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Medicare Direct Graduate Medical Education (DGME) Payments

			AAMC Documents "Medicare Payments for Graduate Medical Education" brochure (PDF, 7 pages - 5.7 MB)

Health professionals are trained in clinical settings as part of their education. Typically, this training occurs in "teaching hospitals" or health systems which provide the environment for the clinical education of physicians, nurses and allied health professionals. Hospitals that sponsor training programs incur real and significant costs in addition to the costs associated with patient care. The Medicare program makes explicit payments to teaching hospitals for a portion of the added costs associated with operating health professions education programs.

Purpose of the DGME Payment

The Medicare Direct Graduate Medical Education (DGME) payment compensates teaching hospitals for some of the costs directly related to the graduate training of physicians. Medicare does not pay the costs of the clinical portion of medical education of medical students that occurs in teaching hospitals. In FY 1997, DGME payments for residents were about $2 billion.

The added direct costs incurred by teaching hospitals in providing clinical physician training, or graduate medical education (GME), include: stipends and fringe benefits of residents, salaries and fringe benefits of faculty who supervise the residents, other direct costs and allocated institutional overhead costs, such as maintenance and electricity. Other direct costs include, for example, the cost of clerical personnel who work exclusively in the GME administrative office.

When Congress established Medicare in 1965, it recognized that:

educational activities enhance the quality of care in an institution, and it is intended, until the community undertakes to bear such education costs in some other way, that a part of the net cost of such activities (including stipends of trainees, as well as compensation of teachers and other costs) should be borne to an appropriate extent by the hospital insurance program (House Report, Number 213, 89th Congress, 1st session 32 (1965) and Senate Report, Number 404 Pt. 1 89th Congress 1 Session 36 (1965))

Background

Since the inception of the Medicare program, the federal government has paid its proportionate share of the direct costs associated with health professions education. The remaining DGME costs are financed by a variety of sources, including other public and private third-party payers' payments for patient care services, the Department of Veterans Affairs, the Department of Defense, state and local government appropriations, faculty practice plans and philanthropies.

From 1965 until the mid 1980s, Medicare paid for its share of DGME costs based on each hospital's historical, "Medicare-allowable" costs. Reimbursement was open-ended: if a hospital increased its DGME costs, the Medicare program would pay its share of the actual allowable costs incurred.

In April 1986, Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (P.L. 99-272), which dramatically altered the DGME payment methodology in two ways. Under this new method, Medicare uncoupled the relationship between direct costs and DGME payments by paying each hospital a portion of its per resident amount based on the DGME costs incurred by the hospital during a base year period and divided by the number of residents counted in the base year. The program audited each hospital's reported costs to determine the per resident amount. In addition, the Medicare program limited the number of years for which it fully supports its share of residency training. In August 1993, Congress again modified the DGME payment methodology (P.L. 103-66), making slight adjustments to the existing COBRA methodology.

The Balanced Budget Act (BBA) of 1997 (P.L. 105-33) made several changes to DGME payments. It placed limits on the number of full-time equivalent (FTE) residents that hospitals can count for DGME payments and required residents to be counted using a three-year rolling average methodology. The BBA also allowed Medicare to make DGME payments to entities other than hospitals, and directed the Secretary to establish a demonstration project for making DGME payments to consortia.

DGME Payment Methodology

Today, Medicare pays each teaching hospital a portion of a hospital-specific capitated, or per resident, amount based on the hospital's DGME costs in FY 1984 or FY 1985. The base year per resident amount is updated annually by an inflation factor. Medicare's portion of the per resident amount is calculated based on the program's share of total hospital inpatient days.

Each hospital has two separate per resident amounts. Since 1993, each hospital receives slightly higher payments for residents training in primary care specialties and slightly lower amounts for residents in subspecialties. Primary care specialties include family medicine, general internal medicine, general pediatrics, preventive medicine, geriatric medicine, osteopathic general practice, and obstetrics/gynecology.

In addition, the program pays lower amounts for residents in subspecialties. After the period required for a resident's initial board certification in the first specialty in which the resident begins training (not to exceed a maximum of 5 years), Medicare pays only 50 percent of its share of the per resident amount. The 50 percent payment continues indefinitely, as long as the resident remains in an approved program (one which is certified by ACGME or for which an ABMS member organization offers a certificate). The maximum period of five years is extended for up to two years for training in a geriatric or preventive medicine residency or fellowship. For primary care "combined" residency programs, such as internal medicine/pediatrics, the BBA of 1997 defined the period of board eligibility to be the minimum number of years of formal training required to satisfy the initial board requirements of the longest program plus one year. More information on Medicare's rules for counting resident's may be found in the brochure, Medicare Payments for Graduate Medical Education: What Every Medical Student, Resident, and Advisory Need to Know (in PDF format).

Medicare now imposes a limit on the number of residents it supports. The limit is based on the number of FTE residents in approved allopathic or osteopathic training programs, before application of the 50 percent weighting factor, that were reported on the hospital's most recent cost report period ending on or before December 31, 1996. Dental and podiatric residents are excluded from the residency limits. The Medicare program continues to make DGME payments for residents who have graduated from U.S. and foreign schools of medicine, as long as they are in approved residency training programs.

Since July 1987, hospitals have been allowed to count the time that residents spend in settings outside the hospital, such as freestanding clinics, nursing homes, and physician offices, subject to certain agreed-upon conditions between the hospital and the outside entity. As a result of the 1997 BBA, certain "non-hospital providers," such as federally qualified health centers, rural health clinics, and Medicare+Choice organizations, may now receive DGME payments.

Nursing and Allied Health Training Payments

The Medicare program continues to make payments to hospitals for its share of the direct costs of nursing and allied health training programs. Payments are made based on a portion of the Medicare allowable costs that are incurred by the hospital. In FY 1997, "pass-through" payments were expected to total about $250 million.

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