Report Summary: Medical Education and Research Costs (MERC): A Final Report to the Legislature February 1996 - Minnesota Dept. of Health

Report Summary: Medical Education and Research Costs (MERC): A Final Report to the Legislature February 1996

The following is a summary of the February 1996 MERC legislative report.  To obtain a copy of the complete report, please contact the HEP staff at

 The Minnesota Legislature recognizes the importance of medical education and research to the state and its economy. As part of the 1993 and 1994 MinnesotaCare Acts, legislators asked the Commissioner of Health to study the costs and financing of medical education and research.

The Commissioner established the Medical Education and Research Cost (MERC) Advisory Task Force, representing key stakeholders, to assist in the study. Two reports have already been submitted to the Legislature on the progress of the study. This report contains the final conclusions and recommendations of the Commissioner of Health.

Since all health care stakeholders, as well as society at large, benefit from medical education and health care research, it is appropriate that the costs of these activities should be fairly allocated across the health care system. The impact of increased competition and the increasing unwillingness of purchasers to pay for the incremental costs of teaching and research through negotiated rates, as well as the anticipated cuts in Medicare funding for medical education, contribute to the problem of decreased funding for these activities.

Challenges to Medical Education and Research

Training clinicians and conducting health care research are costly activities. Teaching institutions have typically financed a portion of the cost of these activities through patient care revenues. Patient care charges at accredited teaching institutions are generally higher than those at non-teaching and non-research institutions because they are intended to cover a portion of the institution's teaching and research costs. Public and private health care group purchasers have traditionally paid this difference (termed the "education and research increment"), thereby covering a portion of the cost of medical education and research. These costs were typically passed on to consumers in their premium rates at a time when there was less emphasis on cost. The implicit rationale was that teaching institutions were seen by purchasers (as well as by society in general) as state, regional, and perhaps even national resources. The higher charges they were willing to pay were equivalent to a tax, of sorts, to guarantee that these institutions would continue to be at the forefront of modern medicine as well as educate health professionals for the future.

However, the group purchasers' willingness to voluntarily pay the education and research increment is eroding. In a price competitive market, group purchasers of medical services are increasingly unwilling to pay the higher charges at teaching institutions when they can obtain care of the same quality for less cost at another institution. In Minnesota, as in many other areas of the country, group purchasers can obtain most patient care services at non-teaching institutions. In such a competitive environment, therefore, teaching institutions may no longer be able to include the education and research increment in their charges and expect purchasers to pay for the additional costs.

Economic Impact of Medical Education and Research Activities in Minnesota

Although it is becoming more difficult to fund these activities, medical education and research are essential: as already noted, the long-term success of any health care system depends on the renewal of its work force and continued investment in health care research. The education and research products of teaching institutions are "our investment in the future" (Kassirer 1994). This is evident in Minnesota, which is recognized as a world leader in training health care professionals, conducting innovative research, and providing high quality care. The state's vibrant health care environment has led to numerous innovations and medical breakthroughs (MDTED 1993).

Health care is the state's leading industry, employing at least 190,000 Minnesotans and generating at least $15 billion of the annual gross state product. The state's medical education and research infrastructure significantly influences Minnesota's health care system and overall economy. New jobs and tax revenues, for example, accrue to the state as a result of the significant external research funding received by Minnesota organizations involved in research. Longer-term benefits include the numerous large and small health-related businesses, including such well-known industry leaders as Medtronic, that have been started in Minnesota on the basis of research done at organizations within the state (MDTED 1993).

Minnesota's medical device manufacturing industry is an excellent example of the statewide impact of medical education and research on the state's overall economy. Minnesota is second only to Utah in its share of the medical device manufacturing industry in the national economy. Total production equalled $1.3 billion in 1990, and this field is considered a "basic industry [in Minnesota], generating income and jobs for the state through high value-added exports." In turn, this and other high-technology industries in the state "create demand for components and other intermediate products, thus generating more jobs." In 1990, there were 176 medical device manufacturing establishments with approximately 14,450 employees. This accounted for 4.1 percent of all manufacturing employment for 1990 (MDTED 1993). This is just one of the ways in which the activities of medical education and research influence the state's economy and illustrates the need for the continued support of these activities. Thus, as traditional group purchasers withdraw support of the education and research increment, alternative funding must be found.

Guiding Principles

The following guiding principles were the basis for discussion and evaluation of the proposed recommendations (MDH 1994). They are organized into five key areas: 1) Global principles; 2) Financing; 3) Administration; 4) Education-specific; and 5) Research-specific.

  • Minnesota should remain a national and international leader in training future generations of health care professionals and in advancing health care knowledge.
  • Public policies for medical education and research should help expand access, contain costs, and assure quality.
  • In return for public funding, training programs should be responsive to public policy goals on medical education and research.
  • Research and patient care are integral to the education of health care professionals.
  • The costs of medical education and research should be identified.
  • All health care purchasers, including public, private (including self-insured), and individual purchasers should help finance medical education and research.
  • Since all Minnesota residents potentially benefit from medical education and research activities, the public should help finance these activities through the state's general revenues or other broad-based funding mechanisms.
  • Funding for medical education and research should:
    • replace a portion of patient-care dollars lost or at risk in a competitive market;
    • be predictable, stable, and sufficient to achieve desired policy objectives; and
    • allow payments to existing and new education and research programs.
  • Funding for medical education should flow to the entity that incurs the costs.

Implementation and administration of any alternative financing mechanism should be simple and inexpensive.

  • Minnesota's teaching institutions should be responsive to the evolving health care professional workforce requirements by:
    • producing an appropriate supply of physicians, dentists, advanced practice nurses, and physician assistants, at a minimum, to meet the needs of the state;
    • producing an appropriate specialty mix (generalists vs. specialists) to meet the needs of the state; and
    • providing health professionals the necessary knowledge, skills, and competencies for tomorrow's health care system.
  • Public policy incentives should be developed to:
    • promote the training of an appropriate mix of health professionals in order to meet health reform's access, cost, and quality goals;
    • resolve any maldistribution of physicians, dentists, advanced practice nurses, and physician assistants in Minnesota; and
    • influence the gender mix and cultural diversity of matriculants.
  • The state should only set broad policy goals to modify the health professional workforce, leaving the development and management of implementation strategies to the medical education infrastructure.
  • Quality control of education programs should continue to be assured by the teaching institutions themselves, according to the standards of national, private accreditation and regulatory organizations.
  • Performance and competencies of physicians, dentists, advanced practice nurses, and physician assistants should remain under the jurisdiction of state licensure boards.
  • State funding and policy mandates for research that are currently funded by patient out-of-pocket expenses or a third party payer should:
    • promote research activities responsive to population health needs;
    • promote continued high quality research.


The following recommendations are based on the work of the Structural Options and Financing Options Subcommittees and three years of research and debate on the issues of funding for medical education and research activities.

Establishment of Medical Education and Research Trust Fund

The Commissioner of Health shall request that the Legislature create and fund a Medical Education and Research Trust Fund with separate accounts for education and research. These funds would be distributed by the Commissioner to eligible programs. The distribution of funds will be accomplished through the application of a formula to the amount of funds available for distribution. Some of the guiding principles for the development of this formula for education are:

  • it is to be equitable (i.e, small programs as well as the major teaching institutions will be included and the funding divided fairly);
  • it should provide incentives for areas of training that are deemed appropriate;
  • it should not encourage the expansion of any area of training where there is an anticipated "oversupply" of providers.

Market forces are having a significant impact on the supply of providers, particularly influencing the mix of trainees. Further, while the total number of trainees are determined by individual decisions of the training facilities, market forces are influencing these decisions as well. The principles contained in the distribution formula are, therefore, designed to reward those training facilities most closely following the market lead in determining both the number and type of trainees to educate. Application for funding from the Medical Education and Research Trust Fund will be on a strictly voluntary basis.

Creation of the Medical Education and Research Cost (MERC) Advisory Commission

The Commissioner of Health shall appoint an advisory commission. The advisory commission will assist in the development and implementation of a mechanism by which to administer the Trust Fund to be set up for funding the activities of medical education and research. They will also continue to study the costs and benefits of medical education and research, funding options, and associated workforce issues. The commission would consist of appointed members and be staffed by staff of the Health Department (similar to the structure of the current MERC Advisory Task Force). The Commissioner shall consider the interests of all stakeholders when selecting commission members. Members should include representation of public and private academic health centers, teaching hospitals, other accredited training programs, managed care organizations, health care group purchasers, other providers, and community leaders. Commission members shall represent both urban and rural interests, and include both ambulatory and inpatient care perspectives.

Establishment of Financing Mechanism

The Department is requesting an annual appropriation of $10 million for the Trust Fund with first year funding to come from general revenues for FY 1997.

The $10 million estimate is based on preliminary and ongoing work by the MERC Advisory Task Force to identify the costs and revenues associated with teaching and research programs to determine the amount "at risk" in an increasingly competitive health care environment. Staff of the Health Economics Program's initial and preliminary estimate of the amount at risk, based on the current mix of teaching programs, is approximately $37 million. The Task Force recommended that public funds be used to fund only a portion of this deficit and recommended funding at 25 percent, representing an estimate of $10 million per year. The cost/revenue calculations will continue to be refined as new and better information becomes available. This estimate does not include a projection of anticipated cuts in federal Medicare funding for medical education.

The MERC Advisory Task Force did not recommend a specific source of funding. However, they did indicate that the most desirable option for new base funding is an allocation from the general fund. This is indeed the most broad-based tax available in which virtually everyone benefitting is contributing toward the cost. In addition, the Task Force recommended that the self-insured contribute to the Trust Fund and encourages the Department of Employee Relations to contribute their "fair share" for the state's self-insured business to the Trust Fund as a model to all other self-insured plans in this state. This may be set up as a "contribution in lieu of tax." A certain amount paid per employee has been suggested.

Transfer of Existing Medical Education Funds to the Medical Education Trust Fund Account

In addition to the base funding of $10 million, other sources may be considered for the Trust Fund. For example, the Department of Human Services (DHS) currently includes an "add-on" to the capitation rates for their Pre-paid Medical Assistance Program (PMAP) for medical education costs. If federal funds are block granted to the state, there may be opportunities for the medical education funds to be allocated through a different mechanism. The new Medical Education Trust Fund Account may be one alternative. By allocating Medical Assistance education funds through the Trust Fund, it is anticipated that there would be fewer administrative costs as well as potential better targeting of scarce resources. Should other such funding sources of medical education be identified in the future, they could also be consolidated into the Medical Education Trust Fund Account if it is deemed appropriate by the legislature.

Development and Implementation of Reporting Requirements

Develop and implement a standard reporting format for the collection of medical education and research costs from all entities receiving funding from the Medical Education and Research Trust Fund. Reports will be submitted to the Commissioner of Health. (NOTE: The Department of Health already has authority under Minnesota Statute 62J to collect certain revenue and expenditure data and has, since 1993, been collecting data on provider expenses and revenues for medical education and research. Any new initiatives should be coordinated with ongoing data collection activities.)

Adjunct Recommendation — Increase Funding for Population-Based Research

The MERC Advisory Task Force supports an increase in funding, separate from the Trust Fund, for Minnesota-specific, population-based research. This special allocation to the Minnesota Department of Health (MDH) should come from the general fund and should not supplant existing allocations, but should result in a net increase in total funds available for this key aspect of health care research. The research may be conducted by MDH or contracted out to other appropriate entities.

Continue Work on Health Care Research

The Commissioner of Health will, with the advice of the Medical Education and Research Cost Advisory Commission, continue the work of developing strategies to identify the cost of health care research that is funded by patient care dollars and mechanisms to increase funding for those activities.

Continued Refinement of Standard Care Requirement

The MERC Advisory Commission should continue to work on a policy that would maintain dollars available for clinical research in Minnesota by requiring all group purchasers operating in the state to cover standard care for those patients involved in clinical trials in Minnesota. This includes research involving investigational procedures and technology and Minnesota-specific outcome medical research conducted by group purchasers and providers to optimize cost-effective care. It excludes research sponsored by a federal agency or other entity. Plans would be required to cover the costs of care that would be provided if the patient were NOT involved in a clinical trial. This policy must be carefully designed so that health plans would not be required to cover additional costs over and above those costs which would have normally incurred through the standard course of treatment. In other words, standard care costs in clinical trials must not exceed the costs associated with standard treatment. Note: Much work on definitions is still needed before such a policy could be implemented. Not all Task Force members agreed with this recommendation.

Establish Voluntary Pooled Research Initiative

Require the Commissioner to establish a mechanism through which group purchasers, in a cooperative voluntary effort with the research community, will select and fund a limited number of randomized, prospective studies. The purpose of the studies is to determine the effectiveness (both in terms of cost and patient outcomes) of certain diagnostic and therapeutic modalities. These studies will be selected by a committee of representatives of researchers, providers, and group purchasers. Selection of a project by this committee will result in a voluntary payment of all costs (as defined in the study proposal) incurred for the selected studies by the group purchasers operating in Minnesota. The number of studies may be limited as necessary, based upon the determination of the committee, taking into account the cost of studies already approved.

*Note that all bibliographical references are contained in the complete copy of the report summarized here, which can by obtained by contacting the HEP staff at

Updated Tuesday, July 31, 2018 at 12:56PM