, especially since Medicare has played an integral role in supporting medical education. It is important that Medicare continue to play an important role. Over time, it has become clear to us that the incentives provided through Medicare payment policy have overpowered market incentives that might affect the number of residents. Some historical background on this will provide context, after which I will describe our current legislative proposals which are designed to more clearly align the incentives of Medicare payment policy with those of the marketplace.


Historically, Medicare paid for inpatient hospital services, including the training of interns and residents, on a cost basis. However, when Medicare began paying for inpatient hospital services through the Prospective Payment System (PPS) in 1983, we recognized that teaching hospitals serve a special population and that the teaching process, itself, means that care in teaching hospitals is more costly than in other hospitals. For this reason, Medicare makes an adjustment to the payment rates for Medicare discharges provided in hospitals that train residents. This adjustment, the indirect medical education (IME) payment, recognizes that the higher costs of treating patients in teaching hospitals. Under current law, the IME payment is based on the teaching hospital's ratio of interns and residents to beds. Because the hospital's IME payment is based on this ratio, the hospital will receive a higher indirect teaching adjustment for each Medicare discharge if it trains more residents. This system provides incentives for hospitals to train more interns and residents. Medicare's IME payments increased from $2.9 billion in FY 1990 to $5.1 billion in FY 1995, an increase of more than 75 percent.

The current formula for determining Medicare's indirect medical education payments provides approximately a 7.7 percent increase for each 10 percent increase in a hospital's ratio of interns and residents to beds. Studies by HCFA, the General Accounting Office, DHHS Inspector General, and the Prospective Payment Assessment Commission have shown that this formula compensates teaching hospitals in excess of the additional costs of treatment. If enacted, the President's proposals would gradually bring Medicare's indirect medical education payment adjustment down to 5.5 percent in 2002, closer to the actual indirect costs of treating a Medicare patient in a teaching hospital.

When Congress created the Medicare PPS in 1982, it excluded direct hospital costs associated with approved educational activities from payment through the PPS system. Since 1985, Medicare has paid teaching hospitals for the direct costs of GME training on a per resident amount. Direct GME costs include such items as salaries and fringe benefits for interns and residents, supervisory teaching physician costs, and miscellaneous overhead associated with operating a medical residency training program. Under this payment system, Medicare determines a hospital's per resident costs in a base year and pays that amount for each intern and resident working in the hospital, adjusted for Medicare inpatient utilization. Since 1987, we have also been paying hospitals for intern and resident time spent in ambulatory training, when the resident is involved in patient care and the hospital continues to pay the resident's salary. Medicare payment for the direct costs of medical education is the second way in which Medicare provides incentives for hospitals to train more interns and residents. Medicare's direct GME payments have increased from $1.3 billion in FY 1990 to approximately $2.0 billion in FY 1995, an increase of 50 percent.

Health resource experts have focused on the overall supply of physicians, the distribution of physicians across the country, and the mix of physician specialists. Organizations such as the Institute of Medicine, the Council on Graduate Medical Education, and the Pew Charitable Trusts have raised concerns that the Medicare program is providing incentives to train too many residents. Furthermore, given Medicare's policy of paying hospitals for training, these and other organizations also have been concerned that Medicare provides incentives to train too many specialists in inpatient hospital settings. Health experts have noted that medical practice is changing; there is increased emphasis on primary care training, and the growth of managed care means a greater demand for physicians who have strong skills in providing primary care services. Just two weeks ago, the American Medical Association, the American Association of Medical Colleges, and other national medical organizations held a press conference, at which they issued a consensus statement confirming the oversupply of physicians and the need for the Federal Government to realign its GME funding policies.

At the present time, Medicare does provide some financial incentives that promote training of care physicians. First of all, Medicare's direct medical education payment reduces payment for training beyond the time needed to train in one specialty. Second, Medicare pays hospitals for direct medical education when a resident works in an ambulatory training site when the hospital continues to pay the resident's salary. I should note, however, that under current law we cannot count this resident time in the indirect medical education adjustment paid to hospitals. And, since the indirect medical education adjustment is typically a much larger share of the hospital's total medical education payments, Medicare's policy of not counting resident time in an ambulatory setting for indirect medical education has been a significant disincentive for hospitals to provide ambulatory care training.

Historically, when hospitals were paid charges or costs by all payers, the costs of medical education were shared by all payers. However, as managed care companies and other insurers negotiate with hospitals for lower payment rates, hospitals increasingly rely on Medicare to help finance medical education. Over the next few years, we will continue to see major changes in the configuration of the health services workforce. However, the need for large sums of money to support the education of our health care providers will not disappear. While it is the responsibility of government to support activities that are essential to the welfare of its people, that does not preclude the need for other interested parties to do their part.

Senator Moynihan and others have introduced legislation to ensure that private payers make a contribution to the cost of medical education as well as the public sector. There is a great deal of interest in these proposals and we look forward to working on this issue with Senator Moynihan and other Members in this session of Congress.


The President's FY 1998 Budget Proposals include a number of provisions affecting GME. These Proposals are designed to more closely align the incentives created by Medicare payment policy with market incentives, and to help achieve the following commonly agreed-upon goals:

  1. to stop the rapid growth in the number of medical residency positions,
  2. to encourage more training in primary care,
  3. to encourage more training in non-hospitals settings for all residents,
  4. to provide more payment equity for teaching hospitals when they serve Medicare managed care enrollees.

Our legislative proposals are not designed specifically to redistribute primary care and specialty residency slots or to force programs to downsize. We do not think that it is appropriate for Medicare to become involved in the micro-management of the details and operations of individual residency programs; any attempt to do so would be fraught with difficulties. Given the dependence of many teaching hospitals on Medicare GME funding, any major or overly prescriptive changes in payment policy could have serious ramifications.

Let me now briefly describe our GME proposals in the President's FY98 Budget.

I. Cap on the Number of Residents:

The number of residents increased from 107,850 in FY 1990 to 129,434 in FY 1994, an increase of 20 percent. To stop the rapid growth in the number of residents, we would limit Medicare's payment to the number of residency slots at each teaching hospital in the 1996 residency year (ending June 30, 1997). We also would cap the number of specialist residents at the number the program had in the same residency year. In this way, hospitals could increase their number of primary care residents, as long as they reduced their numbers of specialty residents, but not vice versa. We would also cap Medicare's payment for IME, so that the hospital could not inflate the intern and resident to bed ratio to gain additional payments by reducing its number of beds. This reform is supported by the American Medical Association.

II. Use three-year rolling average of FTEs for GME and IME payments:

We believe that many hospitals continue to increase the numacilities will have to participate in accredited teaching programs and bear the costs of the residency program (i.e., resident salaries). We realize that other non-hospital settings, such as ambulatory surgical centers and physician offices, are also important training sites. Our proposal also would give the Secretary the authority to make GME payments to other non-hospital sites in the future and would be an important step toward improved medical care access in rural areas.

IV. Allow hospitals to count residents in non-hospital settings for IME purposes:

To encourage more training in non-hospital care settings, and to eliminate the current disincentive for hospitals to allow residents to rotate to these non-hospital settings, we propose to allow hospitals to include such residents in the calculation of their IME payments. Currently, hospitals cannot include residents in, non-hospital settings, other than in the hospital's own outpatient department. To prevent additional increases in Medicare's IME payments, this proposal would not allow the resident-to-bed ratio to exceed the ratio that exists in the base year. However, the hospital's payment would not decrease if a resident were transferred to a non-hospital setting, as long as the hospital continued to pay the resident's salary. We believe this proposal will make hospitals more inclined to let residents rotate to non-hospital settings.

V. Reduce IME formula:

We also propose to decrease the IME formula to align Medicare's payments more closely with the actual additional costs attributable to teaching. Our proposal would decrease the IME payment so that instead of hospitals receiving a 7.7 percent increase in payments for every 10 percent increase in their resident to bed ratio, they would receive 7.4 percent in FY 1998, 7.1 percent in FY 1999, 6.8 percent in FY 2000, 6.6 percent in FY 2001 and 5.5 percent in FY 2002 and thereafter. HCFA, GAO and ProPAC analyses over the years have shown that an adjustment in excess of 4 to 5 percent is not empirically justifiable. There was clear bipartisan support for reducing the indirect medical education payments, and similar proposals appeared in all of the budget reconciliation bills last year.

VI. Make GME/IME payments to hospitals for Medicare managed care enrollees:

Finally, while we do achieve savings in the IME formula and GME reforms, we propose to extend our support to teaching hospitals by directly providing them medical education payments of $10.7 billion over five years for their treatment of Medicare managed care enrollees. Mr. Chairman, our proposal is very similar to the initiative you reported out last year. As you well know, under current law, Medicare managed care contractors negotiate payment rates with teaching hospitals. Many managed care contractors are not willing to pay explicitly for the costs incurred in medical education. Medicare's payment rates to managed care contractors are based on fee-for-service (FFS) spending in the county, and include Medicare spending for medical education. Under our proposal, Medicare would pay teaching hospitals directly for direct and indirect medical education. This payment would be based on the number of Medicare managed care enrollees treated by the hospital. The mechanics of this process would be simple: hospitals would provide bills for managed care enrollees, which would enable us to calculate how much GME and IME the hospital would have received for those cases under FFS. The hospital would receive a separate payment from HCFA for their managed care enrollees. This would free teaching hospitals to negotiate more competitive rates with managed care contractors, since their costs of teaching would be reimbursed separately. We look forward to working with you on this and our other proposals.


We realize the significant impact that changes to Medicare payment policy will have on residency programs, and we appreciate the importance of residents in the delivery of health care. For these reasons, HCFA is also supporting several projects that test medical education reforms; demonstrations are very useful in testing the appropriateness of specific payment methodologies in advance of full implementation.

The New York Medicare GME Demonstration

New York hospitals train a formidable 15 percent of the country's residents and receive 20 percent of Medicare's annual spending on graduate medical education activities, $1.4 billion out of $7.0 billion in FY 1996. In view of New York's large number of residency slots, HCFA recently announced a major Medicare GME demonstration project in New York which serves a number of important national goals. It will lead to a reduction in the overall number of residents, it will increase emphasis on primary care training and on training in ambulatory sites, and it is designed to help teaching hospitals redirect their graduate medical education programs so they can meet the demands of a more competitive health care market.

In New York, the number of residents increased 11.1 percent in the last four years. Although many hospitals report that they have been considering downsizing their teaching programs in response to competitive pressures, we have seen little actual evidence of movement. Both our actuaries and the Congressional Budget Office assume continued modest growth in the number of residents nationally over the next several years.

In New York's hospitals, teaching and service delivery missions have been highly interdependent due largely to the State's regulatory system and to the need to serve a large indigent population. In part because of favorable payments for residents under Medicare's GME rules, New York hospitals have become highly reliant on residents to provide care. In an increasingly competitive health care market, and given the widespread concern about oversupply of physicians, such a heavy emphasis on residents is no longer appropriate.

This demonstration will help New York's hospitals transition to a more focused and innovative teaching mission by providing transitional payments to assist participating hospitals re-engineer the ways they provide care by reducing the number of residents by 20-25 percent.

The project is voluntary and the requirements for participation of hospitals are quite demanding. HCFA set the overall thresholds for reductions -- while protecting primary care training -- and required applicants to present strategic plans for both training and service delivery. Participating hospitals and their medical leadership are responsible, within the demonstration's parameters, for determining the implementation strategies that fit their unique teaching missions and the service needs of their communities.

Specifically, 42 hospitals, either singularly, in joint ventures, or consortia, will participate in Phase I of this demonstration. Each applicant selected an option to decrease the number of residents they train by either 20 or 25 percent over the six-year life of the demonstration. Hospitals that agree to increase the fraction of primary care residents they train by 20 percent, or that are part of a formal consortium with coordinated GME programs, must reduce their resident counts by 20 percent. All other hospitals must reduce their number of residents by 25 percent. Participants that fail to meet the agreed-upon targets face loss of all transition payments. The number of resident slots reduced will be more than 2,000, from a base in New York of over 14,000.

Medicare will make transition payments that will gradually decline to zero over the life of the demonstration. In any year, these payments are a fraction of, and never more than, what Medicare would have paid in the absence of the demonstration. We expect these transition payments to total around $400 million over the demonstration period, but it is important to realize that participating hospitals will in fact receive less in Medicare GME payments than they would have in the absence of the demonstration. The transition payments are not "new" money, over and above baseline spending, but are a portion of the reduced Medicare spending resulting from the reductions in resident counts from the levels assumed in the baseline. Overall, we estimate that under current law, Medicare will achieve net savings -- even after making the transition payments - of at least $300 million, and perhaps as high as $650 million, over the six years of the demonstration. We are currently working to refine this estimate.

Over the longer run to the extent resident reductions are permanent and to the extent participants create better training programs and more efficient and competitive service delivery infrastructures, longer term savings to the Medicare program are also possible.

Later this year we expect to develop an additional aspect of the project designed to emphasize care in ambulatory training sites. As medical care has moved to ambulatory settings, medical training should do likewise. However, developing ambulatory training -- which requires both mentors and space in clinics and doctors' offices -- is difficult, and Medicare payment policy inhibits training outside the hospital.

A number of other organizations have expressed interest in the New York project. The President's legislative proposal for basing Medicare GME payments on a three-year rolling average of the count of residents would be very similar in effect to the way hospitals are treated under the New York demonstration. This proposal could help other hospitals receive transition payments as they reduce the number of residents they train.

Utah's GME Proposal

We have been working with the medical education community in Utah as they develop a proposal for a consortium to coordinate all GME activity in the State. This consortium would set training priorities and make resource allocations for GME in the State, based on work force planning and goals. As planned, the consortium would receive funds for GME directly from Medicare and Medicaid and possibly from private insurers as well. There is currently legislation in front of the Utah State legislature to create this consortium. Once this legislation has passed, we expect to work with the medical education community in Utah to try to develop a proposal for a demonstration.

Michigan's Medicaid GME Proposal

Michigan is intending to revamp how its Medicaid program pays for GME, and we have been in consultation with them about their proposed reform. The State is striving to achieve a better alignment between the number and type of medical professionals trained and the medical needs of its Medicaid population. Michigan would like to recapture GME funds that have been included in its Medicaid managed care capitation payments and redirect those payments to hospitals and managed care organizations that have entered into collaborative partnerships between university medical and health professional schools.

The State would use three methods in its restructured GME payment system. One would distribute funds based on historical cost of direct and indirect medical education. Another would make payments based on the number primary care residents drawing salaries at each hospital. The third would provide incentive payments to hospitals or managed care entities for innovations in health professions education. This new design does not require demonstration waivers and we have been working with the State to implement it in a way that conforms with Medicaid payment rules.


There is broad consensus among the various players on the goals for reforming Medicare payment for graduate medical education. We all agree that we need to let the market appropriately determine how many and what types of residents are trained, and Medicare should not be in the business of micro-managing our Nation's medical education programs.

The high-quality research and medical education that occurs in academic health centers is internationally recognized, and we are rightly proud of their contributions. Medicare has played an integral role in supporting medical education and will continue to do so. Clearly, there is a need for reform, and I am heartened by the level of consensus that exists around the various proposals for medical education reforms. I look forward to working with you and the other members of this Committee to pass these reforms.

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