Hospitals say they subsidize graduate medical education, but cost-benefit unknown

Graduate medical education at teaching hospitals traditionally has fulfilled two goals: training thousands of young doctors and providing lower-cost, front-line daily patient care as part of a medical team that includes higher-paid practicing physicians and nurses.

The goals are still important, but despite more than $1 billion annually in graduate medical education funds supporting those programs, some of the Michigan's 50 teaching hospitals say they're subsidizing the programs.

Changes in accreditation regulations over the past 15 years have reduced work hours for residents, increased their outpatient training opportunities, increased supervision by teaching physicians and added higher osteopathic accreditation costs.

Whether the programs are ultimately costs or moneymakers for hospitals is mostly unknown. Expenses tied directly to the programs are tracked, but overall cost-benefit accounting that would take into account such things as savings or lower medical bills for patients from the use of lower-paid residents instead of practicing physicians isn't done.

Leslie Rocher, M.D., chief academic officer of Southfield, Mich.-based Beaumont Health, said the $57 million Beaumont Hospital in Royal Oak, Mich., received in 2013 for its 395 residents from federal, state and health insurance sources barely covers the costs of maintaining its residency programs.

"It is pretty close; sometimes we are a little shy," Rocher said.

Of Beaumont Hospital's 395 residents, 91 are not covered by Medicare and so are paid for by Beaumont. The $57 million for GME represents 4.73% of Beaumont's net patient revenue in 2013, or about $189,368 per resident.

Medicare is the main source of GME funding, about $853 million for Michigan in 2013, and comes in two pots.

The smaller portion, about 30%, is direct payments to cover residents' salaries, benefits, medical malpractice premiums, administrative costs and stipends for supervising physicians. The remainder consists of indirect payments to cover teaching hospitals' higher costs to treat the sicker patients they typically have.

Hospitals are limited in the number of residents they can have, based on the 1996 Balanced Budget Amendment.

Michigan hospitals also receive $163 million annually from state general funds and Medicaid and another $100 million from Medicaid health plans.

At Henry Ford Health System, Eric Scher, M.D., vice president of medical education and chairman of internal medicine, said direct GME funding does not support the 687 residents across all of its hospitals.

"For more than 10 years, I have been dipping into (indirect payments) to cover" GME programs, Scher said.

In 2013, Henry Ford Hospital received about $96 million from federal, state and health plan sources for its 569 residents funded by Medicare. The hospital paid for an additional 12 residents to cover service demands.

"We have to pay for faculty, program directors, resident salaries. Everything is going up. The benefits don't remain flat, but Medicare doesn't recognize that," Scher said.

Steven Minnick, M.D., a residency program official at St. John Hospital and Medical Center in Detroit, said GME funding still covers his costs, but increasing regulations have cut into margins the past decade. The hospital also pays for 75 residents over and above the 158 paid for by Medicare to help cover patient care and increase the number of practicing physicians.

"Whatever the numbers (GME funding) are, they will be different next year," he said. "We need to maintain quality, and it becomes more difficult."

But do GME programs make money for hospitals?

The short answer is nobody knows. That is because a complete accounting of total payments received by and expended by teaching hospitals from federal, state and insurance sources has never been conducted, said Patrick McGuire, CFO of St. John Providence Health System.

McGuire said direct payments can be tracked within a hospital to show expenses paid to residents, teaching physicians and benefits. But indirect payments have not been accounted for because they freely flow through the entire hospital, he said.

"We don't do a profit and loss (statement) on our residency programs," McGuire said. "Our mission (for residency programs) is to provide good patient care and to offer the community" fully trained doctors.

However, the Medicare Payment Advisory Commission, or MedPAC, which advises Congress, has estimated indirect payments may be $3.5 billion higher than actual indirect costs. Overall, federal spending for GME has been increasing for decades and now is at about $10 billion for direct and indirect payments.

But McGuire is concerned about a pending state regulation in 2016 that will require teaching hospitals that accept GME state general funds to conduct cost-accounting of revenue and expenses of residency programs.

"It will be relatively difficult, depending on what the state is looking for," he said. "It is producible, but will be more difficult on the indirect side because our residents (and teaching doctors) provide whatever care is necessary" without concern for billing or tracking expenses.

Atul Grover, chief public policy officer for the Association of American Medical Colleges, said there is a feeling by some policymakers that hospitals make money on GME.

"They don't. We don't do a good job to show that the services residents provide, that are getting billed for, would cost more if hospitals had to replace them with someone else to do that service," Grover said.

The AAMC, which represents 129 U.S. and Canadian allopathic medical schools and dozens of large teaching hospitals, has called for GME programs to provide greater financial transparency and for the adjusting of the GME payment formula to include performance-based measures. In exchange, AAMC wants Congress to increase Medicare GME funding to add 3,000 residents at a cost of $1 billion to help future physician supply and care for new Medicaid and insured patients under Obamacare.

Overall, teaching hospitals receive about $125,000 to $200,000 from state and federal sources for GME programs, said Leah Gassett, a consultant with ECG Management Consultants in Boston.

With average resident salaries at $50,000, benefits and perks averaging another $50,000 and administrative expenses adding another $25,000 to $50,000 per resident, the average cost to train a single resident is $120,000 to $145,000, Gassett said.

Medicare direct payments "absolutely do not cover the costs," Gassett said. "What we find is some hospitals do not account for all faculty and other costs."

But Gassett acknowledged that if indirect payments are added, some hospitals are close to breaking even or making money, Gassett said.

"We see lot more people getting into the GME than not," she said. "They believe there is a strategic benefit with or without" positive GME profit margins.

Scher said large academic medical centers like Henry Ford and Detroit Medical Center are heavily reliant on residents for daily patient care.

"Much of that (resident work) is taking care of very vulnerable patient populations that wouldn't really be possible to do" based on current hospital staffing levels, said Scher.

Depending on the hospital service, residents contribute 40% to 60% of direct care of patients, estimated Tom Gentile, a residency program consultant and former hospital GME official based in Southeast Michigan.

Minnick said residents are a major part of medical safety nets for underprivileged populations at teaching hospitals.

"If you start to cut those, you will weaken those programs," Minnick said. "As part of the team, they interact with nurses and allied health professionals."

If residents were reduced or removed from the patient care equation, hospitals would have to hire additional hospitalist physicians, nurses, physician assistants, nurse practitioners and licensed practical nurses, which would increase costs, Minnick said.

In a larger sense, Scher said, hospital residency programs also are used to recruit top physicians for teaching, patient care and research.

Another practical benefit of training residents at hospitals is the challenge "to stay on top of your game," Scher said. "You have residents or fellows question you every day."

"My dilemma is how you replace (residents') curiosity, their intuition and the extra things they do with great patient care," Minnick said.

The bottom line, said Rocher, is residents are "core parts of the medical team.”

"Hospitals say they subsidize graduate medical education, but cost-benefit unknown" originally appeared on the website of Crain's Detroit Business.