Residencies for Sale

The closing of Hahnemann Hospital in Philadelphia leads to a legal battle over whether these positions can be bought and sold.

Richard Mark Kirkner
Contributing Editor

A Philadelphia story
Private equity owners closed Hahnemann Hospital and want to sell off the residencies.

Source: AP Photo/Matt Rourke ID: 19178621752486

As Philadelphia hospitals go, Hahnemann University Hospital has stood in the shadow of three more prestigious academic research centers—Thomas Jefferson University, the largest health system in the region; the University of Pennsylvania, consistently ranked among the top academic medical systems; and Temple University, the city’s de facto public hospital (because Philadelphia doesn’t have one). Yet, it’s Hahnemann, bankrupt and shuttered since the summer, that’s drawing national attention, becoming the front line in the battle over how Medicare oversees medical residency programs it pays for. 

The private equity firm that owns Hahnemann, a 496-bed teaching hospital in the center of the city, declared its bankruptcy and shut its doors after 170 years. Hahnemann had 550 Medicare-funded residency slots, which the bankruptcy judge awarded to Jefferson for $55 million to be split among Hahnemann’s creditors before another judge ordered a stay. The bankruptcy judge’s ruling raised the ire of CMS, which asserted its claim that only it, and not bankruptcy court, can move Medicare-funded residencies. CMS won the stay pending a hearing and ruling on its appeal. 

Slots on the block?

This has raised a question the appeals court will have to sort out: Are Medicare-funded residencies something Medicare doles out and oversees for the benefit of the nation’s medical education system and Medicare beneficiaries, or are they assets that hospitals can buy and sell like other assets? Hospitals all over the country are watching how it plays out. 

Katharine Van Tassel, a visiting law professor at Case Western Reserve University in Cleveland who specializes in health law, has followed the case closely. “CMS is considering whether this would be a good precedent,” she says of the sale of Hahnemann’s residencies. It raises a question: How does one quantify the value of a residency slot? “You are then turning residency slots more into an asset that can be sold.”

Sale of Hahnemann’s residencies bypasses the accreditation process, says Katharine Van Tassel, a law professor at Case Western Reserve University in Cleveland.

If the sale of the Hahnemann residencies goes through, it could open the floodgates for other financially troubled hospitals to sell off some of their residencies. CMS says treating residencies like privately owned assets will undermine how it oversees and funds residencies. 

$140,000 per

According to the Association for American Medical Colleges, Medicare is the largest single source of funding for graduate medical education (GME). In 2016 it paid hospitals $3.79 billion to cover direct costs such as residents’ stipends and benefits, the salaries of the physicians who teach the residents, and related overhead. Medicare also pays teaching hospitals “indirect medical education adjustments” to cover increased costs for more complex patients—standby capacity in burn and trauma centers, for example—but that’s a separate stream of revenue. 

To be eligible for Medicare GME payments, a teaching hospital must have an approved residency program in medicine, osteopathy, dentistry, or podiatry. Teaching hospitals often are affiliated with a medical school. Medicare regulations state that an approved medical residency program is one that is accredited by one of a number of organizations, including the Accreditation Council for Graduate Medical Education (ACGME), for medical residencies. 

The amounts of the payments are based on the number of residents, the hospital’s specific per-resident allotment (which includes adjustments for inflation), and the percentage of Medicare beneficiaries in the hospital’s patient population. A contract between CMS and the hospital spells all this out. CMS estimates that a full-time equivalent resident represents approximately $140,000 a year in GME spending. Applying that math to the Hahnemann–Jefferson case, the 550 resident slots would represent revenue of about $77 million annually. 

For hospitals, residents represent an attractive and relatively cheap ancillary workforce. Van Tassel notes that the average first-year resident’s salary is about $50,000, which is largely offset by the $40,000, on average, that CMS pays to hospitals for resident salaries. “In comparison, a physician assistant or nurse practitioner salary averages about $100,000 per year,” Van Tassel says. 

A narrow but crucial issue here is how Medicare recovers funds for overpayments for residencies, called “look-back payments” in Medicare vernacular. The bankruptcy judge ordered that creditors set aside $3 million to cover those payments, but CMS didn’t agree to that. “It’s a very small amount of money compared with the amount they’re paying for those residencies,” notes Van Tassel. 

From a hospital administrator’s perspective, a residency slot may look like just another revenue-producing asset. CMS lawyers are arguing that a residency is a contract that is specific and exclusive to a particular hospital, in this case Hahnemann. This isn’t the first time a hospital has closed and its residencies moved to another institution. But it could be the first time it happens without CMS approving what it calls a “change in ownership,” and that approval doesn’t come unless the new owner agrees to all the obligations CMS expected of the previous owner. 

“Zombie hospital”

Another possible catch is the ACGME accreditation that CMS requires of all residency programs. Jefferson has accreditation for its existing slots, but it’s unclear if it has accreditation for the 550 it would absorb from Hahnemann. The question for CMS is whether Jefferson can absorb all those doctors-in-training into its existing services while maintaining a comparable proportion of Medicare beneficiaries in its entire patient population. It’s also unclear if Jefferson has applied for accreditation of the additional slots. (ACGME does not comment on pending applications, and Jefferson declined to.) “Because you’re approved for a certain kind of residency program, for a certain number of residents—in other words, you have the capability and the capacity to train residents in particular specialties and provide quality patient care at the same time—doesn’t mean that you’ll be able to provide the kind of supervision for the hundreds of residencies that have been offered at a prior hospital,” Van Tassel says. “They’re bypassing the whole core accreditation piece.”

In granting CMS’s request for a stay of the sale of the Hahnemann residencies, U.S. District Judge Maryellen Noreika noted that Hahnemann had stopped providing patient services in July and was, as the Philadelphia Inquirer described it, a “zombie hospital” whose only service since then had been transferring patient and physician records. Government lawyers argued that as a shuttered, nonfunctioning hospital, Hahnemann had lost its rights to transfer its residencies to other hospitals.

But the owners of Hahnemann have countered that the hospital is still functioning as it transfers medical and physician records, and the Pennsylvania Department of Health hadn’t taken away Hahnemann’s license when Managed Care last checked in early October. 

Noreika also concurred that there is a strong argument that the provider agreement between Hahnemann and CMS is a contract that can’t be reassigned to a new party without settling CMS’s outstanding claims. What’s more, allowing the sale to go through could prevent Medicare from exercising its oversight authority and violate Medicare laws and regulations, Noreika stated in her decision. CMS’s argument that it could permanently lose the ability to manage the distribution of residency slots deserves a hearing, said the judge. 

It’s the end of the line for Hahnemann, bereft of patients and money. But a lasting part of its legacy may be the legal and financial fate of the residency system that has trained physicians in this country for generations. 

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