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Balanced Budget Act of 1997: Implications for Graduate Medical Education

Changes in Medicare payments to managed care plans will provide a more stable source of funding to support medical education, research, and specialty care at the nation's teaching hospitals. In The Balanced Budget Act of 1997: Implications for Graduate Medical Education, James Reuter, at Georgetown University's Institute for Health Care Research and Policy, explains that with the passage of the Balanced Budget Act (BBA), academic health centers (AHCs) that serve Medicare managed care patients will be paid directly for the graduate medical education costs associated with their care. This change, which will be phased in over five years, should provide $1.6 billion in 2002 directly to teaching hospitals for the care of Medicare patients.

The separation of teaching costs from patient care revenues is consistent with recommendations by the Fund's Task Force on Academic Health Centers, in its report Leveling the Playing Field: Financing the Missions of Academic Health Centers. By separating these costs, AHCs should be able to compete more fairly for market share and maintain their academic mission.

Although the BBA sets a significant precedent in the approach used to provide Medicare support for graduate medical education, Reuter notes that teaching hospitals will face significant reductions in future Medicare payments. BBA savings provisions will reduce payments to AHCs for graduate medical education by 28 percent after a five-year phase-in period.

In addition, the act will cap the number of residents for whom Medicare provides support. Incentive payments will encourage downsizing of training programs. These changes will support the long-range objectives of reducing the total number of new physicians in training.

The net effect of the BBA is to reduce the payments that teaching hospitals receive from Medicare for their education and other academic activities. Reuter concludes that policies enacted in the BBA will require AHCs to be aggressive in curbing their costs if they are to retain their positive operating margins.

Facts and Figures
  • The average direct cost of graduate training in teaching hospitals was $54,000 per resident in 1993.

  • The BBA will reduce payments for indirect medical education by $5.6 billion over five years.

  • From 1990 to 1993, graduate medical education spending grew by 21 percent in areas with high HMO penetration, compared with 36 percent in areas with less competition.

  • About 14 percent of Medicare beneficiaries are now enrolled in HMOs; that number is expected to double by 2003.

Publication Details



Balanced Budget Act of 1997: Implications for Graduate Medical Education, James A. Reuter, Institute for Health Care Research and Policy, Georgetown University, The Commonwealth Fund, December 1997