Medicare payment for resident training in nonprovider settings

Healthcare Financial Management, March, 2004 by Christopher L. Keough

Hospitals may receive direct graduate medical education (GME) and indirect medical education (IME) payments under Medicare Part A for residents' training in a physician office, freestanding clinic, or other nonhospital setting. The rules governing these payments have undergone significant revisions in recent years, including the new "redistribution" rule adopted by CMS in August 2003, and have become a source of increasing controversy among teaching hospitals and CMS.

As a result, Congress enacted a one-year moratorium on Medicare disallowances of GME and IME payments for residents' training in nonhospital settings in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (DIMA). Congress also directed CMS and the OIG to complete studies over the coming year that may well lead to further changes in the current system. Accordingly, teaching hospitals and their financial officers should stay up to speed on the existing rules and further changes that are likely to follow in the near future.

Background on Medicare Payments for GME and IME

Since the inception of the Medicare program, the services furnished in a hospital by a resident in training under an approved residency program have been covered under Medicare Part A as inpatient hospital services and similarly excluded from coverage under Part B as physician services (even when the resident is a licensed physician). Originally, Medicare paid hospitals for the reasonable costs of approved residency training programs, including resident stipends, the compensation paid to teaching physicians, and other administrative overhead associated with an approved residency program (see 42 CFR [section] 413.85).

CMS has long been reluctant, however, to pay hospitals for resident training outside the hospital setting. For example, in the early 1980s, when Medicare still paid hospitals for the reasonable costs of approved residency training programs, CMS took the position that a hospital should not be paid for the costs associated with family practice residents' training in an outpatient clinical setting. The agency argued that the cost of training residents in an outpatient setting was not an allowable cost of inpatient hospital services because it was not a cost related to services furnished by the residents to hospital inpatients. In Loyola University of Chicago v. Bowen and University of Cincinnati v. Bowen, two federal appellate courts overturned that position. The courts concluded that the cost of this training must be paid because the net cost of a residency-training program is allowable if the program is accredited, and residents require training in outpatient clinical settings for accreditation of a family practice program.

Overview of the IME Payment

In 1983, Congress began to move away from reasonable-cost payment with the enactment of the inpatient hospital PPS. When Congress enacted the PPS, it included a payment adjustment for IME costs. The IME adjustment is a percentage add-on to standard PPS payments per discharge, and it is intended to compensate PPS hospitals for higher-than-average operating costs that are statistically correlated with the intensity of a hospital's teaching activities.

The amount of the PPS payment adjustment for these "indirect" costs is driven by the ratio of a hospital's number of full-time equivalent (FTE) interns and residents to its number of beds, which serves as a proxy for a hospital's teaching intensity. Generally, a hospital's FTE count for IME may include residents' time spent in hospital inpatient areas that are subject to the PPS and in the hospital outpatient department. In addition, beginning October 1, 1997, the IME count may also include residents' time spent in other nonhospital settings if the hospital incurs all or substantially all of the cost of the training program in that setting and meets certain additional requirements discussed later.

Overview of the GME Payment

The direct costs of approved educational activities, including the costs of approved residency-training programs, are not classified as an operating cost and, therefore, are not paid under the PPS. When the PPS was first implemented, these costs continued to be paid based on reasonable cost. In 1985, however, Congress provided for GME payment a separate prospective payment method for the direct costs of approved residency training programs (see Social Security Act [section] 1886[h]). Under this method, payment for direct CME costs is based on three principal factors:

* A hospital-specific average per resident amount, which is derived from a base year (usually 1984) and trended forward by inflation update factors, subject to a floor and ceiling relative to a locality-adjusted national average rate

* The hospital's number of FTE interns and residents in approved programs

* The hospital's ratio of Medicare inpatient days to total inpatient days

Generally, a hospital's FTE count for GME may include resident time spent in all areas of the hospital complex, including the outpatient department and inpatient areas that are exempt from the PPS. In addition, a hospital may also include residents' time spent in a nonprovider setting as of July 1, 1987. As in the IME context, however, the hospital must incur all or substantially all of the cost of the training in that setting and meet certain further criteria discussed later.