Medicare Indirect Medical Education
(IME) Payments
In addition to providing basic health services to their communities,
teaching hospitals have the additional roles of providing clinical
education for all types of health professionals, an environment
in which clinical research can flourish, and highly specialized
patient care. Because of their education and research missions,
teaching hospitals offer the newest and most advanced services and
equipment, and with residents and supervising physicians available
around-the-clock, teaching hospitals care for the nation's sickest
patients.
The additional missions of teaching hospitals increase the cost
of patient care at these institutions. In recognition of the differences
in operating costs between teaching and non-teaching hospitals,
the Medicare program includes a special payment adjustment in its
prospective payment system (PPS).
Purpose of the IME Payment
The Medicare Indirect Medical Education (IME) payment carries a
"medical education" label, but its purpose, as stated
by Congress when it created the PPS in 1983, is much broader:
This adjustment is provided in light of doubts...about
the ability of the DRG case classification system to account fully
for factors such as severity of illness of patients requiring
the specialized services and treatment programs provided by teaching
institutions and the additional costs associated with the teaching
of residents...The adjustment for indirect medical education costs
is only a proxy to account for a number of factors which may legitimately
increase costs in teaching hospitals (House Ways and Means Committee
Rept, No. 98-25, March 4, 1983 and Senate Finance Committee Rept,
No. 98-23, March 11, 1983).
Background
The justification for a special payment adjustment for teaching
hospitals is rooted in Medicare's cost limits of the 1970s. As the
program made its payment limits for hospitals' routine costs more
stringent in the late 1970s, government and private researchers
consistently showed that teaching hospitals had higher costs than
non-teaching hospitals, even after the direct costs of graduate
medical education were removed from teaching hospitals' cost structures.
Researchers found that a hospital's intern and resident-to-bed ratio
(IRB) was related to an increase in hospital costs. In 1980, the
concept of an "indirect medical education adjustment"
was recognized. The Medicare cost limits for routine patient care
provided at teaching hospitals were increased to incorporate a differential
based on the IRB in each teaching hospital. In 1982, The Tax Equity
and Fiscal Responsibility Act (TEFRA) (P.L. 97-248) established
an adjustment for teaching hospital costs.
In December 1982, when the Secretary of Health and Human Services
proposed a new Medicare payment system, the resident-to-bed adjustment
to the TEFRA cost limits was converted to a PPS payment, called
the IME adjustment, to recognize the higher costs of teaching hospitals:
The indirect costs of graduate medical education are
the higher patient care costs incurred by teaching hospitals with
medical education programs....It is also true that the mere presence
of interns and residents in an institution puts extra demands
on other staff and leads to the existence of higher staffing levels.
The process of graduate medical education results in very intensive
treatment regimens...there is no question that hospitals with
teaching programs have higher patient care costs than hospitals
without (Secretary of the Department of Health and Human Services,
Hospital Prospective Payment for Medicare: A Report to Congress,
December 1982, pages 48-49).
The DHHS Secretary estimated that Medicare inpatient operating cost
per case increased approximately 5.79 percent with each 10 percent
increase in the number of residents per hospital bed. However, two
months after the Secretary's report, the Congressional Budget Office
(CBO) presented an impact analysis showing the proposed DRG-based
payment system would have adversely affected 71 percent of teaching
hospitals if the IME adjustment were set at 5.79 percent. The Administration
proposed to double the adjustment to 11.59 percent for each 10 percent
increase in the IRB. Congress supported this modification of the
empirical estimate and included the IME adjustment in the prospective
payment legislation.
As more current and refined information became available, the IME
adjustment was recalculated and lowered. The original adjustment
of 11.59 percent was reduced to 8.7 percent in 1986 when better
data became available. It was reduced by an additional 0.6 percentage
point to finance part of the disproportionate share (DSH) adjustment,
resulting in an IME adjustment factor of 8.1 percent in 1986. With
enactment of the Omnibus Budget Reconciliation Act of 1987 (P.L.
100-203), the IME adjustment remained at 7.7 percent from October
1, 1988 until October 1, 1997 when it was reduced to 7.0 percent
as a result of the Balanced Budget Act (BBA) of 1997 (P.L. 105-33).
The BBA included a schedule for reducing IME payments by 28.75
percent over a four-year period. The schedule has been altered by
the Balanced Budget Refinement Act (BBRA) of 1999 (P.L. 106-113),
the Beneficiary Improvement and Protection Act (BIPA) of 2000 (P.L.
106-554), and most recently, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (P.L. 108-173). The BBA reduced the
IME percentage add-on from 7.7 percent in FY 1997 to 7.0 percent
in FY 1998 and 6.5 percent in FY 1999. The BBRA and BIPA maintained
the IME adjustment at 6.5 percent in FYs 2000, 2001 and 2002 before
reducing it to 5.5 percent in FY 2003 and thereafter.
Section 502 of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003, which was signed into law (P.L. 108-173) on December
9, 2003, increased the Medicare Indirect Medical Education (IME)
adjustment from 5.5 to 6.0 percent on April 1, 2004; 5.8 percent
in FY 2005; and 5.55 percent in FY 2006. In FY 2007, IME payments
are reduced to 5.35 percent before being set at 5.5 percent in FY
2008 and beyond. (See table). It is estimated that this provision
will provide $400 million to teaching hospitals over ten years.
The BBA also made changes in how residents are counted for the IRB,
a key variable in the IME formula. Beginning in FY 1998, hospitals
are permitted to count residents in a non-hospital setting for IME
payment purposes if the hospital incurs all, or substantially all,
of the costs for the training program in that setting. A limit was
placed on the number of full-time equivalent (FTE) residents in
allopathic and osteopathic training programs that a hospital could
count in either a hospital or non-hospital settings. The number
of residents could not exceed the number of residents counted during
the hospital's most recent cost report period ending on or before
December 31, 1996. In addition, a hospital's IRB cannot exceed the
ratio of residents-to-beds in the same cost reporting period. Finally,
the BBA required residents to be counted using a three-year rolling
average.
IME Payment Methodology
For every Medicare case paid under the inpatient PPS, a teaching
hospital receives an additional payment, calculated as a percentage
add-on to the basic price for the case. The hospital's IME payment
is determined by inserting its individual resident-to-bed ratio
into a formula which is written in Medicare statute. Specific limits,
described above, and other rules about counting residents and beds
apply in determining the hospital's IRB.
As a hospital's involvement in graduate medical education increases,
its percentage add-on to the basic PPS price also increases. In
FY 2006, a hospital with 5 residents for every 100 beds (IRB=0.05)
will receive an add-on payment of 2.73 percent. A hospital with
25 residents for every 100 beds (IRB=0.25) will receive a 12.96
percent add-on payment to its basic PPS price.
Over 1,100 teaching hospitals receive IME payments. The Congressional
Budget Office estimates that IME payments will be $5.6 billion in
FY 2006 (2005 estimates).
Contacts
Lynne Davis Boyle, Assistant Vice President
AAMC Government Relations
ldavisboyle@aamc.org
(202) 828-0526
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