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

Slept through by students worldwide

“Prehistoric” Times Pre 1940’s Pre 1940’s –Little specialty training –Hospitals covered “costs” Room, board, laundry Room, board, laundry Built into patient charges Built into patient charges (6 fold increase in residency positions ) (6 fold increase in residency positions ) –Rise in specialization –GI bill Qualified individuals – living allowance Qualified individuals – living allowance Hospitals – subsidies to offer positions to servicemen Hospitals – subsidies to offer positions to servicemen –Costs Rise Added to insurance charges Added to insurance charges

Timeline 1965:Medicare Established 1965:Medicare Established 1982:TEFRA ( Tax Equity Finance Reconciliation Act ) 1982:TEFRA ( Tax Equity Finance Reconciliation Act ) 1983: PPS ( Prospective Payment System ) 1983: PPS ( Prospective Payment System ) 1985:COBRA ( Consolidated Omnibus Budget Reconciliation Act ) 1985:COBRA ( Consolidated Omnibus Budget Reconciliation Act ) 1993:OBRA ( Omnibus Budget Reconciliation Act ) 1993:OBRA ( Omnibus Budget Reconciliation Act ) 1997:BBA ( Balanced Budget Act ) 1997:BBA ( Balanced Budget Act ) 1999:BBRA ( Balanced Budget Refinement Act ) 1999:BBRA ( Balanced Budget Refinement Act ) 2003:MMA ( Medicare Modernization 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 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 20% Medicare days = 20% GME costs reimbursed Private payers Private payers –Paid usual and customary charges that included GME costs (cost basis) 1965

TEFRA ( Tax Equity Finance Reconciliation Act ) Recognized increased cost of patient care in teaching hospitals Recognized increased cost of patient care in teaching hospitals Additional payments for GME allocated Additional payments for GME allocated Based on resident to bed ratios 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). 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: GME allotment was split into two groups: –Direct Medical Expenditures (DME) –Indirect Medical Expenditures (IME)

Direct Medical Expenditures DME supports costs that can be directly allocated to education, including: 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) 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 Based on –Per resident amount ( inflation adjustment) –# of residents –Percent medicare days Example 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 s alary/fringe, supervisors salary/fringe, administrative costs, allocated institutional overhead costs (library, electricity, etc). DME supports resident s alary/fringe, supervisors salary/fringe, administrative costs, allocated institutional overhead costs (library, electricity, etc).

Indirect Medical Expenditures IME supports additional operating expenses of teaching hospitals 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 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) ] CF= Correction Factor (The 2003 CF was 1.35) IRB= Institution’s Resident-to-Bed Ratio Example: IME= 1.35 x [(1+0.50) ] 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

Common IME Reporting Expressed as the average add-on per 0.1 resident-to-bed ratio Expressed as the average add-on per 0.1 resident-to-bed ratio Originally 11.6% Originally 11.6% The cost of IME is controlled by legislative manipulation of the Correction Factor. 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 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 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). 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. 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. 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) (Exceptions= geriatrics and preventive medicine)

DSH Disproportionate Share Hospital Payment adjustments for treating disproportionate share of indigent Payment adjustments for treating disproportionate share of indigent IME reduced to 8.1 % (from 11.6%) IME reduced to 8.1 % (from 11.6%) IME reduced to 7.7% IME reduced to 7.7%

OBRA (Omnibus Budget Reconciliation Act) Eliminated the yearly adjustments upon the consumer price index (as established in COBRA). Eliminated the yearly adjustments upon the consumer price index (as established in COBRA). This would be reversed by later legislation. This would be reversed by later legislation

BBA (Balanced Budget Act) Capped the number of resident positions per hospital – based on 1996 numbers Capped the number of resident positions per hospital – based on 1996 numbers No additional DME or IME for residents that exceed their 1996 “cap.” No additional DME or IME for residents that exceed their 1996 “cap.” Established the “Three-year rolling average rule” to determine resident number Established the “Three-year rolling average rule” to determine resident number Cut IME to 5.5% (over 5 years) Cut IME to 5.5% (over 5 years)

BBRA (Balanced Budget Refinement Act) Reduced the variability of DME PRA Reduced the variability of DME PRA –PRA variability in 1995 $10, ,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 70 th percentile Programs that had a PRA of less than 70% of the mean PRA were adjusted up to the 70 th percentile Programs that had a PRA greater than the 140 th percentile were adjusted down to the 140% Programs that had a PRA greater than the 140 th percentile were adjusted down to the 140% Programs in the middle left alone Programs in the middle left alone

MMA (Medicare Modernization Act) The MMA increased (transiently) the average add-on for calculating IME to 6% (per.1 resident to bed ratio). 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). The average IME add-on per.1 resident to bed ratio was 5.5% in 2008 (with a declining scale for higher resident numbers)

Where does this leave us? $20,000 DME $20,000 DME $99,369 IME $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 Academic Affiliation Agreement with hospitals Clinic subsidies Clinic subsidies So $70,000 IME So $70,000 IME Total $90,000 “income” 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 $20,000/resident % to Dean, DIO % to Dean, DIO FTE costs FTE costs –Coordinator –Administrative –PD –Teaching faculty ABSITE, etc 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.” “…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 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 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 used to determine the negotiated amount the third-party payer will pay for the same DRG. $ 0 for GME 24% inflated cost due to IME Adjustment