In the world of healthcare policy and law, we usually discuss issues impacting providers, but don’t often report about the training and infrastructure behind what allows our healthcare system to treat patients in our facilities. Many warnings have come and gone about how we are not training enough physicians for primary care, and the ACA and other programs have sensitized us to the need for more family practice, pediatricians and internists as healthcare delivery reform proceeds. Well, if we weren’t paying enough attention, last week’s Institute of Medicine (IOM) report, “Graduate Medical Education That Meets the Nation’s Health Needs” should be a wake-up call to all academic medical centers, hospitals and medical schools around the nation because the IOM calls for major change in response to today’s shifting healthcare environment, and essentially proposes dismantling its current funding system.

Training interns and residents, post-medical school training (called “graduate medical education” or “GME”), is required before doctors can be licensed to practice medicine. Congress recognized the importance of these programs and investing in this aspect of our healthcare system at the inception of the Medicare program in 1965 and developed a means to include funding for this program as part of the Medicare law. Since that time, the Medicare and Medicaid programs fund GME residency training programs and help to support teaching hospitals in which those programs are housed. The IOM study identified that the vast majority of GME funding—about $15 billion in 2012—comes from the Medicare program, and thus, the Medicare program can be leveraged to redesign the GME system to reward desired outcomes and improve program performance.

If we didn’t have enough going on in the world of the health reform, this IOM study proposes to restructure the program completely as to funding, oversight and programmatic review.

To that end, the IOM called for more accountability for the funds and an end to the current manner in which funds are paid. The report made five recommendations:

1. Maintain aggregate GME support (which is the total of indirect medical education (IME) and direct GME expenditures for a base year, trended forward annually for inflation) while taking steps to modernize payment methods based upon performance, ensure program oversight and accountability and incentivize innovation in the content and financing of GME. The report called for phasing out the current GME payment system over a ten-year period.

2. Build a new GME policy and financing infrastructure, including the creation of a GME Policy Council to ensure the development and oversight of a strategic plan for GME training, ensure sufficient geographic distribution and specialty configuration of the physician workforce and create and manage funding and data collection under the guidance of the new policy council.

3. Create a new Medicaid GME fund with two components: (1) an operational fund to distribute ongoing support for residency training positions that are currently approved and funded; and (2) a transformation fund to finance initiatives to develop and innovate GME programs, determine and validate performance measures and pilot alternative methods and award new Medicare-funded GME training programs in priority disciplines and geographic areas.

4. Modernize the GME payment methodology by replacing the current system and consolidating the current IME and GME payment into one combined payment to sponsoring programs, based upon a national per resident amount (with an adjustment for geographic area). The per resident amount would equal the total value of the operational fund divided by the current number of full-time equivalent Medicare-funded training slots. This recommendation also would redirect the funding stream directly to the sponsoring organizations and implement performance-based payments using information from the transformation pilots.

5. Medicaid GME would remain within the state’s discretion but would be subject to the same level of transparency and accountability as in the Medicare GME program.

One of the major components of the lengthy report involves the recognition that, at the time the GME funding program was developed, a majority of the training of residents and interns occurred within the academic hospital itself and not in the community, while currently the healthcare system encourages patients to be treated outside the hospital, in community-based settings with physician extenders and other allied health personnel. Current funding formulas discourage training at these outlying clinics or community-based settings.

The IOM report drew almost immediate criticism from the American Academy of Medical Colleges and the American Hospital Association, which voiced significant concern with a wholesale dismantling of the current training and funding system for physicians in this country. They identified that, while more physicians are needed in primary care, there still are areas of subspecialty care, such as in pediatric neurology, where we do not train enough physicians and the training must occur in a hospital inpatient setting.

Many critics identified the significant changes occurring in healthcare today and that this report, which recommends substantial change in the funding and structure of GME, calls for the weakening of a foundational aspect of the healthcare infrastructure. While change and innovation must occur, critics found the recommendations irresponsible given the magnitude of the changes to which hospitals, medical schools and physicians are adapting.

The IOM report contains significant detail regarding the current funding of the Medicare GME program and the proposed recommendations that surely will be of interest to a Congress that remains focused on cost cutting in government programs and ways to ensure that Medicare funding is cost effective. Healthcare executives in academic settings should keep a watchful eye on these policy developments and funding discussions, as they work to sustain and attempt to grow our nation’s physician workforce.