Teaching hospitals: GME cuts are headed your way

NY payment subsidies may be tip of the iceberg

If U.S. teaching hospitals were stunned by last February’s disclosure that Medicare officials plan to pay New York academic facilities not to train physicians, they would do well to brace themselves for more bad news. Spending cuts and stronger Medicare oversight of physician residency programs are on the way, according to Medicare watchers.

After years of debating how best to put the brakes on runaway graduate medical eduction (GME) costs, the Health Care Financing Administration is finally taking action. In recent months the agency has issued a spate of proposals and administrative initiatives designed to rein in escalating GME payments.

‘It’s just the beginning’

The controversial New York plan is just one approach that HCFA is likely to test over the next few years. "HCFA is zeroing in on graduate medical education. One way or other, GME will be restructured," says Ellen Altman Milhiser, an independent Medicare analyst based in Gaithersburg, MD.

At stake is a significant part of the $6 billion hope chest that Medicare pays out annually to the nation’s 1,300 university-affiliated acute-care facilities. The funds go to help defray the cost of training more than 100,000 residents annually at an average cost of $60,000 per physician, according to HCFA. But the price tag can go as high as $240,000 per resident, the agency adds.

And many of these physicians are training in such specialties as cardiology and psychiatry, which some critics — including HCFA — say are no longer in high demand in the era of managed care. Furthermore, HCFA claims that much of Medicare’s financial support goes to pay for residents to perform services that could be performed by physician extenders, such as helping out in emergency departments.

"Residents do represent an important part of the labor pool. So this issue involves more than just money," says Martin Friedman, MBA, director of administration and finance in the department of medicine at Pennsylvania State University’s Milton S. Hershey Medical Center in Hershey.

One option carves out GME

But HCFA apparently sees things differently. Already, the Clinton administration has proposed the option of carving out direct GME payments under Medicare risk programs and paying facilities under a separate, as-yet-unspecified calculation.

And last year, HCFA introduced tough new guidelines requiring physician faculties to personally supervise residents’ daily activities more closely and to document hands-on instruction, or Medicare won’t pay for their services under Part B.

"Restrictions like these will affect quality of care, I think, more than whatever happens in New York," says W. Robert Wright, FACMPE, president and chief executive officer of University Health Associates, the 350-member faculty organization at the University of West Virginia’s Ruby Memorial Hospital in Morgantown.

However, Wright and other faculty administrators predict little or no immediate effect on group practices. "I don’t think there’ll be any short-term effect on physician groups. But it’s too soon to predict the future," Wright says.

Hospitals have long used the labor issue in fending off cuts, Milhiser says. "Solvency is also brought up. They claim they really need the payments to stay afloat. But many have very healthy profit margins," she adds.

HCFA has additional reasons for implementing reforms, including:

The difficulty of calculating payments appropriately.

Payments vary widely, based on historical levels and current need. But the cost is largely dictated by the teaching hospitals. There are no limits to the number of residents trained or the amount spent by the government, according to the Washington, DC-based Institute of Medicine (IOM), an arm of the National Academy of Sciences.

Growing managed care.

HCFA is shifting more Medicare patients to Medicare risk plans, which pay hospitals and physicians using county-specific economic benchmarks known as Average Adjusted Per Capita Costs (AAPCC). But Medicare HMOs don’t send Medicare patients to teaching hospitals in large numbers, Milhiser notes.

Growing pressure to act.

In recent years, the Clinton administration has been under keen pressure to restructure GME payments. The influential Physician Payment Review Commission, a Washington, DC-based advisory group to Congress, has advocated modifying the GME system to ensure equity and better management.

IOM recommends payment equity

The latest player to weigh in with an opinion is the IOM, which in April issued recommendations at HCFA’s request for revamping GME funding. The IOM recommends:

• setting targeted spending levels for direct GME annually;

• distributing payments more evenly among hospitals nationwide (some hospitals are paid ten times the national average per resident, the IOM says);

• allowing non-hospital facilities such as clinics and physician offices to qualify for GME, which would lower costs;

• creating a trust fund with defined payment levels to facilities based on their historical track record, not present need.

Still, the effort to revamp GME payments isn’t so simple. Not all states are like New York, says Charles Mullins, MD, executive vice chancellor for health affairs at the University of Texas System in Austin. The University’s six teaching institutions train many of the 1,300 first-year residents produced by the state’s eight medical colleges.

"The New York deal won’t work in Texas because we don’t have a physician surplus here. In fact, we fall below the national average in number of physicians per population," observes Mullins, who helped draft the IOM recommendations.

HCFA officials say the New York plan, which involves 41 of the state’s powerhouse teaching facilities, is a demonstration project. Meanwhile, industry insiders across the country are divided over the effects of reducing residency programs and cutting badly needed payments to hospitals already threatened with steep cuts in overall Medicare expenditures.

Hospitals need resident labor

They’re also slightly envious of the the New York hospitals. "If the government is going to hand out sugar plums, why only hand them out in New York?" says Friedman.

The New York plan, which is known as the Medicare Graduate Medical Education Demonstration Project, calls for the agency to make incentive payments totaling $400 million over six years to eliminate about 2,000 residency positions. The hospitals currently train 10,286 residents at a cost to Medicare of about $900 million per year.

Even with the incentives, HCFA expects to save some $300 million in New York over the six years by reducing the number of residents and shifting many patient-care duties to physician extenders and nurses.

The plan immediately drew fire from critics, who blamed HCFA for treating physicians like so many acres of surplus wheat. But others praised the move as reasonable and judicious.

"To just cut the hospitals off and leave them fewer resources would have sent the wrong message. I applaud HCFA’s actions," says Wright. Individually, New York hospital administrators are reluctant to openly discuss the plan. But the Greater New York Hospital Association in New York City, which originally proposed the idea to HCFA, has tried to put a positive spin on the project.

According to a prepared statement the "hospitals will be partially cushioned from financial loss as they . . . restructure their training programs to respond to the new [managed care] marketplace." Collectively, New York produces some 15% of medical specialists, leading the nation.