Indirect Medicare Education Payments Are Too High

HRD-89-33: Published: Jan 5, 1989. Publicly Released: Jan 5, 1989.

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Pursuant to a legislative requirement, GAO: (1) examined the factors responsible for the variations in patient costs and Medicare payments among teaching and nonteaching hospitals; and (2) estimated the adjustment needed to compensate teaching hospitals for the indirect cost of medical education.

GAO found that: (1) teaching hospitals had higher patient-care costs than nonteaching hospitals because of costlier locations and case mixes and because they tended to be larger than nonteaching hospitals; (2) location, case mix, hospital size, and the availability of a graduate medical education program are contributory factors to variations in Medicare payments to hospitals; and (3) the Prospective Payment System (PPS) formula created an imbalance in Medicare payments because it did not account for all cost variation sources. GAO estimated that an appropriate indirect-cost adjustment factor would be: (1) 3.73 percent if the PPS formula were expanded to include other relevant cost factors; (2) 5.9 percent under the PPS formula; and (3) 6.26 percent, taking into account the shortcomings in the PPS formula and PPS failure to consider other cost factors in the indirect-teaching-cost adjustments. GAO believes that an adjustment factor of 6.06 percent would be appropriate after 1995.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Section 4621 of the Balanced Budget Act of 1997 significantly reduces the indirect medical education adjuster, phasing in the reduction over fiscal years 1998-2000.

    Matter: Congress should reduce the teaching adjustment factors for fiscal years 1989 through 1995, and for 1996 and beyond, to levels shown by GAO analysis of Medicare costs. Should Congress wish to use the savings from the lower payments to teaching hospitals to reduce overall Medicare outlays, the legislation should specifically reflect that decision. Congress should also include provisions directing the Secretary of Health and Human Services to periodically reestimate the effects of graduate medical education on Medicare costs, based on the most current hospital cost data available at the time.


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