Proposed Reductions in
Medicare IME Payments to
AAMC Teaching Hospitals: National
and State Economic Impacts
February 2011
Teaching Hospitals and Indirect Medical Education Payments
As a result of their unique capabilities and responsibilities, teaching hospitals’ costs are higher
than those at other hospitals. For example, there are significant expenditures associated with
the training offered at teaching hospitals for new physicians and other health care professionals.
In addition, these hospitals provide the clinical environment in which this training can occur.
Teaching hospitals are sites that treat the most complex patients, maintain standby capacity for
a full range of emergency services (many unavailable elsewhere in the community), are the first
adopters of cutting-edge technology, and provide specialized services, such as trauma and burn
care. They are sites for clinical research and many are safety net providers in their communities.
Since its inception, the Medicare program has provided funds to teaching hospitals for the
higher costs associated with their unique patient care, education, and research missions.
Medicare’s indirect medical education (IME) payments to teaching hospitals help cover the
program’s portion of the additional costs associated with teaching hospitals’ clinical care
environments and the patient care they provide. In FY 2011, Medicare IME payments are
estimated to total about $6.4 billion.1
The 112th Congress is expected to consider a wide range of solutions for reducing the federal
deficit. One such option, which was proposed by President Obama’s bipartisan National
Commission on Fiscal Responsibility and Reform, is a 60 percent reduction (approximately $3.9
billion) in Medicare IME payments to teaching hospitals.
In December 2010, the Association of American Medical Colleges (AAMC) retained Tripp
Umbach to measure the economic impact 2 of the potential reduction in IME payments to the
AAMC’s Council of Teaching Hospitals and Health Systems (COTH) on the 43 individual states
(and the District of Columbia) 3 in which they are located, as well as the nation as a whole.
Reduced IME Payments Could Mean a $10.9 Billion Loss to the US Economy
The loss of revenue to each COTH member based on potential federal cuts in IME payments has
a direct and indirect impact on the state’s economy. Tripp Umbach estimates for every $1.00
the federal government cuts in IME payments, the hospital’s state economy loses $3.84. These
potential cutbacks for COTH hospitals and health systems alone are estimated by Tripp Umbach
to mean a total loss to the US economy of nearly $10.9 billion 4.
1
AAMC Analysis using FY 2011 Inpatient PPS impact file.
2 For the purposes of this report, “economic impact” includes both the direct and indirect business volume
generated by an institution. Direct impact includes items such as institutional spending, employee spending, and
spending by visitors. The indirect impact, also known as the multiplier effect, results from the re-spending of dollars
generated directly by the institution.
3 COTH members in Maryland and Puerto Rico were not included in this research even though AAMC does have
members in these locations; additionally this study was based only on those 263 COTH members which were a part
of the 2008 AAMC membership impact study.
4 This study measures only the impact of IME payment reductions on those hospitals that are members of COTH and
not the total impact of the Medicare IME payment reductions. In addition it is important to note that this IME
impact is estimated assuming it would take place in 2012 however the economic impact is based on 2008 dollars.
2
IME Cuts Could Cost the US Over 72,600 Jobs and $653 Million in State and Local
Revenue
The financial loss to the state’s economy is not the only cause for concern; reduced IME
payments could also result in lost jobs. Tripp Umbach estimates that the recommended
reduction in IME payments could mean a loss of over 72,600 FTEs5 from COTH member
institutions. These cutbacks in employment, in turn, could lead to a loss of $653.4 million in
local and state revenue.
In addition, COTH member organizations have substantial economic and social impacts to their
multi-county regions and within the counties and cities where they have operations.
Communities in all regions of the country typically rely on teaching hospitals for job creation,
advanced research, new business development, and education of medical professionals in
addition to the clinical care. While beyond the scope of this study, cost cuts could have
substantial consequences locally and regionally with an impact estimated in the billions.
5 All employment in this study is in Full Time Equivalents (FTEs).
3
Table 1
Summary of Economic, Employment, and Government Revenue Loss
Due to Recommended IME Federal Payment Reductions for COTH members
4
Goals of the Economic Impact Study of COTH Members
The AAMC identified a need for data on their members’ current economic impact on states’
economies, employment, and government revenue.
Specifically, Tripp Umbach was
commissioned to perform research that quantifies the potential negative impacts of federal cuts
in IME payments to COTH members on their individual states as well as the nation with regard
to:
•
•
•
The State Economy,
Employment and
State and Local Government Revenue.
Consultant Qualifications
Tripp Umbach has performed more than 150 economic impact studies for both academic
institutions and large health care systems, including the Mayo Clinic Rochester, UPMC Health
System, and all Ohio medical colleges. The firm has completed similar statewide studies in
Pennsylvania, Minnesota, New York, Wisconsin, Ohio, Virginia, and South Carolina. The Tripp
Umbach methodology generally employed in these studies was originally derived from a set of
research tools and techniques developed for the American Council on Education (ACE). 6
Methodology Employed in the Economic Impact Study
The methodology employed in this research shows the impact that the loss of IME funding to
COTH members could have on the state economy, state employment, and state and local
government revenue. COTH members impact the national economy by hundreds of billions of
dollars annually. These members are major employers in their home states and therefore major
generators of personal income for state residents. Businesses operating within each state in the
wholesale, retail, service, and manufacturing sectors benefit from the direct expenditures of the
institution and its staff on goods and services. In addition, businesses in each state are
recipients of spending by hospital patients, patients’ visitors, medical students and their visitors.
Cuts in the amount that these particular organizations have to spend could impact both the
direct and indirect economic, employment and government revenue impacts that the COTH
members have both statewide as well as nationally.
All of these “direct” expenditures are re-circulated in the economy as recipients of the firstround of income “re-spend” a portion of this income with other businesses and individuals
within each state. This re-spending is often termed the “multiplier” or “indirect” effect. Tripp
Umbach’s research has determined a teaching hospital business volume multiplier effect of 2.3.
Therefore, for every dollar directly spent by a teaching hospital, an additional $1.30 is indirectly
generated for a total impact of $2.30. The methodology used for this study measures the effect
6 Caffrey, John and Isaacs, Herbert, "Estimating the Impact of a College or University on the Local Economy,"
American Council on Education, 1971.
5
of both direct and indirect business volume, employment, and government revenue impacts for
states containing a COTH member.
Not included in Tripp Umbach’s impact model is patient spending at the hospital itself and
economic benefits which result from COTH members’ provision of community health
improvement activities, preventive and primary care, access to care, and physician training.
Additionally, the impact generated by the existence of non-employed physicians with privileges
at COTH member institutions is not included in this study.
The ACE-based 7 methodology employs linear cash flow modeling to track the flow of institutionoriginated funds through a delineated spatial area. Tripp Umbach modified the ACE model to
accommodate the complexities of COTH member organizations.
Tripp Umbach researchers worked closely with representatives from the AAMC to collect the
required data. After generating the impact that COTH members have on their state and the
nation with the IME funding as a portion of the organization’s spending, the COTH member’s
impact was generated with the recommended IME cutback. The differences of these impacts
were used to deduce the impact loss as a result of the IME payment reduction.
AAMC Member Economic Impact Model
7 Caffrey, John and Isaacs, Herbert, "Estimating the Impact of a College or University on the Local Economy,"
American Council on Education, 1971.
6