Budget Options
December 8, 2016

Mandatory Spending Health Option 12

Multiple Budget Functions

Consolidate and Reduce Federal Payments for Graduate Medical Education at Teaching Hospitals

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Mandatory Outlays 0 -1.1 -1.6 -2.1 -2.8 -3.4 -4.1 -4.8 -5.4 -6.4 -7.6 -31.9

This option would take effect in October 2017.

Hospitals with teaching programs receive funds from Medicare and Medicaid for costs related to graduate medical education (GME). The Medicare payments cover two types of costs: those for direct graduate medical education (DGME) and those for indirect medical education (IME). DGME costs are for the compensation of medical residents and institutional overhead. IME costs are other teaching-related costs—for instance, the added demands placed on staff as a result of teaching activities and the greater number of tests and procedures ordered by residents as part of the learning and teaching process. As for the Medicaid payments, the federal government matches a portion of what state Medicaid programs pay for GME. The Congressional Budget Office estimates that total mandatory federal spending for hospital-based GME in 2016 was more than $10 billion, of which roughly 90 percent was financed by Medicare and the remainder by Medicaid. Teaching hospitals also receive funding from other federal agencies—which is discretionary rather than mandatory spending—as well as funding from private sources.

Medicare’s DGME payments are based on three factors: a hospital’s costs per resident in 1984, indexed for subsequent inflation; the hospital’s number of residents, which is subject to a cap; and the share of total inpatient days at the hospital accounted for by Medicare beneficiaries. Medicare’s IME payments are calculated differently: For every increase of 0.1 in the ratio of full-time residents to the number of beds in a hospital, they rise by about 5.5 percent. (To increase that ratio by 0.1, a 100-bed hospital, for example, would have to add 10 full-time residents.)

Beginning in October 2017, this option would consolidate all mandatory federal spending for GME into a grant program for teaching hospitals. Total funds available for distribution in fiscal year 2018 would be a fixed amount equaling the sum of Medicare’s 2016 payments for DGME and IME and Medicaid’s 2016 payments for GME. Total funding for the grant program would then grow with inflation as measured by the consumer price index for all urban consumers (CPI-U) minus 1 percentage point per year. Payments would be apportioned among hospitals according to the number of residents at a hospital (up to its existing cap) and the portion of the hospital’s inpatient days accounted for by Medicare and Medicaid patients.

In CBO’s estimation, the option would reduce mandatory spending by $32 billion between 2018 and 2026. By 2026, the annual savings would represent about 30 percent of projected federal spending for GME under current law. Over that period, most of the savings would stem from the slower growth in GME funding over time.

An argument for reducing the overall subsidy for GME is that federal payments under current law exceed hospitals’ actual teaching costs. The Medicare Payment Advisory Commission (MedPAC) has consistently found that the IME adjustment is overstated. In its most recent analysis, MedPAC estimates that an IME adjustment about one-third the size of the current one would reflect the indirect costs that teaching hospitals actually incur. That analysis suggests that a smaller subsidy would not unduly affect hospitals’ teaching activities. A smaller subsidy also would remove an incentive for hospitals to have a greater number of residents than necessary. Another argument for this option is that consolidating federal funding for medical education would reduce the costs of administering the program for the government and teaching hospitals.

An argument against the option is that reducing the federal subsidy for GME could lead teaching hospitals to shift the composition of their residency programs toward specialists and away from primary care residents. In response to the caps on Medicare-funded residency slots, which were put into place in 1996, hospitals did not stop expanding their residency programs—but they did tend to favor specialists over primary care residents because employing specialists tends to be more financially attractive. If hospitals responded to further reductions in federal GME subsidies in the same way, shifting the mix of their residents even more toward medical specialties, they would exacerbate a recent trend that could limit the number of primary care doctors in the future. Alternatively, hospitals might respond to the reduced subsidy by lowering residents’ compensation and making them responsible for more of the cost of their medical training.

Another argument against the option is that some teaching hospitals use part of their GME payments to fund care for uninsured people. The option could therefore disproportionately affect hospitals that treat a larger number of uninsured patients. Furthermore, states could lose some discretion to direct Medicaid GME payments to hospitals because the federal government would be administering the grant program. Finally, even if payments were initially equal to hospitals’ costs, the payments would grow more slowly than inflation and thus would probably not keep pace with increases in costs. Over time, therefore, hospitals and residents might bear an increasing share of the costs of operating a residency program.