Medicare: Indirect Medical Education Payments Are Too High

GAO discussed Medicare's indirect medical education payments to teaching hospitals. GAO found that: (1) the Prospective Payment System (PPS) set payment rates for hospital operating costs based on diagnosis-related groups and hospital standard payments; (2) hospitals could receive higher PPS payments by treating a disproportionate share of low-income Medicare beneficiaries and additional payments by conducting graduate medical education programs; (3) teaching hospitals received 106-percent higher payments per discharge and had 95-percent higher costs per discharge than nonteaching hospitals, while minor teaching hospitals received 45-percent higher payments per discharge and had 40-percent higher discharge costs; (4) estimates of indirect teaching costs per Medicare discharge ranged from 3.73 percent to 7.19 percent and all of the estimates were lower than the statutory 7.65-percent adjustment factor; (5) most of the differences in hospital costs related to input prices, outputs, and efficiency, rather than to teaching; (6) after these factors, the indirect cost of medical education accounted for the remaining differences in the teaching hospitals' higher costs; and (7) because the amount paid to hospitals remained the same after adjustments for particular hospitals or groups of hospitals, higher payments to teaching hospitals resulted in lower payments to nonteaching hospitals. GAO believes that Congress should reduce the teaching adjustment factor for 1989 and beyond to 5.09 percent.