Health Affairs, 22, no. 6 (2003): 123-125 doi: 10.1377/hlthaff.22.6.123 © 2003 by Project HOPE	New Online   Senate Health Reform Bill   Rewarding Providers   Public Option Policy Brief   Health Reform & Abortion   Delivery System Reform

This Article Abstract Reprint (PDF) Submit a response to this article Alert me when this article is cited Alert me when Comments are posted Alert me if a correction is posted Services E-mail this article to a friend Similar articles in this journal Similar articles in Web of Science Similar articles in PubMed Alert me to new issues of the journal Add to My Personal Archive Download to Citation Manager Reprints & Permissions Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Guterman, S. Search for Related Content PubMed PubMed Citation Articles by Guterman, S. Related Collections Hospitals Research And Technology Safety-Net Systems Health Spending

Teaching Hospitals

PERSPECTIVE

Financing Teaching Hospital Missions: A Context

Abstract

 
The issue of what teaching hospitals do, how much it costs, and how it should be financed has been the subject of ongoing debate. This Perspective provides a context for considering the implications of the latest contribution to that debate: the paper by Lane Koenig and colleagues that presents new estimates of teaching hospitals’ mission-related costs. I address the system through which teaching hospital activities are financed, the difficulty in identifying and estimating the costs of teaching hospitals’ missions, and the problems involved in determining how those missions should be underwritten.

To evaluate the implications of this work, it is important to review and examine the context to which it applies. Several elements of this context are particularly problematic: the patchwork system by which graduate medical education (GME) and the other functions that teaching hospitals serve are now financed, the difficulty involved in measuring those functions and estimating how much they cost, and the even more difficult problems related to how and how much to pay for them and how that responsibility should be distributed.

Current approaches to financing teaching hospital missions. GME is financed by a variety of revenue sources that flow through a variety of related institutions. Academic health centers (AHCs) might consist of a medical school, an affiliated hospital and other patient care facilities, and a faculty practice plan. The medical school might receive funds from research grants, aid from state and local governments, and endowments and gifts; the hospital and other patient care facilities also might receive funds from these sources, as well as payments for patient care. Support for the expenses related to GME activities might, in turn, flow among these institutions in various ways.¹

The environment in which teaching hospitals function has changed dramatically during the past few years. Surpluses from private payers, after growing steadily as a percentage of costs through the late 1980s, began to decline as managed care plans and other insurers became less able and therefore less willing to pass along steep cost increases through their premiums. Moreover, although some major teaching institutions are associated with higher quality and thus may remain attractive to managed care plans, these facilities’ higher costs could make it increasingly difficult for them to compete for patients.²

Medicare’s subsidies for teaching hospitals have been reduced sharply since the Balanced Budget Act (BBA) of 1997. Medicaid programs rapidly adopted managed care approaches to control their acute care costs; however, managed care plans rarely have explicit mechanisms to cover the higher costs of teaching facilities. In addition, the efforts of individual states to maintain these differentials in their Medicaid programs is subject to rising pressure on their budgets and the willingness to finance them with more taxes.

"The most difficult questions on this issue go far beyond the estimate of mission-related costs."

Identifying teaching hospital missions and estimating their costs. One of the reasons for the crazy-quilt system for financing GME and teaching hospitals’ other missions is the difficulty in measuring the extent to which individual facilities undertake and accomplish them.

Medicare’s per case payments for acute care hospital inpatient services have been adjusted based on each hospital’s teaching intensity (measured by the ratio of interns and residents per bed, or IRB) since the implementation of the inpatient hospital prospective payment system (PPS) in October 1983. The original proposal submitted to Congress by the secretary of health and human services (HHS) acknowledged that "although it is not known precisely what part of these higher costs are due to teaching...and what part is due to other factors...the Medicare Cost Reports clearly demonstrate that costs per case are higher in teaching hospitals.³ Under this proposal, payment was based on an estimate of the relationship between teaching intensity and Medicare operating costs per discharge. However, projections indicated that a vast majority of teaching hospitals would experience a reduction in payments based on this estimate: "This adjustment is provided in light of doubts...about the ability of the...case classification system to account fully for factors such as severity of illness of patients requiring the specialized services and treatment programs provided by teaching institutions and the additional costs associated with the teaching of residents...the adjustment for indirect medical education costs is only a proxy to account for a number of factors which may legitimately increase costs in teaching hospitals.⁴ Congress doubled the level of the indirect medical education (IME) adjustment when the payment system was implemented.

Since its implementation, the IME adjustment has been sharply reduced. However, although the current adjustment is less than half of what it was originally, it still more than twice as high as indicated by the most recent estimate by the Medicare Payment Advisory Commission.⁵ But sharp disagreements remain as to the purpose of this payment adjustment, and thus also as to the costs involved.

The paper by Koenig and colleagues contributes to the literature by attempting to represent more explicitly some of the missions performed by teaching hospitals and by expanding the consideration of the costs these hospitals bear beyond the Medicare context. Although the specific results will be debated—they still are based on coefficients attached to variables that are at best rough proxies for some teaching hospital missions—they are important in taking the discussion further than it has gone thus far. However, this type of analysis does not provide answers to the key questions of which of these missions should be supported, how they should be financed, and by whom.

How should the costs of teaching hospital missions be financed? The answer to this question is difficult to determine because, as described above, the current system by which these missions are financed is a mélange of implicit and explicit subsidies, none of which is based on a clear notion of what is being paid for.

Private payers historically have provided an implicit subsidy through higher payment rates than necessary to cover the costs of their patients. This subsidy, however, is subject to market pressures, which have intensified over the past decade (although they may be decreasing somewhat now). Relying on this approach renders teaching hospital missions extremely vulnerable to factors that might be unrelated to society’s need for them. Moreover, the implicit nature of these subsidies means that they may not be—in fact, they probably are not—targeted to the appropriate facilities.

The explicit subsidy employed by Medicare also has its problems. First, as described above, there is disagreement as to the specific missions that are being supported by the Medicare GME payments, or to what extent they ought to be supported by a public program.⁶ Second, the Medicare subsidy for IME costs is based on a teaching intensity measure—the IRB—that has been subject to dramatic change over the past decade, with both the sizes of residency programs and the numbers of staffed beds changing considerably from year to year. The relationship of this variable to hospital costs—much less to the missions performed by teaching hospitals—undoubtedly also has changed over time.

Moreover, because GME subsidies are included in the payment rates paid by both private payers and Medicare, it is more difficult to subject teaching hospitals to market pressure to increase efficiency. If the market price includes support for the broader missions that teaching hospitals undertake, as well as the costs of patient care, reductions in that price could reduce access to those mission-related functions, rather than merely reducing inefficiency. Markets work best when the correspondence between the price and what it is paying for is clear and explicit.

The paper by Koenig and colleagues contains a carefully thought-out approach to estimating the mission-related costs incurred by teaching hospitals. But the most difficult questions on this issue go far beyond the estimate of mission-related costs: What missions does society want teaching (and other) hospitals to provide? How much is society willing to pay for these missions (regardless of their costs)? And what mechanism or mechanisms are most appropriate to reflect society’s preferences and make sure they are fulfilled? These questions are sure to be debated for years to come.

Editor's Notes

Top Editor's Notes NOTES

 
The opinions expressed in this paper are those of the author alone and should not be construed as representing the position of the Centers for Medicare and Medicaid Services (CMS), the Department of Health and Human Services, or any other government agency.

Stuart Guterman is director of the Office of Research, Development, and Information, Centers for Medicare and Medicaid Services, in Baltimore.

NOTES

Top Editor's Notes NOTES

 

1. For a more detailed discussion of this issue, see J.Reuter, The Financing of Academic Health Centers, IWP no. 96-112 (Washington: Georgetown University Medical Center, Institute for Health Care Research and Policy, April 1996).
2. See J.Reuter et al., HMOs’ Use of Academic Health Centers, IWP no. 96-103 (Washington: Georgetown University Medical Center, Institute for Health Care Research and Policy, March 1996).
3. R.Schweiker, Report to Congress: Hospital Prospective Payment for Medicare (Washington: U.S. Department of Health and Human Services, December 1982), 48–49.
4. House Ways and Means Committee and Senate Finance Committee Reports, March 1983, as cited in L. Fishman, Medicare Payments with an Education Label: Fundamentals and the Future (Washington: Association of American Medical Colleges, 1996), 20.
5. Medicare Payment Advisory Commission, Report to Congress: Medicare Payment Policy (Washington: MedPAC, March 2003), 53–59.
6. See J.Newhouse and G. Wilensky, "Paying for Graduate Medical Education: The Debate Goes On," Health Affairs (Mar/Apr 2001): 136–147.

                      What's this?