Medicare Indirect Medical Education (IME) Payments
In addition to providing basic health services to their communities, teaching hospitals have the additional roles of providing clinical education for all types of health professionals, an environment in which clinical research can flourish, and highly specialized patient care. Because of their education and research missions, teaching hospitals offer the newest and most advanced services and equipment, and with residents and supervising physicians available around-the-clock, teaching hospitals care for the nation's sickest patients.
The additional missions of teaching hospitals increase the cost of patient care at these institutions. In recognition of the differences in operating costs between teaching and non-teaching hospitals, the Medicare program includes a special payment adjustment in its prospective payment system (PPS).
Purpose of the IME Payment
The Medicare Indirect Medical Education (IME) payment carries a "medical education" label, but its purpose, as stated by Congress when it created the PPS in 1983, is much broader:
This adjustment is provided in light of doubts. about the ability of the DRG case classification system to account fully for factors such as severity of illness of patients requiring the specialized services and treatment programs provided by teaching institutions and the additional costs associated with the teaching of residents. The adjustment for indirect medical education costs is only a proxy to account for a number of factors which may legitimately increase costs in teaching hospitals (House Ways and Means Committee Rept, No. 98-25, March 4, 1983 and Senate Finance Committee Rept, No. 98-23, March 11, 1983).
The justification for a special payment adjustment for teaching hospitals is rooted in Medicare's cost limits of the 1970s. As the program made its payment limits for hospitals' routine costs more stringent in the late 1970s, government and private researchers consistently showed that teaching hospitals had higher costs than non-teaching hospitals, even after the direct costs of graduate medical education were removed from teaching hospitals' cost structures. Researchers found that a hospital's intern and resident-to-bed ratio (IRB) was related to an increase in hospital costs. In 1980, the concept of an "indirect medical education adjustment" was recognized. The Medicare cost limits for routine patient care provided at teaching hospitals were increased to incorporate a differential based on the IRB in each teaching hospital. In 1982, The Tax Equity and Fiscal Responsibility Act (TEFRA) (P.L. 97-248) established an adjustment for teaching hospital costs.
In December 1982, when the Secretary of Health and Human Services proposed a new Medicare payment system, the resident-to-bed adjustment to the TEFRA cost limits was converted to a PPS payment, called the IME adjustment, to recognize the higher costs of teaching hospitals:
The indirect costs of graduate medical education are the higher patient care costs incurred by teaching hospitals with medical education programs. It is also true that the mere presence of interns and residents in an institution puts extra demands on other staff and leads to the existence of higher staffing levels. The process of graduate medical education results in very intensive treatment regimens. there is no question that hospitals with teaching programs have higher patient care costs than hospitals without (Secretary of the Department of Health and Human Services, Hospital Prospective Payment for Medicare: A Report to Congress. December 1982, pages 48-49).
The DHHS Secretary estimated that Medicare inpatient operating cost per case increased approximately 5.79 percent with each 10 percent increase in the number of residents per hospital bed.
However, two months after the Secretary's report, the Congressional Budget Office (CBO) presented an impact analysis showing the proposed DRG-based payment system would have adversely affected 71 percent of teaching hospitals if the IME adjustment were set at 5.79 percent. The Administration proposed to double the adjustment to 11.59 percent for each 10 percent increase in the IRB. Congress supported this modification of the empirical estimate and included the IME adjustment in the prospective payment legislation.
As more current and refined information became available, the IME adjustment was recalculated and lowered. The original adjustment of 11.59 percent was reduced to 8.7 percent in 1986 when better data became available. It was reduced by an additional 0.6 percentage point to finance part of the disproportionate share (DSH) adjustment, resulting in an IME adjustment factor of 8.1 percent in 1986. With enactment of the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203), the IME adjustment remained at 7.7 percent from October 1, 1988 until October 1, 1997 when it was reduced to 7.0 percent as a result of the Balanced Budget Act (BBA) of 1997 (P.L. 105-33).
The BBA included a schedule for reducing IME payments by 28.75 percent over a four-year period. The IME adjustment was reduced from 7.0 percent to 6.5 percent on October 1, 1998 (Federal Fiscal Year 1999), and will be lowered further to 6.0 percent in FY 2000 and 5.5 percent in FY 2001.
The BBA also made changes in how residents are counted for the IRB, a key variable in the IME formula. Beginning in FY 1998, hospitals are permitted to count residents in a non-hospital setting for IME payment purposes if the hospital incurs all, or substantially all, of the costs for the training program in that setting. A limit was placed on the number of full-time equivalent (FTE) residents in allopathic and osteopathic training programs that a hospital could count in either a hospital or non-hospital settings. The number of residents could not exceed the number of residents counted during the hospital's most recent cost report period ending on or before December 31, 1996. In addition, a hospital's IRB cannot exceed the ratio of residents-to-beds in the same cost reporting period. Finally, the BBA required residents to be counted using a three-year rolling average.
IME Payment Methodology
For every Medicare case paid under the PPS, a teaching hospital receives an additional payment, calculated as a percentage add-on to the basic price for the case. The hospital's IME payment is determined by inserting its individual resident-to-bed ratio into a formula which is written in Medicare statute. Specific limits, described above, and other rules about counting residents and beds apply in determining the hospital's IRB.
As a hospital's involvement in graduate medical education increases, its percentage add-on to the basic PPS price also increases. In FY 1999, a hospital with 5 residents for every 100 beds (IRB=0.05) receives an add-on payment of 3.19 percent. A hospital with 40 residents for every 100 beds (IRB=0.40) receives a 23.36 percent add-on payment to its basic PPS price.
Over 1,200 teaching hospitals receive IME payments, but residents and IME payments are concentrated in relatively few teaching hospitals. The Medicare Payment Advisory Commission (MedPAC) estimates that IME payments were $4.6 billion in FY 1997. About one-fifth of all teaching hospitals, which trained two-thirds of all residents in 1995, received two-thirds of all IME funds.
Lynne Davis. Office of Governmental Relations, 202-828-0526.