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Chapter 10 FINANCING MEDICAL EDUCATION Jessica Townsend Introduction Analysis of the f inancing of medical education is a complex task. It involves examination of numerous sources of funds that flow into and among the various educational settings, funds that are used to finance the diverse functions and responsibilities of the organizations that participate in medical education. Sources of funds include federal and state governments, families or individuals that pay tuition, insurance companies that pay f or patient care, and philanthropy. Organizations involved in medical education include medical schools and numerous patient care sites in which students gain clinical experience. Functions funded under the umbrella of medical education include construction, academic teaching, clinical teaching and experience, and research. As Brown noted, "This confusing welter of functions and responsibilities means that the public cannot buy an M.D. without buying a total package of training, research and services."] He adds, "One could not assemble a more hagridden set of fiscal resources. Given such a situation it is not surprising that the various sources of financing tend to outfumble each other in reaching for the medical education bill and to shift their own mounting fiscal difficulties onto each other or onto the medical schools.''] Academic health centers care for patients, conduct research, and educate students. It is difficult to sort out how each function is financed because the funding streams are unclear, and the performance of one function is often inextricably linked to other functions. Similarly, on the cost side the relationship is often unclear, with the cost of one function often depending on the performance of other functions. The rise and fall of each source of financing has, to a great extent, been driven by various perceptions of the need for medical manpower, notions of equity of access to higher education in general and medical education in particular, equity of access to health care, and the nation's need for biomedical research. The federal government has used a number of funding mechanisms to achieve such policy goals as facilitating medical education for members of specific socioeconomic groups, increasing the supply of specific medical specialties, and stimulating the supply of physicians in specific geographic areas. States have also contributed to medical education, sometimes pursuing similar, sometimes different, goals. Examination of the various funding mechanisms, the extent to which they were successful in attaining their goals, and their impact on the organization of medical education can increase the understanding of the possible ef fects of current changes in the f inancing of medical educe t ion . 243

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The policies expressed through support of different facets of medical education and of patient care have important implications beyond the achievement of explicit policy goals. While medical schools and hospitals have responded to financial incentives (such as those to expand enrollment or provide primary care residencies ) , federal and state support has also affected the behavior of schools and students in other ways. The combined impact of government funding in the 1960s and 1970s created an era of expansion throughout medical education, resulting in an enterprise that has been heavily dependent on the various streams of money. Students have relied on both general education assistance and programs targeted to medical education and to specific groups of medical students. The aggregate impact of financial support has allowed medical schools to select students from a large, diverse group of applicants. Today, students and schools are experiencing changes in both the flow of funds and the medical environment. Many sources of funds are being curtailed and competition among hospitals and physicians is increasing. Schools, hospitals, and students are all searching for new sources of support or are trying to increase support from sources that have potential for expansion. It remains to be seen whether government and educational institutions will maintain a serious commitment to the policy goals that are still pertinent. Some specialties are still in short supply. Some areas of the nation are still medically underserved. Some demographic and cultural groups are still underrepresented in the pool of physicians. Many of those close to the medical educational enterprise fear that financial pressures will cause these goals and others, such as providing high-quality basic science education, to be submerged in the quest for financial stability. Government Involvement in Financing Medical Education Government has been directly involved in financing medical education through support of educational institutions, loans, scholarships, and grants to medical students. Indirect support has also been given through the financing of research and patient care. In some cases one piece of legislation supports more than one stream (e.g., institutional support and student support), making it difficult to separate support into categories; however, for purposes of clarity, the following section groups government actions into the categories of research, institutional support, loans and scholarships, and patient care, although some overlap occurs. Medical schools and teaching hospitals are today experiencing financial pressures caused by the decrease in funding levels or by the complete withdrawal of many sources of funds upon which they had come to rely. Although there are many reasons for the overall decline in government funding, the ma Jor reasons are twofold: f irst , a general concern with the high cost of medical care and the proportion of national resources devoted to health care--a concern that has become more acute as fiscal pressures on federal and state budgets have increased; second, a perception that the aggregate supply of 244

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physicians has increased to such an extent that it has become difficult to justify support, or subsidy, to further increase the supply of physicians. Table 1 in Chapter 8 shows some major changes that took place in the financing of medical education between 1960/61 and 1980/81. The federal share of medical school support fell from almost 54 percent in 1964/65 to 30 percent in 1977/78 (and has remained at 29 percent through 1980/81~. Federal research support accounts for the largest decline, falling from 36 percent in 1964/65 to only 17 percent in 1980/81. Two sources of funds rose as the federal share declined. States arid localities, which provided 15 percent of medical revenues in the mid-1960s, provided over 20 percent by the late 1970s, but have failed to increase their share significantly since then. Medical practice plans in the 1960s generated only 2 to 3 percent of revenue. By the end of the 1970s, those plans provided a substantial 15 percent, and are expected to become an increasingly important source of support. Although increases in tuition and fees have been the subject of much discussion, their proportional contribution to medical school revenues has not shown much change over the last 20 years. Medical schools and hospitals are adjusting to the new environment of more constrained financial resources. Strategies to find new sources of support or to increase revenue from existing sources are being developed. Policymakers and those concerned with medical education need to consider the impact of the changing pattern of financial support. It is especially important that the impact be disaggregated to determine whether there remains a need for targeted support to achieve specific policy.goals. Support for Research Although the National Institutes of Health (NIH) was created in 1930, it was not until the mid-1940s that significant amounts of government research funds started to flow into academic health centers. From the beginning, research money went to individual investigators and was directed largely to researchers in schools of medicine or graduate departments of universities, with the result that biomedical research became concentrated in those centers. 2 Growth of biomedical research in medical schools was rapid. In FY 1941, 6 of the 71 four-year medical schools had some federal money. By 1948, 69 of those schools had NIH grants.2 The importance to medical school income of federal research grants also grew rapidly, representing 36 percent of total medical school support in FY 1964/65. Although the dollar amount of federal research funding continued to grow--increasing from $281 million in 1964/65 to $614 million a decade later, and exceeding $1 billion in 1980/81--the proportion of total income represented by thin source of funds decreased from 21 percent in 1970/71 to 17 percent in 1980/81 as other sources increased at a greater rate (Table 1, Chapter B). 245

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Biomedical research funding has been significant to medical education beyond the expansion of research capabilities and the enlargement of opportunities for research careers. Research funding has permitted the expansion of faculty and the inclusion of teachers with primary interest in research. In addition, the funds have supported a range of personnel, including research assistants, graduate students, and others, and have added impetus to the emphasis on technology and specialist training.2 In FY 1983 the administration's budget proposals for NIB and the Alcohol, Drug Abuse, and Mental Health Administration (ADAMHA) were rejected in favor of spenting increases that added $362.4 million to NIH's budget, bringing it to a total of over $4 billion. Cuts in ADAMHA's budget were averted. However, a policy of reducing the direct costs of NIH noncompeting project grants by 4 percent will start to be felt by medical schools. Institutional Support Concern about the nation's supply of physicians surfaced as a public concern in the 1940s, but indirect support of medical education through biomedical research funding was the only federal input into education until 1963 when the Health Professions Educational Assistance Act (P.L. 88-129) was enacted. Institutional support under P.L. B8-129 took the form of federal matching grants for construction or expansion of teaching facilities. The legislation also included a student loan program.3 This first effort to pursue a policy directed at expanding the physician supply provided the basis of much that was to come. The Act was extended and amended in 1965, and other legislation followed. Demand for health care was spurred by health insurance coverage of increasing numbers of people and by the enactment of Medicare and Medicaid--and as demand increased, the physician supply was perceived increasingly to be inadequate. In 1966 federal support was, for the first time, tied to medical School enrollment. Medical Schools had not responded to the 1963 legislation with sufficient expansion to assure the desired increase in the physician supply. Schools became eligible for awards based on the number of full-time medical students. In addition, "basic and special improvement grants" were offered to support faculty and curriculum improvements ant to help put the schools on a sound financial footing.4 These efforts were evidently not enough. In 1970 more than half of all medical schools were recipients of financial distress grants,4 so in 1971 the federal government responded by changing the nature of institutional support . Described as "the f irst attempt at a truly 'comprehensive ' approach to health manpower training,-3 the Comprehensive Health Manpower Training Act (P.L. 92-157) funded construction, some operating costs, some Scholarships, and capitation payments with bonuses for enrollment increases as an incentive to expansion. An additional goal for physician manpower policy became apparent in the early 1970~. Responding to perceptions of specialty and geographic 246

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maldistributions of physicians, P. L. 92-157 included special construction support for schools in health manpower shortage areas and f inancial incentives f or training primary care professionals . 3 The emphasis on primary care became more pronounced in the Health Professions Educational Assistance Act of 1976 (P.L. 94-484) as receipt of capitation became conditional on the provision of primary care residencies--in 1978, 35 percent of first-year residencies had to be in primary care. By 1980 that proportion had risen to 50 percent, reflecting continuing concerns about the overproduction of many specialties and the shortage of primary care physicians. P. L. 94-484 also included provisions that "signify the intent of Congress to affect the way in which individual institutions develop training programs and establish curricula emphases. Student choice of graduate training opportunities, post-graduate decision-making, and the development of financial incentives relevant to individual choice were all subject to Congressional consideration."3 Thus , the federal government by the late 1970s had involved itself in many details of medical education, firmly indicating that medical manpower and the provision of medical care was considered a national concern and a national resource. Area Health Education Centers (AHECs) are a relatively small federal initiative, but illustrate an approach to changing the institutional format of medical education. The program provides funds for medical and osteopathic schools that decentralize education by providing training and experience in shortage areas. The concept being implemented is twofold: first, that graduates who have had experience in rural areas are likely to return to such areas to practice; second, that establishing centers in rural areas makes those areas more attractive to physicians, since access to these sophisticated outposts of academic medicine decreases the sense of isolation experienced by rural practitioners. The success of AHEC programs varies from state to state (it is currently in place in eight states) and has been most vigorously and effectively pursued in a few states, such as North Carolina, where the state has appropriated substantial funds to enhance federal spending. State support of medical education has developed for numerous reasons. Some relate to political pressures to provide in-state medical education for constituents; others relate to states' accepting responsibility for enhancing medical knowledge by creating academic and research centers. A more important reason may be the perception that graduates tend to practice in the state in which they acquired their-medical education, so that the existence of a medical school is thought to help increase the state 's supply of physicians. Hough and Harder analyzed the distribution of all U.S.-trained physicians, reviewing a number of studies that examined the determinants of physician location; the authors find evidence that, although overall roughly 40 to 50 percent of physicians practice in the state in which they went to school (the proportion from state 247

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schools was higher than from private schools), there are other variables that also significantly affect location decisions.5 They concluded that "the physician supply argument for building or supporting medical schools may be less compelling than in the past, for reasons beyond the control of the states." In particular, Rough and Marder f ind evidence that states with small populations, high physician-to-population ratios, and schools with poor reputations and a high proportion of graduates in specialties other than primary care are likely to retain f ewe r of their graduates than do other states . These findings suggest some reasons why there has been variation among states in the extent to which policies aimed at retaining graduates have succeeded. State institutional support of medical education is directed largely to public schools, but varies widely among states in both dollar and per capita amount. The variations reflect differences in each state 's need for physicians, its ability to attract physicians to the state, and its f iscal resources. 6 State funding increased as a proportion of total medical school revenues, from 11 percent in 1963 to over 18 percent in 1977, and over 20 percent in 1980, at the same time as the federal share fell from over half to less than one- third .6, 7 A recent study notes that in 1980 public medical schools benefited from an average of $29,500 per student in state aid, while private medical schools received $2, 930 per student. Increases in state capitation have also benefited state Schools more than private schoola--state per capita support for private schools rose 3.5 percent per year between 1974 and 1980, compared with 11.1 percent for public schools. During this period, federal capitation declined from g2, 137 to $1,072 per student; the increases in state support did not make up the losses from the federal decline.8 Although federal capitation has not been as important to medical schools as to many other health education Schools, such as pharmacy and optometry schools, the value of this money was enhanced by the fact that it was a mayor source of flexible funds. Medical schools today are trying to make up the loss of federal capitation through tuition increases and expanded medical practice plans. To date, state institutional support has in aggregate not fully compensated for federal reductions, and in view of fiscal pressures on the states it seems unlikely that substantial funding increases will come from that source. Student Loans, Scholarships , and Service-Payback Programs Governmental student support, like institutional support, reflects and responds to policy goals that change over time. Issues that the federal legislators have accepted as being in their sphere of responsibility, expressed through legislation concerning support of medical students, include the aggregate physician supply, the geographical and specialty distribution of physicians, and the 248

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socioeconomic composition of the physician pool. This latter issue resulted both from a concern for equity of access to medical education and from the notion that specific population groups (e.g., blacks) are likely to serve specific underserved populations (e.g., inner-city minorities) and that some cultural groups (e.g., Hispanics) are better served by physicians of similar cultural backgrounds. In short, federal student financial aid has been aimed at achieving certain health policy goals, and to a lesser extent at meeting financial needs. A review of federal loans and scholarships available to medical students is included in Chapter 8 of this report. In that chapter, the policy goals and mechanisms incorporated in each program are indicated. Since the passage of the Health Professions Educational Assistance Act of 1963, which established the Health Professions Student Loan (HPSL) program, there has been substantial growth in loan funds available to students, in the average size of loans, and in the proportion of students receiving loans. Loans to medical students increased more than tenfold in the decade 1962/63 to 1972/73, from $4 million to $43 million, and almost tripled in the following five years, rising to $126 million by 1977-78 (see Chapter 8~.7,9 Over the same 15-year period (1962/63 to 1977/78) the number of students receiving loans grew from 7,000 to 62,000, with the average loan increasing from $600 to $2,000.9 By 1981/82, more than 80,000 loans worth $416 million were made.7 Scholarships have also become increasingly important to medical students. In 1957/58 just under 10 percent of students received some sort of scholarship (with or without service obligations). By 1975 over 48 percent were receiving scholarships, with an average value per student of almost $2,000.1° In l9Bl/82, more than 34,000 scholarships worth a total of $144 million were awarded.7 States have also been involved in loan and scholarship programs for medical students, although the state role in loan funds has been largely confined to administering federal programa.ll State scholarship programs, developed in the late 1970s, are similar to National Health Service Corps scholarships in that they contain a service-payback provision requiring delivery of primary care in underserved areas of the state, with a dollar payback option. Lewin and Derzon in 1982 identif fed 39 such programs involving one of more of eight health professions in 29 states.ll One review of state medical student aid programs tied to service commitments concludes that they are generally ineffective as tools to enhance physician services in underserved areas. The reasons given for this failure include lenient buy-out provisions (usually allowing the recipient to repay the loan at a low interest rate--10 percent or less--over a period of years), small loans (which make buy-out attractive), and lack of subsidies to further encourage practice in desired areas. 12 High buy-out rates are viewed in some states as undermining the purposes of the programs to the extent that they are being phased out . In other states, the programs are sometimes viewed as too costly or as unnecessary because rural physician shortages are 249

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disappearing. Thus, the day of state, service-conditional student aid programs may be drawing to a close. The attractiveness to students of the different federal and state loan and scholarship programs has fluctuated as the conditions of the programs have changed. Important variables include the amount available, the schedules and interest rates of loans, and service requirements or payback options of scholarships. For example, Health Education Assistance Loans (HEALs) are available at 3 1/2 percent above the 91-day Treasury bill rate, which resulted in a 13 3/8 percent interest rate at the beginning of 1983. Because of its relatively high interest rates and the availability of cheaper sources of money, HEAL has not been considered a first-choice loan. However, with the shifting availability of loans and with rising tuitions, one observer notes that in some high-tuition schools, financial administrators have been forced to assume that all medical students will borrow from HEAL as well as from the Guaranteed Student Loan (GSL) program, which has lower interest rates than HEAL does.7 It is notable that between 1980/81 and 1981/82, GSLs rose $39.4 million (down from a $41.2 million increase the year before), while HEAL loans increased by close to $18 million (up from an $11 million increase the year before).7 Overall there has been a substantial increase in the total of financial assistance for medical students. In 1981/82 loans and scholarships provided more than $465 million--an increase of $63.6 million over the year before. Of the $665.4 million total, 84 percent was from federally sponsored programs, and $228.7 (34 percent) came from the GEL program (see Chapter B). The program makes available low-interest loans through commercial and nonprofit lenders. Students can borrow $5, 000 per year, up to a total of $25, 000. The administration has moved, and intends to continue to move, in a direction that restricts eligibility for these loans. The first move was to require a needs analysis for students of families with an adjusted gross income of $30,000 or more. The proposed 1984 budget contains a proposal that all ~ tridents undergo needs analysis and that the origination fee be raised. Since the GSL program has been a signif leant f inancer of medical education, restrictions on the program will have considerable impact--students will have to use more expensive money to finance increasing tuition costs. Two student assistance programs have been particularly helpful to especially needy students. The Health Professions Student Loans (HPSL) program made more than 10,000 loans, averaging $2,376, in 1981/82. Students with exceptional need are given priority in this program. Exceptional Financial Need Scholarships have helped students with severely limited resources finance the first year of education. With loans averaging nearly $12,000, this program was designed to provide a risk free first year for disadvantaged students who, it was thought, were unwilling to incur debt to enter an educational program when they had doubts about their ability to survive academically. The program was not allocated any funding in the 1984 budget request, but the HPSL program remains. 250

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Two other programs have been major sources of financial assistance to medical students. The Armed Forces Health Professions Scholarship program made $44.8 million available to almost 3,000 students in 1981/82 (Chapter B) . In return for this substantial ($13,733 average) scholarship, participants must generally fulfill a three-year military obligation. This program is expected to continue at the same level in FY 1984. The National Health Service Corps was designed to improve the health manpower situation in shortage areas. This program has been declining for a number of years, and no funds were requested in the 1984 budget. In sum, a number of programs have been eliminated, and others have had eligibility constraints placed on them, all at a time when tuitions are rising and the future earnings of physicians may be less certain. The impact of these changes on the composition of the medical student body and the future choice of specialties has yet to be seen. However, in the light of the cuts being made, there is concern that medical education may become a luxury of the rich, that the qualifications of students may decline, and that the schools that serve a large proportion of, minority students may suffer disproportionately. Patient-Care Services Payment for patient care by federal and state government has increased demand for the product of medical education ~ physicians--and has paid for that education through support of clinical training and through revenues that accrue to medical Schools from medical practice plans (in which some of the revenue generated by faculty physicians practicing medicine f low back into the medical schools ~ . There exists a Long tradition of integrating patient care with medical education. Formerly, hospitals gave small stipends to residents and interns who treated charity patients. Full-time clinical faculty were in the minority, and part-time or volunteer faculty supported themselves through private practice earnings.2 With the advent of Medicare and Medicaid and the expansion of private health insurance, new sources of financing became available. From the outset, Medicare reimbursed stipends, faculty salaries for supervision, and other educational expenses--and Medicaid has followed number of and pay for residents increased and teaching similar principles. As a result, the increased, full-time clinical faculty _ physicians could bill for services that were formerly provided free of charge'.2 Operating revenues became the major source of residency financing, providing 75 percent of the $1.4 billion cost of residency stipends and fringe benefits in 1978/79.13 With the shift of clinical faculty from part time to full time and from volunteer status to working under contract to academic institutions, patient revenues have played an increasingly important role in financing medical education. One form of contract that has become more prevalent in recent years is the medical practice plan--a 251

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mechanism that governs income f rom the medical practices of faculty members. Such plans are an increasingly important source of revenue for medical schools, having increased from 5. ~ percent of total school revenue in 1970 to over 15 percent in 1980/81.7 The increasing complexity of medicine and the expansion of the knowledge base to be taught to students have been, in part, responsible for an expansion of clinical faculty that has paralleled the increase in income from practice plans.l4 Coinciding with increases in faculty numbers have been increased cost and the need to find additional sources of revenue to compensate faculty. In 1980, 87 of 99 schools surveyed by the Association of American Medical Colleges (AAMC) had practice plans, most of which were designed to encourage faculty to produce income through clinical practice, but those same schools tried to limit this incentive so that teaching and research would not be neglected. Practice plans are often a unit of a medical school or of an independent, nonprofit corporation. In some plans, stable faculty incomes are provided; in others, earnings are considered in the annual compensation review; and in yet others, faculty may earn up to a ceiling or there may be a threshold level above which the faculty member retains a decreasing proportion of incremental earnings. In most cases, the department or institution also benefits from practice revenues.l4 The growing popularity of practice plans has caused some alarm. Some foresee heightened conflict between the patient-care and teaching missions of the academic community and excessive pressures on faculty to produce patient-care revenues. However, although there is variety among plans, and they are still evolving' the AAMC survey suggests that they all "aim to control the intensity of faculty practice, to provide ample compensation for clinical faculty, and to retain a portion of net practice earnings as unrestricted revenue of the medical school and/or its clinical departments.''l4 To the extent that the plans successfully pursue these goals, the education of medical students should not suffer. Financing graduate medical education through patient revenues is thought to inf luence the types of residencies of f ered . Sloan notes that "any factor that stimulates demand for one type of hospital service relative to others will be reflected in hospital employment patterns, including house staff.... Unfortunately, although a plausible relationship exists, no one to date has directly linked third-party reimbursement to the specialty mix of residents employed by hospitals."l5 Certainly reimbursement policies are in part responsible for the existing emphasis on inpatient rather than outpatient residencies. Whether patient revenues, and in particular Medicaid and Medicare, are appropriate payers for graduate medical education is a controversial issue. It is argued that since residents spend the majority of their time on patient care, their costs should be paid through patient revenues--an argument often supported by hospital administrators, since such revenues have been a stable source of 252

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income. (This argument implies that priorate insurers as well as federal and state payers should pay for stipends. ~ Furthermore, it is argued that federal support for residencies allows policymakers to implement national goals, such as encouraging increases or decreases in certain specialties. Opponents of financing graduate medical education through reimbursement argue that, first, this arrangement increases the cost of care and, second, it is inappropriate to provide public support f or physicians in training since their future f inancial expectations are high--an argument that is applied to general federal support of medical education, not only the graduate stage. Federal and state support of graduate medical education has resulted in substantial growth in residencies. Between 1960 and 1965 there was no growth, but in the following five years the number of residencies grew from 44,800 to 61,900, of which 82 percent were filled. Recently there has been concern expressed that the number of available residencies will not be sufficient for the number of physicians seeking graduate training. The most recent data indicates that, although residency offerings have confined to increase (to 73,800 in 1981/82), the demand for residencies has shown a larger increase, since 94 percent of the 1981/82 positions were filled.7 More alarming to medical school graduates were the results of the 1982 computerized Match Day--the program that matches applicants to f trst-year residency training programs to positions: 18, 410 graduates applied for only 1B,300 positions. The 1982 graduate "glut" was largely caused by an increase in returning foreign medical school graduates. In 1982, 92 percent of domestic graduates were matched. The crunch has been felt by graduates of foreign medical schools~only 39 percent of those with U.S. citizenship were matched, and of non-American graduates of foreign Schools a mere 31 percent were matched .16 The number of for f irst-year graduate positions has been declining for a number of years, dropping from 1B,702 available in 1980 to 17,600 in 1982.* A particular concern is expressed about availability of primary care positions. The offerings of such residencies increased by 75 percent (from 5,535 to 9,661) between 1971 and 1976; there was a concurrent increase in the proportion filled, from 88 to 98 percent. The rate of increase in primary care residencies subsequently slowed, with only a 5 percent increase between 1976 and 1980, followed by a slight decline to 1982. Although this trend-- together with an expected decline in aggregate residencies--is viewed with alarm, some observers take a more optimistic stance. Klndig and Dunham suggest that "individual positions will be added one by one in random locations and specialties where local programmatic and funding *These data on first year graduate positions were collected by the AMA through a survey asking program directors to estimate the number of positions that will be available. 253

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situations allow such expansion.''l7 They go on to suggest that this should be viewed as an opportunity to ensure that training positions in desired specialties and locations become available through institutional planning, reimbursement policies, and special state and federal grants. The implication of this approach is that if hospitals are reacting to financial pressures by reducing residency offerings, policymakers should intervene with financial incentives to ensure the national and locally desirable number and distribution of specialists. A recent move that will almost certainly affect residency offerings is the Medicare diagnosis related group (DRG) prospective payment plan. The plan passed by Congress developed a formula for compensation of teaching hospitals for indirect teaching costs. The impact of the new payment system on graduate medical education is as yet unknown; however, the formula to calculate compensation for teaching costs is based on the ratio of interns and residents to beds, so early fears that residencies will decline as a result of the DRG system may turn out to be unfounded. Conclusion Ma jar policy ob jectives behind the federal and state health manpower and health education actions of the last two decades included 0 expansion of the physician supply, 0 expansion of the supply of primary care physicians, o lowering of f inancial barriers to medical education for economically disadvantaged people, and 0 expansion of the physician supply in underserved areas. The extent to which these goals have been achieved varies. There is no doubt, however, that governmental, institutional, and student support have together increased the number of available medical school places, applicants, and graduates. First-year enrollments almost doubled between 1965/66 and 1980/81, rising from 8,759 to 17,204. The number of applicants showed a similar increase, rising from 18,703 in 1965/66 to 36,100 in 1980/81. Thus, although there have been fluctuations, the acceptance rate for applicants was similar at the beginning and end of the period--48. 2 percent and 47.5 percent respectively (Table 1, Chapter 7) . This supply of applicants to fill the increasing supply of medical school places was ensured by continued attractiveness of the profession (including an expectation of good income), availability of money that reduced the educational investment, and increased numbers of college graduates. With these elements changing, the number of applicants started to decline from a peak in the mid-1970s--a decline that probably has not yet been arrested (Table 1, Chapter 7~. 254

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The result of expanded educational activity, coupled with a drop in the rate of population growth, is that the number of physicians per 100, 000 population grew. f rom 148 to 177 in the ten years between 1965 and 1975; that trend has continued.18 Policymakers today are trying to evaluate the impact of an increased supply of physicians. Graduate medical education has also expanded. Internships and residencies of fered showed no growth between 1960 and 1965, but in the following five years, 1965 to 1970, expanded from 44,800 to 61,900, of which 51, 000 ~ 82 percent ~ were f illed .13 More recent ly, there are signs that residency of ferings are starting to decline . Minorities ~ blacks, American Indians, Mexican Americans, and Puerto Ricans ~ have made some gains in representation among physicians, but are still only a small proportion of the pool of physicians. Between 1969/70 and 1980/81, minority representation in first-year medical school enrollment grew from a little less than 5 percent to 9 percent, reflecting an increase from 500 to 1,500 enrollees (Table 2, Chapter 7~. The extent to which economically disadvantaged people have entered medical education is less clear. Students from families with the lowest fifth of national incomes increased their representation in the medical student body from 4.8 percent to 8.5 percent between 1963 and 1975. This reflects an increase of nearly 200 percent in the number of very disadvantaged students.l9 There is little doubt that increasing numbers of medical students have benefited from the availability of loans and scholarships. However, it is unclear how much the socioeconomic characteristics of students have been changed by such funds, the extent to which decrease in indebtedness resulting from low-interest loans and scholarships has allowed students to choose less-well-paying specialties, and how many people have chosen careers in medicine who would have been unable or unwilling to do so in the absence of help in paying tuition. The overall impact or student f inancing of loans and grants has been substantial. In 1963/64, 84 percent of students' incomes came from themselves or their families, and 15 percent from grants and loans. By 1974/75 these proportions were 68 percent and 32 percent, respectively.l9 Not surprisingly, the amounts expended for loans expanded considerably-of ram .4 million in 1962/63 to more than $126 million in 1977/78, with the number of students who benefited f ram the loans growing f ram almost 7, 000 to 61, 500 over the same period . 9 Scholarships have grown similarly, but have involved smaller amounts of money and smaller numbers of students. However, since scholarship programs are generally more precisely targeted to a group of people or trying to achieve a specific narrow policy goal, it may be that the impact of scholarships has been quite significant. In 1963/64, 5,000 medical students received $3.6 million in scholarships. By 1977/78, 24,000 students received more than $7 9.4 million. 10 Some of the goals of the government programs that fund medical education appear to have been achieved--e . g ., expanding the supply of physicians and creating an academic base for biomedical research. 255

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Others were only partially or temporarily accomplished--e."., locating physicians in underserved areas and putting medical education on a stable f inancial footing. But policies and priorities today suggest that assumptions about federal commitment to such goals as maintaining financial stability for medical schools or ensuring equitable financial access to medical education are not necessarily correct, and changes in the flow of funds into medical education are forcing a rethinking of many roles and relationships among the components of medical education. Academic health centers, and in particular medical schools, are trying to adjust to changing policy and funding environments. To some extent, medical schools today are the victims of an earlier expansionary era when increasing the production of health manpower was considered a priority. Government funding resulted in a substantial ~ ncrease in both the number and size of medical schools. Research f unding resulted in the development of institutional research capability and research faculty. Patent for health services for the poor, aged, and disabled, combined with payment for hospital teaching functions, encouraged hospitals to of fer residencies to graduate students and clinical experience to medical students. Student loans and scholarships ensured a steady demand for medical education and lowered financial barriers to groups who might otherwise have been unable to participate in medical education. . The $6.4 billion medical school enterprise is now regarded by some as overblown, excessively costly in itself, and indirectly a contributor to the high cost of health care. At issue are the size of the biomedical research enterprise, whether the nation should be educating so many physicians and so many specialists or subspecialists, whether patient care revenues should pay for education, and support of students who will eventually be well compensated. At the same time, the political and economic climate is producing a trend away f ram support of all these questioned activities, and medical schools are starting to experience f inancial pressures as government support declines. Other f inancial pressures that are today becoming quite acute are in one sense the result of the success of medical education and government policies. The increased supply of physicians--and specialists--together with broad coverage of health care services, has enabled community hospitals to become direct compe titors to teaching hospitals in the provision of sophisticated medical care. Teaching hospitals are therefore competing with community hospitals for patients, especially paying patients. Medical schools and teaching hospitals have started to develop strategies to deal with these mounting financial pressures. One strategy has been to organize medical practice plans that are designed to Compensate clinical practitioners while producing revenue f or the academic institutions. There is some feeling that the growth of medical practice plans has resulted in a split between clinical and research faculty that creates problems for both. For clinical faculty, the problem is that teaching becomes secondary to more 256

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profitable patient-care functions. For research faculty, the problem is that their revenue-earning ability compares unfavorably with that of clinical faculty; thus, unless they are able to support themselves fully with increasingly scarce research awards, their continued academic employment can become uncertain. Teaching hospitals, whose costs are higher than community hospitals because of their patients ' severity of illness, special case mix, educational costs, and role in caring for poor and nonpaying patients, are developing strategies to maintain their occupancy rates. They are looking at their communities and developing ways of becoming providers of basic medical care for their neighborhood populations, and they are establishing Health Maintenance Organizations to ensure that a group of paying patients will use the hospital. But these strategies are unlikely to provide real fiscal relief for many teaching hospitals, in part because they are often located in poor, inner-city areas. With little or no relief from the federal government in sight, the stance of state governments becomes increasingly important. If current moves are pointers for the future, the outlook is mixed. In Maryland, the rate review commission has moved to protect hospitals with significant bad-debt loads. New York has passed legislation that helps hospitals, notably teaching hospitals with large bad-debt burdens. California, however, has directed the state Medical agency to contract with the lowest-cost providers, usually not teaching hospi tals , to provide care f or the pat lent s . But whichever way the states move, it is clear that today they play an important role in the f inancial welfare of teaching hospitals. The impact on clinical education of the numerous f inancial pressures on teaching hospitals may be felt in several ways. Patient revenues will be pressured by changes in Medicaid and Medicare reimbursement and by competition from community hospitals. Income from medical practice plans will in turn be reduced, which may result in a reduct ion in size of clinical faculty. Loss of patient-care revenues may lead to reductions in the size of residency programs. As financial pressures increase, medical schools and teaching hospitals may start to rethink and restructure their relationships with each other. Medical schools are no more immune to financial pressures than are teaching hospitals. Loss of federal capitation support (which has not generally been made up by increased state institutional support) and the failure of increases in research funding to keep pace with inflation have led medical schools to seek increased financial support from other sources, one of which is tuition. However , students attempting to pay the higher tuition levels are being hit by limits on low-interest loans. These pressures may affect medical education in a number of ways. There may be a decline from current levels of basic science faculty which could have serious consequences both for the thoroughness of the science education of medical students and for the numbers choosing careers in research. Research activities may become concentrated in the schools that are most successful in competing for 257

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grants, leaving other schools without research orientation. Medical education may become increasingly a prerogative of students from high- income groups, effectively decreasing the pool of applicants from which schools can choose students, with a resultant decline in the quality of students. Furthermore, restriction of medical education to more wealthy s tudents would mean that health services to certain underserved groups would be likely to suffer, since a large proportion of excluded students would be those most likely to practice in underserved areas or would be the best care providers for specific cultural groups. Finally, increased student investment in education might result in their choosing the most lucrative specialties. If policymakers decide that there is still unmet need for some of the less-well-paying specialties, special target programs will have to be maintained and developed to ensure a continued supply of the desired kinds of practitioners. The impacts of changes in the dif ferent sources of funds will vary in their effect among schools of different types, such as public and private schools and high-tuition and low-tuition schools. The impact may be especially severe on the schools that educate primarily minority students. The two best established are Howard and Meharry, - but Howard enjoys a special federal appropriation. Meharry, which has educated ~u percent or the nation's black medical faculty members, benefited from the federal emphasis on primary care and minority enrollment from the mid-19 60s until the late 1970s. The president of Meharry has pointed out that the school does not have major research funding and has relied on capitation, Medicaid and Medicare funding, and low-cost student loans and scholarships (particularly the National Health Service Corps) to help educate often-poor minority students and provide health care for low income people (Appendix D). If the role of schools like Meharry is valued (both in providing a special environment for minority students and in supplying physicians likely to serve traditionally underserved populations), there may be justification for targeted institutional and student support. 258

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REFERENCES 1. Brown, R. E. Financing medical education. In Anlyan, W., et al. The Future of Medical Education. Durham, N.C.: Duke University Press, 1973. 2. Hanft, R. S. The impact of changes in federal policy on academic health centers. Health Affairs 1~4~:67-82, 1982. 3. Korper, S. P. Federal health manpower legislation. In Hadley, J. ea., Medical Education Financing. New York: Prodist, 1980. 4. Hadley, J. and Levenson, M. Institutional support for medical schools and teaching hospitals. In Hadley, J., ea., see Reference #3. 5. Hough, D. E. and Marder, W. D. State retention of medical school graduates. Journal of Medical Education 57:505-513, 1982. 6. Hadley, J. State and local financing options. In Hadley, J. ed. see Reference #3. 7. Medical education in the United States 1981-82. Journal of the American Medical Association 248:3223-3328, 1982.- 8. State Support for Health Professions Education, Prepared for the Committee on Labor and Human Resources, United States Senate, by the Congressional Research Service of the Library of Congress. Washington, D. C. Government Printing Office, 1981. I. Feldman, R. D. Loan programs and medical educat ion f inancing. In Hadley, J., ea., see Reference #3. 10. Lee, R. H. Scholarship programs and medical education financing. In Hadley, J., ea., see Reference #3. 11. Lewin, L. S. and Derzon, R. A. Health professions education: State responsibilities under the new federalism. Health Affairs 1 ( 2 ): 69-85, 1982. 12. Strosberg, M. A., Mullan, F., and Winabert, G. R.- Service- conditlonal medical student aid programs: The experience of the states. Journal of Medical Education 57: 586-S92, 1982. 13. Association of American Medical Colleges. Graduate medical education: Proposals for the eighties. Supplement to Journal of Medical Education 56~9, part 2~:90, 1981. 14. Jolly, P. and Smith, W. C. Medical Practice Plans in 1980. - Washington, D.C.: Association of American Medical Colleges, 1981. 259

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15. Sloan, F. A. Patient care reimbursement: Implications for medical education and physician distribution. In Hadley, J. ea., see Reference #3. 16. Scarcity of residency slots becoming worry for medical school graduates. Medical World News, Aug. 2, 1982. 17. Klndig, D. A. and Dunham, N. C. A future shortage of residency training positions: Dilemma or opportunity? New England Journal of Medicine 300 :1484-1485, 1983. l 18. Hadley, J. Introduc tion e In Hadley ~ J., ed ., see Reference #3. 19. Koleda, M. and Craig, J. A new era in medical student finance, 1976-1980. Looking Ahead Vol . 2, No. 4. Washington, D. C.: National Planning Association, 1976. 260