# Appropriate IME and DSH payments

Although Medicare has a set rate schedule, not all hospitals receive the same payment for providing the same service. Among the number of adjustments Medicare makes to its inpatient prospective payments rates are the indirect medical education (IME) and disproportionate share hospital (DSH). The goal of IME is to compensate hospitals for patient care costs related to teaching medical residents; the goal of DSH is to compensate hospitals for treating low income individuals. Medicare enacted the IME adjustment in 1984 and hte DSH adjustment in 1986 and today these adjustments account for approximately \$17 billion (\$10.8b for DSH and \$6.3b for IME) or over 12% of Medicare inpatient care payments in 2010.

Is this the appropriate level to subsidize hospitals for these activities? According to a paper by Nguyen and Sheingold, the answer is no.

Our analyses suggest that the empirical level for IME would be much smaller than under current law—about one-third to one-half. Our analyses also support the DSH adjustment prescribed by the Affordable Care Act of 2010 (ACA)—about one-quarter of the pre-ACA level. For IME, the estimates imply an increase in costs of 1.88% for each 10% increase in teaching intensity. For DSH, the estimates imply that costs would rise by 0.52% for each 10% increase in the low-income patient share for large urban hospitals.

Due to the Affordable Care Act, the DSH payments have been lowered to more empirically justifiable levels. The IME adjustments, however, will remain unchanged for the foreseeable future.

The additional payment for the operating cost of indirect teaching, the IME adjustment, is calculated as a percentage add-on to the basic DRG payment. This percentage add-on, called the IME adjustment factor, is computed using a hospital’s ratio of interns and residents to beds (IRB) denoted by (r), and a multiplier set by Congress (c), in the following equation:

• IME adjustment factor = c * [(1 + r)0.405 – 1]

The exponent, 0.405, represents the estimated impact of teaching intensity on cost per discharge, while, the multiplier, c, reflects a policy “target” to assure that teaching hospitals receive adequate payment under the national prospective rates