Medicaid programs have rapidly adopted managed care approaches to control their acute care costs; managed care plans rarely have explicit mechanisms to cover the higher costs of teaching facilities, and the efforts of individual states to maintain these payment differentials are subject to rising pressure on their budgets and the willingness to finance the payments through higher taxes.

Medicare is the only payer with an explicit mechanism nationwide to support GME and the special services and patient care missions provided by teaching hospitals. Because of this, Congress focused on the methods used by Medicare in developing their 1995 proposal for the creation of a Graduate Medical Education and Teaching Hospital Fund. This proposal was included in the Balanced Budget Act of 1995 that was passed by Congress and vetoed by the President.

This section also focuses on the methods used by Medicare to provide support for GME and teaching hospitals over the years. It contains an overview of the policies that determine Medicare's payments to hospitals with GME programs and the implications of these policies for the distribution of Medicare payments and the financial status of teaching hospitals.

Medicare Teaching Payments

The Medicare program provides two types of extra payments to hospitals with graduate medical education programs. First, teaching hospitals receive an adjustment to their Medicare Prospective Payment System (PPS) payments to reflect the added patient care costs associated with operating an intern and resident training program. The IME adjustment accounted for about 6.2% of total PPS operating payments in FY 1996, or about $4.3 billion. A separate IME adjustment is applied to PPS capital payments.

Second, Medicare also pays teaching hospitals an amount, separate from PPS payments, to offset the direct costs of GME programs. These payments cover resident salaries and benefits, the salaries of supervising physicians, the cost of office space, and other overhead. Medicare direct GME payments for resident training totaled about $2.2 billion in FY 1996; in addition, $0.3 billion was paid to hospitals with nursing and allied health training programs.

In addition to Medicare's payments to teaching hospitals, physicians who directly supervise interns and residents are allowed to bill under Part B of Medicare and be paid for the services they are supervising. Although it is not part of Medicare's explicit support for GME and teaching hospitals, it can be an important part of the revenues that are used by these hospitals to support their training programs.

Payment Policies Prior to Prospective Payment

At its inception in 1965, the Medicare program reimbursed each hospital for the reasonable operating and capital costs attributed to the treatment of Medicare

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