In the coming months, hospitals that receive direct graduate medical education (DGME) and indirect medical education (IME) payments from Medicare will see the rules governing those payments change yet again. Some of these changes are the result of the MMA, while others are the result of recent changes to the Medicare regulations. Most of the changes affect a hospital's full-time equivalent (FTE) count used in calculating both DGME and IME payment amounts; other changes relate to certain aspects of the IME methodology, all as discussed below.

Residents Training in Nonhospital Settings
The first set of changes relates to hospitals training FTEs in nonhospital locations. The current Medicare rules found at 42 C.F.R. § 413.86(f)(4) require that a hospital have a written agreement in place with each nonhospital training site in order to include the residents training at those locations in the hospital's FTE count. The written agreement requirement has been in place for a number of years, and CMS has required that the agreement address both resident salary and fringe benefit payments and payments for supervisory physicians at the offsite location. In the 2004 inpatient PPS rule, published on August 11, 2004, CMS has again tinkered with the written agreement requirement. First, CMS has clarified its policy to be that a hospital "must incur all or substantially all of the direct GME costs, including those costs associated with the teaching physician, regardless of whether the written agreement states that the teaching physician is 'volunteering' [his or her time]." 69 Fed. Reg. 48,916, 49,176 (Aug. 11, 2004). CMS states that even though the agreement may specify that the physician is volunteering his or her time, or alternatively, even though the hospital may be paying only "a nominal amount" of compensation for the teaching physician's 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." Id. In other words, although it is less than clear on this point, CMS seems to have placed further restrictions on the ability of hospitals to count FTE time spent training in nonhospital locations when the supervision of the residents is performed by volunteer - that is, uncompensated - faculty.

Two exceptions to the "no volunteers" policy, however, unquestionably remain. First, Congress has placed a one-year moratorium on requiring compensation for supervisory physician costs involved in the training of family practice medical residents at nonhospital sites. CMS is interpreting this moratorium to apply to portions of cost-reporting periods that take place during calendar year 2004 as well as to cost reports that relate to prior years but that are settled during 2004. Second, CMS has stated that, "in the case of a solo practitioner. ., no direct or in-kind payment needs to be made to the supervising physician." 69 Fed. Reg. at 49,182. CMS's rationale for the position is that, in the case of the solo practitioners, compensation is based solely on the number of patients that the practitioner sees and for whom he bills. CMS reasons that if the physician is teaching, as opposed to treating patients, there is no "cost" associated with the time because the physician is not receiving compensation in any form for that time.

In the 2004 regulation, CMS has also clarified that "[CMS] policy has required that the written agreement between the hospital and the nonhospital site be in place prior to the time that the hospital begins to count the FTE residents training in the nonhospital site." 69 Fed. Reg. at 49,179. Left unaddressed, but an area of continuing confusion, is whether hospitals may structure a later agreement that, in essence, "pulls together" other agreements or pieces of correspondence that individually might not satisfy the regulation's requirements but that collectively do so and that were entered into prior to the training taking place. Under these circumstances, one could make a reasonably persuasive argument that the subsequent agreement simply memorialized the agreements that were previously entered into and that all of the agreements, taken together, satisfy both the intent and the language of the regulation.

As noted above, CMS has long required a written agreement between hospitals and offsite locations. In its new rule, however, CMS is softening this position by permitting, but no longer requiring, that the agreement in place be written. Hospitals still will be required to meet the requirement that they incur all or substantially all of the costs of the program in the nonhospital setting, but they no longer will be required to show a written agreement in place as a precondition to counting those residents. This change, however, is really one of form over substance. Hospitals still will be required to meet all of the conditions that have previously been imposed on them. That is, they will have to incur, as before, the resident salary and fringe benefits as well as the costs of the supervising physician. Moreover, if the hospital does not enter into a written agreement, the hospital is required to pay all or substantially all of the costs of the training in the nonhospital site by the end of the third month following the month in which the training takes place. If the costs of the supervisory physicians are reimbursed through some sort of in-kind arrangement, CMS has specified that those arrangements must be provided for or made available to the teaching physician at least quarterly to the extent that residents are training in the nonhospital setting in that quarter.

Residents in Clinical Base Year
In the new rule, CMS also has addressed how to count residents whose first year is spent in a clinical base year. Under the GME rules, as we know, hospitals may count as full, or "1.0," FTEs only those who are in their initial residency periods. Thereafter the residents are counted as ".5" FTEs. Residents in certain specialties, such as radiology and anesthesiology, are required to spend an initial year of generalized clinical training (the "clinical base year") as a prerequisite to the time spent in more specialized training. If the clinical base year training occurs as part of a transitional year program, CMS has long agreed that the initial residency period selection does not occur until the resident's second residency year, when the resident enters a specialty program. What this means is that the resident will be considered to be in his or her initial residency period as determined by the length of the specialty program. Conversely, Medicare has taken the position, at least in recent years, that if the clinical base year is spent in some other program, such as internal medicine, the length of that particular program determines the duration of the resident's initial residency period. Thus, even though a resident may be entering, for example, internal medicine simply to satisfy his clinical base year requirement, CMS has said that the term of the initial residency period is determined by the term of the internal medicine program and not by the longer specialty program. CMS now, however, has modified its position somewhat. CMS will allow the initial residency period to be controlled by the longer specialty program in those cases in which the resident engages in a simultaneous match, that is, in those cases in which the resident matches for both the clinical base year training program and the lengthier specialty program at the same time.

Reallocation of Unused Resident Slots
Perhaps the most significant change relating to FTEs results from section 422 of the MMA, which requires the reallocation of "unused resident slots" beginning July 1, 2005. In 1997, Congress placed caps on the number of FTEs that a hospital can count. Those caps are based on the number of allopathic and osteopathic residents that the hospital trained in its most recent cost-reporting period beginning on or after December 31, 1996. A hospital has been able to claim the number of FTEs it is training at the hospital and at its offsite locations (as long as the hospital has an agreement with the offsite location) to the extent that the number of FTEs does not exceed the 1996 cap. If the hospital's current year FTE count is above its cap, however, it generally is not allowed to count those extra FTEs.

The hospitals that are at or above their caps have complained that they are penalized while other hospitals are allowed to operate below their caps. In response, Congress enacted section 422 to provide relief by providing for a reallocation of resident slots. In section 422, Congress specifies that if a hospital's "reference resident level" is below its 1996 cap, its cap is to be reduced by 75 percent of the difference between the 1996 cap, subject to certain adjustments, and the reference resident level. The reference resident level, in turn, is based on the hospital's most recent cost-reporting period ending on or before September 30, 2002, for which a cost report has been settled (or, if not settled, submitted but subject to audit) or, in certain instances, the cost-reporting period that includes July 1, 2003. Special rules apply for those circumstances in which a hospital is part of a Medicare-affiliated group and is, through their process, sharing FTEs with other hospitals. Notably, the fact that the hospital may have claimed a certain number of FTEs in 2002 or 2003 is not necessarily determinative of whether it will later be subject to a section 422 reduction. CMS has made clear that a hospital's FTE resident count used for purposes of determining the cap reduction is subject to audit by a fiscal intermediary, with the fiscal intermediary performing desk reviews or more detailed audits. What this means is that there could be circumstances in which a hospital is training a number of FTEs that equals or exceeds its 1996 cap, but could still be subject to a downward adjustment because of, for example, the lack of a training agreement with an offsite location.

The reduction in FTEs from certain hospitals is only one part of the reallocation process, however. Once CMS has taken away the "unused resident slots" from certain hospitals, it is then required, by statute, to reallocate those FTEs to other hospitals, giving priority first to rural hospitals, second to urban hospitals not located in large urban areas, and third to hospitals that are the only hospitals with a specialty residency program in the state. CMS, in its August 11, 2004 regulation, describes the application process in detail. Significantly, no hospital is allowed to gain more than 25 new FTEs. Also significant is the fact that the transferred or reallocated slots are subject to different reimbursement rules. The MMA provides that, for DGME, the per-resident amounts for the reallocated residents will be based on a locality-adjusted national average per-resident amount. The IME payments will be based on a multiplier of 0.66, which is well below the current multiplier level.

The reallocation provisions are effective for cost-reporting periods beginning on or after July 1, 2005, although much of the administrative process of determining how many slots are to be reallocated is currently ongoing. Unfortunately, the determinations made by CMS are exempt from administrative or judicial review. Thus, hospitals are well advised to ensure that all of the documentation supporting their claims are in order.

IME Multiplier
The final recent change in the medical education area relates to Congress's modifying the multiplier used in the statutory formula employed to establish the IME payment amount. The multiplier in the formula was, in 2003, 1.35. In the MMA, however, Congress directed that the multiplier be increased substantially to 1.47 for the period April through September 2004, and then reduced to 1.42 for the federal fiscal year 2005. In federal fiscal year 2006, the amount is to be reduced further to 1.37, and in federal fiscal year 2007, the multiplier goes down to 1.32. In federal fiscal year 2008 and beyond, the multiplier then returns to the rate that was in place in federal fiscal year 2003, 1.35.

IME Bed Count
The IME calculation is based principally on the multiplier discussed above and on the hospital's ratio of FTEs to its number of beds. In the May 2003 proposed inpatient PPS rule, CMS suggested certain changes to how it would determine the number of "available bed days," which is what CMS uses to calculate the number of beds in this ratio, but it then delayed action on the proposal. In the August 11, 2004, rule, however, CMS took final action, adopting most of what had been proposed. CMS is modifying its rules to state that bed days in a unit that is unoccupied for the preceding three months by patients receiving a level of care that would generally be payable under IPPS will be excluded from the available bed count for the future months. In addition, even in units that are occupied by one or more patients receiving an IPPS level of care, beds still may be excluded from the count if they could not be made available for patient occupancy within 24 hours for 30 consecutive days. Finally, beds otherwise countable but used for outpatient observation services (unless the patient is ultimately admitted as an inpatient), skilled nursing swing-bed services, or ancillary labor/delivery services are excluded from the count.

Conclusion
These changes to the DGME and IME rules are substantial and reflect the latest in a series of annual changes that we have come to expect, and should expect in the future. Because of the number of dollars that Medicare spends in the area of medical education, we can be virtually certain that we shall see further changes implemented by either Congress or CMS in the near term.