Medical Education and Research Costs (MERC) Annual Report on Program Implementation - Minnesota Dept. of Health

Medical Education and Research Costs (MERC)

Annual Report on Program Implementation

March 1999


This report was prepared pursuant to Minnesota Statute section 62J.69, which directs the Commissioner of Health to provide the Legislature with an annual summary report on the implementation of the Medical Education and Research Costs (MERC) Trust Fund. This report provides information on the 1998 Trust Fund distribution and the status of the application and distribution process for the current year, state fiscal year 1999. This report also includes information on the work of the MERC Advisory Committee and subcommittees, the medical education and research studies directed by the 1998 statute, and ongoing issues and concerns regarding the financing of medical education and research in Minnesota.

Background Information

Medical education and research are vital activities affecting not only the health care community, but the health of every citizen and the economy of the entire state. Health care is the state's leading industry, employing over 200,000 Minnesotans and generating at least $16 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.

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 directed the Commissioner of Health to study the costs and financing of medical education and research. A MERC Advisory Task Force was created in 1993, and the Department has issued annual reports documenting the issues faced by medical education programs and teaching hospitals in the competitive health care market.

In 1996, the Minnesota Legislature established the Medical Education and Research Costs (MERC) Trust Fund to fund a portion of the costs of the clinical training of selected medical professionals (medical students and residents, dental students and residents, advanced practice nurses, physician assistants and PharmD students and residents). Teaching institutions have traditionally covered a portion of these costs by setting patient charges above what they would be in a non-teaching environment. As competition increases, however, health plans are increasingly unwilling to pay this teaching "increment," leaving teaching institutions at a competitive disadvantage. With a shift away from inpatient care, and cuts to Medicare funding of medical education, teaching institutions are finding it more and more difficult to fund the costs of clinical training.

The MERC Trust Fund

The Medical Education and Research Costs (MERC) Trust Fund was created in1996 by the Minnesota Legislature and funded for the first time by the 1997 Legislature. Applications for funding from the MERC Trust Fund are submitted by sponsoring institutions, organizations that are organizationally and/or financially responsible for one or more teaching programs. Funds from the Trust Fund are disbursed to the sponsoring institutions, with explicit requirements to pass the funds through to the sites where clinical training occurs. Many entities in Minnesota are both sponsoring institutions and training sites, and many hospitals and clinics are training sites for several different teaching programs.

The MERC statute requires each sponsoring institution to submit the following data for each teaching program they are responsible for that wishes to obtain MERC funding: costs of clinical training, revenues associated with medical education, information on accreditation, information on the training sites used by the teaching program, and the number of full time equivalent (FTE) students or residents trained at each training site. The table below lists the sponsoring institutions who applied on behalf of training sites during the 1998 and 1999 MERC Trust Fund application process.

MERC 1998 and 1999 Trust Fund Applications
Sponsoring Institution City 1998 Teaching Programs 1999 Teaching Programs
Abbott Northwestern Hospital Minneapolis 2 2
Allina Health System/United Hospital Minneapolis 1 1
Augsburg College Minneapolis 1 1
College of St. Catherine St. Paul 1 1
College of St. Scholastica Duluth 2 2
Duluth Medical Education Council, Inc. Duluth 1 1
Hennepin County Medical Center Minneapolis 11 9
Mankato State University School of Nursing Mankato 1 1
Mayo Foundation Rochester 64 65
Minneapolis Sports Medicine Center Minneapolis 1 1
Regions Hospital St. Paul 6 6
St. Mary's Hospital U of MN Minneapolis 1 1
United Hospital and Children's Healthcare St. Paul 2 2
University of MN Academic Health Center Minneapolis 57 62
Winona State University Winona 2 2
Women's Health Care Nurse Practitioner Program St. Paul 1


154 158

The 1998 MERC Trust Fund Distribution

The 1997 Minnesota Legislature allocated $5 million from the General Fund and $3.5 million from the Health Care Access Fund to the Medical Education and Research Costs (MERC) Trust Fund for distribution in 1998. These dollars were matched through federal Medicaid financial participation, for a total of approximately $17.8 million. The first Trust Fund distribution was completed in early 1998 to 16 sponsoring institutions on behalf of 154 teaching programs and more than 300 training sites. (Appendix 1 shows detailed information on the 1998 funding distribution from the MERC Trust Fund.) The 1998 MERC Trust Fund was distributed based on a formula which reflected the number of eligible trainee FTEs at a particular site as well as the statewide average cost of clinical training for that provider type. The Trust Fund reimbursed a uniform percentage of clinical training costs for each of the eight provider types. For the 1998 Trust Fund, this percentage was 5.9%. The annual average clinical training costs per trainee varied significantly across the eight provider types, as shown by the table below.  

1998 MERC Distribution By Provider Type
Provider Type Teaching Programs Eligible FTEs Average Cost Per Trainee Adjusted Total Costs % of Trust Fund Grant Amount Grant per Trainee % of Costs Covered
Adv. Prac. Nurses
Dental Students
Dental Residents
Medical Students
Medical Residents
PharmD Student
PharmD Resident
Physician Assistant

The 1999 MERC Trust Fund

The 1998 Legislature established ongoing base funding for the MERC Trust Fund through a $10 million appropriation for FY 1999 and a $5 million annual base appropriation starting FY 2000. In addition, the Legislature finalized the formula for the distribution of medical education funds removed from the calculation of PMAP and PGAMC capitation rates, authorized by the 1997 Legislature. Therefore, the 1999 MERC Trust Fund consists of two potential funding sources: the General Fund appropriation with its federal match, and accumulated funds transferred from the Prepaid Medical Assistance Program (PMAP) and the Prepaid General Assistance Medical Care Program (PGAMC) capitation payments.

General Fund Appropriation Distribution

The General Fund appropriation for the 1999 MERC Trust Fund is $10 million, which will be matched with $10.6 million through federal Medicaid financial participation. The Minnesota Department of Human Services has indicated that this $20.6 million will likely be transferred to the Department of Health in May or June, and we anticipate distributing these funds in June of 1999 upon completion of the application process. Funds will be distributed using the same formula utilized to distribute last year's Trust Fund, covering a fixed percentage of the average clinical training costs for each provider type.

Although it appears that there will be a $10.6 million federal match on the 1999 General Fund appropriation of $10 million, it is unclear whether the Department of Human Services (DHS) will be able to obtain a federal match on future MERC Trust Fund appropriations. Reduced federal Disproportionate Share Hospital (DSH) payments, the Medicare "upper payment limit", and the medicaid charge limit interact to limit the ability of the state to continue to receiving federal matching funds on the General Fund Appropriation. The Department of Health will continue to work in partnership with the Minnesota Department of Human Services to attempt to obtain matching funds for MERC.

PMAP/PGMAC Fund Distribution

In the past, a portion of the public program payments to HMOs included an add-on to cover the incremental costs associated with medical education. It was assumed that HMOs were passing the education add-on to teaching institutions through their contracts with providers. The 1998 legislature approved removal of the medical education dollars currently included in the capitated rates of the Prepaid Medical Assistance Program (PMAP) and Prepaid General Assistance Medical Care (PGAMC). These medical education payments will be removed from health plan rates and will be transferred to the MERC Trust Fund, where they will be transferred directly to the programs and clinics that provide clinical training and serve PMAP, PGAMC, GA, and MA enrollees. This transfer of medical education dollars from PMAP and PGAMC to the MERC Trust Fund allows for a more direct and equitable payment of the public program educational dollars. It is important to note that these dollars from the public programs are not new dollars for medical education. Rather, they are existing medical education dollars that can be targeted more effectively by distribution through the MERC Trust Fund.

The Minnesota Department of Human Services has applied for a federal waiver to allow Prepaid Medical Assistance Program (PMAP) and Prepaid General Assistance Medical Care (PGAMC) medical education funds to be transferred from health plan capitation payments to the MERC Trust Fund for distribution. These medical education dollars will be transferred to the Trust Fund monthly beginning the first day of the month one full month after the waiver is approved. For example, if the waiver is approved on March 15th by the Health Care Financing Administration, the first monthly transfer will occur after May 1st and will consist of May PMAP/PGAMC funds. In this hypothetical example, in state fiscal year 1999, the MERC Trust Fund will only receive PMAP and PGAMC funds from May and June 1999. The Department of Health would distribute these PMAP and PGAMC medical education funds that have been accumulated through June 30th to sponsoring institutions by August 30th. The timing of this distribution most likely would be separate from the General Fund Appropriation distribution.

Because of the uncertainty surrounding the receipt of the federal waiver, it is possible that no funds from the PMAP/PGAMC carve out will be available for the state fiscal year ending June 30,1999. For example, if approval of the federal waiver is received after May 31st, the Department of Human Services would begin removing medical education payments from capitation rates no sooner than July 1st, after the end of the state fiscal year ending June 30, 1999. Upon waiver approval, the Department of Health expects to be receiving monthly transfers of the PMAP/PGAMC carve out funds from DHS for fiscal year 2000. MDH intends to distribute these funds twice annually to sponsoring institutions. Any funds accumulated from July 1999 through December 1999 will likely be distributed in January of the year 2000, and funds accumulated from January through June of the year 2000 will likely be distributed in July 2000. All fiscal year 2000 (July 1999 through June 2000) distributions will be based on information received on the year 2000 MERC application. A similar process will be used for future years.

As specified in statute, the formula used to distribute the PMAP and PGAMC funds will equally weigh clinical training costs and public program volume. Information on total PMAP/PGAMC/GA/MA revenues collected on the MERC application form will be used to proxy public program volume.

MERC Advisory Committee

The MERC Advisory Committee and its chair are appointed by the Commissioner of Health to advise the Commissioner on issues impacting medical education and research in Minnesota.

In 1998, the Committee participated in a number of activities including the following:

  • Provided valuable input to the Department of Health to aid in the development of the 1999 MERC application, and to make the application process as efficient as possible.
  • Successfully worked with the Department of Health to accomplish the distribution of the first MERC Trust Fund grants to sponsoring institutions, and training sites around the State.
  • Further defined the issues affecting medical education, especially the effects of the 1997 Balanced Budget Act, and the ensuing Medicare cuts.
  • Through its Research Subcommittee, worked to identify the areas of medical research that are at-risk due to increased competition in the health care market.
  • Through its PMAP subcommittee, worked to reach consensus on the distribution formula for the PMAP and PGAMC carve-out for fiscal year 1999.
  • Began the process of identifying primary care issues in rural Minnesota as a first step towards developing a strategy for workforce planning.

Research Subcommittee

Under Minnesota Statute 62J.69, the MERC Advisory Committee shall continue to study and make recommendations on: (1) the funding of medical research consistent with work currently mandated by the legislature and under way at the Department of Health; and: (2) the costs and benefits associated with medical education and research. To satisfy this legislative requirement, the MERC Advisory Committee charged the Research Subcommittee to meet in November 1998 to examine the effect of reduced patient revenues on medical research, and the need to develop the research component of MERC.

The Research Subcommittee concluded the following:

  • It is difficult, if not impossible, to track the amount of patient care revenue that has been used to fund medical research, particularly because teaching, research and patient care are performed in unison. Past efforts to quantify research costs were unsuccessful and the subcommittee did not recommend renewed efforts.
  • There is a need to strengthen Minnesota's ability to draw talented young researchers. We should examine ways to fund preliminary research and data collection activities that help to pave the way for NIH grants for young researchers.
  • There appears to be unanimous support for the statement that managed care has resulted in increased demands on physician's time with a corresponding decrease in physician's ability to conduct or participate in clinical research. Research facilities are finding it extremely difficult to fund clinical research and recruit top candidates for clinical research in the managed care environment.
  • There is a need for more translational research, in which medical advances resulting from research are introduced into clinical practice.
  • There is a need to fund more physician-based research projects, which are less likely to be funded by the National Institute of Health (NIH), and yet directly impact patient care.
  • Private/public/non-profit collaboration is required in order to leverage resources for funding research in Minnesota. The role of industry, providers, managed care and government needs to be defined. A collaboration is necessary to ensure adequate support for clinical research.
  • Good research attracts patients to Minnesota, bringing patient care revenue to the state. The state also benefits from a manufacturing industry, which has grown as a result of medical research, thereby increasing employment and tax revenue.

As the funding available for medical education and research declines and the costs associated with medical education rise, it is important to ensure that the quality and quantity of medical research performed at Minnesota's teaching hospitals and clinics does not decline. The MERC Advisory Committee and the Department of Health should determine how medical research can most effectively and efficiently be funded in today's changing healthcare market, and what the State's role in funding medical research should be. It is important that the Department of Health examine these issues and begin to draw consensus on the role of the state in funding research and identifying funding mechanisms.

PMAP Subcommittee

The 1998 Legislature approved the distribution of medical education dollars that will be transferred from the Prepaid Medical Assistance Program (PMAP) and Prepaid General Assistance Medical Care Program (PGAMC) to the MERC Trust Fund. The percentage carve-out from the capitation rates, which averaged 4.4% of the rates, was based on previous payments to providers under fee-for-service. Carve-out percentages varied by region, and the average was made up of a weighted average of the following carve-out percentages of the rates: Hennepin 6.3%, Metro Area 2.0%, Other 1.6%. The amount carved out of health plan rates will depend on Medical Assistance inpatient hospital fee-for-service direct medical education costs and Medicare percentages for indirect costs. MDH will receive monthly distributions from DHS commencing the 1st of the month, one full month after waiver approval.

There have been concerns that:

  • The 6.3% carve-out for Hennepin County was based on the assumption that 6.3% of both outpatient and inpatient funds had been going to medical education, when in fact, only the relatively smaller inpatient portion had a medical education component. Therefore the carve out, based on 6.3% of both inpatient and outpatient funds, would result in a disproportionately larger revenue reduction for Hennepin County.
  • For the two largest hospitals, Regions Hospital and Hennepin County medical Center, public program revenue is a large part of their business. The carve out would result in their getting less public program revenue than under current payment rates.
  • Because the pending waiver application to the Health Care Financing Administration makes the timing of the carve-out uncertain, this presents problems in strategic planning and in negotiations between hospitals and health plans.
  • Fee-for-service payments for medical education will not be part of MERC and will continue to remain direct payments to hospitals, and MinnesotaCare payments remain direct payments to health plans.

There have also been concerns about the existing MERC PMAP/PGAMC distribution formula, which currently weights both education and public program volume equally. There is the view that the carve-out funds were Medical Assistance medical education dollars, and should be targeted entirely to medical education. The opposing view, however, stresses the fact that these are public program funds intended to support medical education only in organizations that serve PMAP and PGAMC patients; therefore; the public program volume factor should receive greater weight than the education factor. However, in the end, there was consensus that the current formula was appropriate for the 1999 MERC Trust Fund application and distribution. In addition, the committee agreed that the carve out be preserved since it is not implemented without approval through the federal waiver, and that the federal match as a component of the rates was desirable.

Medical Education and Research Studies

The 1998 Legislature, while providing ongoing support for the MERC Trust Fund, did not provide the Department of Health with administrative funding to administer the Trust Fund and complete the other projects required by the statute. The Department has administered the MERC Trust Fund with existing staff and has chosen to focus current resources on the timely and accurate distribution of the MERC Trust Fund. It is the Department's intention to complete other projects directed in the statute as time allows. The Department of Health recognizes the importance of these studies, but also wishes to stress that adequate administrative funding is crucial to allow each of the following issues to be examined thoroughly.

Review of Eligible Provider Groups

The Legislature gave the Commissioner of Health authority to review the provider groups eligible for the MERC Trust Fund (Minnesota Statutes, Section 62J.69, Subdivision 5) to assure that the distribution of funds is consistent with the purpose of the statute, which is to support medical education in patient care training sites that have experienced a loss of medical education funding due to increased competition in the health care market. The Department of Health is currently reviewing the financing of medical education for chiropractors to determine whether market forces have resulted in a loss of patient care dollars that were formerly available for chiropractic education. In performing this review, the Department of Health and the MERC Advisory Committee are to consider the degree to which the training of chiropractors:

  • takes place in patient care settings which are consistent with the purpose of the MERC Trust Fund;
  • is funded with patient care revenues;
  • takes place in patient care settings which face increased financial pressure as a result of competition with non-teaching patient care entities, and
  • emphasizes primary care or specialties which are in under supply in Minnesota.

Advisory Committee Structure and Composition

In addition, the Legislature directed the Department of Health to conduct a study of the structure and composition of the MERC Advisory Committee (1998 Minnesota Laws, Chapter 407, Article 2, Section 98). The Department is currently reviewing the structure and membership of the MERC Advisory Committee to determine whether it equitably represents all of the stakeholders in the health care industry, including consumers. The Commissioner of Health will appoint committee members in the coming months.

Examination of the PMAP/PGAMC Medical Education Distribution Formula

As directed by the Legislature, the Department of Health, with the assistance of the MERC Advisory Committee and its PMAP Subcommittee, has begun to examine the current statutory PMAP/PGAMC medical education distribution formula to determine whether adjustments are necessary to ensure the equitable and efficient distribution of these funds (1998 Minnesota Laws, Chapter 407, Article 2, Section 98). Meetings of the PMAP Subcommittee have helped define the distribution formula issues. If any PMAP/PGAMC funds are available for distribution during state fiscal year 1999, they will be distributed according to the formula set in statute during the 1998 legislative session, which equally weighs public program volume and clinical training costs.

Additional Criteria for Consideration in the MERC Formula

Minnesota Trainee Retention Rate

The 1998 Legislature directed the Department of Health to study additional criteria for consideration in the MERC formula, including the criteria that the trainees practice medicine in Minnesota after graduation (1998 Minnesota Laws, Chapter 407, Article 2, Section 98). The perception was that the sponsoring institutions in Minnesota would be able to determine the percentage of their graduates who currently practice medicine in Minnesota by analyzing the practice addresses and license status of their alumni. Many sponsoring institutions, however, do not maintain records of alumni or have incomplete or inaccurate alumni data for several reasons. As physicians move, retire, or change occupation, they may not supply the sponsoring institution with updated information; thus, the data maintained by the sponsoring institution may not be accurate or complete, or necessarily consistent with the records of other institutions who utilize a different procedure to track alumni or have maintained records for differing time periods.

Since sponsoring institutions in Minnesota cannot determine the percentage of their graduates who currently practice medicine in Minnesota from the data they currently collect, the Department of Health asked the Minnesota Board of Medical Practice (BMP) to supply data to facilitate the calculation of the number of physicians currently practicing in Minnesota who attended each Minnesota sponsoring institution during an arbitrary time period utilized for data consistency (ten years). The sponsoring institutions were then asked how many physicians have completed their medical school or residency programs during the last ten years. One could then calculate the percentage of physicians currently licensed to practice medicine in Minnesota who graduated from each sponsoring institution by dividing the number of physicians currently practicing in Minnesota who graduated from each sponsoring institution during the last ten years by the number of physicians completing a program from that sponsoring institution during the same time period.

In the course of reviewing data from the BMP, however, the Department of Health discovered that it was of limited usefulness. The data from the BMP was largely incomplete. Out of about 4,700 physicians with practice addresses in Minnesota and licensed in the last ten years, 300 physicians did not identify their medical schools or location of residency program. Furthermore, half of the 4,700 physicians identified either their medical school or location of residency program, but not both. In most cases, it is impossible to tell whether a school is a medical school, a residency program location, or a sponsoring institution; or whether the physician graduated from the program or only attended the program for a short time. In addition, it is often impossible to tell which physicians graduated from Minnesota institutions because location addresses were not supplied and school names were indeterminate in many cases. Dates of program attendance or graduation were also not given for over 60 percent of the records, therefore license dates were used to proxy graduation dates. This resulted in inconsistency between BMP data and the data collected from sponsoring institutions to measure the number of graduates from each program in the last ten years.

Since the Minnesota Department of Health does not have knowledge of additional data sources at this time, it is impossible to determine with an acceptable degree of accuracy the percentage of physicians who remain in Minnesota after completing medical school and/or residency programs at Minnesota sponsoring institutions. Thus, it is not feasible at this time to include as criteria for the distribution of the Medical Education and Research Costs (MERC) Trust Fund the percentage of trainees who remain in Minnesota to practice medicine upon completion of medical school or a residency program. The Minnesota Department of Health, however, will continue exploring whether additional data sources or approaches are available to help address this issue.

Other Criteria for Consideration in the MERC Formula

The Department of Health recognizes the necessity of determining whether any additional criteria beyond the current statutory criteria should be utilized in weighting future distributions of the MERC Trust Fund, and plans to conduct further analysis in this area and to make this a priority for discussion in future MERC meetings. It is important that we consider the effects of the provider, specialty, and geographic distribution of the workforce of medical professionals on access to quality health care and the cost of healthcare for all Minnesotans. This may include not only providing incentives to programs which train medical professionals in shortage specialty areas, but also funding the education of professionals who will serve in Minnesota's under served geographic locations. In addition, there exists an increasingly problematic shortage of less specialized nurses, especially certified nursing assistants. Hospitals, clinics, and nursing homes often pay for the training of such employees, but due to financial constraints are unable to pay these providers high enough wages to retain them in a labor driven market. The extent to which the MERC Trust Fund dollars can be targeted to assist in alleviating workforce shortages should be examined.

Ongoing Issues and Concerns

The Department of Health should continue to identify the issues that affect the funding of graduate medical education, including the effects of the Balanced Budget Act of 1997.

A study conducted by the University of Minnesota indicates that the 33 percent reduction in Medicare Indirect Medical Education over the next five years set into motion by the Balanced Budget Act of 1997 will cost Minnesota's teaching institutions about $100 million over the next five years. In addition, an increasing amount of patient care dollars are being lost as the health care market becomes more competitive, putting greater financial strain on teaching institutions. Teaching programs in Minnesota have indicated that a medical doctor in a teaching institution must see 25 percent more patients to receive the same revenue he or she did two years ago. Unless such institutions receive additional funding, such medical doctors must either spend less time with each patient, which would reduce the quality of care given to these patients; spend less time with residents and students, reducing the quality of education these students and residents receive; or reduce the amount of medical research he or she is able to conduct.

While the revenues available for medical education are declining, the costs of medical education are increasing, due to the increase in knowledge today's medical professionals are required to obtain, and changes in the health care delivery system. To meet the needs of today's medical professionals, medical education programs need to incorporate several areas of study that were not as strongly emphasized or not issues years ago, such as preventive medicine, nutrition, alternative therapies, advanced scientific knowledge and the operation of medical devises, managed care, information technology, and the business of health care. Such changes increase the costs of medical education. The costs of clinical training are increasing due to the move towards community based education necessitated by the change in Minnesota's health care delivery system. Clinical training is more expensive at smaller community training sites because such sites do not have the economies of scale that large training sites benefit from. It is important that medical education is adequately funded during these changing times to avoid an erosion in the quality of medical education received by tomorrow's health care professionals.

Continue to Examine the Needs of the Health Professional Workforce

In today's competitive health care market, teaching hospitals are increasingly unable to finance medical education and research because third party payers are unwilling to pay the higher costs associated with such activities. Without a stable funding source for medical education and research, teaching hospitals are forced to offer residencies in specialties that minimize their costs, which does not necessarily supply the specialty or geographic distribution of medical professionals optimal for Minnesota's population.

The Minnesota Department of Health therefore has concerns about the geographic distribution of providers, and whether there is an adequate supply of certain providers. It is the department's intention to analyze data from a variety of sources to further define workforce planning issues and how the MERC Trust Fund can be used to address any disparities.

Please note that the above report contained a number of appendices.  For a complete hard copy of the report, please contact Diane Reger at

Updated Thursday, July 03, 2014 at 09:51AM