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| Medicare and Graduate Medical Education September 1995 |
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Changes in federal policy regarding graduate medical education may have both budgetary impacts and effects relating to broad goals of public policy in the health sector. In terms of budgetary impact, direct graduate medical education payments are almost $2 billion per year and are projected to grow to over $2.5 billion annually by the end of the decade. Federal payments for the indirect medical education adjustment are about $4 billion per year and are projected to grow to almost $5 billion annually by the end of the decade. The broader goals that GME policy may affect include such issues as sufficient access to care, the cost-effectiveness of health care delivery, and the support of special activities undertaken by teaching hospitals.
GME subsidies, rather than directly affecting those broader goals, probably have their impact through several intermediate outcomes:
Opinions may differ concerning the best approach for affecting those outcomes. In addition, critics may disagree about targets for the outcomes in a world of limited resources.
Differences in opinion on GME policy will depend in part on different
views about market incentives. Disagreements may arise over the degree
to which students and young doctors are aware of or will respond to economic
incentives. Policymakers may also disagree about whether the economic incentives
transmitted through the marketplace are the proper signals to guide the
allocation of resources.
Access to Care
Concerns about access to care are often raised in regard to particular subgroups of the population. Those subgroups include Medicare beneficiaries, indigent people, and people who live in geographic regions, such as rural areas or inner cities, that have few, if any, physicians.
GME policy may affect access to care through several mechanisms. The current formulas for GME subsidies are written in such a way that they offer incentives for teaching hospitals to both provide more services to Medicare beneficiaries and hire more residents. Changes in the formulas might alter teaching hospitals' incentives to treat Medicare beneficiaries. In the longer run, GME policy might affect access to care through its impact on the future supply of physicians. In the shorter run, policies that affect the number of residents could affect access to care in communities in which medical residents provide a significant amount of hospital-based patient care. Moreover, because changes in GME policy might affect the revenues of teaching hospitals, many services that teaching hospitals provide, including care for people who are uninsured and indigent, could respond to changes in the level of GME subsidies.
Medicare Beneficiaries
The current formulas for GME subsidies encourage teaching hospitals not only to employ more residents than they otherwise would but also to be more willing to provide services to Medicare beneficiaries. A hospital's DME payment is based on the product of its Medicare patient load, the allowed amount per resident, and the number of residents. As a result, a hospital's DME payments increase with its Medicare caseload. The IME formula bases payments on the product of the diagnosis-related group payments owed to a hospital for Medicare inpatient services and another factor that depends on the resident-to-bed ratio. Hence, a hospital's IME payments rise with its Medicare admissions (adjusted for diagnoses). It follows that changes in the DME or IME formula would alter the incentive to admit and treat Medicare patients.
Access to care for Medicare beneficiaries could be at risk if the government insurance program reimburses providers for services at lower rates than do private insurers. The fees for physicians' services that Medicare pays have been approximately two-thirds of the level paid by private insurers.(1) For 1993, the payment-to-cost ratio for hospital services for Medicare patients is estimated to have been about 69 percent of the ratio for private payers.(2) Although in general, access does not appear to be a significant problem for Medicare beneficiaries, difficulties could develop if payment rates became sufficiently low.(3) GME payments may affect access because they provide an incentive for teaching hospitals to treat Medicare patients.
People Who Are Uninsured and Indigent
Providing medical care to poor people who are uninsured and who do not qualify for Medicaid coverage is one of the activities of teaching hospitals that may be viewed as a public good (see the discussion later in this chapter). Access to care for uninsured, indigent people may be affected by the level of GME subsidies for two reasons. First, since GME subsidies are a significant source of revenue for a number of teaching hospitals, changing the level of the subsidies would probably affect the amount of various services that teaching hospitals provide, including care for uninsured people. Second, to the extent that care for indigent people is provided by hospital residents, changes in subsidies could affect access for that group by influencing the number of residents available to provide such care.
Geographic Areas That Are Underserved
Standard economic theory predicts that a physician will locate in an area only if the benefits from living and working there are at least as great as those to be obtained in a different location. Abstracting from different amenities (for example, high-quality schools and social and cultural opportunities) available among locales and specific preferences for practicing in particular areas, one would expect that all communities that have doctors would have sufficient demand (or willingness to pay) so that each doctor in those communities earned at least a competitive return on his or her investment in a medical education. Communities will not have doctors if their level of demand is too low for a single doctor to earn an income equivalent to the income that could be made in locations that have physicians. Communities that have doctors will have enough of them to bid incomes (or, in economic terms, utilities) down to the level available in other locales that are being served.
This standard model of physician location makes clear why both general subsidies to physician supply (including GME subsidies) and more targeted attempts to encourage doctors to locate in underserved geographic areas (such as the National Health Service Corps) appear to have limited success. According to the model, if the supply of physicians increased, the number of physicians would increase in all the communities that already had physicians. The increased competition in those communities would bid down doctor's incomes (or utilities). Some formerly unserved communities would add physicians only if the incomes (or utilities) available in served communities became sufficiently low that settling in an underserved community appeared attractive. Therefore, it would not be surprising to find that the counties with the lowest levels of demand would continue to go without a physician even if the number of physicians in the country as a whole grew.
Indeed, the empirical observation that the number of counties with few or no physicians has been little changed by the appreciable increase in the physician-to-population ratio in the country as a whole is consistent with the theory. The model also implies that a policy that directly places a new physician in an area with a low physician-to-population ratio is likely to be offset eventually by the departure of another physician in that area for another market or by fewer physicians settling in that area in the future.(4)
An example of a factor other than government policy toward GME or toward physician supply that might affect the geographic location of doctors is the growth of managed care. Growth in that sector of the health care market might cause a shift in the distribution of some types of physicians toward less densely populated areas. For that shift to occur, two conditions must hold: the infiltration of managed care into a locale must squeeze down physicians' incomes in that area, and the entry of managed care organizations must be greater in more densely populated areas than in less densely populated ones--which is consistent with the view that scale economies are relevant in the formation of managed care networks. Under one plausible scenario, the entry of managed care into an area would result in higher incomes for primary care physicians and lower incomes for non-primary care physicians. Then, if managed care entry occurred to a greater extent in more densely populated areas, one would expect a tendency for primary care physicians to relocate toward more densely populated locales whereas non-primary care specialists would diffuse into less densely populated regions.
An approach for reducing the number of medically underserved areas is to raise the demand for medical services high enough in those locales for physicians to find them economically attractive. To the extent that amenities are fewer in underserved areas, the financial incentives must be even greater if physicians are to be attracted to practice in them. In areas with a significant population of uninsured or underinsured people, the government could provide or subsidize health insurance to increase demand, thereby making the area more attractive to physicians.
One way to subsidize the provision of medical care in such locales would
be to offer an additional payment to physicians for each medical service
they provide. The Medicare program already furnishes that kind of bonus
payment--10 percent for services provided in what it terms "health professional
shortage areas." The bonus program is relatively new; therefore, assessing
whether the program has had a measurable impact on physicians' decisions
about where to practice is premature. It might be the case that some regions
are so sparsely populated, or have such low demand for medical care for
reasons such as low incomes or lack of insurance, or are so lacking in
amenities, that extremely large bonus payments would be needed to draw
a physician to those areas.
Cost-Effectiveness of Health Care Delivery
The cost-effectiveness of health care delivery in the future will be influenced by the size, specialty mix, and training of the future physician workforce. Today's residents are tomorrow's fully trained physicians; consequently, GME policy--through its impact on the characteristics of the residency pool--plays a role in cost-effectiveness. At a more subtle level, the style of practice of future physicians might be altered if GME policy changed in ways that affected the basic model and sites of postgraduate medical training. In a broader context, not only the physician workforce but also the size and characteristics of the nursing and allied health workforces will have an impact on cost-effectiveness.
One particular concern is that the current physician workforce is too oriented toward specialty practice to be compatible with emerging arrangements for managed care insurance. The question then becomes whether an activist policy toward the physician workforce can forecast future demands well enough to forsake relying on the market to determine the number and characteristics of physicians. Different philosophical and theoretical perspectives lead to different opinions about the appropriate policy to follow.
The Appropriate Number of Physicians
Some health policy experts have concluded that the United States has too many physicians.(5) Those claims are based on opinions about the appropriate number and types of physicians required to fill the basic medical needs of the population. Some people have also suggested that the growing number of physicians is a cause of rising medical expenditures and that reducing the number of physicians per 1,000 people would help to contain costs.
Some of the arguments underlying that view of a surplus of physicians are not consistent with a conventional economic approach to labor supply. The latter approach places more emphasis on the discretion of consumers regarding the desirable amount of medical care than does the more rigid approach of determining physician requirements. Some economists are likely to question whether the number of physicians is the fundamental cause of high levels of medical expenditures. Instead, a reasonable interpretation is that other underlying factors cause both large numbers of doctors and high levels of expenditures. Those factors include the incentive to use more services when those services are insured, the favorable tax treatment of employment-based health insurance, the fee-for-service nature of most government-provided insurance, and federal subsidies directed toward the supply of physicians. Conventional economic analysis would stress that in the absence of major noncompetitive factors or distortions, the market has the inherent ability to efficiently allocate people to jobs. Thus, if the number of physicians was excessive, the relative fees and incomes of doctors would fall, the medical profession would become less desirable to potential entrants, and the excess would be eliminated over time.(6)
Analysts with a medical requirements perspective and analysts with a market-oriented economic perspective work from widely different underlying assumptions, but both parties would generally conclude that the nation has more than the optimal number of physicians. The requirements, or planning, approach would base that conclusion on calculations of the number and types of doctors needed to provide what is viewed as appropriate medical care for the population. The market economics approach would base its conclusion on the existence of significant demand- and supply-side subsidies that have caused the medical industry to become larger than it otherwise would be.(7) (That is, the distortions that are present appear to work toward making the medical industry larger than optimal.) The two types of analysts would generally disagree on the proper policy response. For example, planners might argue for continuing the subsidies and imposing quotas on the number and types of residency positions. Market economists would argue for eliminating the subsidies and not imposing any legal restrictions on the number or types of positions.(8)
The Appropriate Mix of Physicians by Specialty
A number of experts have argued that there are too many non-primary care physicians relative to primary care physicians in the current workforce and that a large decline in the fraction of non-primary care residents is necessary to attain a more appropriate balance. Two principal arguments appear to underlie the desire to increase the relative size of the primary care medical workforce. One argument is that more primary care doctors are needed to fill a crucial "gatekeeper" role in managed care organizations and that such organizations represent the future of health care delivery. A second argument is that primary care physicians offer a cheaper, less technological, more preventive and holistic approach to the delivery of health services.
As noted earlier, some experts prefer an activist workforce policy and are skeptical of relying on market forces to determine the size and distribution of the nation's cadre of physicians. In their view, several good reasons support intervention by the government. Proponents of an activist policy argue that the inherently slow adjustment of the physician workforce makes it too costly to rely on market signals alone to encourage greater entry into primary care specialties. Another argument against using market signals is that young physicians are poorly informed about the marketplace for trained physicians. Therefore, only a minimal change in supply would occur in response to shifts in the demand for physicians' services. Market skeptics might also question the validity of demands by consumers for physicians' services. If consumers cannot judge what is best for them, relying on market signals based on consumers' demands for medical services would not tend to yield the appropriate number or types of physicians.
However, the experts who argue for a dramatic increase in the relative number of primary care doctors may err for one of two reasons (or for both): they may be using incorrect forecasts, or they may be making inappropriate judgments about what consumers want. Some expert opinions depend on forecasts of future increases in the prevalence of managed care, including health maintenance organizations, in health care delivery.(9) Experts on the other side of the debate point out that previous forecasts of HMO growth have overestimated the actual rates. Another point of contention concerns the appropriateness of expert opinions in determining the correct balance of medical care needs. Consumers may prefer more highly technological, more interventionist, and more specialized medical care than the experts deem suitable.
Market-oriented economists would point out that the distribution of the supply of physicians among the different specialties will respond to economic incentives, which in turn will reflect the attitudes of consumers about the types of health care delivery systems that they prefer, given the costs of alternative systems. If managed care organizations that make less use of the services of specialists carry the day in the consumer marketplace, the incomes of non-primary care physicians will fall relative to those of primary care physicians, and relatively fewer young doctors will seek non-primary care training. However, free-market economists would warn that, because experts might either incorrectly forecast market trends or incorrectly determine what is best for consumers, it would be preferable to follow a neutral government policy regarding the entry of physicians into various specialties.
Many advocates of a market approach would agree that the government can assist the marketplace by providing information (to help overcome failures in the market for information). But they would also tend to argue that relying on the demands of imperfectly informed consumers is preferable to relying on the political process or a commission of experts to determine the number and types of physicians the country should have. The government could provide information to consumers, medical students, and young physicians and then allow them to make decisions in a free market.
Empirical evidence suggests that both the total supply of physicians and the distribution among specialties respond to changes in relative incomes. However, an interventionist policy may still have merit despite the existence of such evidence. For example, one may accept the view that students, residents, physicians, and hospitals respond to economic incentives; however, one may also view the response time as too slow or feel that consumers are inadequately informed and therefore that signals from the marketplace convey inappropriate incentives. Policymakers who subscribe to those views may argue for intervention by the government to alter the economic incentives. Such alterations might include paying relatively larger subsidies for primary care residencies than for residencies in other specialties or changing the fee schedule for Medicare to reward primary care activities relatively more than non-primary care activities.
The Appropriate Site for GME Training
The current system of GME subsidies to teaching hospitals may reinforce the traditional approach to GME centered at the hospital site--an approach that some experts have questioned. Many of the patient care activities of fully trained primary care practitioners occur in a nonhospital setting. But because non-primary care specialties have relatively more of their services associated with a hospital setting, the current mechanisms for GME financing may encourage more new doctors to focus on non-primary care specialties than if GME subsidies were also available to group practices outside of hospitals. Some industry experts have argued that HMOs find that newly trained primary care physicians have not developed adequate skills to work in an HMO environment because their training has used the hospital rather than the medical group practice as its principal focus.(10)
Hospital-based training has many advantages, however, and hospitals
might remain the principal site of post-medical school training even if
relative subsidies to the residency programs at teaching hospitals were
reduced. The hospital, for instance, allows a resident to see more difficult
and more severe cases and to see a variety of cases and procedures in one
venue.
Special Activities of Teaching Hospitals
Because changes in the level of subsidies would affect teaching hospitals' revenues, other activities and services that they offer besides GME might be altered in response to changes in the generosity of GME payments. Indeed, the special activities and special services of teaching hospitals are cited as additional reasons for providing GME subsidies.
Economists classify some of those special activities as public goods--goods that, because their benefits cannot be restricted to those who purchase them, tend to be undersupplied in the absence of subsidies. The special activities of teaching hospitals in that regard may include engaging in research and development, treating and educating the public about communicable diseases, and providing care to indigent people.
Other special activities may include funding some medical school education
and dealing with more difficult cases than are seen in other hospitals.
A substantial amount of the revenues of medical schools is derived from
patient care income generated at affiliated teaching hospitals; in addition,
the facilities of some teaching hospitals are used for education at the
medical school level. Since GME payments affect the level of revenues of
teaching hospitals and subsidize residency programs whose teaching faculty
may also be affiliated with a medical school, the resources of medical
schools are probably affected by GME subsidies. To the extent that some
of the activities of teaching hospitals are seen as promoting the public
welfare, policymakers could provide subsidies for those special activities
specifically rather than indirectly supporting them through GME payments.
1. See Physician Payment Review Commission, Annual Report to Congress, 1995, pp. 75-80.
2. See Prospective Payment Assessment Commission, Medicare and the American Health Care System: Report to Congress (June 1995), p. 21.
3. See David W. Lee and Kurt D. Gillis, "Physician Responses to Medicare Payment Reform: An Update on Access to Care," Inquiry (Fall 1994), pp. 346-353; and Physician Payment Review Commission, Annual Report to Congress, 1994, pp. 325-366.
4. See Joseph P. Newhouse and others, "Does the Geographical Distribution of Physicians Reflect Market Failure?" Bell Journal of Economics, vol. 13, no. 2 (Autumn 1982), pp. 493-505.
5. See the summary in Steven A. Schroeder, "Managing the U.S. Health Care Workforce: Creating Policy Amidst Uncertainty," Inquiry, vol. 31, no. 3 (Fall 1994), pp. 266-275. The groups that have concluded that there are too many physicians include the Council on Graduate Medical Education, the Bureau of Health Professions, and the Physician Payment Review Commission.
6. One theoretical viewpoint that places relatively more emphasis on the notion that the number of physicians is an underlying cause of higher levels of medical expenditures is the "demand inducement" theory. The basic idea is that doctors take advantage of consumer ignorance and respond to potential reductions in their own income by providing more services to their patients than they would otherwise. The empirical importance of demand inducement is controversial among economists who study the health industry.
7. At one time, it was thought that the number of physicians was being held at an artificially low level to boost physicians' incomes. Proponents of that view argued that licensing laws and limitations on the number of places in medical schools were the tools by which those artificial restrictions on supply were enforced. Under such a scenario, a market economist might have favored subsidizing the supply of physicians to offset the anticompetitive restrictions on that supply. Beginning in the 1970s, the market for the supply of physicians appears to have become more competitive (see Monica Noether, "The Growing Supply of Physicians: Has the Market Become More Competitive?" Journal of Labor Economics, vol. 4, no. 4 (October 1986), pp. 503-537). If immigration polices were altered to restrict further the entry of foreign medical graduates, arguments for offsetting anticompetitive restrictions on supply might become more relevant.
8. Market-oriented economists who are concerned with allocating resources efficiently might go even further. They might argue that if the distortions toward too large a medical industry, which arise from the tax treatment of employment-based insurance and subsidized government-provided insurance, cannot be eliminated, the distortions could be offset by taxing the "inputs" used to produce medical care. But it might be difficult and impractical to impose taxes in a neutral fashion across those inputs.
9. For example, see Jonathan P. Weiner, "The Demand for Physician Services in a Changing Health Care System: A Synthesis," Medical Care Review, vol. 50, no. 4 (Winter 1993), pp. 411-449.
10. For example, see Robert Gumbiner, "Perspectives of an HMO Leader," Inquiry, vol. 31, no. 3 (Fall 1994), pp. 330-333.
