The Medicare System

In 1965, after years of debate, the Medicare law (PL 89-97) was passed as part of the Social Security Act. This law was originally designed to have the federal government provide health insurance for the poor, elderly population who could not afford health insurance. The Medicare payment plan consists of two parts: hospital insurance (Part A) and supplementary medical insurance (Part B). Part A covers costs for inpatient care, skilled nursing facilities (inpatient centers with rehabilitation facility), home health aides, and hospice care (treatment for terminally ill patients who expect to live less than 6 months). In general, Part A benefits are automatically provided to those over 65 who are entitled to social security and railroad retirement benefits. Disabled people who are eligible for benefits get the same coverage. (Waid, 1997).

Supplementary hospital insurance (Part B) is available to most US resident citizens over 65 years old and certain non-citizens over 65. Part B is mainly a coverage for physician services, but it also includes a variety of out-patient and emergency services (such as clinical test, medical equipment and supplies, and ambulance care). Part B coverage is optional and there is an extra premium for this coverage. Services such as dental care, eyeglasses, hearing aids, and most prescription medicines are not covered under either Part A or Part B unless the beneficiary chooses to enroll in a managed care plan (Waid, 1997).

The government also provides public health insurance through the Medicaid program. Medicaid is funded by both the state and federal governments to provide health insurance for the medically vulnerable and needy population who come from low-income families. Specifically, it is available to all children (less than 19 years old and born after September 1983) whose family is below the poverty level, children less than six years old whose family income is below 133% of the poverty line, pregnant women whose family income is below 133% of the poverty level, recipients of adoption or foster care assistance who qualify for social security, and recipients of supplemental security income (such as welfare; Waid, 1997). Different states may cover more patient groups than those under Medicare and by other state-only funds; however the federal government will not help with this coverage. Medicaid’s coverage is required to include: inpatient and outpatient services, children’s vaccinations, nursing facility services for those older than 21, home health care for those eligible for skilled nursing services, laboratory tests, and nursing and physician services. States will also receive funding for providing optional services such as diagnostic and clinical services, prescriptions and rehabilitation care, and physical therapy (Waid, 1997).

The federal government reimburses the state with a portion of the Medicare costs called the Federal Medical Assistance Percentage (FMAP). This percentage is determined by the average per capita income in that state compared to the whole country. States with a higher income level are reimbursed by a smaller percentage than those with a lower income level. The percentage reimbursed is restricted to between 50 and 83%, and averages 57 percent throughout all the states and DC (Waid, 1997). Each state determines the amount the providers will receive. They must pay the providers a sufficient amount so that Medicare beneficiaries have the same access to the treatment Medicare covers as does the rest of the population in the same area. The states are required to provide extra funding to hospitals that treat a disproportionately high amount of Medicaid or low-income patients (called “Disproportionate share hospital”; Waid, 1997).

Having passed the Medicare and Medicaid law, the government created an excess demand for doctors, thus the medical schools had to train more physicians. It worked well for the new physicians receive training on the Medicare and Medicaid patients, so the government had to provide support for medical education. Academic Health Centers (AHCs; organizations of medical universities, their associated hospitals and clinics, and a faculty practice plan) still provide a significantly higher portion of the Medicaid and uncompensated patients’ care than do non-teaching hospitals (approximately twice, compared to their size; Reuter 1997a). Additionally, having more Medicare patients treated in teaching hospitals provides Medicare patients with better service, although more costs, since teaching hospitals are more technologically advanced and have more facilities. The government also provides support because it is social investment into education and teaching hospitals and because teaching hospitals cost more (Herdman, 1998).

Originally, the government covered half the Medicare cost and the patients paid the rest. However, the law has been revised significantly to expand the coverage for the beneficiaries and to increase the population covered. As the cost of outpatient care grew, the governments covered 70% of the cost and the patients covered 30% (Thomas, 1995). Additionally, the law has been extended to cover all the population over 65 (not just the portion of the elderly population that is poor), and it provides extended coverage for critically ill and disabled patients. There is also, a more significant portion of the population over 65 now. This is because the death rate has decreased and the baby boom generation is now at the age to receive Medicare support. This has lead to a significant increase in the cost of Medicare for the government. Specifically, in 1965 Medicare cost the government $3 billion; by 1995, it cost the government $180 billion annually. Continuing this rate of increase, it is expected that the Medicare fund for inpatients would go bankrupt by the year 2002 (Thomas, 1995). There has also been an increase in the Medicaid costs. This is because there is more technology to keep critically ill patients alive, to treat older patients, and to keep more very low weight babies alive (Waid, 1997). Also, the disproportionate share hospital payment program has caused Medicaid to cost the federal government more. With the upcoming expected shortage in the Medicare and Medicaid fund, the government sought means to reduce the Medicare and Medicaid expenditures.

In August of 1997, the balanced budget act was signed in order to reduce federal government spending and eliminate the budget deficit. Being a major source of growth in government spending recently, Medicare took a disproportionately large share of the spending cuts. Specifically, although Medicare was only 13.15 % of the budget, it absorbed 56.5% of the cuts in government spending (Iglehart, 1998). Thus, Medicare’s spending for the beneficiaries significantly decreased. However, these cuts in Medicare’s spending were necessary so the Medicare trust fund does not run out. Because Medicare and Medicaid are significant contributors to funding of Medical education and teaching hospitals, the balanced budget act will have a significant impact on Medical education.

Medicare Funding of Medical Education

Medicare and Medicaid comprise the largest sources of funding for AHCs. Totally, they provide 45.6% of the funding for private AHCs and 55.6% of the funding for public AHCs. The other significant source of funding is the private health insurance which represents 37.1% of the private AHC's funding and 25.7% of that for public AHCs (Reuter 1997a). There are two basic types of health care insurers and providers: Fee-for-service and Managed care organizations. Medicare funds the two types by different mechanisms, so the differences between them should be understood.

With a completely fee-for-service insurance, the patient may choose any doctor he wishes. The amount the patient (or his employee if his company provides insurance) must pay is in proportion to the patients total medical costs. In a managed care hospital (an HMO) the hospital is combined with the insurance provider, so the patients must choose from physicians who are employed with the hospital tests (Council On Graduate Medical Education, 1995). An important characteristic of managed care hospitals is that health care insurance is pre-paid. The money for from all the patients is collectively used for treatment of each patient. Thus, managed care hospitals tend to limit the patient’s care by minimizing use of specialists and expensive tests (Council On Graduate Medical Education, 1995). However, this does make them significantly cheaper. Managed care insurance is relatively new (started in the 1980s); However it is becoming increasingly common. AHCs' hospital and insurance can be of any type from HMOs to fee-for-service insurance.

. Medicare funds fee-for-service AHCs through two payment methods: Direct GME costs and Indirect GME costs. The direct medical education payment (DME) is a per-resident amount paid to cover teaching hospitals’ extra cost directly because of the training of residents. This is a per-resident amount that covers resident salaries and benefits, the salaries of supervising physicians, the average cost of office and laboratory space, and other overhead costs. The DME is paid to the hospital dependent of the number of residents they train and the average cost (per each resident) of running the hospital. The DME is calculated for the costs of funding based upon the per-resident costs of running the hospital for the current year (found by adjusting 1984 cost for inflation). Medicare pays a portion of DME funding equivalent to the fraction of inpatient days held by Medicare patients (the rest is paid by other sources such as insurance). Before the balanced budget act, there was no cap on the number of residents they could get funding for training (Reuter, 1997b).

Medicare’s indirect medical education adjustment (IME) depends on the number of residents working at the hospital in inpatient or outpatient services (number of residents per hospital bed). Before the balanced budget act, the system was that every 10% increase in the number of residents per hospital bed would cause a 7.7% increase in the funding received through IME (Reuter, 1997b). The IME is intended as a general support for teaching hospitals and a compensation for higher costs generated by resident training programs in hospitals.

Managed care hospitals receive Medicare funding by a different method. Since managed care insurance is less expensive than fee-for-service insures, they receive less funding from Medicare. Medicare pays to managed care health centers 95% of an adjusted average per capita cost (AAPCC) of caring for Medicare patients. The AAPCC is an average of the costs to care for the patients had they been in the same geographical area, but not in a managed care hospital. This AAPCC includes the IME and DME amounts paid to teaching hospitals. Thus, even though some managed care hospitals do not train medical students, they get a portion of the DME and IME payments. Also, the amount of funding managed Care hospitals get would be dependent upon whether locally there are more teaching or non-teaching hospitals (Reuter, 1997b).

Changes with the Balanced Budget Act of 1997

With the balanced budget act, there have been significant changes to how Medicare funded medical education in order to reduce Medicare’s spending. One provision in the balanced budget act involves reducing the IME and DME payments that AHCs receive. Before the balanced budget act, a 10% increase in the ratio of residents to hospital beds would result in 7.7% increase in the funding AHCs receive. With the balanced budget act, by the year 2000 this will be cut down to only 5.5 percent change in funding for a 10% increase in the number of residents per hospital bed (Reuter, 1997b). This will result in a decrease in IME funding of $5.6 billion for 1997 to 2002. Additionally, over five years the total DME payment will be cut by $700 million (Iglehart, 1998; Reuter, 1997b).

The balanced budget act also contained various provisions to shape the physician work force. Before the balanced budget act, the AHC were funded through DME and IME based upon the number of residents they trained. If they trained more residents, they received more funding through DME. Thus, it encouraged them to train an excessive amount of physicians, even though there was not demand for them in the market. The resulting increase in the number of residents trained (26.4% from 1989 to 1996; Iglehart, 1998) is a major factor contributing to the increase in Medicare’s education spending. Additionally, the problem of physician oversupply is quite significant, so the balanced budget act established a new policy to fix this. First, they established a cap on the number of residents that an AHC can receive funding for training. With the new law, they can not train more residents than they had at their most recent report before December 31, 1997. In later years, the limit will be based upon a 3-year average (Reuter, 1997b).

Second, with the balanced budget act, hospitals will receive a pay-back for submitting a plan to reduce the number of physician they train by 20 to 25% (Reuter, 1997b). However, if they reduce the number of primary care physicians they train, they cannot get any pay-back through the balanced budget act. This is because, despite the general excess of physicians, there is a slight shortage of primary care physicians. Additionally, if they train more physicians than their plan allows they will lose all this pay-back.

The amount of pay-back they receive decreases each year and is determined by a complex mechanism. If they cut back the number of physicians they train, they would get less DME and IME funding, as such they get the pay-back to partially compensate. The amount they receive in pay-back is related to the difference between how much funding they receive (through IME and DME with their cutback of more than 20%) and how funding they would have received if they cutback by only 5%. AHCs receive a decreasing percentage of this amount each year. Specifically, in the first year they get the complete pay-back; in the second year they get 75% of the pay-back; in the third year they get 50% of the pay-back amount; and in the fourth year they get 25%. After five years they do not get any pay-back (Herdman, 1998). Thus, these new provisions give AHCs a financial motivation to slowly cut back the number of physicians they train.

The balanced budget act established additional incentives to encourage the training of primary care physicians. Much of the primary care training is not done in inpatient settings (where IME and DME apply), so primary care training did not get much funding. With the balanced budget act, DME funding can be applied to sites besides inpatient hospital care such as: rural health clinics, community health centers, and Medicare managed care plans. Additionally, the law provides for forming demonstration groups which consist of AHCs combined with health care providers such as group practices, outpatient facilities, or community health centers. This combined group would get the DME funding thus providing more funding for primary care physicians (Reuter, 1997,b).

Some of these provisions would, however, reduce the funding for medical education, so another legislation was added to compensate this and increase the funding AHCs receive. Since managed care AHCs are significantly more expensive than non-teaching managed care hospitals, before the balanced budget act they had lost a lot of their Medicare customers to non-teaching hospitals. Before the balanced budget act, managed care AHCs did not receive the full pay-back and non-teaching managed care hospitals got some of the funding for DME and IME. With the balanced budget act, DME and IME funds will be removed from a part of AAPCC in non-academic managed care hospitals over a five-year period (till 2002). Instead, managed care AHCs, will receive all this DME and IME funding. Thus with this provision Managed care AHCs will get more funding, so they can get their market share of customers (Reuter, 1997b). Since this is just a change of who Medicare pays, it would not cost the federal government extra.

Effects of the Balanced Budget Act.

Many of the changes allowed Medicare to control the physicians supply. However, there has been a controversy over whether Medicare should act as a controller of physician supply rather than leaving it up to market forces. The balanced budget act of 1997 was Medicare’s first attempt for Medicare to actually control the physician workforce. Specifically, it is expected that there would be a decrease in the number of residents trained while keeping the number of primary care physicians constant. (Herdman, 1998; Reuter 1997b).

The AHCs were motivated to cut back on the number of specialized physicians they trained, but there was a lot of room left for them to decide how they would cut back. Currently, US medical schools produce only 16, 000 students while the residency programs accept approximately 25,000 students (Pardes, 1998). As such, almost all US medical graduates (92-94%) are accepted to a residency position (National Residency Matching Program, 1997). The medical schools also accept a significantly less portion of foreign medical graduates (20 to 67% of applicants) as compared to U.S. medical graduates for a variety of reasons. First, foreign graduates have not been trained for the American health care system and culture. Second, training residents is very expensive for the AHC, so it is a waste to spend that money those who may not serve America population after training. Third, in comparison to many other countries, the American medical school is much more difficult, so foreigners would generally be less qualified. In the past years (from 1978-1997), the changes in the percentage of residents accepted (due to changes in physician supply and demand) have correlated to the changes in the percentage of foreign medical graduates accepted. Thus the residency programs are accepting foreign medical graduates as needed (9000 in 1997) to fill the empty slots. As such, the decrease in residency training will most strongly affect the number of foreign medical graduates accepted into residency programs (Pardes, 1998; Iglehart, 1998).

The balanced budget act also motivated the AHC to train less specialist physicians and more primary care physicians by giving a payback for reducing the number of specialist, but not the number of primary care physicians. The effects of this will are difficult to predict and will probably vary between hospitals. However, as the program for reduction of training positions is optional, there is expected only a slight (3 percent) decrease in the number of residents trained (Reuter, 1997b).

Through the balanced budget act, AHCs get a payback for cutting the number of residents they trained. Before the passing of the balanced budget act there was a “demonstration program” in New York in which a similar payback system started. In the New York program, the government gave the hospitals extra funding equivalent to a fraction of the money they lost because they trained fewer physicians. Similar to the balanced budget act, the fraction received each year decreases. This served to show that the number of residents could be reduced (by giving extra funding for a time period) and the federal government would still save money. Started in 1996, this program will cover a five year period. Through this program 39 hospitals in New York accepted to cut down the residency training by 2200 (out of totally 10500 or 21%) and increase the number of primary care physicians by 13% (Iglehart, 1998). Over the five years it would be favorable for the government (saving an expected $299 million) and the New York hospitals would get extra funding totaling and estimated $412 million.

However, there was much opposition to the demonstration program, and later the balanced budget act, among the public. First, it was regarded by many as a system which paid the hospitals not to teach (Pardes, 1998; Iglehart, 1998). Second, there is not complete agreement of the physician excess. In medically underserved areas (such as rural areas and inner cities) there is a shortage of physicians (Iglehart, 1998). As such paying health centers to reduce physicians trained in these areas would make it even more difficult for these areas to get physician access. Thus, there was not agreement about the necessity of reducing physicians and, consequently opposition to the extending New York’s system nationally. This opposition lead to proposal of an amendment to the balanced budget act which removed funding for programs similar to the New York demonstration program. Although the amendment failed, it attracted almost half the senate votes (45 of 100). (Iglehart, 1998). Thus, there is still a significant opposition to the balanced budget act, especially reducing the number of physicians trained.

The balanced budget act also contained provisions that would reduce the amount of funding teaching hospitals receive including butting down the payments received through IME payments. This would be partially offset by extra payments received from managed care, but there is still expected to be a net decreases in funding of $1.6 billion over the five year period (1997 to 2002; Reuter 1997b).

Lastly, The passing of the balanced budget act has brought attention to the appropriateness of Medicare being the largest source for funding of AHCs. Although it compromises approximately half of the payment for teaching hospitals, Medicare is the source for most all of the government funding for teaching (with other government funding as 1 to 3 % of the funding for teaching hospitals; Reuter, 1997 a). Additionally, Medicare is the only major single source for funding of teaching hospitals; the other significant source is private insurance which comes from many different sources. Recently there have been various propositions for a new method for financing Medical Education.

Suggestions for changes in Medicare and Medical Education

Although teaching hospitals treat non-Medicare patients as well as Medicare patients, they only get extra funding for teaching (IME and DME) from Medicare. Thus, a new method in which all recipients of health care from teaching hospitals would support medical education was proposed (Herdman, 1998; Pardes, 1998). This was the system in New York before 1996 when the demonstration program started. At that time, New York got the funding from Medicare as well as from other health care recipients, so it received more funding than any other state. Totally, Medicare funded them with over $90,000 per resident while the payment from third party insurers exceeded that of Medicare at $190,000 per resident (Iglehart, 1998). As Herdman says in his article “...while Medicare should pay its share of GME support for all its beneficiaries, other funding sources should address the non-Medicare share proportionately.” In summary, it is more appropriate for AHCs to get payment from all the sources since they all get the additional benefits of treatment from an AHC rather than a non-teaching hospital.

Another suggestion that has been made is that DME payment be open for non hospital providers like rural health clinics and federally qualified health centers. In any case, the funding should be opened to those centers who are responsive to change that will manage graduate medical education. Specifically, we should encourage those who provide services to rural areas. Additionally, through the funding we should encourage those that provide primary care (as opposed to inpatient services; Herdman, 1998, Pardes, 1998).

There is also significant variation in the cost of training residents between various hospitals which is due only to geographical factors (Anderson, 1996). This is partly due to factors such as a different quality of training for residents. To make this level it has been proposed (Herdman, 1998, Pardes, 1998, Anderson, 1996) that the national cost of residency training should be paid for (rather than paying a hospital-specific amount).

References

Herdman, Roger. “Proposals for Funding Graduate Medical Education” Archives of General Psychiatry 55 (1998): 299 - 302. Online

Iglehart, John. “Medicare and Graduate Medical Education” New England Journal of Medicine 334 (1998): 402-407. Online.

Pardes, Herbert. “The Institute of Medicine Report of Graduate Medical Education” Archives of General Psychiatry 55 (1998): 307 - 308. Online.

Reuter, James A. (a) The Financing of Academic Health Centers: A Chart Book (New York: The Commonwealth Fund, 1997a)

Reuter, James A. (b). The Balanced Budget Act of 1997: Implications for Graduate Medical Education (New York: The Commonwealth Fund, 1997b)

Thomas, Bill. “1965-1995: Medicare at a Crossroads.” Journal of American Medical Association 274 (1995): 276-278.

United States. Council on Graduate Medical Education. Department of Health & Human Services. Sixth Report: Managed Health care: Implication for the physician Workforce and Medical Education. 1995

Waid, Mary. Health Care Financing Administration. Department of Health and Human Services. Brief Summaries of Medicare & Medicaid Title XVIII and Title XIX of the Social Security Act. 1997. Online.

Anderson, Gerard. “What Does Not Explain the Variation in the Direct Costs of Graduate Medical Education” Academic Medicine 71 (1996): 164-166.

National Residency Matching Program, 1997. Table 4: PGY-1 Positions, Active Applicants and Match Rates.