Medicaid: Graduate Medical Education Payments

Published by the Government Accountability Office on 1997-03-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

 General Acconnting~ce
 Washin@on, D.C. 20648


 March 3,19!97

The HonorableJohn R X&&h
chainnan, Committeeon the Budget
Houseof Representatives
                             .       ‘on PavmenQ
subject Medicaidz GraduateMeduxlEducaiz
The f&eral g-       en& primarily through its Medkare prom is the largest
singlepayertoteachingh~~fforthecoststheyincurtrainingmedical              -
residents.’ Medicaremakesgraduatemedicaleduc&on (GME)payments
hospitals. GMEpaymentscoverthe period of farmal cljnicaltraining that
foIlows graduationfrom medicalschool duringwhich new physicians-medicaI
resident+arepreparedtopracticeinach&enspecW@area This-
usuallyoccumintea&inghosp&alsandissupenWdbykultyphgsicians.            To
directandindirectcosts. Infiscalyear1996,MedicareGMEpsymentstotaled
an esbimated $6.7 billioxL

However,unlike &dica,tx?,for which the amount‘of GMEpkymentsis well
documented,not much is known about Medicaid’ssupportof GME. For this
reason,you askedus to provide you with informationon (1) existing studks
that e&mate overall Medicaid expendituresfor GME;(2) the amountof
Medicaid GME paymentsfor the 10stateswitbthe largestoverall Medicaid
expenditures,and the basis for deWminingthesepayments;and {3) how
Medicaid and Medicarecoordinatetheir GMEpaymentsto avoid duplication.

‘The Departmentof Veterans’Affairs and the Departmentof Defeusealso
contribute to graduate medical education. In additioq while private insurers
usually do not make payment~specificallydea@atedfor graduatemedical
education,part of the amountthey pay may,in fact, be usedfor education.
                 GAO--97077R         Medicaid Graduate Medical Education

To answerthesequestions,we reviewedavailableliterature on GME and
Medicaid and contactedMedicaidofficialsfrom the 10stateswith the largest
total Medicaid expendituresin liscal year 1996. These10statesaccountedfor
closeto’60 percentof total Medicaidexpendituresduringthis period. We
discussedhospitsl reimbursementmethodologieswith officials fkom the Health
CareF?.nancing Administration(RCFA)andthese 10 states. We also obtained
fkom these statese&in&es of MedicaidGMEpaymentsfor the most recently
availabletime period? Finally, we obtainedand reviewedthe 10 states’
Medicaidplans and d&ussed with stateand HCFA officials how Medicareand
Medicaid GMEprogramsare ~oordmakd.~We performedour review between
December1996and February1997in accordancewith generallyaccepted
ln summary,althoughthe exact amountof MedicaidGMEpaymentsis
unkuown, two studiese&bated theseexpendituresat about $1.3billion and
$22billioninfiscalyesr1996. Wealsofoundthat8ofthelOstateswiththe
hugest overall Medicaidexpendituresin fiscal year 1996provided support to
tea&inghospitalsforcostsasso&edwithGME. Thesestatesuseddifferent
methodsto calculatetheir GMEpayments,and their annuale&mated
expendituresfor GME,which they generallyconsid- rough approximations,
rangedbm a low of $17million to a high of $870million. Regardingwhether
programscoordinatetheir GMEpayments,HCFAofficisls told us that HCFA
doesnot deterrkne whetherMedicaidGMEpaymentsduplicatethose madeby
Medicare. On the other hand,officialsfrom the eight statestold us that their
paymentswere intendedto coverMedicaid’sshareof GME. We could not
independent@determinefrom the documentsreviewedif duplication exists
becausestates’plansoften did not containsufkient detail explainingtheir
The direct medicaleducation(DME) costsof providing GMEinclude salaries
and fringe benefitsfor residentsand&achingphysicians,the cost of conference
and classroomspace,the cost of equipmentand suppliesusedfor instructional

me stateswe contactedoperateon a variety of calendarand fiscal years.
Thafore, the datathey reportedoften coverdifkrent time periods.
?Eachstate operatesits Medicsidprogramunder a stateplan that HCFAmust
approvefor compliancewith currentMedicaidlaw and regulations.Among
other things, theseplansdescribehow the statereimbursesmedicalproviders.
2              GAOLEEES-97-77R Medicaid Graduate Medical Education

purposes,and allocatedoverheadcosts. Indirect medical education(IME)
costs are the higherpatknt carecoststhat teachinghospitalsare thought to
of procedures,bigher staff ratios, andincreasedrecordkeepingassociatedwith
Medicare and most skateMedicaidprogramsmakepaymentsto teach@
hospitals for GME. Otherpayersgenerallyagreeto pay hospitalsa given
amount for eachserviceprovidedwith no explicit recognition of GME.
Hospitalsmay include the cost of GMEwhen detemWng their prices for these
services. MedicareDMEpaymentsare basedon hospitals’W year 1984
identified DME costs,while MedicareIME paymentsare calculatedbasedon
hospitals’ratio of residentsto bedsas well as Medicareprospectivepayment

In contrast, statesare fkeeto designtheir own Medicaidhospital payment
tgmkms,and sign&ant variation existsamongthen~ As with Medicare,some
Other states,while not de&gnaWga specificGMEpaylaent,basetheir
paymentstohoqpitalsoncostdatathatreflectGMEcosts. Inthesestates,
isolating the actual amountof GMEpaymentsis often -cult.
Somestatesalso pay managedcare organWlionsa capita&irate for Medicaid
beneficiaries’care. Dependingupon how the capitatedrate is determined,a
portion of it may be for GME m          this amount with precision,
however,is often dif@cult
While the total amountof actualMedicaidpaymentsfor GMEis not readily
available,recent estimatesindicatethat the combinedpaymentsfor DME and
IME are substantial. HCFAdoesnot tcackindividual states’or nationwide
Medicaid expenditureson GME However,the Intergovernmen~ Health Policy
Project @IPP) and the NationalAssocWionof Children’sHospitalsestimated

              GAo/HEHs-97.77R     Medicaid Graduate Medical Education

fiscal year 1996expendituresfor MedicaidGME. Theseestimatesdiffer
considerably they are about $1.3and $2.2billion, respectively.’
We contactedthe 10stateswith the highestoverall Medicaidexpendituresin
fiscal year 1996andaskedthem to provideus with the amount of Medicaid
fundspaidtotea&inghospit&forGME. Wefoundthateightstates
   .         teading hospitalsfor a portion of their resident &airing costs;their
e&mates of GMEpaymentsfor their mostrecent@availablecalendaror fiscal
year raugedfrom at least $17million to $870million. Theseamounts,however,
typically representedrough edhaks, and officials fkom these stateswere
often unableto identify their Medicaidprograms’total GME expenditures. Q?he
enclosurethat accompanies   this letter desxibes the amountsof, and methods
usedfor, deter&r&g the 10 states’MedicaidGMEpayments.)
Es&Ming statespecificor nationwideMedicaidGME expendituresis difiicult
for severalreasons.First, neither Medicaidlaw nor regulationsrequkes states
to report the amountpaid for GME. Also, a number of statesinclude GME
with other costswhende&mining their paymentrates to hospitals&eating
Medicaidpatients. Thus,statesmay be unableto identS@the portion of their
paymentattributablesolelyto GME. Further complicatingeffork to compile
Most of the eight statesthat paid MedicaidGME basedtheir xeimbursementat
least in part on MedicareGMEpaymentprinciples. Medicaremakesseparate
DME and IME paymentsto &aching hospitalsaccoxxBtgto uniformly applied
formulas. The MedicareDME paymentis calculatedusing eachhospital%fiscal
year 1984DME costper resident,adjustedfor inflatioti’ The paymentis
further at&wtedto reflect the hospital’scun-entnumber of full-time-eq@@ent
residentsand Medicarekshareof total inpatient days. The MedicareIMEI

4AnofficialassocW&withtheIHPPsunreycharactenzed. its $1.3billion
es&hateas coxmemathbecauseof the methodologyused. Further, neither
estimateincludesthe amountof GMEpaymentstypically madeto managedcare
organizatons2s part of their capitatedpayment.
6Payments  are determinedfor the hospitalb cost-reportingperiod beginningon
or after October1,1933,but beforeOctober1,1984.
4               GAOLEEES-97177It     Medicaid Graduate Medical Education        .

 paymentis au adjustmentto the rates paid underMedicare’sprospective
 paymentsystemthat is basedon a formula that includesa hospital’sratio of
 total medical residentsto total beds.6
Severalof the stateswe reviewedmodi@the Medicareformulasto determiue
their MedicaidGMHpayments. For example,in lieu of usingthe DIKE cost per
resident. from fiscal year 1984,New York and Michiganuse 1981and 1999,
mpecbdy astheir baseyears SimiWy, Ohiomodifiesthe MedicareIBIE
formula by k&&Wing a higher multipk wheu cakuWng its MedicaidIME
payment. ‘lhischangeresultsinahigherIMHpaymentthaniftheMedicare
formula were followed exactly. Further, not all statesmakespecik paylnents
forboth@pesofGME. Sevenoftheeightstatesreimburseteachmghosp~
for both DME and IME costs,while one statereimbursesthesehospitalsfor
DME costs only-
Medicaid hospital paymentmethodsmsy supportteach@ hospitalsin other
ways California’sMedicaid programdoesnot makeseparateGMEpayments
to teach@ hospitals. However,becauseMedicaidreimbursementrates are
hsxeh@hercostsbecauseoftea&ingprogramscouldreceive higher Medicaid
reimbursements.Also, althoughIllinois elimh&d specificMedicaidGME
paymentsto hospitalsin state fiscal year 1996,it continuesto support the
higher costs of teach&q hospitalsby payingsomeof thesehospitalshigher
rates for certain proceduresor throughlump sumpaymentsfor a number of
MEDIm   GIUE                                        .-
Officisls from the eight statesthat paid MedicaidGMEtold us that their states’
      . paymentswere intendedto pay for Medicaid’sshareof the costs
a=uatedwithtminingphysicians. ThisissimilartoMedicareGMEpayments,
which are intendedto compensatehospitalsfor Medicare’sshareof these
costs. Becausesomebe&i&ties quali@for both Medicaidand Medicare,

‘jIn 1989,we report& on problemswith the IME formula (Medicare: Inclirect
Medical Education Pavments Are Too His&, GAOBRD4933). The Prospective
6              GAO/HEES-97-77E      Medicaid Graduate Medical Education

however,it is possiblethat they could be countedtwice in arrivhg at the
amount of a hospital’sGMEpayments.
HCFA’sreview of stateMedicaidreimbursementplans doesnot include a
determinationof whetherMedicaidGMEpaymentsduplicatethose made by
Medicare. Rather,HCFAreviewsstatereimbursementplansthat include GME
to determinewhetherGMEreimbursementis reasonable,is linked to Medicaid
semicesor someother proxy for Medicaid’sshareof hospital operations,and
remainswitbincertainstatutory~o~         Becausethestateplanswe
obtained did not alwaysiucludesuf6cientdetail aboutcounting beneficiaries
eligible for both MedicaidandMedicare,we couldnot alwaysdetermine
whether MedicaidGMEpagmentsduplicatedthoseof Medicare.
We provided a draft of this report to HCFAprogram-levelofficials’ and we have
incorporatedtheir technicalsuggestions  whereappropriate.

As arrangedwith your office, unlessyou publicly announceits contentsearlier,
weplannofurtherdis&ibutionofth&letteruutil3Odays&eritsdate.         Atthat
time, we will sendcopiesto the Secretaryof Healthand Human&vices and
other in-       parties.
If you haveany Questionsaboutthe mat&s discussediu this letter, pleasecall
me on (3l2) 220-7600.Staff who contributedto this review include Paul
Alcocer, SusanThilhm, andDanielLee.

Assoate  Director, Health
 Financingand SystemsIssues

6              GAOnBEHs-97077R Medicaid Graduate Medical Education
ENCLO!XJFUZ                                                  ENCLOSURE

                                              AND RElSVm

California doesnot makespecificreimbursementsto teachinghospitals for
GMEthough its Medicaidpro-

              GAOLEEES-97-m       Medicaid Gradmte Medical Education
  ENCLOSURE                                                      ENcLosuRE

  Period covered: Statefiscal year 1996(07/l/96 to OW30/96)
  Estunated GMEl%menditures:
  Direct medicaleducation             No e&hate
  Indirect medicaleducation:          Noes&hate -
, Disproporti0xW.e
  hospitalprogram’                    $17.9million
  Mauagedm                            Noes&ate
  Total GMEexpenditures:              At least $17.9million
  The Florida Medicaidprogrampayssix teachinghospitalsin the state,which
  must meet severalq@i@ingcriteria, Quarterlypaymentsfor GMEas part of its
  DisproportionateShareHospital@SH)program. The total amountthesesix
  hospitalsreceiveis basedon 1egislaWeappropriationsand is allocatedamong
  them accordingto a statutory formula In addition, all &aching hospitalsare
  reimbursedfor GMEto the extent that direct medical education@ME) and
  indirect medicaleducation(IME) costsare included in the daily rates paid to
  them by the state. The state,however,has never calculatedthe GME
  componentof theserates. Simila& althoughGME is included iu the capita&d
  paymentsthe statemakesto managedcare orga&ations, the state has never
  trackedthis amountandis unableto provide an esUmateof what the total

 ‘Besidespaymentsto reimbursemedicalprovidexsfor servicesrendered,sbtes
 are mquiredunderDSHto make additionalMedicaidpaymentsto hospitalsthat
 servelarge numbersof Medicaidand other low-incomepatients.
  8              GAO/EEHS-97-m       Medicaid Graduate Medical    Edw&km
ENCLOSURE                                                   ENCLOSURE

Beginningin state fiscal year 1996c7/ygg),the Illinois Medicaidprogram
stoppedspecificallyreimbursing:teach&ghospitalsfor GME. Previously,the
state had reimbumedkaching hospitalsfor both DME and IME co&s. In its
last. year of fuuding, the Medicaidprogramreimbursedteachinghospitals au
eshmatd $166million for GlW3.This e&mate doesnot include the amount of
GME paymentsmadeto managedcare organbtions as part of their capitated

              GAWHEES-97977B     Medicaid Graduate Medical Education
ENCLOSURE                                                  ENcLo~

Period Covered:StateBcal year 1996{10/l/M to g/30/96)
       _.           .
          GM33Exoen&turq ..
Direct medicaleducations           $26.0million
Indirect medicaleducations         $0

Managedcare:                       Noestbate
Total GMEexpendi-                  At least $26.0million
Pameut Methodoloav
The Massachusetts  Medicaidprogramspecificallyreimburseshospitalsfor DME
costsonly. The DMEpaymentis calculatedeachyear using each hospital’s
reported GltdI3costsandMedicaid’sshareof total discharges.The state makes
DME paymentsto hospitalsas perdischmgeadd-ens. Although the capitated
that include GMEcosts,GMEcostshaveneverbeeu distinctly identS&

 10            GAOAEHS-97-77R     Medicaid Graduate Medical Education
ENCLOSURE                                                     ENCLOSURE

PeriodCovered: Calendaryear 1996

Direct medicaleducations             $84.3 million
h@rectmedical educations

Managedcare:                          $46.0million
Total GMEexpenditures                 $211.3million
The MichiganMedicaidprogramreimburseshospitalsfor both DME and lME,
usingan approachmodeledlargely on the Medicareformulas. The DME
paymentis basedon 1989costs,austed eachyesr by a hospitalmarket basket
index, and Medicaid’sshareof inpatient beddays. DME paymentfor recipients
with dual Medicaid/Medicareeligibili~ is spedfically excluded. The DME
paymentis a cost-settkd, add-onthat is paid twice monthly to the hospitals.
The lME paymentis includedin the states’diagnostic-~        group (DRG)and
daily paymentrates and is approximate&66 percent of the MedicareIME

11             GAO/EWES-97077BMedicaid Graduate Medical Education
ENCLOSURE                                                   ENCLOSURE

fonnula.8 Capitationrates for managedcare 0rganMtions incorporateall
health care costs,inch~dingthose for GME.B

%Jnderthe state’sDRGsystem,the paymentrate is b&d on eachpatient’s
%khigan has announcedan entirely new GMEreimbursementsystemthat is to
be implementedon 7/l&?. The new plan, which will abandoncust-based
formulaq will be a prospectivepaymentsystemwith fixed amountsfor each
hospitalbasedon costsestablishedin the 1996cost reports. Separatepayments
to a consortiumof kaching hospitals,univemities,and healthmaintenance
organations (HMO) for innovativet&ning programsthat involvemanaged
care. Michiganwill also “carveout” the GME componentfrom the capita&d

12            GAO/EEHS-97-77B     Medicaid Graduate Medical Education
 ENCL-                                                            ticLQsuRE

 Period Co&        Calendaryear 1997
EstimatedGME Exoenditure:
Direct medical educaiio~               812.8million
Indirect medical education:             258miUion _
Managedcare:                           $30million to $40million
Total GME expenditures                 $68million to $78million
The New JerseyMedicaidprogramreimbursesail teachinghospitalsin the state
for GME. To createthe pool of funds from which theseMedic&d GME
paymentsare drawn, New JerseyappliesDME andIkIE formulasto the state’s
mqjor teachinghospitalsi Thesefmulas are modeledlargely on the
Medicareformulas,substitutingMedicaidsta&tics for MedicarestatWks
number of medicalresidents. Thesefimds are subjectto cost settlementeach
year. Paymentfor GMEis a&o includedin the capitatedratespaid to
managedcare cqgdations, but it is not specIficallyidentified.

“‘New Jerseyd&es a m@orteachinghospitalas having45 or more full-time
equivalentmedicalresidentsin the 1993Medicareauditedcost report,
13             GACYHEEIS-97.77R    Medicaid Graduate Medica Education
ENCLOSURE                                                      ENCLOSURE

Period covered: calendaryear 1996

Fee-for-serviceand managedcare:
Direct medical educ&tion~             $370million
Indirect medical educaiionz           $60OmilUon -
Total GME expendituresz               $870million

The New York Medicaidprogramreimbwseshospitalsfor serviceson the basis
of a perdixharge rate with an add-onfor DME. The DME paymentis based
on eachhospital’s 1981cost report aajustedyearly to reflect rising costs. The
lME reimbursementis an acQustment  to paymentsfor Medicaidservicesbased
on the sameformula usedby Medicare,with one exception. The state revised
its Medicaid IME form& in 1991and now determinesIb+lEreimbursementon
the basisof the number of reside& and internsat eachhospitalin 1990,
adjustedfor the type of medicinethey practiced. For vie,        primary care
specialtiesare generallyassigneda weightingfactor of 1.6,while the speciUes
of emergencyand preventi medicineare assigneda factor of 1.1. New York
also subtracts a GME componentfrom the capitalionrates paid to managed
care orgmWtions and paysthis amountdirect& to the &aching hospitals.U

%n January 1,X397,New York eliminatedits hospitalrate-settingq&em for
Blue Cross,HMOs,commercialinsurers,self-insuredfunds, and private payers.
Under the former systemof state-& hospitalreimbursementrates, private
payerscontributed about $1 billion to GME. The reform essentiallyhalvesthe
guaranteedcontribution of the private payersand createsa pooling me&an&m
to disttibute t&se funds. If no further changesare madeto the Medicaid
program,its GME paymentsshouldremainrelativelysteadyforthenextseveral

ENCLOSURE                                                   ENmsuRE

Period Covered:Statefiscal year 1996(?fUW to 6430/W)
EMmated GMEExDenditures:
Direct medicaleducations           $62.9million
Indirect medicaleducations         $98.2million _

Managedcare:                       Noesthate
Total GAB expendituresz            At least $161.1milIion
The Ohio Medicaidprogramreimburseshospitalsfor b&h DME and IME. The
DME paymentis basedon eachhospital’sMedicaidcost report kom 1986-86
a@sted yearlyto reflect rising costs. The IME reimbursementis an
ac@stmentto paymentsfor Medicaidservicesbasedon the Medicareformula,
exceptthat Ohio maintaineda multiplier of 2.0 when Med@re reducedits
mukiplier to 1.89. Roth DME and IME paymentsare subjectto a test of
reasonableness, a@sted for casemix and then by the DRGrek&ve weight, and
p&d jointly as an add-onto the DRGreimbursementamom& Paymentfor
GMEis includedin the capitatedrates paid to managedcare organWions,
althoughan estimateof this amountwas not provided

16             GAOAZEJB-97,77RMedicaid Graduate Medical Education
ENCLOSURE                                                     ENCLOSURE

Period covered: calendaryear 1996
          GMEExnendamq    ..

Direct medicaleducations             $42.8million
Indirect medicaleducation            Noes&ate -
Managedcare:                         No edimate
Total GMEexpenditurea                At least $42.8million

The Penn@va& Medicaidprogramreimbursesacute care texhing hospitals
forbothDMEandlME. TheDMEpaymentisbasedoneachtaching
hospital’s1984436 Medicaidmedicaleducationcosts,subjectto annuallimits.
The paymentsaxemademonthly as prospectivepayments Reimbursementfor
lA4Ecostsis includedin the Medicaidrates paid to eachteach@ hospitaL
ThestateisunabletoquanUQtheIMEportionofthisrate.            PaymentforGME
was l&torically includedin the cap&ted rates the state paid to managedcare
omens.          Beginningin calendaryear 1997,however,the state has begun
ncamingout” the GMEiportion of the capita&d rates and will pay this amount

16             GAWEEES-97077R       Medicaid   Graduate Medical Education
ENCLOSURE                                                      ENCLOSURE

Period covered: State fiscal year 1996(9/l&4 to W31195)

Direct medicaleducations              $38.2million
Indirect medicaleducations            Noestim& -
Managedcare:                          $0.6 million

Total GMEexpenditures                 At least $38.7million
Pawent Methodology
The TexasMedicaidprogramreimburseseachhospitalfor Medicaidserviceson
the basisof a hospital-speci& Wandardpaymentrate,“‘whichincludesboth
DME and IME. The DME paymentis determinedusingsimilar methodsto
thoseusedfor Medicare,substitutingMedicaid’sutilization rate for Medicare’s.
lME costsare not specificallyidentified but are includedin the standard
paymentrate, which is basedon eachhospital’sreport& costs. Also, payment
for GMEis includedin the capitatedrates the state paysto managedcare


17             GAO/EEHS97.77R      Medicaid Graduate MedicaJ Education
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