A teaching hospital's direct graduate medical education (DGME) payments are made on a per resident basis and are based on each hospital’s unique per resident amount (PRA). This PRA, once established, is permanent and cannot be modified or reset, other than by annual updates for inflation. Longstanding teaching hospitals that trained residents during the PRA "base period" established their PRAs based on the allowable residency training costs that they claimed on their first cost report after the inpatient prospective payment system (IPPS) began in 1983. 

Hospitals that were not training residents in 1983 establish their PRAs based on the hospital's first full cost reporting period (CRP) with residents. To determine a PRA, the Centers for Medicare & Medicaid Services (CMS) divides reported costs from the first CRP with residents by the number of full-time equivalent (FTE) residents training in the hospital that year to determine the teaching hospital's cost per resident. The Medicare allowable costs used to establish a hospital's PRA include costs attributable to GME across an entire hospital complex, including within the hospital, at hospital-based providers and within distinct part units. These costs may include, but are not limited to, expenses such as:

  • GME office expenses
  • Stipends and benefits of residents
  • Teaching physician salaries and benefits
  • Payments for preceptors
  • Accreditation fees
  • Professional fees
  • Recruitment expenses
  • Infrastructure improvements (e.g., call rooms, library, lecture rooms, etc.)
  • Technology for faculty and residents
  • Other allocated hospital overhead

Ultimately, due to regulatory requirements, the hospital's base year PRA will be established at the lowerof 1) the provider’s actual cost per resident incurred for the approved GME program from the base year CRP cost report data, or 2) the weighted average PRA of all teaching hospitals located in the same geographic wage area as the new teaching hospital, updated to the base year CRP. If fewer than three existing teaching hospitals are located in the same geographic wage area as the new teaching hospital when the base year GME PRA is determined, CMS instead will use the weighted average PRA of all teaching hospitals located in the same Census Region as the new teaching hospital, updated for inflation to the base year CRP.

If a hospital is reclassified for wage index purposes to another Core-Based Statistical Area (CBSA), this geographic reclassification will not affect how the base year PRA is determined. The geographic area where the hospital is actually located is what matters for purposes of establishing a PRA, because geographic reclassification does not apply to section 1886(h) of the Social Security Act, which governs DGME payments. Therefore, CMS does not use a hospital's geographic reclassification to set its base-year PRA.

A hospital that never trained residents should be aware that accepting resident rotators—even for short durations—will automatically cause its PRA to be established. This is the case even if the hospital does not report the resident rotators on its cost report. In fact, if a new teaching hospital does not report any costs associated with rotators on its cost report, it risks having its PRA set at zero. This problem is outlined in more detail in a recent GME @ Dentons article, "Be careful with resident rotators: What you don't know might hurt your hospital's ability to receive Medicare GME payments in the future."

Additionally, a bipartisan bill (S 2671/HR 4732) was recently introduced in Congress to help address this issue. For more information on this potential legislative solution and the related advocacy effort, see the recent GME @ Dentons alert, "Congress introduces bipartisan legislation to help teaching hospitals with vexing 'resident rotator' issue."

Setting the PRA is one of the many important considerations that a hospital needs to take into account if it wishes to become a new teaching hospital and to be reimbursed by Medicare. For more information on the Medicare rules that apply to hospitals that are first starting residency training programs, see the GME @ Dentons article, "The Medicare payment basics of becoming a new teaching hospital."