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

1. The history of GME financing: How did we get here? James R Korndorffer Jr , MD FACS Professor, Department of Surgery Program Director, Surgical Residency Tulane University Health Sciences Center

2. Slept through by students worldwide

4. “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

5. 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)

6. 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.”

7. Medicare Established (1965) 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)

8. 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

10. PPS (Prospective Payment System) 1965 1982 1983 • 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)

11. 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)

12. 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

13. Direct Medical Expenditures • DME supports resident salary/fringe, supervisors salary/fringe, administrative costs, allocated institutional overhead costs (library, electricity, etc).

14. 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:

15. 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 on Average DRG= $4,500 Number of DRG’s Medicare= 13,800 PPS= est. $62,100,000 Additional IME Funds= $62,100,000 x 24.1%= $14,904,000 IME per resident (n= 150*) = $99,360 per resident

16. 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.

17. 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

19. COBRA (Consolidated Omnibus Budget Reconciliation Act) 1965 1982 1983 1985 • 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)

20. DSHDisproportionate Share Hospital 1965 1982 1983 1985 1986 1989 • Payment adjustments for treating disproportionate share of indigent • IME reduced to 8.1 % (from 11.6%) • IME reduced to 7.7%

21. 1965 1982 1983 1985

22. OBRA (Omnibus Budget Reconciliation Act) 1965 1982 1983 1985 1986 1989 1993 • Eliminated the yearly adjustments upon the consumer price index (as established in COBRA). • This would be reversed by later legislation.

23. BBA (Balanced Budget Act) 1965 1982 1983 1985 1993 1997 • 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)

24. BBRA (Balanced Budget Refinement Act) 1965 1982 1983 1985 1993 1997 1999 • 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

25. MMA (Medicare Modernization Act) 1965 1982 1983 1985 1993 1997 1999 2003 • 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).

26. 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”

27. 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

28. “leftover money” • $20,000/resident • % to Dean, DIO • FTE costs • Coordinator • Administrative • PD • Teaching faculty • ABSITE, etc

29. 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.”

30. THIRD PARTY INCOME FOR GME MEDICARE BILLING Dollars reimbursed for a given DRG 24% IME inflated cost due to IME Adjustment Support of Graduate Medical Education Hospital Revenues

31. MEDICARE BILLING Dollars reimbursed by Medicare for a given DRG 24% IME inflated cost due to IME Adjustment Dollars reimbursed by the Third Party Payer for a given DRG 24% inflated cost due to IME Adjustment $ 0 for GME The Medicare total expenditure per DRG (including the IME adjustment) is used to determine the negotiated amount the third-party payer will pay for the same DRG. Hospital Revenues