The history of GME financing: How did we get here?

James R Korndorffer Jr , MD FACSProfessor, Department of SurgeryProgram Director, Surgical ResidencyTulane University Health Sciences Center

Slept through by students worldwide

“Prehistoric” Times

Pre 1940’s– Little specialty training– Hospitals covered “costs”

Room, board, laundry Built into patient charges

1945-1965 (6 fold increase in residency positions)– Rise in specialization– GI bill

Qualified individuals – living allowance Hospitals – subsidies to offer positions to servicemen

– Costs Rise Added to insurance charges

Timeline

1965: Medicare Established 1982: TEFRA (Tax Equity Finance Reconciliation Act)

1983: PPS (Prospective Payment System) 1985: COBRA (Consolidated Omnibus Budget

Reconciliation Act) 1993: OBRA (Omnibus Budget Reconciliation Act) 1997: BBA (Balanced Budget Act) 1999: BBRA (Balanced Budget Refinement Act) 2003: MMA (Medicare Modernization Act)

Medicare Established(1965)

“…educational activities enhance the quality of care…it is intended, until the community undertakes to bear such education costs in some other way, that part of the net cost of such activities should be borne by the hospital insurance program.”

Medicare Established (1965)

Medicare– A portion of payments allotted to support

GME. – The percentage of GME costs reimbursed

same percent of Medicare days in the hospital 20% Medicare days = 20% GME costs reimbursed

Private payers – Paid usual and customary charges that

included GME costs (cost basis)

1965

TEFRA (Tax Equity Finance Reconciliation Act) 1965

1982

Recognized increased cost of patient care in teaching hospitals

Additional payments for GME allocated

Based on resident to bed ratios

PPS (Prospective Payment System)

PPS shifted Medicare payments for GME from cost-based (i.e., how much was spent on care) to diagnostic related groups (DRG’s).

GME allotment was split into two groups:– Direct Medical Expenditures (DME)– Indirect Medical Expenditures (IME)

1965

19821983

Direct Medical Expenditures

DME supports costs that can be directly allocated to education, including:– Salary and fringe benefits for residents– Salary and fringe benefits for supervisors– Administrative costs of GME programs– Allocated institutional overhead costs (library,

electricity, etc).

The allowable DME per resident amount (PRA) was locked-in based upon the 1983 fiscal year cost report (adjusted for inflation)

DME Payment Calculation

Based on – Per resident amount (1983 + inflation

adjustment)– # of residents– Percent medicare days

Example– $100,000 (PRA) x 118 (# residents) x .2

(Medicare days/total days) = 2,360,000– $20,000 per resident

Direct Medical Expenditures

DME supports resident salary/fringe, supervisors salary/fringe, administrative costs, allocated institutional overhead costs (library, electricity, etc).

Indirect Medical Expenditures

IME supports additional operating expenses of teaching hospitals– Higher indigent patient load– Clinical inefficiency of physicians-in-training– Increased utilization of resources– Additional support for the academic infrastructure– Higher patient severity of illness

IME – not a distinct payment, – an inflator of the clinical care DRG payments a

hospital bills Medicare– Calculated using resident to bed ratio– Formula is as follows:

Calculation of IME

IME = CF x [(1+IRB)0.405- 1]

CF= Correction Factor (The 2003 CF was 1.35)IRB= Institution’s Resident-to-Bed Ratio

Example: IME= 1.35 x [(1+0.50)0.405- 1]IME= 24.1% add onAverage DRG= $4,500 Number of DRG’s Medicare= 13,800PPS= est. $62,100,000Additional IME Funds= $62,100,000 x 24.1%= $14,904,000IME per resident (n= 150*) = $99,360 per resident

Common IME Reporting

Expressed as the average add-on per 0.1 resident-to-bed ratio

Originally 11.6% The cost of IME is controlled by

legislative manipulation of the Correction Factor.

Potential problems

Increase in the number of residents at a facility - increases the IRB - increases the IME add-on percentage

Increase in Medicare services - increases the PPS - increases the total IME

COBRA (Consolidated Omnibus Budget Reconciliation Act)

Mandated that all GME reimbursement (DME and IME) had to be based upon the inpatient setting. (This would be partially reversed in 2007).

Established COGME (Council on GME) to oversee GME expenditures and advise the DHHS.

Mandated that GME reimbursement would only be provided for the time required for a resident to complete his/her first certification* (maximum of 5 years). Thereafter, only 50% of reimbursable expenses would be provided.

(Exceptions= geriatrics and preventive medicine)

1965

19821983

1985

DSHDisproportionate Share Hospital

Payment adjustments for treating disproportionate share of indigent

IME reduced to 8.1 % (from 11.6%)

IME reduced to 7.7%

1965

19821983

19851986

1989

1965

19821983

1985

OBRA (Omnibus Budget Reconciliation Act)

Eliminated the yearly adjustments upon the consumer price index (as established in COBRA).

This would be reversed by later legislation.

1965

19821983

19851986

1989

1993

BBA (Balanced Budget Act)

Capped the number of resident positions per hospital – based on 1996 numbers

No additional DME or IME for residents that exceed their 1996 “cap.”

Established the “Three-year rolling average rule” to determine resident number

Cut IME to 5.5% (over 5 years)

1965

19821983

1985

1993

1997

BBRA (Balanced Budget Refinement Act)

Reduced the variability of DME PRA – PRA variability in 1995 $10,000 -240,000 per

resident– 70% to 140% of the mean PRA

Programs that had a PRA of less than 70% of the mean PRA were adjusted up to the 70th percentile

Programs that had a PRA greater than the 140th percentile were adjusted down to the 140%

Programs in the middle left alone

1965

19821983

1985

1993

19971999

MMA (Medicare Modernization Act)

The MMA increased (transiently) the average add-on for calculating IME to 6% (per .1 resident to bed ratio).

The average IME add-on per .1 resident to bed ratio was 5.5% in 2008 (with a declining scale for higher resident numbers).

1965

19821983

1985

1993

19971999

2003

Where does this leave us?

$20,000 DME $99,369 IME

– Not all IME applied to direct resident institutional costs – controlled by hospital

– IME is diverted to subsidize: Academic Affiliation Agreement with hospitals Clinic subsidies

So $70,000 IME Total $90,000 “income”

Institutional Cost

Salary $44,000 to 53,000

Benefits $7994

Malpractice

-Louisiana Compensation Fund $3,800 to 4,400- Tulane self-insurance fund & Zurich $4,921

Average $ 70,000

“leftover money”

$20,000/resident % to Dean, DIO FTE costs

– Coordinator– Administrative– PD– Teaching faculty

ABSITE, etc

What are we left with?

“…educational activities enhance the quality of care…it is intended, until the community undertakes to bear such education costs in some other way, that part of the net cost of such activities should be borne by the hospital insurance program.”

Dollars reimbursed for a given

DRG

Dollars reimbursed for a given

DRG

24% IME inflated cost due to IME

Adjustment

24% IME inflated cost due to IME

Adjustment

Support of Graduate Medical Education

Hospital Revenues

MEDICARE BILLING

THIRD PARTY INCOME FOR GME

Dollars reimbursed by Medicare for a given

DRG

Dollars reimbursed by Medicare for a given

DRG

24% IME inflated cost due to IME

Adjustment

24% IME inflated cost due to IME

Adjustment

Hospital Revenues

MEDICARE BILLING

Dollars reimbursed by the Third Party Payer for a given

DRG

Dollars reimbursed by the Third Party Payer for a given

DRG

The Medicare total expenditure per DRG(including the IME adjustment) is usedto determine the negotiated amount the third-party payer will pay for the same DRG.

$ 0 for GME

24% inflated cost due to IME

Adjustment

24% inflated cost due to IME

Adjustment