TRADITIONAL APPROACHES BY STATES TO FINANCING MEDICAL EDUCATION

The role of State government in supporting medical education is well established. Since the late 1940s, States have subsidized loan and scholarship programs as financial incentives for medical students and physicians in training, and most States have provided some level of institutional support through general appropriations for undergraduate medical education. Several States also provide matching funds for the support of federally funded AHECs. Furthermore, most States elect to provide some level of support for GME, primarily through Medicaid payments to teaching hospitals.

Despite such initiatives, the environment in which this financing takes place has significantly changed in recent years. Although State appropriations to medical schools have increased steadily since the early 1980s, the percentage that these funds represent to the revenue base of the average medical school is declining. Major payments for GME that most States make through their Medicaid programs, second only in size to Medicare’s contribution, are threatened by new cost controls and cuts in spending. States increasingly rely on loan repayment programs, tax credits, practice development subsidies, and other strategies, rather than scholarships, to encourage small numbers of graduating physicians to practice primary care in HPSAs.

Undergraduate Medical Education

Historically, State general revenue appropriations for medical education have been largely directed to undergraduate training. In 2001, allopathic medical school revenue from State and local government general funds was worth over $3.6 billion. Most of the money was unrestricted, and often those funds going to single institutions were difficult to isolate and analyze.¹⁶

Although the amount of funds that States devote to medical education has more than doubled since the early 1980s, the proportion of allopathic medical school revenue from State and local appropriations in 2001 was less than 8 percent compared to 23 percent in the early 1980s. The shift in the payer mix of medical schools reflects in part the growing importance of revenue to the programs from either patient care or faculty practice plans (34 percent of total revenue in 2001).¹⁷ About 60 percent of all allopathic medical schools and 30 percent of osteopathic medical schools are State owned or State related and receive State appropriations. Some States also subsidize private schools.

Graduate Medical Education

Medicaid Payments to Teaching Hospitals

Since the inception of the Medicaid program in the 1960s, States have paid what they believe to be their fair share of GME costs. Second to Medicare, Medicaid is the largest explicit payer of GME, providing teaching hospitals between $2.5 and $2.7 billion in 2002, amounts slightly higher than the $2.3 to $2.4 billion estimate of total Medicaid GME payments in 1998. Although Medicare has a statutory requirement to support GME, State Medicaid programs have no such formal obligation. However, most States historically have made payments for GME under their fee-for-service (FFS) programs. (States have the option to support such additional services as GME and to receive matching Federal funds for them.) In 2002, all States except Illinois, Kansas, and South Dakota volunteered to make GME payments under FFS programs. Even those States without medical schools provide GME support from their Medicaid programs to residency programs within their States.

Of the 46 States and DC that made GME payments under their Medicaid FFS programs in 2002, the majority of States (24) and DC recognize and reimburse for both direct graduate medical education (DGME) and indirect medical education (IME) costs. Although most States acknowledge and pay for direct and indirect medical education costs, nine States make no distinction in their GME payments between DGME and IME. One State, Tennessee, pays for GME only under its managed care program.

When asked how GME payments are calculated, nearly half of the States and DC (21) that pay for GME under FFS programs say they use methods similar to those used to pay for GME under the Medicare program. Nearly an equal number of States report using some “other” method for calculating DGME or IME that was not specified in the survey. Three-fourths of States and DC (35) that pay for GME under FFS programs distribute GME payments through the hospital’s per-case or per-diem rate. Fifteen States reimburse teaching hospitals for GME costs by making a separate direct payment to these institutions.¹⁸

State Medicaid GME payments on average are about 8 to 9 percent of total Medicaid inpatient hospital expenditures. By comparison, Medicare’s over $6 billion in GME payments (for both DGME and IME) represent about 7 percent of its total inpatient hospital expenditures.¹⁹ State GME proportions range from less than 1 percent to 32 percent.²⁰

As with appropriations for undergraduate training, most State support for GME through Medicaid has been without restriction on the specialty of physicians being trained. Because most States, in paying for GME, follow the Medicare methodology that reimburses for education and service provided in hospital-based settings only, Medicaid programs have done little to allow payment for the additional costs of teaching in ambulatory sites. For most ambulatory education programs that train primary care residents, care is provided to large numbers of Medicaid and indigent patients. Typically, such sites, which are not connected to a teaching hospital, earn no additional revenues from Medicaid to cover teaching costs, making it difficult for many of the programs to survive.

Line-Item/State Agency Funding for Family Medicine Departments and Primary Care Residencies

Most States now earmark funds for training in family medicine and other primary care residencies. At least 15 States have enacted laws that specifically encourage or mandate creation of family medicine departments or other family practice training programs in State-supported schools. More than 40 States have created special grant programs for family physician training and about half of all States specify appropriations for family practice education. Other States have enacted laws that call for studying the feasibility of establishing residency programs in family practice, based on using clinical sites in rural areas.²¹

According to the American Academy of Family Physicians, in the mid-1990s a State on average provided about $3.6 million a year (or about $21,000 for each State-funded residency position) to support family practice residencies. At least eight States each appropriated more than $7 million annually for such programs.²² Although family practice residencies have grown significantly in number and size in recent years, State support in general has remained stagnant or declined. Depending on the size of the programs, State expenditures vary tremendously in the amount of a resident’s salary or in total costs covered by the funds.²³ State legislators often have viewed support for primary care residencies through placement of their graduates as solving rural residents’ and indigent populations’ problem of access to primary care.

Student and Resident Scholarships and Loans With Service Obligations

Nearly all States have in place scholarship and loan forgiveness programs targeted to placing small numbers of primary care professionals in medically underserved areas. Many States with few primary care residencies, or with such residencies that have fewer filled positions, are offering loan repayment incentives to medical students who select in-State primary care residencies. Such initiatives are viewed as effective because the site of residency training is thought to be a strong predictor of future practice location. To discourage defaulting on loans, most States levy penalties on students who do not meet their obligations. Financial incentives to medical students and residents are increasingly targeted to those who wish to practice primary care in medically underserved areas. A few States are considering using loan forgiveness to relieve educational indebtedness for would-be primary care practitioners.