A bipartisan group of four Senators (Bill Cassidy, Catherine Cortez Masto, Michael Bennet, and John Cornyn) recently introduced a bill to expand Medicare payments for Graduate Medical Education (GME). They argue this legislation is needed to address physician shortages, which are concentrated in primary care and rural communities.
But there is no overall shortage in medical residencies. The reluctancy of new physicians to practice in underserved communities in fact owes much to the existence of GME subsidies, which require residents to be trained in big city academic centers. These supplemental payments were originally designed to secure the support of the nation’s most expensive hospitals for Medicare reforms, rather than to increase the supply of the nation’s physicians.
After 4 years of medical school, graduates undertake a 3 to 7 year medical residency (depending on the specialty), where they work as apprentices to experienced clinicians – typically in a hospital setting.
As well as paying teaching hospitals for the care they deliver to patients, Medicare provides additional funding for them to pay residents, their instructors, and the administrative costs of medical education. It also compensates facilities for the slower speed and greater overhead costs associated with procedures which involve training. These funds are distributed in proportion to the number of Medicare patients hospitalized and according to the number of “residency slots” which is allocated to each facility. Medicaid also makes similar add-on payments, without any limit on slots.
In 2021, Medicare and Medicaid distributed $25 billion for GME to a fifth of the nation’s hospitals. With around 100,000 physicians in training, these add-on payments amounted to more than four times the average resident salary of $59,279.
Senators Cassidy, Cortez Masto, Bennet, and Cornyn argue that Congress in 1997 capped the number of residency slots for which hospitals could claim Medicare GME add-on payments due to concerns of a physician surplus. Now, they suggest, the U.S. faces “a shortage of 139,940 physicians by 2036,” and advocate increasing the residency slots.
Yet, there is no clear market failure which makes it necessary to subsidize hospitals to train new physicians. Health economists note that medical residents perform valuable work for hospitals, and “implicitly pay for the high cost of their training… by accepting salaries below the market value of their services.” In fact, residents likely increase the productivity of experienced physicians, by helping with patient preparation and triage, while providing on-call coverage.
Hospitals have therefore found it profitable to expand residency programs, even without Medicare funding for additional slots. The number of accredited medical residents increased by 27% in the two decades after the cap on Medicare GME slots was established, while over 70% of teaching hospitals in 2018 trained more residents than they had slots. Salaries of medical residents did not change when Medicare GME add-on payments were introduced, or when the number of slots for them was capped.
In fact, GME add-ons may have harmed the distribution of new physicians. The Government Accountability Office notes that GME payments dwarf other expenditures on medical training, but don’t align with goals set out by the national strategic plan on the medical workforce. Most of the funding goes to expensive academic medical centers in big northeastern cities, which serves to pull new doctors away from small towns and rural areas where physician shortages are greatest – and where they could be trained at lower cost. Furthermore, GME payments serve to pull residents into inpatient settings, training them to treat emergency trauma cases, rather than patients with chronic diseases, which will be the focus for most of their careers.
Medical education has always been more of a pretext than the real purpose of GME subsidies. When Medicare was established in 1965, hospitals were paid according to the costs they incurred in treating patients – an arrangement which paid costlier expensive facilities more, but also caused costs to increase. In 1983, when Congress fixed Medicare for inpatient procedures to limit the escalation of costs, it created add-on payments for GME so that high-cost academic medical centers and New York’s congressional delegation would support the reform. As the then-director of Medicare’s research department noted: “It was a bribe, pure and simple… and it worked.”
In large part due to GME add-ons, Medicare payments for surgery are now 33% to 59% higher at top teaching hospitals than non-teaching hospitals. GME add-ons fly in the face of the recent bipartisan push for “site-neutral payment”, which attempts to equalize Medicare fees across hospitals, according to the most cost-effective levels. Nonetheless, the Association of American Medical Colleges argues that its member hospitals deserve higher payments, because research and training responsibilities interact to confer unique capabilities to meet communities’ most complex medical needs, such as responding to mass-casualty events.
Even if such considerations justify existing GME add-ons, they do not mean that a further expansion of GME payments would address America’s medical workforce challenges. In 2024, a record number of residency positions were available, but 6.2% were unfilled – with more residencies unfilled than ever before in family medicine. Although the Senators propose to earmark some of the extra slots for “underserved areas”, these additional payments would likely serve to divert new physicians from less politically-favored communities, where they may be more needed.
Chris Pope is a senior fellow at the Manhattan Institute.
