Medicare indirect medical education payments to teaching hospitals should be overhauled, MedPAC says

Although the proposals represent a significant change, most hospitals wouldn’t be projected to experience a large impact on their payments.

Medicare’s model for making indirect medical education (IME) payments to teaching hospitals is tilted too heavily toward the inpatient side and should be updated, according to the Medicare Payment Advisory Commission.

As part of its semiannual report to Congress, released June 15, MedPAC examined the system of IME payments, which support the higher costs incurred by acute care teaching hospitals. IME payments to those 1,100 hospitals in 2019 totaled $10.1 billion, all of which went to cover inpatient care for Medicare fee-for-service and Medicare Advantage beneficiaries.

The new recommendations are for CMS to consider in future payment rules. The proposals do not seek to reduce IME payments but rather to alter the distribution.

“IME payments do not accurately reflect the effect of teaching on patient care costs across settings, resulting in IME payments above teaching hospitals’ costs for patient care in inpatient settings but below their additional costs for patient care in hospital settings,” the report states.

The concern is that the current model warps financial incentives because teaching hospitals lose IME revenue whenever they shift care to outpatient settings as warranted.

In addition, IME payments don’t cover some of the inpatient costs sustained by teaching hospitals for care provided to Medicare Advantage beneficiaries.

Principles of a revamped IME payment system

Medicare should make IME payments for both inpatient and outpatient care delivery under the prospective payment system for each setting, according to the recommendations. Furthermore, payment adjustments should be based on a teaching hospital’s ratio of residents to patients rather than current metrics, which use ratios of residents to inpatient beds and residents to inpatient daily censuses.

In addition, “Medicare should transition to empirically justified levels of IME payments, such as by maintaining aggregate IME payments equal to current policy until such time that they match empirically justified levels,” the report states. Currently, IME payments for inpatient operating costs are set by statute and are “higher than empirically justified.” A new payment approach should be based on “an empirically derived estimate of the relationship between teaching and Medicare cost per case, using the most recent data available.”

Another feature of the proposed approach would be to expand IME payments for care provided to Medicare Advantage beneficiaries (while excluding the payments from MA benchmarks). This recommendation is designed to “help ensure that MA plans have incentives to direct enrollees to use teaching hospitals when appropriate and that teaching hospitals receive equal IME support for their care of FFS and MA beneficiaries in all settings,” the report states.

The impact of the recommendations

Total IME payments would not immediately change under the proposal. “However, the revised policy would shift IME payments toward teaching hospitals with additional costs not accounted for in the current policy, including most hospitals that currently treat a larger share of Medicare patients in outpatient settings,” MedPAC wrote.

“Over time, as care continues to shift to outpatient settings, we anticipate that empirically justified IME payments would match and then exceed those under current policy baseline; once that occurs, IME payments could be set at their (higher than current-law) empirically justified levels.”

The financial impact of the new policy is projected to be small for most teaching hospitals. Those that treat a larger share of beneficiaries in outpatient settings, or that will do so in the future, would receive higher payments.

More than three-quarters of IME payment recipients would experience a payment change of less than 1%, MedPAC states. The relatively muted impact would be seen across categories of teaching hospitals (e.g., for-profit/not-for-profit, urban/rural and high/low shares of low-income patients).

In the aggregate, two groups could expect to see relatively large adjustments. IME payments would increase by 0.7% for smaller teaching hospitals and would decrease by 0.5% for hospitals in the highest quartile of residents per bed; among the latter group, the change would stem from the proposed shift to using residents-to-patients as the key ratio rather than residents-to-beds.