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Resident Physician Forum
May 26, 1999

How Medicare Calculates GME Payments, Part I

Author Affiliations

Prepared by Ashish Bajaj, Department of Resident and Fellow Services, American Medical Association.

JAMA. 1999;281(20):1958A. doi:10.1001/jama.281.20.1958

Several groups in the federal government have been studying graduate medical education (GME) funding with the intent of reforming the current system. In an effort to better prepare residents for the debates and discussions on GME funding, recent Resident Physician Forum columns have described these groups and their deliberations and have discussed some of the issues being raised. In this and the next column, we will summarize the current methods used to calculate payments to hospitals.

Before the Medicare program was created, GME was funded directly by the hospital. Residents were provided with a small cash stipend, room, board, laundry, and other services. Some of these costs were recovered directly or indirectly from insurance payments.

When Congress created the Medicare program in 1965, it included provisions for GME funding because it recognized a need for trained physicians to provide health care to the nation and acknowledged that educational activities within a hospital enhance the quality of care. Medicare pays hospitals for GME through 2 payment streams—direct GME payments and the Indirect Medical Education Adjustment. In this column, we will focus on direct GME payments.

Direct payments compensate a teaching hospital for overhead costs related to GME, as well as for the salaries and benefits of residents, teaching physicians, and GME administrative staff. Before 1985, these payments were uncapitated and could be increased if a hospital's direct GME costs increased. Since then, these payments have been capitated and are now linked to a "per-resident" amount.

The average per-resident amount (ARPA) was calculated in 1985 and has been adjusted for inflation in all calculations since then. In simple terms, ARPA was determined by calculating a hospital's total direct GME costs related to Medicare and dividing that by the number of full-time residents. In the early 1980s, hospitals used different methods for calculating their direct GME costs. As a consequence, the ARPA number varies widely. In 1983-1984, ARPA ranged from $7500 to $187,500.1

A hospital's total direct GME payments can be determined by multiplying ARPA by (1) an inflation adjuster, (2) the number of current full-time residents, and (3) the proportion of the hospital's inpatient days used by Medicare patients. This is just a simple way of understanding the calculation. Over the years, Congress has modified the formula to reduce Medicare payments. For example, the inflation adjuster has been reduced for residents in non–primary care specialties, so ARPA even varies within a hospital. Medicare also makes adjustments to direct GME based on the number of years a resident has been in training.

The AMA Department of Resident and Fellow Services will continue to provide updates on the GME funding debate as developments occur.

Boex JR. Factors contributing to the availability of direct costs for graduate medical education.  Acad Med.1992;67:80-84.