Preserving IME payments - Medicare/Medicaid

Healthcare Financial Management, August, 2002 by Christopher L. Keough, Mark R. Fitzgerald

Though largely unnoticed, in August 2001, the Centers for Medicare and Medicaid Services (CMS) adopted a significant amendment to the Medicare regulation governing the indirect medical education (IME) payment under Medicare's prospective payment system (PPS) for inpatient hospital services (a) The new policy restricts the number of full-time-equivalent residents that may be counted in the calculation of a hospital's IME payment by excluding all residents' research not involving the care of a particular patient, including time spent in bench research, journal clubs, seminars, and other training. (b) This change, which CMS has characterized as a clarification of long-standing policy, significantly reduces payments for many teaching hospitals. As Medicare intermediaries implement the new policy through respective audits, some hospitals may lose up to 15 percent of their IME funding, and many hospitals will be forced to contest the application of the new policy through the Medicare appeals process.

Regulatory Context

Since its inception, the Medicare program has viewed the services of residents differently from those of other physicians. While most physicians' services have been paid on a charge basis under Medicare Part B, the services of hospital residents have been covered and paid as inpatient hospital services under Part A.

Until 1985, Medicare paid hospitals for residents' services on a reasonable-cost basis. From the program's beginning, the allowable costs of approved medical education programs included the residents' stipends, the compensation paid by hospitals to teachers, and other indirect overhead costs associated with these programs. (c)

Congress adopted a prospective payment method, effective July 1, 1985, for these direct costs of graduate medical education. (d) Under the system, a teaching hospital is paid a hospital-specific amount for each full-time-equivalent resident. The hospital-specific rate is derived from the hospital's average cost per resident in a 1984 base year established by the statute.

The direct graduate medical education (DGME) payment is not the only source of Medicare funding that is earmarked specifically for teaching institutions. In 1983, when Congress enacted the PPS for the operating costs of inpatient hospital services, it adopted the IME payment under the PPS. The IME payment is intended to compensate teaching hospitals for the higher-than-average operating costs that statistically are correlated with teaching intensity, but which do not include the direct costs of residents' instruction. (e) Congress established the IME payment because it had serious doubts about the ability of the DRG case-classification system to account accurately for the higher operating costs incurred by teaching hospitals as a result of the severity of patients' illnesses and the specialized services and treatment that the hospitals provide. (f)

The IME payment is calculated on the basis of the ratio of a hospital's full-time-equivalent interns and residents to its number of beds. This ratio is a proxy measure for a hospital's teaching intensity, which is correlated with higher-than-average operating costs per discharge due to the factors noted above. The only variable term in the formula is the ratio of interns and residents to beds. Thus, the exclusion of residents' time from a hospital's resident count reduces the hospital's IME payment.

CMS's Clarification

Until CMS issued its policy clarification last summer, the law seemed to indicate that residents' research time could be included in a hospital's resident count for IME purposes, if the research was part of the resident's approved residency training program. Nothing in the Medicare statute or regulations stated that residents had to be engaged in direct patient care activities in the hospital to be included in the hospital's resident count for IME. The IME regulation itself only required that the resident be assigned to either a portion of the hospital covered by inpatient PPS or the outpatient department of the hospital.

Nevertheless, in August 2001, CMS amended the IME regulation to exclude resident research that is not associated with the treatment or diagnosis of a particular patient. CMS says that this amendment is merely a clarification of longstanding policy that previously was articulated in Section 2405.3(F) of the Provider Reimbursement Manual (PRM) and in commentary accompanying prior rule issuances.

The PRM states that a hospital's IME resident count may not include an individual who is "engaged exclusively in research." CMS asserts that this provision excludes any research performed by a resident that is not associated with the treatment or diagnosis of a particular patient of the hospital. In support of this interpretation of the manual, CMS says it relies on general Medicare cost reimbursement principles, which provide that costs incurred by a hospital typically must be related to patient care to be reimbursed by Medicare. CMS further argues that while a resident is engaged exclusively in research, the hospital is not incurring additional patient care costs due to that resident. Thus, CMS concludes, the IME adjustment is more accurate if it excludes residents engaged exclusively in research.