Since the late 1990s, teaching hospitals have had to contend with Medicare's opaque and ever-changing rules addressing hospitals' ability to count, for both DGME and IME reimbursement, those residents who receive their training in nonhospital locations. Hospitals have been increasingly vocal in their complaints about the rules and about their fiscal intermediaries' enforcement of them. Accordingly, over the past year, CMS has issued clarifications and guidance in this area through changes in the regulations, presentations by CMS officials, issuance of letters, and, most recently, publication of Frequently Asked Questions (FAQs) on its website. Unfortunately, significant questions and issues remain.

Background
Since the late 1980s, hospitals have been able to include in their FTE count for DGME those residents training in nonhospital locations as long as (1) the hospital has a written agreement with the nonhospital location stating that the residents' compensation for time spent in the nonhospital location is paid by the hospital; and (2) the residents' time is spent in patient care activities. Since 1997, as a result of the Balanced Budget Act, hospitals have been able to count resident time spent training in nonhospital locations for IME as well as DGME.

Up through 1998, Medicare's rules were relatively easy to apply, given that almost all hospitals paid their residents' full salaries and could document that fact. CMS tightened its rules for DGME and IME, however, effective January 1, 1999, see 63 Fed. Reg. 40,953 (July 31, 1998), to require not only that the written agreements show that the hospital is incurring the cost of resident salaries and fringe benefits while residents are training at a nonhospital site, but that the agreements also state that the hospital is providing "reasonable compensation to the nonhospital site for supervisory teaching activities," as well as "indicate the compensation the hospital is providing to the nonhospital site" for those activities. 42 C.F.R. § 413.86(f)(4)(ii). These new requirements caused considerable confusion among hospitals relating to how much they would have to pay for supervisory physician activities, the circumstances under which physicians might be able to volunteer their time, with whom agreements might be required, and how detailed those agreements must be, among other questions. The recent CMS guidance has addressed these points, at least in part.

Federal Register Guidance Limits Teaching Physician Volunteerism
CMS's first guidance was issued as part of the inpatient PPS annual update for fiscal year 2005. 69 Fed. Reg. 48,916, 49,176-182 (Aug. 11, 2004). In that issuance, CMS made several points. First, CMS addressed the moratorium created by § 713 of the MMA by clarifying that the moratorium applies only to disallowances of allopathic or osteopathic family practice residents training at nonhospital locations during calendar year 2004 (and cost reports settled during that period) and does not apply to residency programs other than those in family practice. Second, and of more general application, CMS stated that regardless of whether the written agreement states that the teaching physician is "volunteering" his or her time, "we have required that the hospital must pay these costs in order to count FTE residents training in the nonhospital site, as long as these teaching physician costs exist." 69 Fed. Reg. at 49,176. Third, CMS stated that the actual cost of time spent by teaching physicians in supervising residents is dependent upon the physicians' salary and the percentage of time that he or she devotes to activities related to the residency program at the nonhospital site.

CMS noted but one exception to the substantial limits it had placed on physicians' ability to "volunteer" their time — that for solo practitioners. CMS stated that, in the case of a "solo practitioner, compensation . . . is based solely and directly on the number of patients that the solo practitioner treats and for which the solo practitioner bills." CMS then reasoned that, in such instances, "we recognize that there are no costs associated with the supervisory teaching physician's time because the physician is not receiving compensation in any form or from any source while conducting teaching activities." 69 Fed. Reg. at 49,182. Therefore, CMS concluded, no direct or in-kind compensation needs to be made by hospitals to such physicians.

CMS's Federal Register guidance on these points was contrary to the practices of many hospitals. The agreements that many hospitals have had with nonhospital sites have been drafted, in part, based on the belief that physicians had more latitude to volunteer their time than permitted under CMS's Federal Register "clarification." Similarly, many hospitals felt that they had broader latitude to negotiate "reasonable" compensation than CMS's Federal Register guidance appeared to permit. At the same time, the Federal Register guidance did not contain universally bad news. CMS set forth, for the first time, its belief that "the regulatory requirements concerning the written agreements may not have been the most efficient aid to fiscal intermediaries in determining whether hospitals would actually incur all or substantially all of the costs of the training programs in nonhospital settings." 69 Fed. Reg. at 49,179. Given this, CMS said that it would allow hospitals, beginning October 1, 2004, not to have written agreements but, instead, to have proof that they provided compensation to the nonhospital site within three months following the month in which the training actually took place. Under this new policy, hospitals may continue to have written agreements stating that the hospitals will incur all or substantially all of the costs of training in the nonhospital sites. Alternatively, the hospitals now may pay the costs of the training program within the specified time and without the need for a written agreement. If the hospital elects to use the written agreement approach, CMS restated, the written agreement must have been prepared prior to the residents beginning their training.

CMS also restated in the Federal Register its position that the compensation paid need not be cash, but may be in the nature of "in-kind compensation." As examples of in-kind compensation, CMS said that hospitals may provide continuing education and other professional and educational support for supervising physicians or may provide them with office space, with the value of this training or space being substituted for monetary compensation. The type of support must be described in the written agreement in lieu of the monetary amount for the hospital. Alternatively, if the hospital is opting to pay all or substantially all of the costs of the training concurrently with the training, the in-kind compensation must be "provided or made available" by the end of the third month following the month in which the training takes place.

CMS Letter Reinforces Policy
CMS's August 2004 Federal Register clarifications were reinforced in a letter dated December 7, 2004, from Dr. McClellan, in his role as Administrator of CMS, to the OIG, addressing the cost of training residents in nonhospital settings. In that letter, Dr. McClellan stated that one of CMS's reimbursement criteria requires the hospital to pay the nonhospital site for the costs attributable to supervising residents at the nonhospital site. Dr. McClellan then gave the following example: "If a teaching physician employed on a salary basis by the nonhospital site spends 10 percent of his or her time supervising residents, then the hospital must pay the nonhospital site 10 percent of the supervisory physician's salary." Dr. McClellan also addressed the question of physicians volunteering their time and stated that CMS has "expected that the nonhospital sites would determine and that the hospitals would pay an amount that reflects the actual costs of supervisory physician activities, regardless of whether the teaching physician is 'volunteering' his or her time." He went on to state that the issue of concern is "not volunteerism but whether there is a cost to the nonhospital site for supervising the residents." Dr. McClellan also stated that some hospitals were paying only a "nominal amount of compensation" for the supervisory teaching physicians' time in the nonhospital setting. This, he noted, is contrary to CMS policy and that "a determination of the cost of training must be made, and the hospital must pay the nonhospital site for those costs, as long as those teaching physician costs exist."

FAQs Offer Further Clarification
The policy statements contained in Dr. McClellan's letter and in the earlier Federal Register issuance were news to many hospitals, and CMS heard from a number of those hospitals and their representatives. From the providers' and their attorneys' comments and questions, it was apparent to CMS that yet further clarification was needed. Accordingly, on April 8, 2005, CMS posted on its website "Medicare Policy Clarifications on Graduate Medical Education Payments for Residents Training in Non-Hospital Settings" (the FAQs). The FAQs, for the most part, underscored CMS's earlier statements described above, but they also contained some new clarifications. First, CMS tackled the repeated issue of whether a physician may volunteer his or her time to supervise residents in a nonhospital site. CMS stated, as it had stated before, that the relevant question is not whether volunteerism is permissible, but whether there is a cost to the nonhospital site. CMS then, however, provided further guidance on whether or not, in its view, a cost might exist. CMS stated that, typically, "there is a cost for teaching physician time if, for example, the physician receives a predetermined compensation amount for his/her time at the nonhospital site that does not vary with the number of patients he/she treats." In contrast, CMS went on to observe, "there is typically no cost for teaching physician time if the physician's compensation at the nonhospital site is based solely and directly on the number of patients treated and for which he/she bills." The most typical example of the no-cost situation, CMS stated, is a solo practitioner who serves at a nonhospital site. By comparison, CMS noted, in the case of a group practice or clinic setting, the physician often receives a predetermined payment amount for his or her work at the nonhospital site, with the predetermined payment amount reflecting all of his or her responsibilities at the nonhospital site. CMS stated that, in such instances, the physician's salary generally covers training residents and other administrative activities, and the predetermined amount is paid regardless of how many patients the individual physician might actually treat. CMS contends that because a portion of the compensation is the cost attributable to teaching activities, the hospital must pay that amount.

In the FAQs, CMS also provided guidance concerning what teaching activities the hospital must actually reimburse and whom it must reimburse. CMS stated that the compensation that teaching physicians must be paid relates to the teaching physician's activities "provided in connection with an approved residency program other than the supervision of residents while furnishing billable patient care services." CMS clarified that only the costs associated with teaching time spent on activities within the scope of the GME program but not in billable patient care activities are considered by CMS to be direct GME costs that need to be paid by the hospital. The vast majority of time spent by residents in nonhospital settings is of a clinical nature in connection with a "billable patient care activity." Following this line of thinking, the bulk of the supervisory physician's time is unconnected with direct GME costs and, thus, does not need to be compensated by the hospital. CMS also clarified that if a physician is an employee or reports to another official at the nonhospital site, the written agreement must be between the hospital and an authorized representative of the nonhospital site. In other words, unless the physician owns the nonhospital site, the agreement should not be between the hospital and the individual physician but, instead, between the hospital and the nonhospital site.

Additionally, CMS stated that if the teaching physicians are employees of the hospital and do not receive any additional compensation from the nonhospital site, no additional payment to the nonhospital site is needed, since the salaries paid by the hospital to the physicians cover the teaching costs both inside and outside of the hospital. The agreement between the hospital and the employee physicians, however, should make these responsibilities clear. CMS also clarified that if the nonhospital site is owned by the hospital, or by the same organization that owns the hospital, the hospital must incur the teaching physician costs and there must be a written agreement in place before the time the residents begin training in the nonhospital site. Alternatively, the hospital must pay the nonhospital site by the end of the third month following the month in which the training takes place. If the hospital and nonhospital site share a common accounting system, the hospital can show that payments were made by using journal entries that reflect the expense of these costs in the hospital's GME cost center and a credit to the nonhospital site.

Additionally, CMS noted that if the teaching physician is on the staff of a medical school and supervises residents in the hospital and in clinics owned by the medical school, the hospital may have a written agreement with the medical school, since the medical school owns the clinics. If hospitals are training in various medical school clinics, the hospitals must have written agreements reflecting compensation arrangements for each clinic.

Clarifications Raise More Questions
While CMS is to be applauded for attempting to clarify its policies, those clarifications, unfortunately, have created a number of questions. In the first instance, CMS's policy clarifications suggest that hospitals must engage in cost finding to determine what the costs of the teaching physicians might be, instead of allowing the parties to decide between themselves what "reasonable compensation" should be. Measuring that time could prove difficult. CMS has stated in its instructions regarding the computation of the per-resident amount that time spent by a supervisory physician with residents in the furnishing of a billable Part B service is not considered to be Part A teaching time or "direct GME." Given the clinical nature of most nonhospital training, it is conceivable that supervisory physicians would have no time spent related to direct GME other than, perhaps, time spent writing evaluations of residents and performing a few other administrative tasks. Nevertheless, the provider's fiscal intermediary may be most skeptical of this point, and proving the lack of "teaching" time may be difficult for hospitals in the absence of, for example, time sheets to back up that position. Getting such documentation may be far from easy. Many, if not most, teaching physicians may be reticent to fill out such records. Furthermore, even if one could establish how much time is related to direct GME activities, will hospitals be able to gather physician compensation information? Physician practices may be reluctant to furnish that information and, if the hospital insists upon it, may decide not to participate in nonhospital training. These are legitimate concerns for hospitals, and CMS's response, in informal settings, has been only that it will "work with" hospitals under these circumstances. Moreover, what if the compensation of the physicians fits neither of the models described-full salary or solo practitioner? Oftentimes, physician compensation models are quite different from those described by CMS. How do these fit within CMS's view of the world, and how might the provider's fiscal intermediary view the arrangement? All of these questions will need to be addressed, either on a case-by-case basis by the hospital's fiscal intermediary or through further clarification by CMS. Indeed, congressional clarification may be necessary in order for hospitals finally to obtain a clear understanding of the rules.