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Resident Physician Forum
June 9, 1999

How Medicare Calculates GME Payments, Part 2

Author Affiliations

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

JAMA. 1999;281(22):2156. doi:10.1001/jama.281.22.2156

Because graduate medical education (GME) funding is being discussed as part of the effort to reform Medicare, the AMA Resident and Fellow Section (RFS) is working to educate residents on how that funding currently operates. The May 26 Resident Physician Forum explained the method used by the Health Care Financing Administration to calculate direct payments from the Medicare program to hospitals for GME. We now provide an overview of the method used to calculate the Indirect Medical Education Adjustment (IMEA).

The IMEA compensates teaching hospitals for higher operating costs associated with the presence of a residency program, costs incurred by having more complicated cases, additional tests ordered by residents in their learning process, and reduced patient care productivity by all staff members. The formulas for IMEA are based on statistical estimates since indirect costs cannot be accurately quantified. For example, it is difficult to quantify how much patient care productivity is lost while hospital staff are engaged in supporting the training program.

The method explained below is only used for hospital departments that receive Medicare payments. If a hospital or hospital department with a residency program is exempt from the Medicare program (eg, pediatric, rehabilitation, psychiatric hospitals, or hospital departments), the method for calculating IME payments is done separately from the Medicare program.

The amount of the IMEA is a percentage add-on to Medicare payments for patient care. Medicare classifies patients into diagnosis-related groups (DRGs) and sets a standard payment for all patients in a particular DRG. The standard DRG payment is then adjusted or each hospital by considering how overhead, wages, and types of cases vary based on the hospital's location (urban hospitals tend to have higher costs and more complicated cases). These calculations are done for both teaching and nonteaching hospitals.

The first step in calculating the percentage of the IMEA add-on is to determine the hospital's ratio of individual residents to beds (IRB). When counting the number of residents, a hospital can only count its full-time equivalent residents who are working in the hospital's inpatient or outpatient department. In some cases, residents assigned to physicians' clinics can be counted in this ratio. When counting the number of beds, a hospital must exclude beds in Medicare-exempt departments but include neonatal intensive care and intermediate care beds.

Once the IRB is determined, the add-on percentage can be calculated. Then the IMEA for each case can be calculated by multiplying this percentage by the DRG payment. In 1996, the formula was 1.89 [(1+IRB).405−1]. This formula gave hospitals an average add-on of 7.65% for every 10% increase in the IRB. In the Balanced Budget Act of 1997, Congress modified the formula to cut Medicare spending. The current average add-on is 6.5% for every 10% increase in the IRB; by 2001, it will be 5.5%. A Senate bill has been introduced that calls for the IMEA formula to be frozen at the 1999 level. Hospitals fear the consequences of still further reductions in reimbursements.