Medicare funding for medical education: a waste of money?

By picking up the tab for training doctors, the government is making

taxpayers pay instead of private industry having to bear the expense, as
it should.
Medicare, the government's medical plan for senior citizens,
is an ongoing political hot potato. Nevertheless, the calculus of
Washington makes it certain that most Americans never will get close to
learning anything useful about the workings of the program which, in
many respects, is wasteful of the taxpayers' money.

Take, for example, one aspect of the behemoth health insurance

program that is not publicized widely. Presently, the Federal
government, through Medicare, explicitly subsidizes the cost of graduate
medical education. In fact, almost $7,000,000,000 was spent on education
in 1996, according to Congressional Budget Office estimates. This money
is intended to cover the direct and indirect costs of medical education,
including such things as salaries for residents and the extra time a
surgeon takes as he or she goes slow to teach a procedure.

The money comes from two pots. The first is direct medical
education (DME) payments, which cover Medicare's calculated share
of the costs associated with the salaries and benefits of residents and
the cost of teaching physicians. This includes money for conference and
classroom space, additional equipment and supplies, and allocated
overhead.

The second funding mechanism is through a so-called indirect

medical education (IME) adjust meet. Recognizing that the additional
missions of teaching hospitals raise their costs, Congress established
in 1983 the IME adjustment as an add-on factor to Medicare in-patient
payments. This was intended to compensate teaching hospitals for certain
intangible and difficult to quantify expenses associated with graduate
medical education programs. According to the original bill, this
included such expenses as in creased diagnostic tests, more aggressive
use of diagnostic services, higher staffing ratios, additional
record-keeping, research, and the fact that teaching hospitals generally
attract a more acute patient case mix.

Since these governmental payments are calculated to cover the

teaching costs associated only with publicly insured patients, some
portion of the expenses of medical education has been passed on through
the higher charges that academic medical centers typically have
collected from private payers. Though the precise amount they contribute
from their own clinical revenues remains to be measured carefully, one
estimate placed this figure at $1,700,000,000, of which about
$1,000,000,000 goes to undergraduate medical education--the four years
of medical school--and $700,000,000 to graduate medical education or
residency training.
By all accounts, medical training is an expensive enterprise. Yet,
exactly how much medical education costs academic medical centers is not
clear. When financial officers at academic medical centers are asked the
amount they actually spend on education, they admit that their

estimates--when they have them--are imprecise.

This is because of difficulty in gauging just how much it costs

the hospital when a senior physician on the medical center's staff
takes extra time to teach a new procedure or how much billable time is
diverted when physicians give lectures to undergraduate medical
students. What is clear is that the medical education process provides
the hospitals with clear benefits to go along with any expenses.
Residents, who work long schedules--sometimes eclipsing 90 hours a
week--staff hospitals at odd hours and provide valuable on-site
supervision when more senior physicians are off. For this, they derive a
salary of about $3040,000 a year.

Residents, in many respects, are a financial windfall to some

hospitals, not a liability. The money that Medicare pays teaching
hospitals to subsidize their training, therefore, amounts to another
Federal subsidy to prop up bloated urban medical centers. It should be
noted that the amount of money academic medical centers claim medical
education costs them each year varies widely among academic hospitals,
from a low of $7,500 per resident to more than $200,000 per resident,
with most reporting that their direct costs per resident were in the
$20-80,000 range, according to a re port published in the Journal of the
American Medical Association. This gap--which persists each year--has
been the subject of intense debate and scrutiny. All studies, even those
commissioned by the government, indicate that the variation is due to
accounting differences.

At issue as well is the frequent expenditure of education money on

items other than the training of physicians. For instance, under the
medical education payment system, money is being diverted from Medicare
to fund teaching at health maintenance organizations. The trouble with
this practice is that just a select few HMOs offer any medical education
programs, and even those that do are seen by most residents as being
ancillary to their medical education.
When HMOs take on Medicare patients, they automatically receive
the extra education money calculated into the reimbursement, even in
cases where they are not participating in medical education. These
payments to managed care companies are a major inducement for going
after a Medicare patient load. Rep. Nancy Johnson (R.-Conn.), a member
of the House Ways and Means Health Subcommittee, said this is where the
establishment of a separate trust fund for medical education makes
sense. "With the trust fund, the hospitals are assured of getting
the money they need and they're not dependent on choking it out of
HMOs."

Some Republican legislators have said that such payments should

not be curtailed because expectations have been built around them.
"What we need to do is talk about a new funding source.... You can
call it a user fee; you can call it increased revenue; you can call it a
tax source," noted Rep. William Thomas (R.-Calif.), chairman of the
House Ways and Means Health Subcommittee. "It is some broader based
funding mechanism to fund the graduate medical education."
Congressional aides, speaking on background, indicated that legislators

are unwilling to challenge the managed care community over this point
because they believe that they will need the HMOs as participants in new
health care reform legislation.

Another problem with the current financing system is that

Federally subsidized residency positions are being offered to graduates
of foreign medical schools with no explicit commitment from those
physicians that they will remain in the U.S. to practice medicine. In
effect, the Federal government is subsidizing the medical training of
foreign doctors.

This is allowed to continue because the hospitals, for the most

part, want to keep it that way. Foreign medical graduates often work in
the least desirable training hospitals. Many of these institutions have
limited funds with which to hire physicians. As a result, graduates of
American medical schools shun these programs, and residency program
directors turn to foreign medical school graduates as a way to staff
their facilities cheaply.

The training many of these hospitals offer is inadequate, and the

residents amass failure rates on their national board exams that
sometimes are twice the national average. In fact, this often proves a
benefit to these hospitals, since it means the residents will be around
for a longer time to provide cheap labor.

If the hospitals are unwilling to admit that foreign medical

graduates are being exploited at the same time that the Federal
government is being ripped off to pay for this practice, graduates of
American medical schools are clear on what is going on. In a survey of
fourth-year medical students conducted for the journal Academic
Medicine, the students, who were about to graduate American medical
schools and were applying for residency programs, admitted that the
higher the percentage of foreign residents a program had, the more
negative was their view of the training they would receive. Moreover, a
survey published in the Journal of the American Medical Association
found that programs which reported an increase in the number of foreign
medical graduates they employed also indicated, over time, a decrease in

the number of applications received from

American medical school
graduates.

The Health Care Financing Administration

(HCFA) is considering
"regional demonstration projects" to test the
feasibility of
pulling graduate medical education (GME)
dollars out of Medicare rates
and creating explicit funding pools to
compensate hospitals for their
teaching costs. Health care analysts at HCFA
said that, although the
details of the change are uncertain, the
policy goals of such a
demonstration would be to protect teaching hospitals' GME funding

in the transition to a more competitive managed care marketplace.

The talked-about modifications would eliminate the ability of HMOs

to divert medical education funds away from medical education. Moreover,
under existing Medicare payment policy, the more residents hospitals
train, the more money they get. Therefore, there is a disincentive to
reduce residency training slots and an incentive to hire more residents.
Hospital executives admit that the current scheme distorts the residency
labor market. The pooling idea, though, neutralizes the financial
disincentives that penalize teaching hospitals for shrinking the number
of medical residents they train.

Worrisome to some residency directors is a Clinton Administration plan to incorporate into the
proposal an incentive for hospitals that
train more primary care residents. Residency directors, particularly
medical specialists, worry that this will distort the free flow of
residents into those specialties where there is the greatest need or the
greatest interest.

If government continues to see the need to subsidize medical

education, another idea would be to offer graduating medical students
vouchers they can apply to the residency program of their choice. This
would have the additional effect of forcing residency programs to
compete for medical graduates. Those that offered inefficient, shoddy training would have a difficult
time attracting medical students. In
effect, vouchers would return the residency selection process to a free
market for labor. It would force programs to offer good training

opportunities at competitive terms or close down.

Moreover, under any reform plan, resident pay should be linked to

what the market will bear in a competitive environment, akin to what
residents earn when they moonlight. Pay should be tied closer to what
the residents bring in by performing billable services and less on what
it costs to educate them. This means fourth-year residents would earn
considerably more than their first-year counterparts, which is the way
it is in any other profession, where junior associates receive less than
their more senior colleagues. Although most people believe doctors are
paid too much, residents are earning about the same in real terms as
they were getting in 1975. The current system makes it profitable for
unscrupulous hospitals to hire as many residents as the law will allow.
The residents perform the medical services cheaply, while the hospitals
are able to bill at full rates.

The plan to roll medical education reimbursements out of Medicare

is a step in the right direction. This idea long has been supported by
the medical education establishment, including the American Association of Medical Colleges, which
lobbies in Washington on behalf of medical
schools. AAMC president Jordan Cohen and others involved in medical
education argue that the plan promotes "shared
responsibility." In other-words, it holds open the possibility that
everyone who "benefits from medical education ought to be
participating in its financing," he suggests. One could envision
that this would include levies on HMOs and other health care providers,

and this is precisely what many in the medical education establishment

have in mind.

That, however, would be the wrong direction. True reform would

have the government's role in the financing of medical education
reduced. In other professions, the burdens of educating new employees
often are borne by the employer, either through high starting salaries,
summer jobs (as is the case in the legal profession), or loans that are
for given or made interest-free once an employee graduates and starts
work. One can envision HMOs or large group practices helping to pay for
medical students' education in exchange for an agreement by them to
work for that HMO for a given time. Wall Street consulting firms
frequently enter into these kinds of arrangements. So long as government
picks up the tab for educating doctors, private industry has no
incentive to step in.

If the costs of educating residents are too high for private

industry immediately to be saddled with, offering medical students
vouchers so they can shop around to different residency programs would
get the entire system moving in the right direction. Ultimately,
hospitals will have to be brought to view residents as what they are--a
source of labor--and treat medical education expenses as a sound
investment, not a benefit to be financed by the taxpayers.

Mr. Gottlieb, a former health care analyst for a Wall Street

investment bank, is a New York free-lance writer whose articles have

appeared in The Wall Street Journal, The Christian Science Monitor, The Journal of the American
Medical Association, and USA Today.

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