ABA Health eSource
 July 2005 Volume 1 Number 11

An Update: Physicians Training Residents In Non Hospital Settings
by J. Mark Waxman, Foley & Lardner LLP, Boston, MA Foot Note

Spurred by recently enacted Medicare Prescription Drug, Improvement and Modernization Act of 2003 Foot Note[MMA provisions (Section 713)], an OIG report entitled, “Alternative Medicare Payment Methodologies For The Costs of Training Residents in Non Hospital Settings” ( “OIG Report”), issued in December 2004, and the April 8, 2005 release by the Center for Medicare and Medicaid Services (“CMS”) of the “Medicare Policy Qualifications on Graduate Medical Education Payments for Residents Training in Non-Hospital Settings” ( “PQ”), training in non-hospital settings has become a “hot topic.” This article addresses why this has become a troublesome area and offers guidance for avoiding unnecessary issues.

Medicare Reimbursement For Graduate
Medical Education (“GME”) In
Non-Hospital Settings

The heart of Medicare reimbursement for the costs of direct medical education ( “DGME” or “DME”) and indirect medical education (“IME”) is an accurate determination of the number of resident full time equivalent (“FTEs”). Medicare determines its share for payment through the payment of a portion of the direct costs of training focused on residents, faculty and related overhead (e.g., salaries and fringe benefits are the basis for DGME payments), and the additional operating costs borne by teaching hospitals – more tests ordered and higher intensity of treatment of the associated with sicker patients (“IME”). Foot Note

One element of the teaching activity that has called for special treatment is that of training residents in non-hospital settings. Authorization for DGME payments when this type of training occurs was specifically allowed under the adoption of Section 1886 (h) of the Social Security Act (“SSA”) in 1987, with IME following under the BBA in 1997 Foot Note(Section 4621). The criteria for the receipt of payment by the academic medical center (“AMC”) were the same for both:

  1. Time was spent in patient care activities;
  2. The medical residency was an approved program; and
  3. The hospital incurred “all, or substantially all” of the training costs in non-hospital settings. Foot Note

This latter provision was defined to mean that “[t]he residents’ salaries and fringe benefits (including travel and lodging…) and the portion of the cost of teaching physician salaries and fringe benefits attributable to direct graduate medical education (“GME”).” Foot NoteThe costs do not include time spent on direct patient care which results in billable services. Foot Note

A second set of requirements also conditions receipt of payment on the existence of a written agreement between the hospital and the non-hospital setting. The agreement is not required to have any specific format, but most provide that:

  1. The hospital will incur the salary and fringe benefit costs while the resident is training at the non-hospital setting; and
  2. The hospital will provide reasonable compensation for the non-hospital setting, indicating the amounts with specificity. Foot Note

MMA and the OIG Report

One of the challenges since the adoption of the resident cost reimbursement formulas relates to the fact that, since 1997, situations arose in which teaching hospitals might claim costs for residents in non-hospital training sites (“NHTS”), but the full costs involved, for example those of the teaching physicians, were not being incurred by the hospital. Indeed, much of the time, teaching physicians would simply volunteer to train residents. This led, as a number of Senators recently noted, to a practice initiated in 2002, whereby CMS would retroactively deny an allocated share of residency payments, particularly where teaching physicians were volunteers. Foot NoteThe Senate had, along with Congress and the President, previously acted to provide a moratorium during calendar year 2004 on disallowances where the hospitals did not incur the full costs related to the physician’s time spent supervision NHTS residents. And, in MMA Section 713, OIG had been directed to study the problem and find out just what were the practices that existed for payments, if at all, for the costs of training residents in NHTS.

The Report, issued in December, 2004, found or recommended that:

There was a need to clarify the treatment of volunteer time; CMS could determine a series of alternative methodologies to pay NHTS costs; and The moratorium should be extended until the issues were clarified and resolved.

The moratorium, however, has now expired.

The CMS Policy Qualifications

In lieu of an extension of the moratorium, on April 8, 2005 CMS published its Policy Qualifications. In its PQ, CMS reaffirmed its recognition of Congress’ commitment to hospitals to encourage more resident training in NHTS. However, through the PQ, CMS reaffirmed the view that time spent by residents in NHTS would be counted to establish qualifying time only if the hospital is “actually incurring all or substantially 'all of the costs' of… training at the hospital site.” Foot Note

As for the specific question of how to address volunteer time by physicians who were training or supervising residents at these sites, CMS sought to refocus the question on “whether there is a cost” to the non-hospital site for supervision. If so, and the hospital paid the costs by reimbursing the non-hospital site, the hospital was required to reimburse it. If not, then no payment would be required. Strangely, however, whether this specifically also meant that the time spent can no longer be counted, is not directly addressed! Foot Note

This gap suggests that the best approach to avoid the potentially adverse answer is to make sure a payment is made, but it must be a payment specifically for “teaching time” activities within the scope of the approved GME program, and not in billable patient care activities. Hence, if the only payments a physician receives are production based, i.e. based only on the number of patients seen and billed, there is no incurred cost to be reimbursed or compensated.

From this point in the PQ, the logic of the presentation seems to deteriorate as CMS attempts to distinguish between the role of and payments to “solo practitioners” and “members of a group practice”. In the case of the former, CMS assumes the only compensation is production based -- i.e., that a facility would not pay a practitioner reasonable compensation for time spent training, or even as a Department Education and Training Director. This inability is then contrasted with a group practice where the physician “often” receives a salary for work at the NHTS, which by definition would (assumedly) reflect “all” responsibilities from which some share could/should be allocated to time spent teaching. If the hospital then paid this amount, then it would have incurred the costs. The role of production based systems, and profit sharing in the “group practice” setting is not explored. Foot Note

CMS does, however, recognize that a “group practice” that is simply an overhead sharing arrangement coupled with no revenue sharing is equivalent for these purposes to the solo practitioner example. Foot Note

A third alternative is to make the supervising physicians hospital employees. Unless additional compensation is received from the non-hospital site, then additional payment is not required since there are no additional physician costs to be incurred. The written agreement would simply need to reflect this state of affairs.

The PQ then addresses several of the written agreement related issues. First, the agreement should be with the physician is the training is office based. The physician “must report” to another official at the NHTS or if the physician is a NHTS employee, the agreement is to be with the site. Presumably this will also be the case if the training physician is not an employee, but receives a reasonable stipend for the training effort.

Second, even if the NHTS is wholly owned or owned by an affiliate, a written agreement must be in place and the hospital must incur the teaching physician costs. Hence in multi-faculty systems, the hospital ust still pay a separately licensed nursing home the necessary costs. This can be accomplished by at least journal entries that show the expense being properly charged and credited to the appropriate cost centers. Foot Note

The same principles also apply where the teaching physician is a medical school staff member and supervises residents in both the AMC and clinics owned by the medical school. The hospital should have a written agreement with the medical school, and the agreement would specify the compensation agreement for each clinic.


Several conclusions may be reached. First, whatever the compensation arrangement between hospital, training physician and NHTS, it is important to have a written agreement in place. Second, ensuring reimbursement for the full FTE costs of residents will likely require that there be a teaching cost incurred by the hospital. Third, if the physician engaged in the training receives purely production based compensation, CMS will take the position that there is no incurred cost to be paid by the hospital. And, fourth, if the physician receives a predetermined compensation amount, regardless of the number of patients treated, there can be an allocated share paid for training which will allow residents to be counted for resident (both IME and DGME) purposes.

Among the items not addressed would be a situation where the physician is paid a specific stipend for teaching, based upon a reasonable hourly rate, or alternative by simply being employed by the NHTS as a part time employee for teaching purposes. The issue which remains is how to deal with (uncoerced) volunteerism, or incentive based volunteerism (in the form of CME credits, Academic Appointments, library access, and participation in hospital rounds). Without a resolution of this issue, hospitals remain at risk. The sad, but conservative answer, would seem to be to discourage volunteerism and adopt a payment and written agreement approach.

Foot NoteJ. Mark Waxman is a partner in the Boston office of Foley & Lardner. His health practice specializes on issues related to academic medical centers, research institutions and regulatory issues for health providers. He previously served as President and General Counsel to CareGroup, Inc. in Boston.
Foot NotePUB. L. 108-173 (December 8, 2003).
Foot NoteSee generally 42 C.F.R. § 413.75 et seq.
Foot NoteBalanced Budget Act of 1997 (Pub. L. 105-33).
Foot Note42 C.F.R. § 413.75(b).
Foot NoteId.
Foot NoteMemorandum dated, December 8, 2004 to Mark B. McClellan, Administration, CMS from Daniel R. Levinson, Acting Inspector General, “Alternative Medicare Payment Methodologies…”
Foot Note42 C.F.R. § 413.78(e). This provision succeeded 42 C.F.R. § 413.86(f).
Foot NoteLetter to Mark McClellan, Administration, CMS dated May 31, 2005 from U.S. Senators regarding the use of volunteer physicians as teachers training residents in non-hospital settings.
Foot NotePQ, Question 2.
Foot NotePQ, Question 3.
Foot NotePQ, Question 4
Foot NotePQ, Question 9. Of interest, the definition of a group practice for other regulatory (e.g. Stark) purposes is not mentioned.
Foot NotePQ, Question 8.