The Effects of the Balanced Budget Act of 1997 on … Effects of the Balanced Budget Act of 1997 on Graduate Medical Education ii The views expressed in this document are solely those

The Effects of theBalanced Budget Actof 1997 on Graduate

Medical Education

A COGME Review

COUNCIL ON GRADUATE MEDICAL EDUCATION

Resource Paper

M A R C H 2000

COUNCIL ON GRADUATE MEDICAL EDUCATION

Resource Paper

The Effects of theBalanced Budget Actof 1997 on GraduateMedical Education

A COGME Review

Written by:

P. Hannah Davis, M.S.

March 2000

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICESHealth Resources and Services Administration

iiThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

The views expressed in this document are solely those of theCouncil on Graduate Medical Education and do not

necessarily represent the views of theHealth Resources and Services Administration

nor the U.S. Government.

iiiThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

Table of Contents

The Council on Graduate Medical Education .................................................................. v

Medicare Support of GME ................................................................................................. 1

Provisions of the BBA Affecting GME ............................................................................... 2

Concerns with the Financial Effects of the BBA’s GME Provisions ............................... 4

GME Activity Trends ........................................................................................................... 5

Effects on Training in Primary Care Specialties and for Rural Practice ....................... 6

Family Medicine .............................................................................................................. 6

Internal Medicine ............................................................................................................ 7

Pediatrics ......................................................................................................................... 8

Rural Practice .................................................................................................................. 9

More Data with Time ........................................................................................................... 10

The Medicare Balanced Budget Refinement Act of 1999 ................................................. 10

Conclusion ............................................................................................................................ 11

Recommendations ................................................................................................................ 11

Bibliography ......................................................................................................................... 12

LIST OF TABLES

TABLE 1: Medicare Payments to Hospitals and/or Ambulatory Sites,Pre and Post BBA of 1997 ............................................................................... 3

TABLE 2: ACGME-Accredited and Combined Specialty GME Programsand Residents ................................................................................................... 5

TABLE 3: Responses to AAFP Survey of Family Practice ResidencyPrograms’ Expansion Plans .............................................................................. 7

TABLE 4: Internal Medicine Resident Physicians and Programs, 1995 - 1998 ................ 8

TABLE 5: Pediatric Resident Physicians and Programs, 1995 - 1998 .............................. 9

ivThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

vThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

The Council on Graduate Medical Education

The Council on Graduate Medical Education(COGME) was authorized by Congress in1986 to provide an ongoing assessment of

physician workforce trends, training issues and fi-nancing policies, and to recommend appropriatefederal and private sector efforts to address identi-fied needs. The legislation calls for COGME toadvise and make recommendations to the Secre-tary of the Department of Health and Human Serv-ices (DHHS), the Senate Committee on Health,Education, Labor and Pensions, and the House ofRepresentatives Committee on Commerce. TheHealth Professions Education Partnerships Act of1998 reauthorized the Council through September30, 2002.

The legislation specifies 17 members for theCouncil. Appointed individuals are to include rep-resentatives of practicing primary care physicians,national and specialty physician organizations, in-ternational medical graduates, medical student andhouse staff associations, schools of medicine andosteopathy, public and private teaching hospitals,health insurers, business, and labor. Federal repre-sentation includes the Assistant Secretary forHealth, DHHS; the Administrator of the Health CareFinancing Administration, DHHS; and the ChiefMedical Director of the Veterans Administration.

Charge to the CouncilThe charge to COGME is broader than the name

would imply. Title VII of the Public Health ServiceAct, as amended, requires COGME to provide ad-vice and recommendations to the Secretary andCongress on the following issues:

1. The supply and distribution of physicians inthe United States.

2. Current and future shortages or excesses ofphysicians in medical and surgical specialtiesand subspecialties.

3. Issues relating to international medical schoolgraduates.

4. Appropriate federal policies with respect to thematters specified in items 1-3, including poli-cies concerning changes in the financing ofundergraduate and graduate medical education(GME) programs and changes in the types ofmedical education training in GME programs.

5. Appropriate efforts to be carried out by hospi-tals, schools of medicine, schools of osteopa-thy, and accrediting bodies with respect to thematters specified in items 1-3, including ef-forts for changes in undergraduate and GMEprograms.

6. Deficiencies and needs for improvements indata bases concerning the supply and distri-bution of, and postgraduate training programsfor, physicians in the United States and stepsthat should be taken to eliminate those defi-ciencies.

In addition, the Council is to encourage enti-ties providing graduate medical education to con-duct activities to voluntarily achieve the recommen-dations of the Council specified in item 5.

COGME Reports

Since its establishment, COGME has submit-ted the following reports to the DHHS Secretaryand Congress:

• First Report of the Council (1988)

• Second Report: The Financial Status of Teach-ing Hospitals and the Underrepresentation ofMinorities in Medicine (1990)

• Scholar in Residence Report: Reform in Medi-cal Education and Medical Education in theAmbulatory Setting (1991)

• Third Report: Improving Access to HealthCare Through Physician Workforce Reform:Directions for the 21st Century (1992)

• Fourth Report: Recommendations to ImproveAccess to Health Care Through PhysicianWorkforce Reform (1994)

• Fifth Report: Women and Medicine (1995)

• Sixth Report: Managed Health Care: Implica-tions for the Physician Workforce and Medi-cal Education (1995)

• Seventh Report: Physician Workforce Fund-ing Recommendations for Department ofHealth and Human Services’ Programs (1995)

• Report to Congress: Process by which Inter-national Graduates are Licensed to Practice inthe United States (1995)

viThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

• Eighth Report: Patient Care Physician Supplyand Requirements: Testing COGME Recom-mendations (1996)

• Ninth Report: Graduate Medical EducationConsortia: Changing the Governance ofGraduate Medical Education to Achieve Phy-sician Workforce Objectives (1997)

• Tenth Report: Physician Distribution andHealth Care Challenges in Rural andInner-City Areas (1998)

• Eleventh Report: International Medical Gradu-ates, The Physician Workforce and GME Pay-ment Reform (1998)

• Twelfth Report: Minorities in Medicine (1998)

• Thirteenth Report: Physician Education for aChanging Health Care Environment (1998)

• Fourteenth Report: COGME PhysicianWorkforce Policies: Recent Developments andRemaining Challenges in Meeting NationalGoals (1998)

COGME Resource Papers

• Preparing Learners for Practice in a ManagedCare Environment (1997)

• International Medical Graduates: ImmigrationLaw and Policy and the U.S. PhysicianWorkforce (1998)

viiThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

Members, Council on Graduate Medical Education

MembersChairDavid N. Sundwall, M.D.PresidentAmerican Clinical Laboratory AssociationWashington, D.C.

Macaran A. Baird, M.D.Associate Medical Director for Primary CareHealthPartnersBloomington, Minnesota

Regina M. Benjamin, M.D., M.B.A.Family PracticeBayou La Batre, Alabama

F. Marian Bishop, Ph.D., M.S.P.H.Professor and Chairman EmeritaDepartment of Family and Preventive MedicineUniversity of Utah School of MedicineSalt Lake City, Utah

Jo Ivey Boufford, M.D.Dean, Robert F. Wagner Graduate School of

Public Service, New York UniversityNew York, New York

William ChingMedical StudentNew York University School of MedicineNew York, New York

Ezra C. Davidson, Jr., M.D.Professor, Department of Obstetrics and

GynecologyKing/Drew Medical CenterLos Angeles, California

Carl J. Getto, M.D.Dean and ProvostSouthern Illinois University School of MedicineSpringfield, Illinois

Kylanne GreenSenior ConsultantCoopers and LybrandWashington, D.C.

Ann KempskiAssistant Director Health PolicyAmerican Federation of State, County and

Municipal EmployeesWashington, D.C.

Lucy Montalvo-Hicks, M.D, M.P.H.State of California Department of Social ServicesSan Diego, California

Susan Schooley, M.D.Chair, Department of Family PracticeHenry Ford Health SystemDetroit, Michigan

Donald C. Thomas, III, M.D.Chief Medical OfficerLos Angeles County Health SystemLos Angeles, California

Douglas L. Wood, D.O., Ph.D.American Association of Colleges of Osteopathic

MedicineChevy Chase, Maryland

Designee of the Assistant Secretary for HealthNicole Lurie, M.D., M.S.P.H.Principal Deputy Assistant Secretary for HealthU.S. Department of Health and Human ServicesWashington, D.C.

Designee of the Health Care FinancingAdministration

Tzvi M. HefterDirector, Division of Acute CareCenter for Health Plans and ProvidersHealth Care Financing AdministrationU.S. Department of Health and Human ServicesBaltimore, Maryland

Designee of the Department of Veterans AffairsGloria Holland, Ph.D.U.S. Department of Veterans AffairsWashington, D.C.

Statutory MembersDavid Satcher, M.D.Assistant Secretary for Health and Surgeon

GeneralU.S. Department of Health and Human ServicesWashington, D.C.

Nancy-Ann Min DeParleAdministrator, Health Care Financing

AdministrationU.S. Department of Health and Human ServicesBaltimore, Maryland

viiiThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

Kenneth Kizer, M.D., M.P.H.Undersecretary for HealthVeterans Health AdministrationU.S. Department of Veterans AffairsWashington, D.C.

Recent Former MembersFormer COGME Vice ChairLawrence U. Haspel, D.O.Senior Vice-PresidentMetropolitan Chicago Health Care CouncilChicago, Illinois

Paul W. Ambrose, M.D.Resident, Dartmouth Family Practice ProgramConcord, New Hampshire

JudyAnn Bigby, M.D.Division of General MedicineBrigham and Women’s HospitalBoston, Massachusetts

Sergio A. Bustamante, M.D.Neonatology Associates LimitedPhoenix, Arizona

Former Designee of the Department of VeteransAffairs

David P. Stevens, M.D.Chief Academic Affiliations OfficerU.S. Department of Veterans AffairsWashington, D.C.

COGME StaffCarol Bazell, M.D., M.P.H.DirectorDivision of Medicine and Dentistry

Stanford M. Bastacky, D.M.D., M.H.S.A.Acting Executive SecretaryChief, Medical and Dental Education BranchDivision of Medicine and Dentistry

F. Lawrence Clare, M.D., M.P.H.Former Deputy Executive SecretaryFormer Deputy Chief, Special Projects and Data

Analysis BranchDivision of Medicine and Dentistry

P. Hannah Davis, M.S.Staff Liaison, Graduate Medical EducationFinancing and PolicyMinorities in Medicine Issues

C. Howard Davis, Ph.D.Staff Liaison, Medical Credentialing and

International Medical Graduate Issues

Jerald M. KatzoffStaff Liaison, Graduate Medical EducationFinancing and PolicyPhysician Workforce Issues

Helen K. Lotsikas, M.A.Staff Liaison, Competencies for A New

Environment

John Rodak, M.S. (Hyg.), M.S. (H.S.A.)Staff Liaison, Geographic Distribution Issues

Eva M. StoneCommittee Management Assistant

Velma ProctorSecretary

Georgia WashingtonSecretary

ixThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

ACKNOWLEDGEMENTS

This report was prepared with the assistance ofmany people, from those who kindly providedroutine data to those who steadfastly stood byme explaining complicated issues. I appreciateall your help. I particularly wish to acknowledgeF. Lawrence Clare, M.D., M.P.H., former COGMEDeputy Executive Director, for his leadership andguidance on the direction of the report and particu-

lar help in the specifics of the subject area of GME.I also thank Stanford M. Bastacky, D.M.D.,M.H.S.A. and Carol Bazell, M.D., M.P.H. for theirguidance in writing this paper. I also wish to ac-knowledge the support of COGME members, andthe GME Financing Workgroup in particular, indeveloping this paper.

xThe Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

1The Effects of the Balanced Budget Act of 1997 on Graduate Medical Education

The Effects of the Balanced Budget Act of 1997 onGraduate Medical Education

On August 5, 1997, President Clinton signedinto law the Balanced Budget Act of 1997(BBA), an omnibus legislative package pri-

marily intended to balance the federal budget by2002. This legislation contained major Medicarereforms, including a number of provisions that im-pact graduate medical education (GME). The BBAreforms encompassed some of the most sweepingchanges in Medicare GME payment in the historyof the program. Given the high level of Medicaresupport of GME training, approximately $6.8 bil-lion paid to teaching hospitals in 1997, thesechanges could have a major effect on the physicianworkforce, from supply and geographic distribu-tion to the setting of training. It has been noted thatthis country has an imbalance in physician supply,specialty mix and geographic distribution.1 Theprovisions of the BBA seemed likely to amelioratethese concerns by removing incentives for contin-ued growth in the numbers of residents. It also pro-vided incentives for training in out-of-hospital set-tings which would sustain primary care and ruraltraining.

However, the BBA may have financially hurtsome of the nations’s teaching hospitals, consid-ered by some to be the “crown jewels” of the Ameri-can health care system. The BBA may have yieldedother unintended consequences as well. This papercovers the GME provisions of the BBA and theireffects on the training of the nation’s residents. Itdiscusses the concerns of financial burden expressedby some, and examines actual data to determine ifthese fears are objectively founded. Some of theeffects on primary care and rural practice are ex-amined. The paper then discusses a recent billpassed by Congress and signed into law to makecorrections and refinements to the BBA. The GMEprovisions of the new legislation, the BalancedBudget Refinement Act of 1999 (BBRA), are in-tended to provide relief to teaching hospitals andphysicians for what are perceived to be some of theBBA’s unintended consequences.

MEDICMEDICMEDICMEDICMEDICARE SUPPORARE SUPPORARE SUPPORARE SUPPORARE SUPPORT OF GMET OF GMET OF GMET OF GMET OF GMETeaching hospitals provide valuable services to

both Medicare beneficiaries and non-beneficiaries.The GME training of physicians and other health

professionals in teaching hospitals is key to pro-viding the nation with its supply of high-qualityphysicians, as well as enhancing the quality of careprovided to hospital patients. Teaching hospitals arealso in the forefront of medical research and tech-nological innovations. They serve a disproportion-ately large number of patients who are poor, verysick and uninsured. Medicare payments to teach-ing hospitals were designed to create incentives forteaching hospitals to serve Medicare beneficiaries,as well as to support the training of physicians tomeet beneficiaries’ medical needs.

Medicare makes two types of payments to sup-port training programs in teaching hospitals for phy-sicians. The Direct Medical Education (DME) pay-ment helps defray the direct costs of trainingphysicians, such as salaries and fringe benefits ofmedical residents and faculty, and hospital over-head expenses. The Indirect Medical Education(IME) payment covers the additional operatingcosts that teaching hospitals incur in patient care,such as the costs associated with offering abroader range of services, using more intensivetreatments, treating sicker patients, and using acostlier staff mix.

Despite numerous recommendations that thenumber of residency positions in the UnitedStates needs to be decreased, the number increasedsubstantially between 1985 and 1996.2 ,3 ,4 A majorcause may be the way Medicare reimbursed forGME. The DME and IME payments provided astrong incentive to hospitals to continue increas-ing their number of residents. Residents, forwhom reimbursement is obtained from Medicare,provide services inexpensively and more flexiblythan full-priced physicians and nurses. It was lu-crative for hospitals to expand their residencyslots. However, this changed when the BBAcapped the number of residents qualifying forDME reimbursement at the number reported onor before December 31, 1996 and initiated aphased-in reduction of the IME adjustment fac-tor. (The Act did allow for establishment of newrural-based residency training programs.)

Overall, the effectiveness of the BBA in re-straining GME growth is difficult to assess becauseof confounding factors, insufficient data and diffi-culty in attributing cause to changes in numbers.


PROPROPROPROPROVISIONS OF THE BBVISIONS OF THE BBVISIONS OF THE BBVISIONS OF THE BBVISIONS OF THE BBAAAAAAFFECAFFECAFFECAFFECAFFECTING GMETING GMETING GMETING GMETING GME

Congress passed the BBA in 1997 partly in orderto place some controls on the continuing growth ofGME positions. The BBA contains several importantchanges in the GME funding mechanisms, designedto affect the number and mix of residents trained.The relevant provisions are:

1. A cap on total residents funded by Medicare.The number of residents for whom DME andIME can be claimed is limited to the full-timeequivalent (FTE) count of residents enrolledin the hospital program in the hospital’s mostrecent cost reporting period ending on or be-fore December 31, 1996 and was made effec-tive in the first cost reporting period begin-ning on or after October 1, 1997.

2. A reduction in the IME Medicare adjustmentfactor from 7.7 percent per 0.1 intern/resident-to-bed (IRB) ratio in FY 1997 to 7.0 percentin FY 1998, 6.5 percent in FY 1999, 6.0 per-cent in FY 2000, and 5.5 percent in FY 2001and subsequent years.

3. A cap on the IRB ratio, which is used in cal-culating the Medicare IME payment. Ahospital’s IRB ratio is limited by the prioryear’s IRB ratio, which then acts as an IRBcap, making it essentially a one-year laggedcap.

4. GME payments to non-hospital settings.Qualified non-hospital providers such as fed-erally qualified health centers (FQHC), ruralhealth clinics (RHC), and Medicare+Choiceorganizations, are permitted to receive DMEpayments for resident training that takes placein those settings if the non-hospital providerbears all or substantially all of the costs oftraining in the non-hospital setting (Table 1).

5. Medicare IME payments to hospitals (as wellas the DME payments they were previouslyable to get) for the time residents train at non-hospital ambulatory sites (such as health cen-ters, HMOs, physician offices) if the hospitalincurs all or substantially all the training costsat that site (Table 1).

6. An ability for hospitals to affiliate for the pur-pose of establishing an aggregate full-timeequivalent (FTE) cap. Hospitals under com-mon ownership, or in the same or contiguousMetropolitan Statistical Areas (MSAs), orjointly listed as sponsors of a residency pro-gram, can affiliate to combine their FTE capsto create an “aggregate cap.” Each hospital has

its own FTE residency cap, but hospitals thatdo not fill their caps may affiliate with hospi-tals that want to exceed their caps, if all hos-pitals in the affiliated group agree. The totalnumber of reimbursable residents for all thehospitals in the affiliated group may not ex-ceed the aggregate cap.

7. A three-year rolling average (two years for ahospital’s first cost-reporting period beginningon or after October 1, 1997) for calculatingthe number of residents for DME and IMEpayments to hospitals to soften the impact ofreductions in numbers of residents.

8. Making available Medicare+Choice DME andIME funds that used to go to managed careorganizations to teaching hospitals forMedicare+Choice patients. This “carve-out”increases in 20 percent increments from 20percent for portions of the hospital cost re-porting period beginning on or after January1, 1998 to 100 percent in 2002.

9. A voluntary resident reduction program wherehospitals in the U.S. that voluntarily reduceresidents by at least 20 percent over the five-year period, are eligible for transition funding.This could allow hospitals transitional fundingto hire replacement staff or redesign services.(This program was modeled after the New YorkMedicare resident reduction demonstration.)

10. A GME demonstration project involving sev-eral consortia. The Secretary of the Depart-ment of Health and Human Services (DHHS)will establish a demonstration project that willpay DME payments to a small number of con-sortia. On January 5, 2000, a solicitation forparticipation in the demonstration was pub-lished in the Federal Register.

11. A DHHS study of the large variation in DMEpayment levels by facility. The Health CareFinancing Administration (HCFA) is currentlyin the process of writing that report to Congress.

The BBA cap on the number of residents is notapplied to new programs established in ruralunderserved areas (non-MSAs according to inter-pretation by HCFA) until they have had three years tofill their resident cohorts, and to hospitals that havenot had residency programs prior to January 1, 1995.

The provisions that appear to have raised themost concern are the per-hospital cap on the num-ber of residents and the reduction in the IME ad-justment factor. The cap on the number of residentsdiscourages facilities from adding or expandingresidency programs. It is an across-the-board capthat limits the total numbers of residents, but in the


process, can hamper expansion of primary care spe-cialties when hospitals do not make correspondingcuts in specialists. Although beneficial from thestandpoint of curbing an oversupply of residentsbeing trained and funded by Medicare, the limita-tion on primary care residents may conflict withthe general goals of the Council on Graduate Medi-cal Education (COGME) to promote the educationand training of a mix of physicians consistent withcurrent and future health care needs including inrural areas. Nevertheless, if the provisions lead to aslowdown in the growth rate of the physicianworkforce, while maintaining or increasing thenumber of primary care physicians, then the legis-lation is in line with COGME recommendations.2

The decreasing IME adjustment factor reducesIME payments to teaching hospitals. The IME ad-justment factor is linked to the IRB ratio, whichparticularly affects academic health centers becausethey typically have the highest resident-to-bed ra-

tios. The resulting reduction in IME payments willbe offset to some extent by the Medicare “carve-out” provision, which secures a major source ofGME funding for teaching facilities, by removingthe GME portion of payments to managed care or-ganizations and providing them to teaching hospi-tals for treating Medicare managed care enrollees.IME payments amount to approximately two-thirdsof the $6.8 billion for GME paid annually by Medi-care to teaching hospitals. In FY 1997 they totaled$4.6 billion.5 The changes in the calculation of IMEas a result of the BBA would have resulted in a 29percent reduction in IME funding to hospitals atthe end of the five-year phase-in period.6, *

* The full reduction in the IME payment has been delayed bytwo years as a result of the recent passage of the MedicareBalanced Budget Refinement Act of 1999 (BBRA). ForFY2000 and FY2001, the IME adjustment factor is set athigher levels than the original BBA provided for. The fulldecrease still takes place in FY2002. The BBRA is discussedfurther on page 10.

TABLE 1Medicare Payments to Hospitals and/or

Ambulatory Sites, Pre and Post BBA of 1997

Pre-BBA Post-BBA Pre-BBA Post-BBA

DME IME

Hospital inpatient orhospital-ownedoutpatient

Yes Yes Yes Yes

Non-hospitalambulatory entity(free standing)

Yes–payment to hospitalwhen it paysresident salaries

Yes–payment to hospitalwhen it bears all orsubstantially alltraining costs1

No–payment was not anoption under federalstatute

Yes–payment to hospitalwhen it bears all orsubstantially alltraining costs1

Non-hospitalambulatory entity(free standing)

No–payment was not anoption under federalstatute

Yes–payment toambulatory sitewhen it bears all orsubstantially alltraining costs1,2

No–payment was not anoption under federalstatute 3

No–no payment toambulatory site,even when it bearsall or substantiallyall training costs1,3

All hospital outpatient facilities affiliated with a hospital are paid by hospital inpatient rules.Free standing means not hospital owned or operated.

Hospital

Ambulatory:Federally QualifiedHealth Center(FQHC), RuralHealth Clinic (RHC)or Medicare+ChoiceEntity

1 “Substantially all” was redefined in the regulations implementing payments to non-hospital facilities to require payment for residentsalaries and fringe benefits, faculty teaching costs and travel costs. Previously, it had been defined as only residents’ salary and fringebenefits.

2 Payments based on reasonable cost determinations.3 Although there are no provisions in the statute allowing IME payments to FQHCs and RHCs, those that engage in training may have

higher operating costs which may be compensated as long as they do not exceed the operating payment caps determined by Medicare.

Training Site(rotations)

Medicare PaymentRecipient and

Bearer of Costs


The voluntary resident reduction program canbe a windfall to hospitals that already intended toreduce their training efforts. For them the incen-tive payments are bonus money. For hospitals thatwere simply considering trimming their programs,the voluntary reduction program can be the incen-tive that encourages them to do it.

The BBA provides for the establishment of aconsortium demonstration project. This is in align-ment with a previous COGME recommendationthat the federal government fund twelve consortiumdemonstrations. In COGME’s recommendation, theprojects must be committed to providing a cost-effective administrative framework within whicheducation and workforce reform can occur.7

CONCERNS WITH THE FINANCIALCONCERNS WITH THE FINANCIALCONCERNS WITH THE FINANCIALCONCERNS WITH THE FINANCIALCONCERNS WITH THE FINANCIALEFFECEFFECEFFECEFFECEFFECTTTTTS OF THE BBS OF THE BBS OF THE BBS OF THE BBS OF THE BBAAAAA’S GME’S GME’S GME’S GME’S GMEPROPROPROPROPROVISIONSVISIONSVISIONSVISIONSVISIONS

The reduction in the IME payments has led toanecdotal reports that teaching hospitals are expe-riencing diminishing revenues and profit margins,and in some cases losing money. The Associationof American Medical Colleges (AAMC), Ameri-can Hospital Association (AHA) and other groupshave expressed concern over the IME provisions.Other organizations have joined them in espousingthe BBA as harmful to the financial viability ofteaching hospitals and their mission to providegraduate medical training, and service to the poor,uninsured, and very sick.

Predictions have been made that the BBA cutscould force some of the nation’s leading teachinghospitals to reduce the scope of their services. Al-though these predictions may be valid, empiricaldata have not yet been sufficiently available to showwhether teaching hospitals have suffered financiallyfrom the GME provisions of the BBA. Dr. GailWilensky of the Medicare Payment Advisory Com-mission (MedPAC) recently stated that systematicdata since the BBA was enacted are very limitedand she expressed doubt about the usefulness ofreports issued by the hospital industry with projec-tions showing an adverse financial impact from theBBA on providers. MedPAC found that the projec-tions used in these analyses portrayed an inaccu-rate picture by assuming a rate of increase in costssubstantially higher than what is known to haveoccurred.8

Further, there are no data on how private pay-ers and the marketplace may have contributed toany financial problems. Traditionally the paymentsprivate third-parties made to hospitals on behalf oftheir insured patients exceeded Medicare and Med-

icaid payments in covering costs. Private insurersprovided substantial support indirectly by payinghospitals for their activities that were substantiallyhigher than the cost of producing patient care.9

Since the early 1990’s however, private insurershave wrung substantial prices concessions fromhospitals by exploiting the system’s excess capac-ity. Furthermore, it is frequently stated that privatepayers are increasingly unwilling to accept pricesthat reflect subsidies for GME. To maintain theirmarket shares, some hospitals may have accededto the demand for lower prices, sometimes belowtheir costs.

Dr. Murray Ross, executive director of MedPACstated “. . . we should not assume that the BBA isthe entire problem. For several years, Medicare’spayments rose faster than its costs, and the incomethis generated made it easier for hospitals to grantthe discounts private payers demanded. Medicarepayments are now rising more slowly than costs,and yet private insurers most likely have not less-ened their demands. We believe that continuingpressure from the private sector has contributed sub-stantially to the degree of financial distress hospi-tals are currently experiencing.” Rep. Pete Stark (D-CA) echoed this sentiment in a written statement“If Medicare payments are not covering reasonablecosts, then they should be adjusted. But if Medi-care payments are adequate to pay for Medicarefee-for-service patients and are being used to cross-subsidize losses on managed care contracts, whyshould we ask taxpayers to make up the differ-ence?”10

Residents and interns are a relatively inexpen-sive and versatile source of labor for teaching hos-pitals. Residents are often more cost-effective touse for providing patient care than practicing phy-sicians and other health professionals. Residentsgenerate revenue beyond their total salary and ben-efits. With the long hours of service provided byresidents, the cost of GME programs might beviewed as a bargain.11 It is understandable that hos-pitals that shift their hiring practices away fromresident physicians as a result of the GME provi-sions of the BBA may incur additional costs.

The effects of capping residents paid by Medi-care and the decreasing IME adjustment factor bythemselves might not be detrimental to teachinghospitals’ financial health. The GME provisions ofthe BBA together with other Medicare rules andchanges in the marketplace may be behind some ofthe financial pressures on teaching hospitals. Hos-pitals are simultaneously affected by other factorsthat lower Medicare expenditures, such as greatercompliance with Medicare payment rules and alonger time for processing claims.12 At the same


time managed care is increasing and a price-basedcompetitive system is emerging.13 These financialpressures may be inextricably linked, making itimpossible to attribute blame solely to the GMEprovisions of the BBA.

It is difficult to find empirical, evidence-basedinformation that supports concerns of either adverseeffects or no effects from the GME provisions.However as time passes, more data are becomingavailable that should show credible post-BBAtrends, and enable a clearer evaluation than cur-rently possible with projected simulation models.A remaining problem that complicates a clear analy-sis is that national data can mask trends in localmarkets.

GME ACGME ACGME ACGME ACGME ACTIVITY TRENDSTIVITY TRENDSTIVITY TRENDSTIVITY TRENDSTIVITY TRENDSTrend data on the numbers of residents, first-

year residents and residency programs over the pastsix years show very little change, and no signifi-cant patterns. Even when there are small differencesin numbers since 1997-98, they cannot be attributedto reduced GME funding as a result of the BBA, be-cause other factors may confound that conclusion.Therefore the available data only enable a look atthe trend, without establishing a definitive cause.

The total number of residents enrolled inACGME-accredited and combined GME programsrose by a negligible amount each year from 1993-94 to 1997-98, and then, in the one year from 1997-98 to 1998-99, fell by nearly 800, making the 1998-99 number of total residents virtually equal to the1993-94 number (Table 2). This pattern did not hold

with first-year residents. From 1997-98 to 1998-99total first-year residents climbed slightly, from24,516 to 24,571 while those with no prior GMEdropped slightly, from 21,808 to 21,732. Between1993-94 and 1998-99, total first-year residentsdropped by 6 percent, while first-year residents withno prior GME was virtually unchanged.14 Thesenumbers show no pattern that may be linked to theBBA.

While there was no increase in the number oftotal residents between 1993-94 and 1998-99, thenumber of U.S. medical school graduates (USMGs)comprised a decreased number and percent of totalresidency slots (Table 2).

But that was not the case for international medi-cal graduates (IMGs). The total number of IMGresidents, while fluctuating somewhat, increased bya striking 11.9 percent between 1993-94 and 1998-99, compared to USMG residents which decreasedby 4.5 percent. The growth in the number of resi-dents clearly has been fueled by IMGs. One of therecommendations COGME has supported is elimi-nation of Medicare support for new exchange visi-tor IMGs. COGME believes that Medicare GMEpayments should be available only for residentsexpected to become part of the U.S. physicianworkforce.

There were no significant differences in thenumbers and distributions of minorities enteringU.S. GME programs during the past three years.The percent of black residents grew slightly, whilethe aggregate number of Hispanic residents re-mained stable.15

In spite of the relative sta-bility of total resident numbers,the number of ACGME-accred-ited and combined residencyprograms grew since 1993-94from 7,435 to 7,892 in 1998-99 (Table 2). The major in-crease in these programs wasamong subspecialties, whichgrew 10 percent in this period,from 3,230 to 3,561. Yet thenumber of residents in subspe-cialty programs actually fell by2 percent during this time, from12,012 to 11,752.16

The numbers of residentsand programs show no clearpattern. Without additionaldata, it is impossible to evalu-ate the specific effects of theBBA on these numbers.

1993-94 7,435 97,370 70,218 72.1 22,721 23.3

1994-95 7,509 97,832 67,524 69.0 23,499 24.0

1995-96 7,657 98,035 68,647 70.0 24,982 25.5

1996-97 7,787 98,076 66,893 68.2 24,703 25.2

1997-98 7,861 98,143 67,111 68.4 25,531 26.0

1998-99 7,892 97,383 67,085 68.9 25,415 26.1

Year

U.S. Medical SchoolGraduate Residents

PercentNumber

International MedicalGraduate Residents

PercentNumber

Numberof

Programs

NumberTotal

Residents 1

TABLE 2

ACGME-Accredited and Combined Specialty GMEPrograms and Residents

1 Includes DO, Canadian and Unknown residents. Source: JAMA, September 1, 1999


EFFECEFFECEFFECEFFECEFFECTTTTTS ON TRAINING INS ON TRAINING INS ON TRAINING INS ON TRAINING INS ON TRAINING INPRIMARPRIMARPRIMARPRIMARPRIMARY CARE SPECIALY CARE SPECIALY CARE SPECIALY CARE SPECIALY CARE SPECIALTIESTIESTIESTIESTIESAND FOR RURAL PRAAND FOR RURAL PRAAND FOR RURAL PRAAND FOR RURAL PRAAND FOR RURAL PRACCCCCTICETICETICETICETICE

This section discusses unintended conse-quences from the GME provisions of the BBA onthe training of primary care residents and the train-ing of physicians for practice in rural underservedareas. These residents are addressed because theyare of prime interest to COGME, which supportsexpansion of primary care specialties and practicein rural areas. Additionally, some of the primarycare specialties may have been especially affectedby the resident caps due to their outpatient trainingcharacteristics and the increasing number of pri-mary care residents.

FFFFFAMILAMILAMILAMILAMILYYYYY M M M M MEDICINEEDICINEEDICINEEDICINEEDICINE

COGME is particularly interested in familymedicine because that specialty has been more suc-cessful than any other in meeting COGME’s goalof training physicians who subsequently practicein rural areas. Family medicine is distinct in dis-tributing physicians in urban and rural areas in pro-portion to the general U.S. population.17

Several characteristics of family medicine resi-dency training make it especially vulnerable to theGME provisions of the BBA. It is the only specialtythat historically has trained a large number of resi-dents in ambulatory settings. At any one time, ap-proximately one-third of its residents are receivingambulatory training. Second, family medicine is arelatively new and growing specialty. Its expansionwas continuing when the statutory cap on the num-ber of residents was imposed as of December 31,1996. Finally, two out of every five of its residencyprograms are the sole programs in hospitals, limitinghospitals’ options to shift resources to this specialty.

Family practice is always training some of itsresidents at non-hospital affiliated ambulatory sites.Ten percent of the ambulatory settings to whichfamily practice residency programs typically rotateapproximately one-third of their residents are non-hospital affiliated. This translates to an estimated250 to 350 family medicine residents (out of a totalof approximately 10,000) who are training in free-standing settings.

A primary impact of the BBA cap on the num-ber of residents in the hospital at the December 31,1996 level is that some family practice residencyprograms did not have their full residency FTEscaptured in the 1996 cost reports upon which thecap is based. That is because some residents whowere on board at the time but training outside thehospital in non-hospital affiliated ambulatory sites

were not counted toward the cap since the cap cov-ers residents in the hospital on the cutoff date.18

This results in an inability for the hospitals and pro-grams to begin claiming Medicare reimbursementsfor those residents, under the cap.

In addition, the December 31,1996 statutoryresident cap applied to programs that had alreadybeen fully established for all three post graduateyears (PGY) that may not have filled each post-graduate class in its entirety. These generally wouldbe newer programs established prior to the statu-tory cap that did not have sufficient time to grow tofill each class to its full extent. Family medicinewould be affected by this situation because it hasbeen a growing specialty, increasing by a net of 11or 12 programs annually in its climb from 380 pro-grams in 1990 to 476 in 1998.19

Hospitals generally have the flexibility to rear-range residents between specialty programs. Thisgives hospitals the ability to augment or decreasecertain specialty programs, based on their needs,provided they have the Accreditation Council forGraduate Medical Education (ACGME) slots avail-able, and as long as the hospital does not exceed itsFTE resident cap. Because 40 percent of familymedicine training programs are the sole residencyprograms in hospitals, these hospitals cannot shiftresident resources from other specialties.20

Since passage of the BBA, family practice hasexperienced its first drop in the number of residencyprograms in almost a decade. From 1998 to1999,the number of family medicine residency programsdeclined by two to 474, reversing a trend of growthsince 1990. At the time the statutory cap was im-posed, nine programs were in the pipeline forACGME accreditation. At this time, it is not knownexactly how many were unable to open. Some mayhave merged; some may have found a way to be re-sponsored by hospitals that never had residencytraining programs.

Family medicine produces more physicianswho ultimately practice in rural areas than any otherspecialty. Nearly one in four of their graduates prac-tices in rural, non-MSA counties. This comparesto approximately 8 percent each for general inter-nal medicine and pediatrics.21 One method familypractice uses to train physicians is through sepa-rately accredited rural training tracks which pro-vide two years of rural training to residents after aninitial year in a non-rural sponsoring institution.Family medicine is the only specialty that uses arural track mechanism.22 Twenty-nine of the 474family medicine programs have these rural train-ing tracks. Rural practice retention rates from thesetracks are high, with 58 to 75 percent ultimately


practicing medicine in rural settings. At least elevenof these tracks have a one hundred percent reten-tion rate of residents practicing in rural areas upongraduation.23

The provision of the BBA that caps the numberof residency slots has inhibited expansion of thesetracks. Although a hospital can reallocate residentsbetween residency programs, this can work to de-crease ambulatory training as much as it can to in-crease it. And although the BBA allows the cap onresidents to be adjusted for the establishment of newprograms in rural underserved areas, family medi-cine cannot start new rural training tracks becausethese programs are hosted in non-rural hospitalswhich have not been allowed the adjustment to thecap that is granted for new rural-based programs.(See “Rural Practice” on page 9.)*

Data suggesting an impact from the BBA onfamily medicine training are available from the re-sults of a survey conducted by the American Acad-emy of Family Physicians (AAFP) and from datafrom the 1999 National Residency Matching Pro-

gram (NRMP) match. The AAFP conducted a sur-vey of the 474 family medicine residency programsin October, 1998. Of these, 282 programs re-sponded, a 60 percent response rate. The data, notyet publicly released, are summarized in Table 3.24

While these results have not yet been fully ana-lyzed by AAFP, they suggest a possible plateau inthe numbers of programs and residents, with thepotential for an eventual decline. Although nearlythe same number of programs were increasing theirresidents as decreasing them, 45 programs had beentold by their sponsoring institutions to decreasetheir number of residents within the next three years.

The results also indicate a significant reductionin the number of new rural tracks that were stillbeing planned after passage of the BBA. Prior tothe BBA, 45 programs were planning a new ruraltraining track; after the BBA, only 24 programswere continuing with this plan.

NRMP data also suggest a plateau in the num-ber of family medicine residents being trained. Thematch results for 1999 show that for the first timein a decade, family medicine did not offer a grow-ing number of family medicine resident positions.In addition, the number of second year positionswhich has usually grown each year by approxi-mately100 due to new residents entering from oste-opathy and other sources, grew by only ten in 1999.

As of July 1, 1999, there were 10,632family practice residents, approximatelythe same number as the year before. Ab-sent a net shift of residents into family medi-cine from other specialty programs, thenumber of family medicine residents willprobably stabilize at approximately 10,600.

INTERNAL MEDICINE

The specialty of internal medicine maybe seeing an indication that a few residencyprograms are closing. In 1999, seven pro-grams requested voluntary withdrawal fromthe residency review committee (RRC) ac-creditation process. This compares to ninevoluntary withdrawals in 1998, five in1997, three in 1996 and none in 1995.25

The RRC does not track the reason that resi-dency programs request voluntary with-drawal. In most cases they are assumed tohave merged with training programs inother institutions, although it is known thatat least one program in Cleveland closedeffective December 31, 1999.26,27 Evenwith this information, and a slightly in-creasing trend in the numbers of internalmedicine training programs requesting

* The capping of resident slots in rural areas and the adjust-ment to the cap for rural-based programs as provided for bythe BBA was modified in the BBRA, which allows for count-ing additional primary care residents, GME payments for non-rural facilities operating programs with rural training tracks,and certain urban hospitals being reclassified as rural facili-ties. The BBRA is discussed further on page 10.

TABLE 3Responses to AAFP Survey of Family Practice

Residency Programs ’ Expansion Plans

Family medicine programs responding to survey

PROGRAM NUMBERS

Program is closing

Program is increasing the number of residents this year

Program is decreasing the number of residents this year

Program not decreasing the number of residents this year,but told they will have to within the next three years

RURAL TRACK NUMBERS

Programs planning a new rural track prior to the BBA

Programs still planning a new rural track

Programs planning the same size new rural track

Numberof

Programs

TotalPrograms

282 474

5 282

25 282

27 282

45 282

45 282

24 45

20 24

Source: Unpublished Data, AAFP, October, 1998


voluntary withdrawal, there are no causal data avail-able to show that the closure was a result of theGME provisions of the BBA. Anecdotally the BBAis blamed for many of the financial problems beingexperienced by hospitals and internal medicine resi-dency programs, as it is for other specialties.

It is possible that the trend in the numbers ofinternal medicine residents may reveal a slight pat-tern that could be linked to the BBA. The total num-ber of internal medicine residents enrolled inACGME-accredited and combined GME programsrose each year from 1995 to 1997, and then, in theone year from 1997 to 1998 fell by nearly 600,making the 1998 number of residents virtually equalto the 1995 number (Table 4). This trend mimicsthe pattern with total residents discussed in the sec-tion “GME Activity Trends”.

Residents in internal medicine subspecialtyprograms declined steadily between 1995 and 1998,with the largest drop from 1995 to 1996. The num-ber of internal medicine residency programs wasvirtually unchanged since 1995, and the number ofsubspecialty programs declined slightly each year.In all, there is very little evidence at this time toshow that the numbers of internal medicine resi-dents and programs are affected by the BBA.

PPPPPEDIAEDIAEDIAEDIAEDIATRICSTRICSTRICSTRICSTRICS

Since Medicare payments for GME training area function of the percent of inpatient days attribut-able to Medicare patients, reimbursement for pedi-atric GME largely occurs in non-children’s hospi-tals caring for both adult and pediatric patients. Inpediatrics, the general sense among medical edu-cators is that when money gets tight, pediatric pro-grams in non-children’s teaching hospitals suffer.Adult services are often more profitable to hospitals,so when a hospital needs to cut back on a programor residents, some believe that pediatrics is one ofthe first programs to be eliminated or reduced.

It is difficult to determine if areduction in the production ofpediatricians would be accept-able, given that there may be anoversupply of pediatricians.28

Recent analyses of the physicianworkforce have yielded widelydisparate estimates of how appro-priately physician supply willmatch demand in the 21st cen-tury.29 Because of the high out-put of training programs, the rateof growth in the pool of practic-ing pediatricians is outpacing therate of growth in the population

of children.30 The number of pediatricians per100,000 U.S. children is increasing and projectedto increase further. The number of pediatric resi-dents climbed from 7,354 in 1995 to 7,728 in 1998(Table 5).

Yet pediatric physician shortages remain in ru-ral areas, remote frontier areas and impoverishedurban areas. Moreover, there does not seem to bean oversupply of pediatric subspecialists. In fact,there is concern that some subspecialties withinpediatrics may be experiencing shortages. From1995 to 1998, the number of residents in pediatricsubspecialty programs fell from 1,536 to 1,482, atrend that is mirrored across all specialties. Thisoccurred while the number of pediatric subspecialtyprograms has been steadily increasing and new sub-specialty categories have been added.

As of December, 1998, 11,823 pediatricsubspecialists had been certified by the AmericanBoard of Pediatrics in 14 subspecialties, which rep-resents just under 18 percent of all board certifiedpediatricians.31 In recent years, there has been adecline in interest in pediatric subspecializationattributable to a number of changes in medicine: ashift to managed care; an increased emphasis onprimary care by payers; an increasing debt burdenamong residents; an increasing subspecialty facultydissatisfaction; and decreased research support.32

With both the percent and absolute number ofpediatric residents entering subspecialty trainingfalling, jobs are currently available in many sub-specialty areas.33,34 While a recent study of medi-cal journal recruitment advertisements for generalpediatricians shows a peak in 1990 followed by adecline, the number of positions advertised for pe-diatric subspecialists remained steady.35

Some in the pediatric medical education com-munity are concerned that the BBA cuts in GMEmay worsen the possibility of a subspecialistshortage. However, the number of pediatric

TABLE 4Internal Medicine Resident Physicians

and Programs, 1995 - 1998

Internal medicine residents 21,079 21,298 21,714 21,130

Internal medicine subspecialty residents 7,742 7,432 7,373 7,335

Internal medicine programs 416 417 415 410

Internal medicine subspecialty programs 1,499 1,496 1,443 1,397

Source: JAMA, Medical Education Issues, 1996 through 1999.

1995 1996 1997 1998


subspecialists had already begun to decline twoyears prior to the passage of the BBA. There are nodata which directly link the legislation to the trendsin pediatric GME.

A particular problem in financing pediatricGME is the extremely low level of Medicare pay-ment to “free-standing” children’s hospitals. Al-though about one-third of all general pediatric resi-dents and one-half of all pediatric subspecialistsare trained in free-standing children’s hospitals, lowMedicare utilization in these children’s hospitalskeeps them from receiving adequate Medicare sub-sidies for GME. The BBA addressed the ongoingissue of financing GME in children’s hospitals byrequesting that the MedPAC and National Biparti-san Commission on the Future of Medicare reviewthe issue. Legislation has subsequently been en-acted to begin to provide federal support for GMEin children’s teaching hospitals.

The American Academy of Pediatrics believesit is important to support efforts to assure that anadequate but not excessive number of well-trainedpediatricians enter the labor market in accordancewith the needs and numbers of U.S. children. Tothat avail, the Academy supports the establishmentof an independent, national heath care workforcecommission or policy body to project aggregateneed for the health care workforce including pe-diatricians, to determine the necessary number ofresidency positions on a national basis, to allocateresidency positions by specialty and subspecialty,to implement appropriate incentives to reinforce theselection of primary care, and to conduct ongoingresearch to ensure the availability of appropriatedata on which to base workforce decisions.36

RURAL PRACTICE

The number of physicians practicing in ruralareas has been inadequate. COGME has docu-mented that osteopathic physicians are proportion-ately more likely than allopathic physicians to be

located in rural areas. Among al-lopathic physicians, family prac-titioners are more likely to settlein rural areas than any other spe-cialty.37 Because family physi-cians comprise nearly half of theentire physician population in ru-ral areas, the impact of the BBAprovisions on family medicine isinextricably linked with the futuresupply of rural physicians. Limit-ing the number of residents in ru-ral areas could be detrimental tothe health care needs of ruralpopulations since restricting the

number of residents training in an area ultimatelylimits the pool of physicians most likely to settleand practice in that area. Studies confirm that resi-dents tend to settle close to their residency programand residents who train in rural settings are morelikely to settle there than their urban-based coun-terparts.38

There were some beneficial provisions in theBBA whereby GME could be used in a targetedway to particularly meet rural needs in overcom-ing physician shortages. The provisions allowed for1) the cap on residents to be adjusted for the estab-lishment of new programs in rural underserved ar-eas; 2) DME payments to institutions other thanhospitals, particularly federally qualified healthcenters (FQHC) and rural health centers (RHC) toencourage the placement of medical residents andinterns in rural settings (See Table 1); and 3) IMEpayments to teaching hospitals for resident timespent outside the teaching hospital to encouragehospitals to place residents in ambulatory settingswithout a loss of revenue (See Table 1).

However, implementation has shown that notall of these provisions have turned out to enhanceefforts to train physicians for practice in rural ar-eas. The rural exception to the hospital-specific capon residency slots in new programs applies only tohospitals physically located in rural areas. The capremains in effect for urban teaching hospitals withnew programs in rural training tracks or with ruralsatellite facilities. This provision particularly im-pacts family medicine, which cannot count residentsin new rural training tracks toward the cap, sincethey originate in non-rural institutions. The exact-ing interpretation used by HCFA has resulted invirtually excluding any growth in rural trainingtracks and rural-based satellite facilities. In ad-dition, existing rural programs are not allowed toexpand.

The provision of IME payments to teachinghospitals for residents in non-hospital settings is oflittle use when established residency programs are

TABLE 5Pediatric Resident Physicians and

Programs, 1995 - 1998

Pediatric residents 7,354 7,618 7,613 7,728

Pediatric subspecialty residents 1,536 1,530 1,490 1,482

Pediatric programs 215 216 216 209

Pediatric subspecialty programs 472 479 491 554

Source: JAMA, Medical Education Issues, 1996 through 1999.

1995 1996 1997 1998


capped only at the number that had actually beenin the hospital. Residents in the non-hospital sitesstill count against the hospital’s overall cap if thehospital bears all or substantially all training costs,while the hospital functions without those residentservices and cannot recruit other residents to fillthe loss. Thus hospitals are not anxious to transferresidents to outpatient rural settings because of theoverall cap limiting the total number of residents.

Finally, although DME payments can now bemade to FQHCs and RHCs, IME payments cannotbe made to either the non-hospital facility or to thehospital under that provision. At the same time, theDME component is usually too small to sustain aresident in most of these settings, because the pro-portion of Medicare patients upon which the DMEcalculation is based, is on average less than 10 per-cent. This provision leads to the need for stand-alone clinics to associate with a hospital in orderfor the hospital to capture the DME and IME.39

Rural hospitals are particularly dependent onMedicare revenue—more so than their urban hos-pital counterparts.40 Rural hospitals consider them-selves particularly vulnerable to the effects of theBBA. Recent data to bear this out come from aWWAMI Rural Health Research Center study ofsix well-managed rural hospitals. Case studies ofthese hospitals showed sudden financial difficultysince 1997, with fewer being profitable, and morehaving negative operating margins.41

MORE DAMORE DAMORE DAMORE DAMORE DATTTTTA WITH TIMEA WITH TIMEA WITH TIMEA WITH TIMEA WITH TIMEAlthough the conclusion cannot be reached that

the BBA has been responsible for financial pres-sures of teaching hospitals or for a decline in num-bers of residents and residency programs, the BBAmay have disproportionately affected some special-ties such as family medicine, limited the trainingof physicians for practice in rural areas and com-pounded financial weakness for teaching hospitals.There is further concern that the BBA’s impactwould sharply escalate in intensity if additionalcutbacks occurred.

As time passes, new information is developingusing real data from post-BBA years. HCIA Inc.and Ernst and Young recently released a study wherethey recalculated the impact of the BBA on hospi-tals. Because they now have substantially morehospital data for 1998, they used actual 1998 fig-ures to show true, non-projected effects of the BBA.One result is that hospital profit margins in 1998were 4.2 percent, which is 2.7 percentage pointslower than they originally predicted when the studywas done using projected 1998 data.42,43 As addi-

tional years of data become available, HCIA Inc.,Ernst and Young, and other analysts will continueto monitor and assess the effects of the BBA.

THE MEDICARE BALANCEDBUDGET REFINEMENT ACT OF1999

As a result of the current outpouring of con-cern over the effects of the BBA, changes to refineand “correct” the law were underway in Congress.A number of bills had been introduced in the Sen-ate Finance Committee and the House Ways andMeans Committee and Commerce Committee tochange some of the GME provisions of the BBA.Legislation to refine the BBA was negotiated be-tween the Senate, the House and the Administra-tion, and ultimately incorporated into more com-prehensive legislation, which was recently signedby the president and enacted into law. The legisla-tion, HR 3426, entitled the Medicare BalancedBudget Refinement Act of 1999 (BBRA) addressesmany BBA issues, including some of the GME pro-visions. The legislative package was signed into lawas part of a broader omnibus bill, HR 3194 on No-vember 29, 1999.

The BBRA provides a series of payment policyadjustments under Medicare that offer financialrelief from the BBA to hospitals, physicians, andMedicare+Choice plans, as part of a larger legisla-tive vehicle.

It is possible that policy makers will never re-spond to a comprehensive plan that restructuresGME financing. Rather there may be significantincremental changes, similar to those in the BBA,followed by a period of adjustments, including leg-islative relief as has happened with the BBRA.44

The BBRA included the following GME pro-visions:

1. Revised the multi-year reductions of IME pay-ments, by freezing the IME adjustment factorat 6.5 percent in FY 2000 and 6.25 percent inFY 2001, and falling to the BBA’s original 5.5percent in FY 2002 and beyond.

2. Established a national average payment meth-odology in computing DME. The agreementcreates a “corridor” surrounding a weightedstandardized national average per-residentamount for DME, beginning in FY 2001. Hos-pitals with per-resident amounts below 70 per-cent of a geographically adjusted weightednational average will receive payments at the70 percent level in FY 2001, and at a levelupdated annually by the consumer price index


(CPI) thereafter. Hospitals with per-residentamounts between 70 and 140 percent of theaverage will continue to receive their currentpayment levels, updated annually by the CPI.Hospitals with per-resident amounts above 140percent of the average will have their paymentsfrozen at current levels in FY 2001 and FY2002, and updated in FY 2003 through FY2005 by the CPI minus two.

3. Increased flexibility in providing GME in ru-ral and other areas by permitting hospitals toincrease the number of primary care residentsthat they count in the base year limit by up tothree full-time equivalent residents if those in-dividuals were on maternity, disability, or asimilar approved leave of absence. Hospitalslocated in rural areas are permitted to increasetheir resident limits by 30 percent for DMEand IME payments. In addition, non-rural fa-cilities that operate separately accredited ru-ral training programs in rural areas, or thatoperate accredited training programs with in-tegrated rural tracks, may receive DME andIME payments for cost reporting periods be-ginning on April 1, 2000 and for dischargesoccurring on or after April 1, 2000.

4. Permited reclassification of certain urban hos-pitals as rural hospitals if the hospitals are lo-cated in a rural census tract of a metropoli-tan statistical area; or are located in an areadesignated by State law or regulation as a ru-ral area or designated by the State as rural pro-viders; or meet other criteria as the Secretaryspecifies.

These provisions are beneficial for teachinghospitals, primary care practice and rural facilities.The financial pressures on teaching hospitals arerelieved with the higher IME adjustment factor forthe next two years. The national average paymentmethodology for DME will help hospitals withlower than average per-resident amounts. Primarycare resident caps may be increased by up to threefull-time equivalents. Rural hospitals may increasetheir caps by thirty percent, while non-rural facili-ties operating in rural areas may begin to receiveDME and IME payments, and certain hospitals canbe reclassified as rural. These new provisions ap-pear consistent with COGME’s goals of increasingprimary care training, and service in ruralunderserved areas.

One desired provision not included in the leg-islation was an adjustment on the number of resi-dents reimbursed by Medicare to include residentstraining in ambulatory settings who were uninten-tionally excluded in determining hospital caps.

Nevertheless, the increase in primary care residentscounted in the base year by up to three FTEs is astep toward remedying some of the unintended con-sequences from the BBA of 1997.

CONCLCONCLCONCLCONCLCONCLUSIONUSIONUSIONUSIONUSIONWithout further data, the impact of the Balanced

Budget Act of 1997 can be looked at in one of twoways. One is that it was important that the BBA beenacted after nearly three decades of relatively un-controlled growth in Medicare spending. Medicaresubsidies had allowed teaching hospitals to expandrapidly by subsidizing their expenses on a cost-plusbasis, thereby facilitating the enrollment of toomany residents, and hiring too much faculty, whoin turn trained too many specialists. Now teachinghospitals must adapt to lower payments. The otherview is that medical schools and their affiliatedteaching hospitals are being made to absorb shocksfor a system that fails to acknowledge their uniquerole in training physicians.45 Thrown into the im-pact are specialties not in oversupply, whose growthmight be curbed. From the data that have been ana-lyzed, it cannot be determined that one side hasmore credence than another. It appears that bothpositions have some validity.

RECOMMENDATIONSCOGME should revisit this issue in 2002, when

empirical data for three to four years since the BBAimplementation will be available. At that time, hos-pital revenues and profit margins will be able to beevaluated, as well as the numbers and specialtiesof residents training and their deployment to ruralareas. Furthermore, passage of the BBRA will re-sult in changed numbers, which will need to be as-sessed in future evaluations. The underpinning ofany future recommendations requires the acquisi-tion of reliable data.

In the meantime, COGME should continue tomonitor the effect of the BBA and the BBRA onGME in its effort to advise and make recommen-dations to improve the training of residents and thefinancing of graduate medical education. COGMEshould keep abreast of developments as a result ofthe legislation. These would include being awareof ensuing discussion on the adequacy of Medicarereimbursement as well as requests for relief.COGME should pay particular attention to provi-sions of the legislation that result in a shift in train-ing from hospital based specialties to non-hospitalsettings, as well as the training of primary care phy-sicians and those in rural settings.


BIBLIOGRAPHYBIBLIOGRAPHYBIBLIOGRAPHYBIBLIOGRAPHYBIBLIOGRAPHY1 Council on Graduate Medical Education., Eighth

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2 Council on Graduate Medical Education. Third,Fourth, Sixth, Seventh, Eighth, Ninth and Elev-enth Reports, 1992 - 1998.

3 American Medical Association. Consensus State-ment on Physician Workforce, February 28, 1997.

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5 American Medical Association. Policy Optionsfor the Support of Graduate Medical Education,CME Report 10-A-99, 1999.

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10 Iglehart, JK. Revisting the 1997 Balanced Bud-get Act, New England Journal of Medicine, July22, 1999, p 302.

11 BBA Impact of GME Payment Reform, DeloitteConsulting, 1999.

12 Van de Water, P.N. Congressional Budget Office,Testimony on the Impact of the Balanced Bud-get Act on the Medicare Fee-for-Service Pro-gram, June 10, 1999.

13 Conway, WA, Jr., Henry Ford Health System,December 17, 1999 memo.

14 Miller, RS, Dunn, MR, Richter, MA GraduateMedical Education, 1998-1999, JAMA, Septem-ber 1, 1999, Vol 282, No. 9, p856.

15 Ibid, p857.

16 Ibid, p858.

17 Council on Graduate Medical Education. TenthReport: Physician Distribution and Health CareChallenges in Rural and Inner-City Areas, Feb-ruary 1998.

18 Wittenberg, H. Organizations of Academic Fam-ily Medicine, Correcting the Technical Deficien-cies in the Balanced Budget Act of 1997, Decem-ber 16, 1998.

19 Hejduk, G. American Academy of Family Phy-sicians, personal communication, November1999.

20 Op cit. Wittenberg.

21 Center for Policy Studies in Family Practice andPrimary Care, Washington, D.C., fall 1999, us-ing 1997 Area Resource File data from the HealthResources and Services Administration.

22 Pugno, P. American Academy of Family Physi-cians, Division of Education, personal commu-nication, January, 2000.

23 Op cit. Wittenberg.

24 Kahn, N. American Academy of Family Physi-cians, personal communication, August, 1999.

25 Accreditation Council for Graduate MedicalEducation website (www.acgme.org/rrc/IM/internal.htm).

26 Ibraham, T. Association of Professors of Medi-cine, Washington DC, personal communication,October 1999.

27 Rodak, W. Accreditation Council for GraduateMedical Education, Residency Review Commit-tee, Internal Medicine, Chicago, IL, personalcommunication, November 1999.

28 American Academy of Pediatrics. PediatricWorkforce Statement. Pediatrics. August 1998;102:2:419.

29 Task Force on The Future of Pediatric EducationII: Organizing Pediatric Education to Meet theNeeds of Infants, Children, Adolescents, andYoung Adults in the 21st Century. Pediatrics.January 2000;105(1)(suppl):161-212.

30 Stoddard, JJ. Center for Studying Health SystemChange, Washington D.C., personal communi-cation, November, 1999.

31 American Board of Pediatrics. Annual Report ofthe American Board of Pediatrics to the Nomi-nating Societies. Chapel Hill, NC: AmericanBoard of Pediatrics; 1999


32 Op cit. Task Force on The Future of PediatricEducation II: Organizing Pediatric Education toMeet the Needs of Infants, Children, Adolescents,and Young Adults in the 21st Century.

33 Jones, MD, Jr. Financing of GME from FOPEII,p5.

34 AOA, letter of 10/7/99 to OME X participants,breakout group discussions, group III.

35 Seifer, SA, Troupin B, Rubenfeld, GD. Changesin Marketplace Demand for Physicians: A Studyof Medical Journal Recruitment Advertisments.JAMA. 1996;276:695-699.

36 Op cit. American Academy of Pediatrics. Pedi-atric Workforce Statement. Pediatrics.

37 Council on Graduate Medical Education, TenthReport: Physician Distribution and Health CareChallenges in Rural and Inner City Area, 1998.

38 Crittenden, RA, The Balanced Budget Act of1997 and Rural Training Supported by MedicareGraduate Medical Education Funds, The Jour-nal of Rural Health, Winter 1999, Vol15, No.1.

39 Ibid.

40 Franco, S.J., Implications of the BBA for RuralHospitals, Working Paper, Project HOPE WalshCenter for Rural Health Analysis, Sept 1999.

41 An Initial Report on the Impact of the BalancedBudget Act on Small Rural Hospitals, WWAMIRural Health Research Center, University ofWashington, Sept 1999.

42 The BBA and a Guide to Hospital Performance,HCIA, (second edition), 1999.

43 HCIA Studies Forecast Ever-Bleaker BBA Im-pact, HCIA news release, September 28, 1999.

44 Health Care in Transition. BBA and the AcademicHealth Centers. Henry Ford Health System, Cor-porate Government Affairs, December, 1999.

45 Kuttner, R. Managed Care and Medical Educa-tion. New England Journal of Medicine, Septem-ber 30, 1999.


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The Effects of the Balanced Budget Act of 1997 on … Effects of the Balanced Budget Act of 1997 on Graduate Medical Education ii The views expressed in this document are solely those