Under the Balanced Budget Act (BBA), the number of residents for which teaching hospitals can receive both Medicare direct medical education (DME) and indirect medical education (IME) payments is generally capped at the level reported during the 1996 Medicare cost report year. A teaching hospital may, however, receive Medicare GME reimbursement for a number of residents in excess of its 1996 cap by entering into a Medicare GME affiliated agreement with one or more other hospitals.

The BBA included an exception to the strict resident caps for teaching hospitals in order to grant those hospitals a degree of flexibility in forming new affiliations and rotating residents under those affiliations. That is, although the Congress did want to control Medicare GME reimbursement by imposing the resident caps, it did not want to hamper the ability of teaching hospitals to create new relationships with other teaching hospitals that would support the delivery of sound medical education. For this reason, the Medicare program allows teaching hospitals to enter into these agreements, which effectively raise and lower individual hospital caps as long as the sum total of the cap adjustments nets to zero. Although this flexibility has been granted since July 1999, the requirements for hospitals electing to form a Medicare GME affiliated group were modified somewhat in 2002, effective for the period beginning July 2003.

Qualifying as an Affiliated Group
The Medicare program defines three means by which multiple hospitals may qualify as a Medicare GME affiliated group. They are:

• two or more hospitals that are located in the same or a contiguous metropolitan statistical area (MSA) and have a shared rotational arrangement;
• two or more hospitals that are listed jointly as the sponsor of a residency program and have a shared rotational arrangement; and
• two or more hospitals that are under common ownership and have a shared rotational arrangement.

Adjustments Within the Agreement
Two or more hospitals that wish to enter into a Medicare GME affiliation agreement for a particular residency program year must provide a copy of that written agreement to both the Centers for Medicare & Medicaid Services and the local fiscal intermediary by July 1, the first day of the residency program year. The agreement must specify each hospital's base year resident cap numbers and the adjustment being made to each hospital's cap for both DME and IME payments. In addition, the agreement must specify the adjustment to each participating hospital's resident count resulting from the shared rotational arrangements among the hospitals.

Shared Rotational Arrangements
A shared rotational arrangement refers to a residency training program under which at least one resident participates in training at two or more teaching hospitals. Effective July 2003, each hospital in the Medicare GME affiliated group must have a shared rotational arrangement with at least one other hospital in the group, and all hospitals within the group must be linked by a series of such shared rotational arrangements.

This shared rotation requirement has existed for entering into a Medicare GME agreement since July 1999 for those hospitals that qualify as an affiliated group as a result of location in the same or a contiguous MSA or as a result of joint sponsorship of a residency program. Previous to July 2003, however, teaching hospitals under common ownership did not need to have a shared rotational arrangement requirement in order to qualify as a Medicare GME affiliated group. The Medicare program has added this requirement for hospitals under common ownership because of concerns that in isolated cases, hospitals under common ownership have shared residency positions, although no formal academic relationship has existed between the hospitals. According to CMS, the intent of the Medicare affiliation group cap exception is to allow for these shared rotation arrangements, and the requirement has therefore been extended to all hospitals electing to enter into such agreements.