Brief Graduate Medical Education Funding

While medical school enrollment has grown 33% since 2002, the number of graduate medical education opportunities needed for those graduates to become licensed physicians has not kept pace. The United States is estimated to have a shortage of 81,180 full-time physicians by 2035, with greater shortages in rural communities and for specialties like primary care and psychiatry. States are rethinking graduate medical education, or GME, to better meet the needs of communities most impacted by physician workforce shortages. 

What Is Graduate Medical Education and Why Does It Matter? 

All medical school graduates must complete a period of graduate medical education, such as a residency or fellowship, to be licensed to practice in the U.S. Residents are more likely to continue to practice in locations where they complete GME training, including rural areas, though rates vary by specialty and state. More than half of residents who completed their training between 2010 and 2019 were still practicing in the state where they trained.  

Where Is Graduate Medical Education Training Offered? 

Most GME training is offered in a hospital setting. About half of the training takes place in hospitals affiliated with a medical school, while the remainder occurs in community-based sites including hospitals, clinics and health care offices. Other providers, like community health centers, can offer GME training, though funding can be limited for these settings.  

Any health care facility with a GME program must be accredited and is sometimes called a “sponsoring institution.” Accreditation criteria vary by specialty but generally include:  

• Faculty-to-resident ratios.  
• Sufficient patient volume to support training experiences. 
• Availability of specific clinical experiences, such as training in other specialties provided onsite or offsite at contracted training sites.  
• Leadership from an experienced GME director. 
• Financial resources for long-term sustainability of the program.  

How is Graduate Medical Education Funded? 

GME is primarily funded through Medicare and Medicaid. Additionally, other funding sources include private payers, the Health Resources and Services Administration (HRSA) which funds GME in children’s hospitals and community health centers, the Veterans Health Administration, and the Department of Defense.  

Medicare Funding for GME 

Medicare has made GME payments to hospitals since its inception in 1965. Medicare is the largest funding source for graduate medical education, accounting for $16.2 billion in GME payments in 2020.  

There are two separate funding streams for Medicare GME payments: Direct GME and Indirect GME.  

• Direct GME (DGME): Funding to cover the direct expenses associated with residency training, such as resident and faculty salaries and benefits, as well as administrative and overhead costs.  
• Indirect GME (IME): Funding to cover the indirect costs of training incurred by the program, such as increased time to perform procedures, interpret results, or additional services ordered by residents. Both Direct GME and Indirect GME are calculated using complex formulas based on the volume of Medicare beneficiaries seen by the hospital or training facility. 

Congress caps the number of residency slots nationwide that Medicare pays for. When Congress establishes new residency slots, hospitals starting their GME programs are given five years before resident caps—the maximum number of residents that can receive GME funding—are set under Medicare. Once set, Medicare resident caps for hospitals are permanent unless changed by Congress or given up by the hospital.  

The Government Accountability Office (GAO) found in 2021 that Medicare GME funding is unevenly distributed between states, with most residents and GME training sites located in the Northeast. Rural and underserved communities tend to have fewer residents and GME programs than urban and suburban communities. Additionally, Medicare GME funding skews towards hospitals and specialties that serve Medicare beneficiaries—mostly adults aged 65 years and older. Medicare has historically played a small role or has not funded residencies for children’s hospitals, psychiatry and primary care.

The Centers for Medicare and Medicaid Services (CMS) issued a final rule in 2021 to implement several provisions of the Consolidated Appropriations Act, including 1,000 new Medicare-funded medical residency positions and a new funding opportunity allowing certain rural training hospitals to increase their GME cap. On April 10, 2023, CMS proposed a new rule to allow Rural Emergency Hospitals (REH), a Medicare new provider type, to serve as training sites for Medicare GME payment.   

According to the GAO, more than 70% of teaching hospitals trained more residents than their Medicare GME caps funded in 2018. To fund positions above and beyond Medicare GME payments, hospitals used other federal programs, state funding, clinical revenue and philanthropic donations.  

The Health Resources and Services Administration’s (HRSA) Teaching Health Center Graduate Medical Education program funds training for primary care residents in community health centers, rural health clinics and tribal health centers. HRSA also funds a Children’s Hospitals GME Payment program to fund training for resident physicians and dentists caring for low-income children across the country.  

Medicaid Funding for GME 

Medicaid is the second largest source of funding for GME in the U.S. States can fund GME through Medicaid fee-for-service or managed care.  

Medicaid GME is unique from Medicare GME in that states can choose to make Medicaid GME payments to teaching entities other than hospitals and for health professions other than physicians. New Mexico permits federal qualified health centers, rural health clinics, and tribal health centers to receive GME payments as part of its Medicaid GME strategic plan. Florida and Idaho paid ambulatory care centers as teaching entities. At least 10 states made Medicaid GME payments for graduate nurses and eight states made Medicaid GME payments for other non-physician professions, such as laboratory personnel, emergency medical services students and dental students.  

States are not required to support GME. For example, New Hampshire enacted legislation in 2023 requiring the department of health and human services to submit a Medicaid state plan amendment to suspend the provision of direct and indirect graduate medical education payments to hospitals as of June 30, 2025. 

Even so, 42 states and the District of Columbia made GME payments under their Medicaid programs in 2018. Medicaid payments for GME grew nearly 50% between 2009 ($3.78 billion) and 2018 ($5.58 billion). State general revenue makes up the largest source of the state share of Medicaid GME payments (37 states), followed by local government contributions (16 states) and hospital or provider taxes (six states). 

States may pay for Medicaid GME as part of a hospital’s Medicaid base rate or offer a separate or supplemental payment for GME to hospitals and other teaching entities. Under managed care, states may distribute GME payments directly to eligible teaching entities or provide indirect payments in their capitated payment rates to managed care organizations (MCOs). States may reimburse hospitals and other teaching entities for direct GME costs, indirect GME costs or both.  

States fund Medicaid GME through a variety of approaches ranging from grant funding, models based on Medicare, or financing that gives special weight to certain specialties. For example:  

• Florida appropriated $97.3 million to its GME Statewide Medicaid Residency Program for participating hospitals and $100 million to its GME Startup Bonus Program for qualifying hospitals with newly approved residency positions in specialties to address statewide demand and shortages.  
• In 2019, the New Mexico legislature created a GME expansion grant program to establish and expand physician residency programs with the option to prioritize positions for specialties experiencing shortages and medically underserved areas within the state. The legislature also created a GME expansion review board charged with developing a state strategic plan for expanding GME programs in the state, which includes payments to community health centers.  
• Ohio pays for GME costs associated with Medicaid services rendered to Medicaid recipients, including recipients enrolled in an MCO. The state may deny Medicaid payment for DGME if the hospital refuses without good cause to contract with a Medicaid MCO serving the same geographic area.  
• Oregon makes GME payments to any in-state public acute care hospital providing a teaching program with more than 200 residents or interns based on the hospital’s reported costs to Medicare, adjusted for Medicaid patient volume. Direct and indirect GME payments from the state are capped and cannot exceed the amount paid to the hospital by Medicare. 
• Under Tennessee’s State Plan Amendment in 2022, the state makes GME payments to qualifying hospitals based on the state’s managed care system utilization and number of residents, with weight given to primary care residents.  

State Appropriations and Private Funding for GME 

To address workforce shortages in specialties and subfields of the medical profession, states may appropriate funding directly to hospitals, universities or other health settings through general fund appropriations. 

• Iowa appropriated state funding for nine additional residency positions and up to two fellowships administered by the University of Iowa hospitals in 2023. Candidates for the fellowship must be residents of Iowa, attend and earn an undergraduate degree from an Iowa college or university and earn a medical degree from a medical school in Iowa.  
• Nevada established a Graduate Medical Education Grant Program in 2023, funded by state appropriations, to award grants to institutions seeking to create, expand or retain accredited programs for residency training and postdoctoral fellowships for physicians.  

GME is also supported by private sources. Private insurers may negotiate higher rates to teaching institutions, implicitly supporting GME, but this is not required in most states.  

• Maryland is the only state that sets hospital rates for private payers as well as public payers under the state’s all-payer hospital rate regulation model. Under this model, Maryland collects payment from private insurance plans for patients treated at hospitals to help finance GME.