On November 17, 2008, the First Circuit Court of Appeals held that the Centers for Medicare & Medicaid Services (CMS) did not act in an arbitrary or capricious manner in determining that time residents spend in research activities unrelated to patient care must be excluded from a hospital's full-time equivalent (FTE) resident count for purposes of the Medicare indirect medical education (IME) payment. Rhode Island Hospital v. Leavitt, No. 07-2673 (1st Cir. Nov. 17, 2008). In reaching its decision, the court granted substantial deference to the agency's interpretation of the IME regulation that was in effect during the fiscal year 1996, and "refused to substitute its judgment for that of the agency." The court adopted the agency's argument that the IME payment was designed to compensate higher "patient care costs" at academic medical centers and that it was therefore appropriate to exclude time spent in research unrelated to patient care from the IME payment calculation. The decision is an unfortunate result for academic medical centers attempting to claim resident time in research activities, but the issue likely will remain the subject of significant legal dispute.

The First Circuit's decision is directly contrary to two federal district court decisions addressing the same IME regulation that allowed hospitals to include research and scholarly activity time in the IME FTE resident count. Unlike the First Circuit, these courts held that the IME calculation uses "teaching activity" as a proxy measure to determine the unidentifiable increased "patient care costs" associated with operating a teaching facility. Since resident time in scholarly activities and research is a required part of a resident's training, these courts held that such time constitutes teaching activity and must be included in the FTE count for IME reimbursement purposes. The agency did not appeal these two decisions in the circuit courts. Whether the next court that reviews the issue will adopt the reasoning advanced by the First Circuit or that contained in the two separate favorable district court decisions remains to be seen. Regardless, the split of opinions provides academic medical centers outside the First Circuit with the opportunity to continue well-reasoned challenges to CMS's IME resident count policy.