GME and the teaching institutions that provide it, which are essential parts of the infrastructure for quality health care in this country. The payment system is actually divided into two major programs: a direct GME (DME) and an indirect medical education (IME) component.

The direct GME component from Medicare comprises payments made directly to teaching hospitals based on 1984 historical costs to cover the stipends of residents, the supervisory personnel, and other associated hospital costs for supporting a residency program. These are payments for each individual, full-time-equivalent resident. Some of the per-resident payments are reduced (weighted) to provide disincentives for long-duration, specialist residencies, and some are paid in full to provide incentives to train generalists. Partial reimbursement of the costs incurred by some hospitals in training other professionals such as nurses and allied health personnel is also made. In general, payments increase by the consumer price index each year, and the fraction of the costs paid by Medicare is the same fraction that Medicare patient-days are of total hospital patient-days. Importantly, physician payments also increase in the form of an equal additional per-resident payment for each additional resident that a hospital adds to its total complement of residents. Because of idiosyncrasies in the 1984 cost base, per-resident payment amounts vary significantly, and likely in ways that do not reflect the real costs of residents, from hospital to hospital; in short, there is currently an incentive to add residents especially for hospitals at the high end of the per-resident payment spectrum.

The indirect medical education component from Medicare is not based on any identified costs. Instead, it is intended as support for teaching hospitals and to compensate for the observed higher costs that the presence of training programs generates in these hospitals. Additional tests, special care units, unsponsored research, more seriously ill patients, and care of nonpaying patients contribute to these higher costs. Medicare pays hospitals for inpatient care for Medicare beneficiaries using a diagnosis-related group (DRG) methodology that pays a predetermined amount to the hospital (with some local, individual adjustment) for each beneficiary admission depending on the patient's diagnosis. For IME payment, a formula has been devised that converts the ratio of the number of full-time-equivalent residents to a hospital's number of beds into a percentage—the more residents per bed, the higher the percentage. This percentage is applied to and increases the DRG payment for each Medicare admission. The annual update of payment rates provided by Congress for the DRG method increases the per-admission payment and thus the IME amount as well; again, an incentive is created to add residents and to train them only within the hospital's walls. Individual hospitals' decisions and the accrediting process are currently the only controls on the number of residents and therefore on much of the payment for direct and indirect medical education. The Medicare GME payment system itself is open-ended, so the system cannot control rising costs caused by expanding resident numbers. FY 1996 support for indirect education ($4.3 billion) was about twice the dollar amount paid for direct education ($2.2 billion).

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