The Present System

Medicare has always played a special role at teaching hospitals, most notably because it pays for most of the costs of teaching that those hospitals incur.

According to Santangelo, Medicare pays for teaching in hospitals through two subsidies: graduate or direct medical education payments (GME), and indirect medical education payments (IME).

Graduate medical education payments are fixed amounts that Medicare pays to a teaching hospital based on the number of residents it trains and its share of patient days.

Indirect medical education payments, according to Santangelo, are intended to compensate teaching hospitals for the additional infrastructure costs inherent in the teaching mission, such as the extra costs of having standby capacity or treating more severely ill patients.

The time it takes to treat each patient is necessarily extended when doctors are being trained, so the IME is based on "teaching intensity," or the ratio of the number of residents to beds. The more intensive the care the more payment the hospital receives.

Teaching hospitals also tend to treat a higher proportion of the indigent and the poor and therefore receive a "disproportionate share" subsidy to cover those costs as well.

The Republican legislation aims to save $270 billion over the next seven years by enacting a series of measures, including reducing the inflationary updates of payments given to hospitals for procedures, reducing the disproportionate share subsidies by 20 percent over the next seven years, and reducing IME payments.

Pieper says teaching hospitals must depend on Medicare to pay these extra costs because insurance companies simply don't have a financial incentive to pay for teaching and research.

"An insurance company that pays for teaching is placed at a competitive disadvantage against another organization that does not," he says. "For them to supplement any payments with an intention of supporting teaching and research is just not in their economic interests."

The market reality in Massachusetts has further exacerbated the situation, says Santangelo.

Competition among HMOs has forced teaching hospitals to cut costs in various ways. For example, one of the hospitals in Santangelo's group is starting to cut specialty training positions.

Pieper says the lack of private insurance funding for teaching and research is the core problem. He says he doubts the competitive private environment will be able to pick up the costs if the government doesn't pay.

Impact

According to Norton, the long-term impact of the Medicare reform legislation on medical education could be devastating, since Congress appears to be targeting the indirect medical education portion of Medicare for substantial reductions.