By CATHERINE RAMPELL
New York Times
Monday, December 23, 2013
Full Story: http://economix.blogs.nytimes.com/2013/12/17/how-medicare-subsidizes-doctor-training/
My Economic View column on Sunday looked at medical residencies, the biggest bottleneck in the supply chain for doctors. Most of this “graduate medical education” training is subsidized by Medicare, for somewhat strange historical reasons sustained by both legislative inertia and the stakeholders who benefit from it. Here’s some detail about how the subsidies work.
When Congress established Medicare in 1965, it set up payments to subsidize residencies “until the community undertakes to bear such education costs in some other way.” Exactly what that meant was unclear, notes Fitzhugh Mullan, a physician and health policy professor at George Washington University. After all, who is this “community,” and why would it voluntarily take over this financial responsibility if the federal government was already paying for it?
In any case, in 1983, Medicare devised a new version of the training subsidy that has essentially carried over until today. The subsidy comes in two parts.
The first is officially for the “direct” costs of training new doctors (like their salaries, benefits, and teaching costs). The second, larger part is officially supposed to pay for the “indirect” costs that hospitals and health care centers incur because trainees are expected to be slow, inefficient, and otherwise generally increase the cost of care.
For example, let’s say a patient comes in with an ailment that Medicare usually pays $2,000 for the hospital to treat. Medicare will instead pay more than that if the hospital employs a lot of residents, with the exact increase in payment determined by a formula.
This means hospitals used to have incentives to create new residency slots ad infinitum so they could keep on getting higher and higher payment rates from Medicare. Congress decided (perhaps understandably) that this was financially unsustainable; there was also some concern about creating an “oversupply” of doctors in the 1990s. So in 1997, Congress capped the number of positions that Medicare would underwrite, freezing the total at what it was the year before.
Hospitals can still create (and have created) new, non-Medicare-financed residency slots, but they must do so using other sources of funds.
As I noted in the column, there is debate about whether hospitals need these subsidies, since at some point in the training process the residents are most likely bringing in a lot of money for the hospitals on net. In fact, the Medicare Payment Advisory Commission has found that the indirect payment rate is almost twice as high as can be justified by empirical data, once you look at the costs of care at teaching hospitals versus nonteaching hospitals.
Medicare subsidies for graduate medical education total about $10.1 billion annually, an average of $112,642 per resident. There is a lot of variation between hospitals because of the way the formula works, though, and the way the slots were allocated when their number was capped in 1997. This recent Health Affairs paper (by Dr. Mullan, Candice Chen and Erika Steinmetz) found that the Northeast is the biggest beneficiary of this legacy funding system.
For example, in 2010, there were 77.13 Medicare-sponsored residents for every 100,000 people who live in New York State. There were, by contrast, just 1.63 residents per 100,000 Montanans. (In raw numbers rather than ratios, New York also has more residents than 31 other states combined.) Subsidies per resident are highest in Connecticut, at $155,135 per resident, compared with $63,811 per resident in Wyoming.
While Medicare-financed residency slots are concentrated in the Northeast, much of the expansion in medical school enrollment has been elsewhere in the country, particularly concentrated in the South.
“State investments in new or expanded medical schools face a substantial barrier because their residency program base is small and they lack Medicare G.M.E. [graduate medical education] funding to expand rapidly,” the paper says. “In some cases, either a state will have to fund new G.M.E. positions, or many of its new graduates will have to leave the state to find residency positions.”