Financing Graduate Medical Education
Authors: Kay Wagner, Staci A Fischer
Journal: New England Journal of Medicine (1980)

the road to become a practicing physician is an expensive endeavor for everyone. Undergraduate allopathic medical education leaves the average medical student in debt over $150,000. Graduate medical education, necessary for physician licensure and board certification, is very costly. In academic year 2009-2010, the ACGME reported there were approximately 111,000 residents and fellows in ACGME-approved programs nationwide. Current salaries for those trainees range from approximately $44,000 – $70,000 depending on postgraduate level and region. The cost of training residents and fellows is considerably higher than their salaries suggest; fringe benefits, malpractice coverage, teaching and administrative costs, support services, library and electronic medical literature resources, call rooms, etc, must be provided as well. In 2009, it is estimated that federal and state financial support for GME exceeded $12 billion. Since the mid-1960s, Medicare has been the largest source of federal funding for graduate medical education. Prior to the creation of Medicare and Medicaid, hospitals funded individual resident and fellow training. The costs were relatively low; for example, prior to 1952 interns at RIH did not receive any remuneration, and fifth year residents received a stipend of $1,320 per year, and were housed on campus, providing care more than the current 80 hours per week limit. Residents were vital to the care of patients and therefore the financial stability of the hospital. Resident stipends at RIH steadily increased to $4,300 and $6,600, for PG-1s and PG-5s, respectively in 1966. With the enactment of the Medicare and Medicaid public insurance programs, however, came a greater demand for physician services. Medicare assumed partial responsibility for supporting graduate medical education (GME) as an incentive for hospitals to create more residency training positions, in part to keep up with the demand for services. In addition, providing educational opportunities for resident and attending physicians at teaching hospitals improved patient care, benefitting Medicare beneficiaries. Until the mid-1980s reimbursement was costbased, and determined by each teaching hospital’s calculation of “reasonable GME costs.” Hospitals would submit reports to Medicare on the costs of providing training, and Medicare would reimburse each hospital accordingly. In 1985, with the passage of the Consolidated Omnibus Budget Reconciliation Act, Medicare established two types of prospective payments for GME in tandem with the establishment of DRG’s: Direct Medical Education (DME) and Indirect Medical Education (IME) Adjustments. DME payments were allocated to cover resident salary and fringe benefits, operating expenses and supervising physician costs. The total DME payment that a particular hospital received was calculated based on three factors: 1) a hospitalspecific Per Resident cost Amount (PRA) based on FY1984 cost report data (which included resident salaries and fringe benefits, supervising physician, administrative and clerical costs); 2) the number of resident FTE’s at the hospital and 3) the proportion of Medicare patient-days at the particular hospital relative to total patient-days. IME adjustment payments were intended to cover additional costs borne by teaching hospitals to provide postgraduate training which were not directly tied to training programs, to account for the increased use of tests and ancillary services, the greater acuity of illness of patients cared for at teaching hospitals, and other inefficiencies associated with teaching hospitals. IME payments are made as a percentage an add-on to a hospital’s diagnosis related group (DRG) payment rate for Medicare discharges. They are based on the IME adjustment factor, which is calculated using a hospital’s ratio of residents to beds and an IME multiplier, which is set by Congress. Thus, the total IME payment that a hospital receives is dependent upon the number of residents the hospital trains, the number of Medicare discharges, and the current level of the IME multiplier. For the first several years of the prospective payment system, Medicare provided DME and IME payments to hospitals for each resident/fellow FTE employed at the hospital based on the Medicare Cost Report submitted by the institution. If the number of residents employed increased, so did the reimbursement. Not surprisingly, residency positions continued to increase at hospitals over the decade. During the same timeframe, but without changing the basic reimbursement model, Medicare made a number of changes to try to control costs. For example, Medicare reduced the IME multiplier, and in an effort to balance primary care versus specialty training, Medicare reduced DME payments for most fellowship positions to half the reimbursement of residency positions. This discrepancy in payment for fellowship positions versus residency positions remains in effect. Despite these efforts, expenditures continued to increase, and in 1997, Congress passed the Balanced Budget Act, which included sweeping changes in the Medicare reimbursement program for GME. The major provisions that affected reimbursement to hospitals included: