The economics of graduate medical education.

n engl j med 370;25 nejm.org june 19, 2014 2357 trained and influences their specialty choices by subsidizing the cost of training. Total federal GME funding amounts to nearly $16 billion annually. Medicare is the largest federal government contributor to GME, providing $9.5 billion — almost $3 billion for direct medical education (DME), to pay the salaries of residents and supervising physicians, and about $6.5 billion for indirect medical education (IME), to subsidize the higher costs that hospitals incur when they run training programs. Federal Medicaid spending adds another $2 billion for GME, and an additional $4 billion comes from the Veterans Health Administration and the Health Resources and Services Administration. States support GME through nearly $4 billion in Medicaid spending.1 The conventional wisdom is that increasing GME funding is key to addressing any physician shortages, will lead to the production of more residents, and reduces the financial burden imposed by becoming a physician. This wisdom results in advocacy for increasing DME funding. But we would argue that DME financing does little to offset the cost of training physicians — that residents essentially pay the full cost of their training, while the DME program simply transfers money to recipient hospitals. IME is more controversial, in terms of both the accuracy of the costs that are reimbursed and the underlying concept — paying institutions more because they spend more, rather than because they provide higher value. Such cost-based reimbursement runs counter to the direction in which health care reimbursement is heading. Moreover, even cost-based reimbursement requires accurate knowledge of costs, ideally marginal costs, but few providers know their cost structure. In his theory of human capital, Nobel Laureate Gary Becker explains why economists believe that residents, not the hospital where they obtain their training, bear the full cost of their education: they accept lower wages during training that offset training’s signifiThe Economics of Graduate Medical Education