Catherine Rampell has a follow-up to her earlier article on the primary care doc shortage (my thoughts on the original piece here). In this one, she delves into the funding of residency slots my Medicare. Here’s the part I think it really worth noting:
In any case, in 1983, Medicare devised a new version of the training subsidy that has essentially carried over until today. The subsidy comes in two parts.
The first is officially for the “direct” costs of training new doctors (like their salaries, benefits, and teaching costs). The second, larger part is officially supposed to pay for the “indirect” costs that hospitals and health care centers incur because trainees are expected to be slow, inefficient, and otherwise generally increase the cost of care.
For example, let’s say a patient comes in with an ailment that Medicare usually pays $2,000 for the hospital to treat. Medicare will instead pay more than that if the hospital employs a lot of residents, with the exact increase in payment determined by a formula.
This means hospitals used to have incentives to create new residency slots ad infinitum so they could keep on getting higher and higher payment rates from Medicare. Congress decided (perhaps understandably) that this was financially unsustainable; there was also some concern about creating an “oversupply” of doctors in the 1990s. So in 1997, Congress capped the number of positions that Medicare would underwrite, freezing the total at what it was the year before.
Hospitals can still create (and have created) new, non-Medicare-financed residency slots, but they must do so using other sources of funds.
As I noted in the column, there is debate about whether hospitals need these subsidies, since at some point in the training process the residents are most likely bringing in a lot of money for the hospitals on net. In fact, the Medicare Payment Advisory Commission has found that the indirect payment rate is almost twice as high as can be justified by empirical data, once you look at the costs of care at teaching hospitals versus nonteaching hospitals.
I still recommend you read the whole thing.