"Having a resident do the case takes longer than an experienced 50-year-old surgeon," Corlette says. "It's a very expensive way of educating."

Moreover, Harvard's teaching hospitals specialize in providing expensive tertiary care, treating severe ailments like diabetes and heart failure with the latest equipment and techniques.

Community hospitals specialize in primary care and may lack advanced technology, so they can afford to lower their prices. Often, they refer their sickest patients to the teaching hospitals.

As a result, teaching hospitals treat a large proportion of the indigent, uninsured and homeless. Many of these patients have not had access to preventative care and enter the emergency room when their illnesses have already reached an acute stage.

Past Methods of Funding

Until now, teaching hospitals have relied on two main sources to fund its costly operations: government entitlement plans, like Medicare and Medicaid, and private insurers.

Since Medicare and Medicaid funds have been unable to cover the full cost of patients' treatments, hospitals have often charged private insurance companies or wealthy foreigners extra fees to make up for losses.

It is these higher prices which are preventing teaching hospitals from effectively competing with hospitals included in community plans.

Medicare pays teaching hospitals based on the national average cost of the operation, but since teaching hospitals' operations consistently cost more than the average, the hospitals must recoup the lost revenue by other means.

In the past, the Medicare program has recognized the higher costs of teaching hospitals and has been willing to pay more to teaching hospitals than community hospitals for the same level of care.

The Medicare program has done this by reimbursing teaching hospitals for "direct medical education" costs, which cover the salaries of interns, residents, and faculty. Medicare has often also paid for "indirect medical education" costs, which cover the inefficiencies of treating patients in a teaching setting and the high cost of treating indigent and severely ill patients.

With the rapid proliferation of HMO's, teaching hospitals will no longer be able to depend on Medicare to bear the extra costs.

As HMO's are lowering the price for many treatments, Medicare subsidies will be able to cover the high costs incurred by teaching hospitals less and less, Corlette says.

Already Harvard's teaching hospitals occasionally run deficits, and their financial margins are lower than other comparable institutions.

"The average community suburban hospitals are doing much better than the teaching hospitals, even though the teaching hospitals have the Medicare subsidy," says Corlette.