Health care's hidden costs Teaching hospitals need relief from rate pressure

June 30, 1996|By Douglas J. Peddicord

ONE LESSER-KNOWN aspect of the Medicare program is that, in addition to providing health insurance for the elderly and the disabled, Medicare is the principal source of funding for the training of physicians in the United States.

Last year Medicare paid out more than $5 billion toward the education costs of the teaching hospitals and academic medical centers which are the backbone of the finest medical system in the world.

Graduate medical education -- the clinical training of physicians after they graduate from medical school -- is an expensive proposition. While salaries paid to residents and interns are low, other costs associated with training are not. Training programs must recruit and support experienced faculty to teach and supervise students. Teaching hospitals must incur the costs of the additional diagnostic tests and therapies ordered by residents and interns and simply, the added time needed by physicians-in-training to effectively treat patients as they learn state-of-the art medicine.

On average, the clinical education of each resident or intern training at a hospital in Maryland costs in excess of $100,000 per year.

Nationally, Medicare allocates its payments to teaching hospitals way of formulas involving a hospital's cost per resident and the ratio of the number of interns and residents to the number of beds the hospital has.

In Maryland, however, Medicare's contribution to the financing of graduate medical education costs occurs through a different mechanism and is arguably smaller than in other states.

Since 1977, the Maryland Health Services Cost Review Commission (HSCRC) has overseen the participation of all payers, including Medicare and Medicaid, in the state's hospital payment system. This rate-setting system mandates that a hospital charge the same price for a particular procedure regardless of who is paying the bill. The cost of angioplasty or a hip replacement does not vary depending on whether the patient is covered by Medicare, Blue Cross or an HMO.

In Maryland's regulated market, Medicare pays the same charges for hospital services as other insurers, not rates that are discounted to below the actual cost of providing care, as is true in every other state. But as a consequence, Medicare does not make additional payments for graduate medical education to Maryland's teaching hospitals and academic medical centers. tTC How, then, are training costs -- which totaled about $175 million statewide in 1994 -- funded?

The answer is that graduate medical education is financed through the charges paid by patients who are treated at community hospitals with teaching programs or one of the two academic medical centers: the University of Maryland Medical Center and the Johns Hopkins Medical Institutions. To support their training programs, these hospitals are allowed to increase the regulated base rates for services, which results in higher costs for patients and insurers compared to non-teaching hospitals.

More than half of all graduate medical education costs are paid by patients who use the University of Maryland and Hopkins. In the University of Maryland Medical System, estimates of the combined direct and indirect costs of medical education range from 8.5 percent to 12.5 percent of all revenues.

While maintaining its commitments to education, research and care for the indigent, academic medicine recognizes that these social missions also drive up the cost of services. But in a market environment in which cost -- not quality -- has become the primary criterion for inclusion in managed-care networks, more concern should be shown for teaching hospitals.

To save money, HMOs and other managed care companies send their patients to less expensive hospitals: those without graduate medical education costs built into their rates. Consequently, Maryland's method of funding graduate medical education through hospital-specific rate adjustments is outmoded. The current system puts teaching hospitals at a competitive disadvantage because it places the burden of cost exclusively on those who use, and pay for, hospital services.

Because Maryland's rate-setting system allows for the financing of only 75 percent of the direct (salary) costs of interns and residents, however, it is difficult to perceive any net advantage for teaching hospitals in a price-sensitive market. Nonetheless, there is opposition to proposals to pay for graduate medical education by pooling statewide costs over all hospitals and establishing a uniform rate adjustment. Critics say only a few hospitals would benefit.

Any plan to spread clinical training expenses further, across ambulatory surgical centers and other outpatient settings, while more accurately reflecting the way health services are delivered today, has even less chance of being adopted.

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