Medicaid and Graduate Medical Education

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Medicaid finances the delivery of primary and acute medical services, and long-term care, for
certain low-income populations. Most states make Medicaid payments to help cover the costs of
training new doctors in teaching hospitals and other teaching programs. Historically, both
Medicare and Medicaid have recognized two components of graduate medical education (GME)
costs: (1) direct graduate medical education, or DGME (e.g., resident salaries, teaching
supervision), and (2) indirect graduate medical education, or IME (e.g., higher patient care costs
because of additional tests ordered by residents). There are no federal reporting requirements to
document Medicaid GME payments by states. Survey data show that such costs (federal and
state) totaled nearly $3.2 billion in 2005, representing 7% of Medicaid inpatient hospital
expenditures nationwide. In May 2007, the Centers for Medicare and Medicaid Services (CMS)
issued a proposed rule that would eliminate federal reimbursement for both DGME and IME
under Medicaid. The rule would also change the way in which the Medicaid upper payment limit
for hospital services is calculated, which would further reduce the federal share of Medicaid costs
for hospitals. Federal savings from the proposed rule were estimated to be $1.78 billion over five
years. P.L. 110-28 (a war supplemental appropriation) included a moratorium on further action by
the Administration on this proposed rule until May 25, 2008. P.L. 110-252, another war
supplemental appropriation, extends this moratorium until April 1, 2009. This moratorium would
be further extended to July 1, 2009, via the American Recovery and Reinvestment Bill of 2009
that was approved by the House Energy and Commerce Committee on January 22, 2009.

Graduate Medical Education.....................................................................................................1
Benefits and Service Delivery Systems Under Medicaid.........................................................1
Medicaid and Graduate Medical Education..............................................................................2
The Proposed Rule on Medicaid GME Payments.....................................................................3
Justification for the Proposed Rule...........................................................................................3
Opposition to the Proposed Rule on Medicaid GME Payments...............................................4
Latest Congressional Action.....................................................................................................5
Author Contact Information............................................................................................................5

Graduate medical education is clinical training in an approved residency program following
graduation from schools of medicine, osteopathy, dentistry, and podiatry. All states require
residency training to be licensed. Most states require three years of such training. The residents,
who are serving a form of apprenticeship, provide patient care under the supervision of a teaching
physician, primarily in teaching hospitals.
GME costs are difficult to determine because teaching occurs in the context of patient care and
research. There are direct GME (DGME) costs, which include residents’ stipends, payments to ¹
supervising physicians, and direct program administration costs. There are also indirect GME
(IME) costs associated with the higher patient care costs in teaching hospitals resulting from
treating sicker patients, using more diagnostic tests, and longer patient stays. Under prospective ²
payment systems (PPS), which do not pay entities for each test or procedure performed, an
explicit adjustment (payment increase) for IME is sometimes viewed as necessary.
Medicare and, in some states, Medicaid make explicit payments to teaching hospitals for their ³
GME costs. Federal appropriations under the Public Health Service Act support primary care
residency programs and other health professional education, as well as support for children’s
teaching hospitals. Other sources of funding include research grants, endowments, and foundation
grants. The Department of Veterans Affairs and Department of Defense also support residency ⁴
positions. The flow of funds among those involved in GME is complex and frequently involves
cross-subsidies between medical schools, teaching hospitals, and other training sites.
Medicaid pays for a wide variety of health care benefits for certain low-income populations,
including inpatient hospital services. In addition, states have flexibility in designing Medicaid
service delivery systems and provider payment rates. States may, for example, provide care
through what is called the “fee-for-service” (FFS) delivery system. Under FFS, beneficiaries have
unrestricted choice among Medicaid participating providers, and they are largely responsible for
their own medical care management and coordination. The state directly (or through a fiscal
intermediary) pays each participating provider for covered services received by a Medicaid
beneficiary. Generally, FFS payments to hospitals are based on prospective payment systems, as
described above.
Medicaid managed care arrangements are significantly different from the FFS delivery system.
Beneficiaries choose (or are assigned to) a primary plan that provides care coordination and
management. Traditional managed care plans, such as health maintenance organizations (HMOs),
make available a specified set of mostly preventive, primary, and acute care benefits for which

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^pr^ov^ide^r^of^G^M^E.

the state pays a fee on a “per member per month” basis, called a premium or capitation rate.
These rates typically reflect the average FFS cost of providing care to specified groups of plan
beneficiaries.
In addition to these methods of paying providers for benefits covered under both the FFS and
managed care delivery systems, states make other supplemental payments to selected providers.
For example, the Medicaid statute requires that states make disproportionate share (DSH)
adjustments to the payment rates of hospitals treating large numbers of low-income and Medicaid
patients. Federal statute specifies DSH allotments for each state. States must define, in their state ⁵
Medicaid plan, hospitals qualifying as DSH hospitals and DSH payment formulas. Most states
also make GME payments under Medicaid. Such payments may be made directly to teaching
hospitals similar to DSH payments, as a part of capitation rates under managed care, or both.
In FY2005, total Medicaid spending for the federal and state governments combined was
approximately $273 billion. Almost $35 billion or 12.8% of total spending was for inpatient
hospital services paid for through FFS. Additional payments related to inpatient hospital care ⁶
under capitated managed care are not separately identifiable.
While there is no formal federal reporting mechanism to document Medicaid GME payments by ⁷
state, other survey data show that Medicaid is a major payer of GME. For example, in 2005, total
state and federal Medicaid payments for DGME/IME were estimated to be nearly $3.2 billion. On
average, Medicaid DGME/IME payments nationwide represented 7% of total Medicaid inpatient
hospital expenditures. State-specific DGME/IME proportions varied widely, from less than 1% to
more than 21% of inpatient hospital expenditures.
States made Medicaid DGME/IME payments under both the FFS and managed care delivery
systems in 2005. For example, 47 states made DGME and/or IME FFS payments. Twenty-two ⁸
states reimbursed for both DGME and IME under the FFS delivery system. Among the 36 states
with capitated managed care programs, 25 included DGME and/or IME payment under such care
arrangements.
States used different methods to distribute GME-related payments to providers. For example,
under the FFS delivery system, 32 states that paid for DGME/IME distributed those payments
through hospitals’ per case or per diem reimbursement rates. Twenty states made a separate direct
payment to these institutions. Five states used both methods.

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^only^I^M^E.

Under capitated managed care, 15 states made DGME/IME payments explicitly and directly to
teaching hospitals and programs. Ten states included DGME/IME payments in their capitation
rates paid to managed care organizations (MCOs). Of these 10 states, 2 required MCOs to
distribute these payments through their negotiated rates to hospitals, and the other 8 assumed
MCOs provide these payments to hospitals.
On May 23, 2007, CMS issued a proposed rule that would make two specific changes affecting ⁹
GME payments under Medicaid. First, it would eliminate all federal payments for DGME and
explicit IME. However, states may otherwise recognize the higher costs of teaching hospitals
through increased base payment rates or supplemental payments. Second, the rule would also
remove Medicare DGME payments from the calculations that set the Medicaid upper payment
limit (UPL) for hospital services. In general, Medicaid payments for inpatient hospital services
cannot, in the aggregate and within three provider categories (state government, non-state
government, and private), exceed a reasonable estimate of what Medicare would pay for the same
services. Medicare excludes DGME costs in the calculation of per discharge payment amounts for
hospital services. Thus, CMS argued such costs are not appropriate in calculating Medicaid ¹⁰
payments either. The proposed rule does not discuss GME in the context of Medicaid waivers.
The proposed rule retains the inclusion of Medicare IME payments in the calculations that set the
Medicaid UPL for hospital services, because such IME payments are intended to reflect the
higher per patient costs in teaching hospitals (e.g., residents order more tests than experienced
physicians).
The estimated federal savings for all of these changes under the proposed rule would total about ¹¹
$1.78 billion over the FY2008 through FY2012 period. The rule would apply to all Medicaid
providers and must be implemented in the first full state fiscal year following the effective date of
the subsequent final rule. A recent congressional study indicates that this rule would result in the
loss of roughly $9.8 billion over the next five years in 36 states affected by the rule that could ¹²
provide such estimates.
CMS provided several justifications for its proposed rule on Medicaid GME payments published
in May 2007. For example, CMS argued that, in contrast to the Medicare statute, GME payments

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are not authorized in Medicaid statute. GME is not included in the list of services considered to
be “medical assistance” in Section 1905(a) of the Medicaid statute, and is not recognized in
Medicaid statute as a component of the cost of Medicaid inpatient and outpatient hospital
services. CMS noted that while Medicaid DSH payments recognize the health service activities of
certain hospitals, GME is not a health service. CMS also stated that it has no statutory authority
or other existing mechanism or data to track or monitor the efficiency and economy of GME
payments, raising concerns about the fiscal integrity of the Medicaid program.
Hospital industry groups and associations have commented on the proposed Medicaid GME ¹³
rule. These organizations note that this rule represents a reversal of long-standing Medicaid
policy, and that GME payments have previously been explicitly recognized by CMS. In addition,
concerns have been raised that cuts of this magnitude will jeopardize the financial condition of ¹⁴
many teaching hospitals right when there is an impending physician shortage. At the winter ¹⁵
meeting of the National Governor’s Association, state officials justified GME payments because
interns and residents provide a great deal of care to Medicaid beneficiaries.
Some commenters noted that there are explicit references to GME payments in both Medicaid ¹⁶
statute and regulations that legitimize such payments under Medicaid. First, Section 1932(b)(2)
stipulates that non-MCO providers that deliver emergency care to an MCO beneficiary must
accept as payment in full (up to) the maximum amount applicable in the FFS setting, minus any
GME payments. Second, Medicaid regulations (42 CFR 438.6(c)(5)(v)) indicate that if a state
makes direct GME payments to hospitals, the state must adjust capitation rates for managed care
to account for GME payments made on behalf of MCO beneficiaries. In both cases, the
provisions were intended to prevent duplicate GME payments under Medicaid managed care. In
addition, this regulatory provision, which was added by CMS in 2002, was intended to mirror
requirements in Medicare managed care, as well as to jointly address state concerns about
preventing harm to teaching hospitals and federal concerns about ensuring fiscal accountability
for these payments. At that time, CMS also signaled that it planned to study existing Medicaid ¹⁷
GME payment arrangements and might issue additional policies in the future.
Finally, opponents of the proposed GME rule have also noted that, for example, (1) prior approval
by CMS of Medicaid state plan amendments (SPAs) specifying coverage of GME constitutes an

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official interpretation that such SPAs met governing statutory and regulatory requirements,¹⁸ and
(2) while GME is not specifically listed in Section 1905(a) of the Medicaid statute, this section of
statute is broadly drafted, and even the accompanying regulations do not itemize every element of ¹⁹
reimbursable costs.
Two days after the Bush Administration published its proposed rule on Medicaid GME payments,
H.R. 2206, the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability
Appropriations Act, became P.L. 110-28. In this law, Congress placed a moratorium on further
administrative action with respect to Medicaid GME payments. This moratorium was in place
until May 25, 2008. Since then, other bills have also been introduced to address one or more of
the Medicaid regulations issued by CMS over the past year or so. For example, with respect to the
GME proposed rule, three bills (H.R. 3533, S. 2460, and S. 2819) would extend the moratorium ²⁰
in P.L. 110-28 for different lengths of time beyond May 25, 2008.
H.R. 5613, as passed by the House, and H.R. 2642 (a war supplemental spending bill),
subsequently passed by the Senate, would also extend the moratorium in P.L. 110-28 on ²¹
administrative action with respect to Medicaid GME to April 1, 2009. In late May, one day
before the Senate passed H.R. 2642, the Secretary of Health and Human Services issued a press
release stating that the Administration would voluntarily refrain from making the GME rule (and ²²
a second rule on cost limits for public providers) effective until August 1, 2008. On June 19, the
House passed an amendment to the Senate-passed version of H.R. 2642 that includes the April 1,

2009, moratorium on the GME rule. Subsequently, on June 26, the Senate passed this same bill.

On June 30, this bill became P.L. 110-252. This moratorium would be further extended to July 1,
2009, via the American Recovery and Reinvestment Bill of 2009 that was approved by the House
Energy and Commerce Committee on January 22, 2009.
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¹⁸^S^{ee Ameri}^can^Ho^spⁱ^t^a^l^A^sso^ci^atⁱ^oⁿ^l^e^t^t^e^r.
¹⁹^Se^e^Na^tiona^{l A}^ssocⁱ^a^tion^of^Publi^c^Hospita^{ls le}^tte^r.
²⁰^Aⁿ^o^t^h^e^{r b}ⁱ^l^l^(H.^R^.¹⁷⁴¹⁾^,^w^hⁱ^c^h^preced^ed^b^o^t^h^P^.^L^.¹¹⁰^-²⁸^and^t^h^e^p^r^op^o^s^ed^G^M^E^rul^e^,^w^o^u^l^d^h^a^{ve p}^r^ohⁱ^bⁱ^t^e^d^t^h^e
^S^ecret^ar^y^o^f^HHS^f^r^o^m^t^a^kiⁿ^g^an^y^actⁱ^oⁿ^t^o^rest^ri^ct^p^a^ym^en^t^s^f^o^{r G}^M^E^o^v^{er a t}^w^o^-^{year p}^e^ri^o^d^.
²¹^For^m^o^r^e^inf^o^r^m^a^{tion on}^H^.^R^.⁵⁶^{13 a}ⁿ^{d H}^.^R^.²⁶⁴²^{, s}^e^e^C^R^S^R^e^p^o^r^{t R}^S²²⁸^49,^M^e^dic^a^id^Fi^na^nc^ing^,^b^y^Ap^rⁱ^l^Gr^a^d^y.
²²^{See CRS Rep}^o^r^t^RS2²⁸⁴⁸^,^M^e^dic^a^id^Re^gul^ati^oⁿ^{of G}^o^v^e^r^nm^eⁿ^tal^Pr^ov^ide^r^s^,^b^y^Jean^Hearn^e^.