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FINANCING OF MEDICAL AND GRADUATE MEDICAL EDUCATION EDUCATION: ISSUES IN PRIMARY CARE EDUCATION SUPPORT* Ruth S. Hanft, Ph.D. Research Professor and Consultant George Washington University Introduction The financing of graduate medical education is complex and evolved pragmatically with the historic development of teaching hospitals and patient care financing. For almost all of this century, medical and graduate medical education clinical instruction has been concentrated in the hospital setting. Graduate and undergraduate medical education are intertwined because of the jointness of clinical activities of faculty/residents and M.D. students. Although the medical school, as an institution, is the focus of undergraduate medical education, graduate medical education organizationally evolved as hospital, program/specialty based education. It is only in recent years that the majority of programs are affiliated with a medical school but control remains decentralized on a departmental or program basis and the accreditation processes are separated for undergraduate and graduate education. While there are data on the sources of revenue that support medical schools and their faculty, and sources of data on support of hospitals, there are no comprehensive data on the funding streams for medical and graduate medical education that: allow disaggregation by discipline/specialty; separate the funds flow between undergraduate and graduate medical education; and separate inpatient and ambulatory care financing. Many of the funding sources are fungible and their specific use is departmental or hospital specific. There have been special one-time studies, cited later, that provide some fragmentary data on primary care education financing, particularly family medicine graduate programs and ambulatory care training. * I would like to thank Catherine White for her ongoing assistance; Lawrence Clare for assistance on federal funding of primary care; and Jessica Townsend for her helpful comments. 173

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The discussion that follows provides: o o o o o A brief history of financing medical and graduate medical education A discussion of the general federal support streams Role of the states Discussion of primary care and ambulatory care education financing Potential sources of support for primary care and ambulatory care education History of Support Until the development of a variety of federal programs that indirectly and directly support medical education, didactic and clinical undergraduate medical education was supported similarly to other higher education through state appropriations for public institutions, tuition and endowments. Public and private medical schools continue to have different mixes of sources of support. Graduate medical education and clinical faculty were supported by hospitals and fees _1 _ ~ 1~__ A_ __ 11 1~ ~ ~ 1 generated oy faculty trom provision ot patient care services to private patients. The majority of clinical education was conducted in hospitals with indigent patients until the advent of Medicare and Medicaid and since that time large programs continue to be concentrated in public hospitals and/or hospitals with large indigent caseloads (Hanft, unpublished). As late as 1955, residents had virtually no responsibility for the day-to-day management of private patients of moderate means and even less contact with patients on the hospitals' "gold coast" (Rabkin, 19601. Prior to World War II, medical schools relied on a small full-time faculty, mainly in the basic sciences, and a "volunteer" or geographic full-time clinical faculty which received no compensation or modest stipends from the school and/or hospital with the quid pro quo being the prestige of the affiliation with a medical school and/or teaching hospital and admission privileges for private patients at a teaching hospital. Residents and interns were provided with meals, housing and sometimes small stipends. Medicine started developing a scientific base about 1890 and medical schools and some hospitals began to evolve into research institutions with the institutions receiving funds from individuals, foundations and state appropriations (Dietrick and Berson, 19531. The Ransdell Act of 1930, created the National Institutes of Health (Mider, 19761. The National Cancer Institute was established in 1937 (IOM, 1976; Hanft, 19841. World War IT marked a turning point with substantial federal investment in biomedical research funding. This funding became a major 174

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source of indirect support for medical schools and their faculty with the clinical research focused in the teaching hospital. In 1945, at the end of World War II, President Truman explicated his views of the deficiencies in health and medicine. Among the recommendations were federal support of medical education and biomedical research. In 1947, the President's Scientific Research Board recommended a substantial increase in federal funds for medical research and medical education (Bardley and Harvey, 1976). Though the AMA opposed federal support for education, financing of health care services and expansion of social insurance to health care, it did not oppose funding of biomedical research. Biomedical research funding became a major source of revenue for the development of medical schools and the expansion of facula with clinical faculty involved in graduate medical education as well as undergraduate education. NTH grants awarded for the conduct of research and research training included funds for salaries of faculty who conducted research and also spent time in teaching. These funds enabled the schools to expand the numbers of full-time faculty (Relman, 1984). By 1955, one third of medical school revenues were derived from research grants and contracts (Stevens, 1971; JAMA, 1987). Direct federal support for education did not emerge until the 1960s, although throughout the fifties numerous individuals and commissions expressed concern about the slow increase in the number of medical students. Federal direct support for schools and undergraduate medical education began in 1963, in anticipation of the increased utilization of services that would result from the expansion of private insurance and the enactment of health insurance for the elderly (Stevens, 1971; Hanft, 1982; Relman, 1984). This support was relatively brief. Patient care funding began to increase with the growth of private health insurance in two ways. Hospitals incorporated education costs into their charges, and for a growing number of middle class patients, insurance covered physicians' fees. Teaching programs, however, continued to rely principally on indigent patients until the advent of Medicare and Medicaid (Relman, 1984; Stevens, 19711. A recent study shows a continued strong link between graduate medical education and indigent care (Hanft unpublished). Today support for graduate and undergraduate medical education comes from a multiplicity of sources. Although data are available on medical school support and some data are available on resident support, there are only very gross estimates of hospital support, mainly Medicare estimates. There are no national 175

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estimates on support for outpatient education. There is no way to separate precisely medical school support by graduate and undergraduate training except through special case studies. Although sources of financing are similar for undergraduate and graduate training, the proportion contributed by each revenue source differs for each type of education. In the undergraduate years biomedical research, state appropriations and practice plan revenues dominate the financing of medical schools. During residency years patient care funds from both hospital and faculty practice plan revenues dominate, paying an estimated 80 percent or more of the total costs of graduate medical education, with the majority of funds from hospital revenues. Table ~ shows trends in revenues; Table 2 shows sources of revenue for public and private medical schools. As Table ~ shows, the fastest growing source of revenues for medical schools are medical practice plans. Much of this revenue is generated from the joint teaching/patient care activities of graduate medical education. These revenues have risen rapidly as a Pronortion of total medical school revenues. ~ , 1 1 ~ 1 ~ ~ ederal revenues, other than research, have declined substantially and revenues from research have also declined as a proportion of total revenues, although they constitute the second largest source of support. Table 2 shows the most recent published data by ownership of medical schools. In reviewing the data, it should be noted that almost 60 percent of the schools are public schools. Ownership is a key factor in the distribution of revenues, with almost 30 percent of public school revenues derived from state and local government. Private schools are more heavily dependent on professional fee income. Payment from hospitals account for one-fifth of revenues and professional fee income for another fifth or a combined total of 43 percent. In contrast, public universities derive less than ~ percent of their revenue from hospital payments and a slightly smaller amount than private schools from professional fees. However, the difference in hospital payments may be an artifact of the way states provide funds to their medical schools and teaching hospitals. For example, where the state owns its own teaching hospital, the full faculty salary may be paid directly to the medical school through the appropriation to the school rather than passing the supervisory salary through the hospital books, or the hospital may pay the department with the revenues reported as practice plan revenues. 176

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Table 1 Trends in U.S. Medical School Revenues Selected Years 1971-1987 Revenue Source 1970-1971 1975-1976 1986-1987 Percent Percent Percent Federal research 25.6 24.3 19.9 Other federal 18.8 11.7 3.8 State and local government 18.9 23.8 18.5 Tuition and fees 3.7 4.6 5.3 Medical service 12.2 18.0 37.6 Other income 20.9 17.6 14.8 Total* 100.0 100.0 100.0 * Totals may not add due to rounding. Source: "Medical Education in the United States, 1986-87" Journal of the American Medical Association, August 26, 1988, Vol. 260, No. 8, Table 4, p 1080 177

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Table 2 Revenues of Public and Private Schools by Source of Funds. 1986-1987 Percent Distribution Source of Funds Public Private State and local government 29.7 2.2 Professional fee income 19.4 22.5 Recovery of indirect costs 5.0 S.3 Tuition and fees 3.2 7.6 Endowment 0.2 2.3 Gifts 0.2 1.2 Income from college services i.7 0.S General university funds 2.4 1.0 Reimbursement from hospitals 7.S 21.2 Research and teaching training 1.5 1.1 Sponsored programs* 25.9 29.0 Miscellaneous 2.9 2.7 Total ** 100.0 100.0 * Mainly biomedical research. ** Totals may not add due to rounding. Source: Same as above - Table 9 p. 1083. 178

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It is important to note that these tables represent averages and there is wide variation among medical schools as to source and mix of revenues. The mixes of revenues depend not merely on public or private ownership, but factors including: university ownership of the teaching hospital; the types of teaching hospitals affiliated with the medical school; the patient payor base for generation of fees; the research emphasis of the school. Comparable aggregate data are not available for teaching hospitals, undergraduate medical education separated from other missions or for graduate medical education separated from other missions. Federal Support* Biomedical Research Federal direct investment in support of medical education began in the early sixties but indirect support from biomedical research was in place. Biomedical research funding, predominantly from the National Institutes of Health, began to grow rapidly after World War II, and provided a base of indirect support for medical schools, particularly for undergraduate medical education. While biomedical research funds are granted for the conduct of biomedical research, these funds also support faculty salaries and graduate fellowships. This support enabled medical schools to expand the size and expertise of their faculty and led indirectly to the further development of technology, the demand for specialist training and the consequent specialization of the delivery of medical care in the United States. The combination of an increasing reliance on federal support for research and the opposition by the American Medical Association to direct federal involvement in the support of education, led to the domination of biomedical research and research/specialty oriented faculty in medical education over a twenty year period from the 1940s to the 1960s. The influence of the domination of this support ran and runs counter to the public goals of increasing the supply of primary care physicians relative to other specialties. State appropriation support of public schools and more recently patient care funding have tended to counterbalance the research domination, as did the direct federal capitation payments (support per student) in the 1970s (Hanft, 1982). *Drawn extensively from R. Hanft "Impact of Changes in Federal Policy on Academic Health Centers Health Affairs Vol 1 No,. 4 Fall 1982:67-81. 179

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Though biomedical research funds are still a major source of revenue for medical schools, they have declined as a proportion of total revenues since the 1960s. However, the proportion of these revenues to total revenues varies substantially by institution with some institutions receiving much higher than the average revenues from this source and some schools deriving little revenue from this source. Education Support In the late 1950s and early 1960s, increased availability of health insurance stimulated public demand for health care services. In addition, there was a public perception of a shortage of health professionals. Efforts to provide hospital insurance for the elderly and increased federal involvement in the care of the indigent elderly through the Kerr-Mills Act contributed to growing public and congressional fears that the increased demand for services could not be met due to a shortage of health professionals. Although some private and public commission reports urged federal support for health professions education, organized medicine stood firm in its opposition to such support until the early 1960s. In 1963, at the onset of the "Great Society" programs, the Health Profession Education Assistance Act was passed (P.~. 88-1291. It provided for matching grants to assist in the construction of teaching facilities for schools of medicine, dentistry, osteopathy, public health, optometry, pharmacy, podiatry and nursing (Health Resources Administration, 1980). The Act was the start of a stream of legislation which enlarged the federal direct commitment to health professional education and culminated in the 1971 Comprehensive Health Manpower Training Act (P.L. 92-157) and the Nurse Training Act (P.L. 92-168). These laws provided a new type of support for health professions schools - "cavitation" - which was based on the number of students enrolled in health professions programs. Although the manpower legislation continued to require the expansion of enrollment until 1980, during this later period the emphasis was on issues of geographic and specialty distribution of physicians rather than on gross numbers (Health Research Administration, 19801. By 1974, disagreements over the need for capitation support developed. The executive branch was concerned about a potential surplus of physicians, while Congress was concerned about geographic shortages of personnel and specialty distribution. In fiscal year 1980, the capitation support level for medicine was reduced to less than one half the 1972 amount, and in fiscal year 1982 it was completely eliminated. Special grants were included from the early 70s to spur the development of family practice programs and beginning in the late 70s to support primary care residencies in medicine and pediatrics. These special grants 180

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continue at very modest levels and include support for family medicine, general internal medicine, pediatrics and geriatrics. Grants for family medicine residency programs began in 1972. These programs grew from 117 to 381 in allopathic medicine. About 45 percent of these programs received federal support between 1972 and 1988 and in 1988 total federal grants were 20.3 million dollars (Health Resources and Services Administration, 19881. Grants for general internal medicine and general pediatrics began in 1977 and currently are funded at about 13 million dollars. During the 1970s there were changes in support from the Veterans Administration (VA) and the Department of Defense (DOD) including: Veterans Administration support to increase enrollment and to improve the quality of instruction in existing medical schools; the development of new 'Veterans Administration" medical schools; and the creation of a federal medical school to train physicians for the uniformed services. The VA began to develop affiliations with medical schools in 1946 under legislation whose goal was the improvement of the quality of care in VA hospitals and clinics. Medical school faculty and residents have been provided salary support through these arrangements since that time. The Veterans Administration Medical School Assistance and Training Act of 1972 (P.L. 92-541) enabled the VA to assist in the establishment of new state medical schools to be operated in conjunction with and located near VA hospitals, and the expansion of existing schools. Five new schools were developed and the first students were enrolled in 1977 and 1978 (Health Resources Administration, 1980). Despite the direct educational support provided by the federal government, biomedical research and patient care dollars continued to provide higher proportions of financial support to institutions during this period. Budget proposals from the Administration since 1981, have tried to terminate all direct education support for health professions schools except the support of faculty and residents provided through the VA deans' committee arrangements and the funding of the Uniformed Services Medical School and military residencies. About 12 percent of the residencies are supported through these programs. The Congress however, has repeatedly rejected termination of grant support for primary care and family medicine education. Patient Care Support Patient care activities are an integral part of the educational process. Prior to the 1960s, clinical instruction was supported primarily through small stipends from the hospitals for support of residents and interns (Stevens, 1971; Relman, 19841. Full time clinical faculty were supported by tuition and state and county appropriations to state universities and their hospitals and salaries from 181

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county hospitals. Volunteer and part-time faculty found their support through private practice earnings. Most joint patient care/teaching activities centered on indigent patients and were conducted in federal, counter, municipal, university, and philanthropically supported hospitals (Rabkin, 1960~. With the advent of Medicare and Medicaid and the rapid growth of private insurance, new sources of funding became available for support of clinical training. This support took two forms: additional salary support of residents and supervisory teaching physicians in hospitals, and support for patient care services to individuals newly covered by public or private insurance. These new sources of revenue enabled teaching hospitals to expand their residency programs, increase substantially the stipends paid to residents, pay faculty for supervision of residents, and allowed these programs to keep pace with the expansion of undergraduate medical school programs. In fact, the number of residency positions have exceeded the number of medical school graduates for several decades. In addition, these funds provided an additional stream of support for schools and faculty, allowing for continuing rapid expansion of clinical faculty. Teaching physicians who heretofore had provided individual patient care service for indigent patients without reimbursement were now able to bill fees for these services, for those covered by Medicare and Medicaid. Many medical schools and their individual departments and divisions developed or expanded organized "practice plans" for collection and disbursement of these fees. This source of income has grown rapidly since the early 1970s (Hanft, 1982; JAMA, 1988~. The amount of revenue generated from faculty practice plans varies widely among institutions, depending on many factors, including the payment sources for patients' care, the structure of the practice plans. The plans now account for more than 19.4 percent of the gross revenue of public schools and almost 22.5 percent of private schools' revenue. Hospital payments in addition, amount to 7.8 and 21.2 percent respectively (see Table 21. It should be noted that not all practice plan revenues flow through the medical schools and the amounts reported in the literature are understated. These revenues are usually distributed by the practice plan, after expenses are paid, to faculty in the form of salary supplements and fringe benefits. Depending on the structure and charter of the plan, some of these funds are also used by the department for recruitment, travel, seed money for research and development, support of fellows and in a few instances, for support of residents It should be noted that many plans provide a percentage of gross or net revenues to the dean/vice president, which can be used for a variety of purposes. With the increased flow of third party payments, in the 1970s, issues relating to both geographic location and types of specialty training began to arise, as well as issues of the "fairness" of financing. Specifically, reimbursement from ~2

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third party payers for inpatient services has financed a greater proportion of the costs and charges than for outpatient services. Until recent changes designed to reduce health insurance costs, private hospital insurance rarely required cost sharing by the consumer. In contrast, reimbursement for outpatient services from third parties is usually structured to include deductibles (payment by the patient before the third party will pay) and coinsurance (a percentage of the bill paid for by the patient) and does not cover preventive services. It is therefore easier to support specialty training oriented toward inpatient specialties and inpatient care than primely care specialties oriented toward outpatient training (IOM, 1976; GMENAC, 1980). Additionally, the usual and customary fees billed by physicians and paid by public and private insurance programs tend to reward procedure oriented practice at a higher rate than cognitive activities. Specialties such as surgery and radiology are able to generate much larger revenues than pediatrics. A number of commentators: the Institute of Medicine (IOM, 1976), the Health Care Financing Administration's Office of Research, Demonstration and Statistics (HSAIO and Stason, 1979) and the Graduate Medical Education National Advisory Committee (GMENAC, 1980) and the Council on Graduate Medical Education (COGME, 1988) report that these sources of revenue have contributed greatly to the emphasis on specialty and subspecialty training in medicine. The recent study for the Physician Payment Assessment Commission, has recommended a new structure for physician payments that would increase fees for primary care and cognitive activities and reduce fees for surgery and other procedures (Hsaio, 1988). The fee structures and the sites of care clearly influence the amount of practice plan revenue different departments of a medical school can generate. Financing of education through third party payments has different economic burdens and benefits than financing through general revenues of government. The benefits and burdens also fall in geographically uneven patterns since the location of graduate medical education programs is not related to per capita population in a state nor to the number of undergraduate medical student positions within a state. Private health insurance premiums are fixed dollar contributions based on the health care experience of the particular group. Small employer groups, and high risk industries pay higher premiums than large, young, white collar groups. Employers can deduct the full cost of their contributions from their gross income for tax purposes. Large industry, particularly unionized industry, tends to have more comprehensive health insurance coverage than small or low wage industry. The overall effect is regressive with smaller/low wage industry paying higher prices for the same insurance and potentially a higher subsidy for graduate medical education. This factor, however, is counterbalanced to some extent by 183

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hospitals. In addition, some states provide specific funds for training in family medicine and primary care residencies. The reduction of federal funds to state governments with the end of general revenue sharing and reductions in funding for many social programs has led states to scrutinize increasingly, medical education and teaching hospital support. Competing priorities for state revenues, combined with the separation of Medicare and Medicaid reimbursement in 1982, are stimulating reevaluation of state support. State Medicaid programs no longer follow the Medicare reimbursement principles and many do not recognize indirect education costs. In addition, Medicaid reimbursement can be at rates below the costs of teaching hospitals, and Medicaid providers can be limited by competitive bidding (Schramm, 19831. State appropriations decreased from 23.S to 18.5 percent of medical school revenues in 1986-87. The Lewin Wisconsin study surveyed a number of states regarding state support for graduate medical education. For example, California in 1985-86, provided 40 percent of the support of resident stipends and fringe benefits at five University teaching hospitals. They provided operating subsidies to these hospitals. In addition, there is a special grant program for support of family medicine residencies. The state has required cuts in residencies. Illinois supports the residency positions in its state University hospital but these funds are not earmarked. There is also support for residencies in primary care specialties. Indiana University hospitals receive no operating subsidies or payment for resident stipends. The state does subsidize residency programs in community hospitals. In addition, there is a special grant program for family Practice residencies. Virmnia provides a subsi~v to its University hospitals for ~ ~ , ~ ~ . ~ . ~ ~ ~ ~ ~- ~ ~ ~ ~ indigent care and supports tamlly medicine residencies ~Lewln 1YbU). The states varsr widely in how they support graduate medical education, their teaching hospitals and the degree of control they maintain over the number of residency positions in their own hospitals with some states, notably New York, attempting to control the total number of residencies. State university hospitals are a major training base for residents, providing approximately 15 percent of all of the graduate medical education positions. ~6

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Primary Care Residencies and Ambulator Care Training Historically, support of graduate medical education has come from hospital financing. While prior to the Flexner report preceptorships with individual physicians were a common method of training, the rise of the hospital and the concentration of technology in the hospital led to the focus of undergraduate clinical and graduate medical education in hospital settings (Rosenberg, 1987). Traditionally, hospitals incorporated education costs in their cost base and these costs were recognized during the implementation of Medicare. Blue Cross cost based plans also recognized these costs and hospitals incorporated these costs in charges to charge payers. The evolution of the family medicine residency and the development of the community based medical schools in the 1960s and 1970s stimulated the initial interest in a change in focus of residencies from the traditional large teaching hospital to community based hospitals and ambulatory care settings. The advent of competition in the late 1970s and prospective payment, stimulated changes the nature of the hospital and the delivery of health care services and has led to increased pressures to expand education sites to ambulatory care settings. While most pronounced in the primary care specialties, ambulatory care training is an increasing need in specialties like ophthalmology, radiology, and general surgery. The financing of graduate medical education however, has not changed accordingly, except for the recent Medicare change which recognizes the direct cost the hospitals pays when the resident is in an outpatient setting, including outpatient settings outside the hospital if the hospital is willing to support these costs. There are no national data on financing of graduate medical education in ambulatory care settings. There are data on federal primary care grants and data can be aggregated from the states where there are appropriations for primary care residencies. Family medicine residences and faculty were funded by 32 states in 1985. In dollars in 1982, the total state funds were 54 million (Ricketts, DeFreize and Wilson 1986). There are fragmentary studies primarily in family medicine on sources of financing but not in total dollars. Family medicine residencies are structured differently than other residencies. In general, the first year of education is based in a hospital with the financing from the hospital. In subsequent years the education takes place in an ambulatory care group setting with support from grants and fees for service generated by faculty and residents. Residents who are licensed can have their services billed for in these settings, although not in the hospital setting. On 187

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average, about thirty percent of the revenues come from fees from patient care (Ciriacy, 19851. Perkoff cites estimates of a maximum of one-third of the expenses of primary care education could be generated from patient fees (Perkoff, 19861. Schroeder has noted that shifts in the site of training from the hospital to the ambulatory care setting are not followed by the revenues "Thus the medical schoolts designated sources for clinical teaching (tax supported state money for public) and some private schools ... tend to remain at the teaching hospital even while some of the teaching function shifts out of it..." (Schroeder, 1988 p. S121. There are several generic problems in financing prlmaly care reslaencles outside of the hospital setting. These problems may be of lesser magnitude in support of general surgery or other procedural specialties where patient charges tend to be substantially higher for services. The problems are summarized as follows: . _ In the hospital setting the resident and supervisory physician are paid salaries from hospital revenues with education costs separately recognized by Medicare and Medicaid and historically included in hospital charges. a personal and identifiable service is prodded by the teaching physician, a fee can be charged to the patient or insurer. Residents may not bill fees. In the outpatient setting not linked to a hospital (for Medicare) and for outpatient settings in terms of other insurers, the resident's salary and a supervisory salary for the faculty must be generated from fees to the patient/third party or from grants from government and/or philanthropy. In the primary care specialties, the fee levels as noted extensively in the literature, are substantially lower than for procedure oriented specialties. While there are two sources of patient care support for hospital based or hospital outpatient linked training there is only one in the non hospital ambulatory care setting. Payments for physicians services as distinguished from payments for hospital services, historically did not incorporate education costs since education was almost exclusively hospital based in allopathic medicine. - The development of faculty practice plans has been on a departmental/specialty basis similar to the organization

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of residencies with the procedural specialties able to generate substantially higher revenues than primary care specialties, because of the Medicare and private insurance charge structure. The revenues of these plan flow to the department with some small percentage flowing to the institution. . . ~. . . . Conceptually, all education, both undergraduate and graduate medical education should be an institutional responsibility. The organization of medical schools on a departmental basis and graduate medical education on a specialty/program basis combined with the departmental flow of hospital and practice plan revenues leave the medical school institution with a paucity of flexible funds. Institutions that do not receive public appropriations, or where the appropriation is in the form of line items, unless the institutional percentage of practice plan revenue is . While substantial, have little ability to cross subsidize cross subsidies are endemic among the missions of a medical school, they do not operate on an institution Awe basis in the medical schools for graduate medical education programs. High earning departments and specialties retain the majority of their practice earnings for departmental and even division rather than institution wide goals. Graduate medical education programs for more than fifty years were focused in the hospital setting. With the development of third parer payments, these payment systems incorporated the costs of education within the hospital at first; imnlicitv With the enactment of Medicare graduate medical education. costs ~ O ~ ~ ~ . ~ ~ ~' ~ ~ . AT ~ ~ ~ ~ I 11 were explicitly recognized as allowable costs. hospital relmDursement initially under Medicare was cost reimbursement. Physicians' services however, were and are, reimbursed on a charge basis, based on usual and customary costs within a prevailing, with no mechanism and little need until the 1970s to recognize education functions. Supporting education through charge based reimbursement to physicians is feasible and has been done by Mayo and in part by some primary care programs, notably family practice residencies. There are however, both institutional and structural constraints that limit the viability of relying on charge payments to fully support ambulatory based programs summarized as follows: - The charge and reimbursement structure that rewards procedural activities at much higher rates than cognitive services. ~9

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- - Potential reduced productinty in ambulato~ care education and higher costs in contrast to hospital based education (see LJave paper). The high indigent and Medicaid caseloads that reduce revenue potential from fee billings where public clinics , community health centers, and/or outpatient departments of public hospitals are the sites of education. The departmental structure of practice plans and the consequent lack of flexible funds at the medical school level that could allow it to cross subsidize across revenue generating and nonrevenue generating graduate medical education programs. Greater burden on patients since outpatient services generally have higher proportinate deductibles and coinsurance than inpatient services. Currently Medicare permits the hospital to count residents serving in outpatient settings and allows salary and fringes for them. This assumes however, that the hospital will be willing to pay for services provided outside of the institution. While helpful to the hospital in supporting patient services in outpatient settings in its own facilities, the liklihood of this source of support being available to freestanding ambulatory care settings is limited. The Importance of Patient Payor Mix As A Source of Financing of Primary Care Education The scattered studies of the financing of primary care residencies, particularly family medicine residencies, show the importance of clinic fees in supporting these programs. The discussion above has pointed out that while education costs have been incorporated into hospital payments, either implicily through the charge structure or explicitly through cost pass throughs and indirect adjustments, there is no similar support mechanism for ambulatory care training. Even when directly funded through grants or the hospitals in their own clinics, physician payment/fees for service are an important source of support. The patient payor mix becomes a critical element in the ability to finance the ambulatory care training outside of the traditional hospital setting. ,, ~ The lack of an education component in the fee structure is compounded by other factors, based on the type of payor for the patient care. Where community health centers serve as the ambulatory care site, they are heavily dependent on Medicaid payments and federal grants under Section 330 of the public health 190

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service act. These grants do not provide funding for residents. Furthermore, except in states like New York where Medicaid payments to these types of facilities are relatively generous, physician fee payments under Medicaid are substantially lower than under Medicare or private insurance and in some states are actually below average practice costs. In highly competitive medical markets, HMOs must keep their costs low and premiums competitive. Unless there is another source of support for residents and faculty, the graduate medical education programs would need to either substitute for current costs or generate sufficient income through enhanced productivity to cover the graduate medical education costs in an HMO (see the Lave paper). An ambulatory care setting in a well insured fee for service community on the other hand, is in a far more favorable financial position. Yet even in these instances ambulatory care training in primary care is more difficult to support than surgical or subspecialty care because of the fee structure. Payment to cover the education costs, assuming that graduate medical education is additive to the cost of practice, would entail transfer of some costs directly to the patient because of deductibles and coinsurance applied to most outpatient services. Robert Walkington's paper, published in this volume, provides a number of examples of the reliance on different types of program support, including demonstration projects, AHEC funding, state and federal grants. Who Should Support GME The question of who benefits and who should pay for graduate medical education has been a subject of debate for many years. The resident's role increases from apprentice to quasi/student provider to independent provider during the course of the residency. Despite the finding of the National Labor Relations Board that house staff should be considered students, the fact remains that they provide a substantial amount of patient care (IOM 1974, 1976; Arthur Young 1986). While the academic medical community has long sought to place graduate medical education within the purview of the medical schools and universities, and therefore might be expected to seek or provide funding for this period of education, the fact remains that resident clinical training has several beneficiaries. Analyses of the activities of house staff uniformly show that a large part of resident/training is spent providing care to patients and frequently without direct supervision (IOM 1974, 1976). The 1976 IOM study found that house staff spent an average of 61 percent of their time providing patient care with or without 191

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supervision. An additional 15 percent was spent in patient care activities that included undergraduate medical students and other health professions students (19761. Is the resident a student or an employee? If a student, shouts he/she pay tuition like other graduate students or can one argue that the salary earned is lower than the income that could be generated in practice at the same stage of the career, so in effect the student is paying an implicit tuition in the form of foregone earnings (Yoder, 19801. No matter how the resident is classified, there is no doubt that the resident provides a significant amount of patient care services that might otherwise be prodded by physicians who render fees for these services, or more likely services to patients who are uninsured. From the studies that have been conducted, patients are major beneficiaries of house officer activities. Furthermore, a large proportion of training takes place in public and large teaching hospitals and their outpatient departments that provide care for the indigent. Residents have traditionally and continue to provide indigent care. In some states, the family practice residency clinics are major providers of care to Medicaid and uninsured patients. Medical schools also benefit from the teaching activities of house staff. The studies show a significant teaching contribution by the residents to the education of medical students. Yet no payment is made by the schools to the teaching sites for these activities. Faculty also benefit significantly. The resident provides an "extra" hand and coverage for the teaching physicians, as well as contributing substantially to the services that the teaching physician bills for. These fees flow to the medical school department and faculty in addition to the hospital payment for supervising faculty. Hospital benefits accrue from the availability of round-the-clock physician staffing by residents at lower cost than if provided by community physicians. Teaching programs are also regarded as a qualitative asset for hospitals. The resident also benefits, receiving the advanced training that provides the skills to practice a high earning profession. There are multiple beneficiaries. However, current practice places the majority of financing burden on patient care funds. Patient care financing under certain programs, notably insurance premiums and Medicare, is regressive. Opponents of using patient care funds to finance graduate medical education object on several grounds: That this constitutes a "sick tax" on teaching patients 192

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because the inclusion of the costs of GME tends to increase costs to patients; that because the general public contributes to medical care financing through insurance premiums and social security taxes, payment for graduate medical education through reimbursement may result in inequitable income transfers from people with low incomes to physicians with high income expectations; because some specialties, e.g. surgery, are better able to generate patient care income, there is an incentive to support and expand programs in those specialties, thus affecting the ultimate specialty distribution of physicians (Fruen and Korper, 1981; Commonwealth, 1985~. In addition, the distribution of residencies unrelated to either future location of physicians or per capita population, places disproportionate financing burdens on certain states (Hanft, unpublished). In fact, a case could be made for multiple sources of financing from the multiple beneficiaries if there could be quantification of the benefits that accrue to each. These sources of financing could include: Tuition paid by the resident for education. Salary support from health professions schools to account for teaching activities of the resident. Salaly support from the hospital for standby/coverage of services. Fees or salary support from patients/third parties for the provision of services. Salary support or fee sharing from faculty. Moving to increased fee support, to support increased primary care training in the outpatient setting raises the following problems, and probably is not feasible unless the financing of practice plans on a departmental basis is changed to institution wide plans. The barriers to increased fee based support in summary include: Increased regressing of the financing. Continued incentives to support residencies in the high fee/high earning specialties and inability of the primary care specialties to generate sufficient funds to cover education costs. The concentration of GME in settings with a large number of indigent, both Medicaid and uncompensated care, patients. Large amounts of dollars, not including faculty fees, estimated at 8-10 billion dollars (4 billion of Medicare funds) flow for the support of graduate medical education. The issue is not the amount of revenues but the distribution of the revenues in support of graduate medical education priorities. 193

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REFERENCES Bardley, J. and Harvey, A.M. (1976) Two Centuries of American Medicine 1776- 1976 W.B. Saunders Company, Philadelphia 413-419. Commonwealth Fund (19881. Report of the Task Force on Academic Health Centers, "The Contribution of Academic Medical Centers to Clinical Research" (unpublished). Commonwealth Fund (1985) Prescription for Change, Report of the Task Force on Academic Health Centers, The Commonwealth Fund, New York. Council on Graduate Medical Education, (COGME 19871. Discussion Paper on Financing of Graduate Medical Education Washington, DC. Deitrick, d.E. and Berson, R.G. (1953), Medical Schools in the United States at Mid CenturY, McGraw Hill, New York, Chapters 2 and 3. Fruen, M. and Korper, S. (19811. Issues in Graduate Medical Education Funding Journal of Health Politics. Policy and Law (1) 87-97. GMENAC (1980) Report of the Graduate Medical Education National Advisory Committee to the Secretary, Department of Health & Human Services, Washingrton, DC, DHHS Publication No. (HRA) 81-651. Hanft, R.S. (1982) The Impact of Changes in Federal Policy on Academic Health Centers. Health Affairs 1~41. Hanft, R.S.~1989~. An Analysis of Factors that Influence the Size of Graduate Medical Education Programs: Implications for Financing (dissertation in progress). Health Resources Administration (HRA), U.S. Department of Health and Human Services 1980. Chronology of Health Professions Legislation 1956-1979. Government Printing Office, Washington, DC. Health Resources and Services Administration (HRSA) U.S. Department of Health and Human Services (19881. Overview of Program Activity for Graduate Training in Family Medicine. Section 786(a) Public Health Service Act. An Annual Report of Grant Program Activity. 194 Fiscal Year 1988, Rockville, MD.

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Page 2 Hsaio, W. Braun, P.; An Overview". 22353. Dunn, D.; Becker, E. "Resources Based on Relative Values, Journal of the American Medical Association 260~16) 2347 Institute of Medicine (19741. Costs of Education in the Health Professions Parts ~ and Il. National Academy of Sciences, Washington, DC. Institute of Medicine (1976~. PaYment of Teaching Physician Medicare Medicaid Reimbursement Policies, National Academy of Sciences, Washington, DC. Journal of the American Medical Association (JAMA) 1988. Issue. American Medical Association, Chicato 260~81. Lave, J. (1984~. Hospital Reimbursement Under Medicare. Fund Quarterly 62~2) 251-268. L`ewin and Associates, Birnbaum I, Hanft, R. et al (1986~. Education in Wisconsin. Report to the Division of Health, State of Wisconsin. Annual Education Milbank Memorial Graduate Medical Lundy, J. (1984). "Payment for Medical Education Under the Medicare Program", prepared for The Hearings on the Subcommittee on H~lt.h ~nr1 th" Environment of the U.S. Senate Committee on Finance. Mider, C.. (1976~. "The Federal Impact on Biomedical Research". Advances in . . , . . ~ _ American Medicine: Assays at the Bicentennial, Josiah Macy Foundation, New York. Perkoff, G.T. (1986~. Teaching Clinical Medicine in the Ambulatory Setting, New England Journal of Medicine 314~) 27-31. Rabkin, M.T. (1960~. The Teaching Hospital and Medical Education: One Room Schoolhouse, Multiversity Dinosaurs? Journal of Medical Education 60 92- 97. Relman, A.S. (1984~. Who Will Pay for Medical Education in our Teaching Hospitals, Science 226, 20-30. 195

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Page 3 Ricketts, T.C.; De Friese, G.H. and Wilson, G. (1986~. Trends in the Growth of Family Practice Residency Training, Health Affairs 5~4) 84-96. Rosenberg, C.E. (19871. The Care of Strangers, Basic Books Inc., New York, Chapters 7 and S. Schramm, C.~. (19831. Teaching Hospitals and the Future Role of State Government, New England Journal of Medicine 308~1) 41-45. Schroeder, S. (19881. Expanding the Site of Clinical Education: Moving Beyond the Hospital Walls, Journal of General Internal Medicine 3(S) S5-14. Stevens, R. (19711. American Medicine and the Public Interest, University Press, New Haven and London, Chapter 17. Yoder, S. (19801. "Financing Graduate Medical Education" in Graduate Medical Education Present and Prospective A Call to Action, Josiah Macy Foundation, Inc., New York. Young, A. and Company (1986~. Study of the Financing of Graduate Medical Education, Washington, DC. 196