Estimates of graduate medical education, research, and standby capacity show that the greater costs of academic health center hospitals are likely justified.by Lane Koenig, Allen Dobson, Silver Ho, Jonathan M. Siegel, David Blumenthal, and Joel S. Weissman ABSTRACT: Academic health centers and other teaching hospitals face higher patient care costs than nonteaching community hospitals face, because of their missions of graduate medical education (GME), biomedical research, and the maintenance of standby capacity for medically complex patients. We estimate that total mission-related costs were $27 billion in 2002 for all teaching hospitals, with GME (including indirect and direct GME) and standby capacity accounting for roughly 60 and 35 percent of these costs, respectively. To assure their continued ability to perform important social missions in a competitive environment, it may be necessary to reassess the way in which these activities are financed.T h e h i g h c o s t o f ac a d e m i c h e a lt h c e n t e r s (AHCs) and other teaching hospitals has been attributed to the unique missions these institutions pursue-including graduate medical education (GME), biomedical research, and the maintenance of standby capacity for highly specialized patient care.1 Although the value of these missions is generally recognized, there is ongoing debate over the extent to which they add to the cost of patient care and the proper mechanisms for paying for these costs.2 Medicare is often viewed as the primary payer of GME, because of its size and its use of explicit payment adjustments for teaching hospitals. Private payers also contribute through higher negotiated rates, although these implicit subsidies are vulnerable in competitive markets.