Study: BBA cuts hurt teaching hospitals


Contact: Maureen Maxwell
(202) 232-9033 or (800) 274-2237, ext. 2560 

WASHINGTON—A new analysis shows that the Balanced Budget Act of 1997 hurt the financial health of U.S. teaching hospitals by reducing their Medicare payments. Aggravating the problem, Medicare+Choice support of medical education was 90 percent less in 1999 than the baseline projections at the time of passage of the BBA. The research from the Robert Graham Center: Policy Studies in Family Practice and Primary Care in Washington, D.C., was published in the January/February edition of the Annals of Family Medicine.

"Although our research findings support our hypothesis that the financial health of teaching hospitals has been affected by the BBA97, it suggests that other forces contributed as much or more," said Robert L. Phillips, Jr., MD, assistant director of the Center. "However, Medicare payments remain an important financial cushion for the survival of teaching hospitals."

The authors found that the role of Medicare in supporting graduate medical education (GME) has been substantially reduced since 1997. Medicare payments to teaching hospitals were designed to create incentives for those hospitals to serve Medicare beneficiaries and to support the training of physicians to meet beneficiaries’ medical needs. However, between 1997 and 1999 total Medicare support for education fell by $350 million even as costs rose by $675 million.

The research revealed:

Nearly 35 percent of teaching hospitals – 248 out of the 713 in the study - had negative operating margins in 1999.

Teaching hospitals’ total operating margins fell by more than 50 percent between 1996 and 1999, from 5.2 percent to 2.5 percent.

More than one-third of teaching hospitals operated in the red.

In contrast, the operating margins for the 108 family practice single-residency hospitals examined fell 21 percent on average. However, the proportion of these residency hospitals operating with negative total margins nearly tripled - from 12 percent operating in the red in 1996 to 30 percent in 1999.

According to the researchers, in the face of this growing financial strain, teaching hospitals also have to cope financially with the rising costs of patient safety mandates, increasing pressure to improve resident work hours, rising medical liability premiums, and other rising health care costs. The role that Medicare should play needs to be examined. Although family practice single-residency hospitals appear on average to be financially healthier than other teaching hospitals, their larger shift into negative operating margins and low GME margins suggest they might be particularly vulnerable to market and Medicare payment changes.

"Both classes of teaching hospital are valuable resources that warrant specific monitoring and, perhaps, advocacy. The substantial declines in GME payments relative to steep GME cost increases mean that the role of Medicare in supporting this important function needs special attention in the overall debate," wrote the authors. They also pointed out the critical role of the Medicare Payment Advisory Commission in evaluating the effects of Medicare policy changes and called for more transparency in its methods.

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Note to journalists: To interview Dr. Phillips, or to obtain a copy of the article, please contact Maureen Maxwell at (202) 232-9033, (888) 794-7481, or

The Robert Graham Center conducts research and analysis that brings a family practice perspective to health policy deliberations in Washington. Founded in 1999, the Center is an independent research unit working under the personnel and financial policies of the American Academy of Family Physicians. For more information, please visit

The information and opinions contained in research from the Robert Graham Center do not necessarily reflect the views or policy of the AAFP.