MEDICARE  CERTlFlED  AMBULATORY  SURGICAL  CENTERS 
CATARACT  SURGERY  COSTS  AN0  RELATED  ISSUES 
OFFICE  OF  INSPECTOR  GENERAL 
OFFICE  OF ANALYSIS  A>NGINSPECTIONS  r 
. 
MEDICARE  CERTIFIED  AMBULATORY  SURGICAL  CENTERS 
CATARACT  SURGERY  COSTS  AND  RELATED  ISSUES 
RICHARD  P.  KUSSEROW  MARCH 1988 

INSPECTOR  GENERAL 

OAI-09-88-00490 
 J 
EXECUTIVE  SUMMARY 
PURPOSE:  The  inspection  was  designed  to  provide  the  Health 

Care  Financing  Administration  (HCFA)  with  specific  data  and 

information  concerning:  (1)  the  cost  of  cataract  surgery, 

(2)  the  provision  of  ancillary  services  and  (3)  the  instances 

of  aborted  surgeries  in  ambulatory  surgical  centers  (ASCs). 

BACKGROUND:  In  March  1986,  the  Office  of  Inspector  General 

(OIG)  issued  a  report  on  Medicare  cataract  implant  surgery.

The  report  discussed  the  costs  of  cataract  surgery  in  both 

inpatient  and  outpatient  settings.  To  help  HCFA  determine 

appropriate  ASC  facility  payment  policy  and  rates  for  the 

July  1,  1988  payment  update,  the  OIG  conducted  this  followup 

inspection  on  the  costs  of  cataract  surgery  in  ASCs. 

As  of  December  1987,  893  ASCs  were  certified  to  participate  in 

the  Medicare  program.  The  Medicare  law  defines  an  ASC  as  a 

distinct  entity  that  (1)  operates  exclusively  for  the  purpose

of  providing  surgical  services  to  patients  who  do  not  require

hospitalization,  (2)  has  an  agreement  with  HCFA  to  participate 

in  the  Medicare  program  as  an  ASC  and  (3)  meets  prescribed

conditions  for  coverage. 

Payment  is  made  for  facility  services  in  ASCs  on  the  basis  of  a 

prospectively  determined  rate  for  each  covered  procedure.  All 

covered  procedures  are  assigned  to  one  of  four  payment  groups.

Each  group  is  assigned  a  single  reimbursement  rate  which  is 

adjusted  for  geographic  variations  in  labor  costs.  For 

multiple  procedures,  ASCs  receive  100  percent  of  the  highest 

applicable  group  rate  and  50  percent  of  the  group  rate  for  the 

second  procedure. 

The  Omnibus  Budget  Reconciliation  Act  of  1986  mandated  that 

the  Secretary  of  Health  and  Human  Services  review  and  update

ASC  payment  rates  by  July  1,  1987.  Because  HCFA  had  not 

completed  a  survey  and  audit  of  the  existing  prospective 

payment  rates,  the  1987  update  was  based  on  a  projected 

increase  of  18.7  percent  in  the  consumer  price  index.  The 

July  1988  update  will  reflect  the  results  of  a  survey  and 

audit  which  were  conducted  during  1986  and  1987. 

Cataract  extraction  with  an  intraocular  lens  (IOL)  implant  is 

considered  a  multiple  procedure.  Ambulatory  surgical  centers 

receive  separate  payment  for  the  IOL.  Separate  payments  may 

be  made  also  for  ancillary  services  which  are  not  considered 

directly  related  to  the  provision  of  the  cataract  procedure. 

Laboratory  tests  that  meet  this  criterion  may  be  billed  by  the 

ASC  if  the  ASC  has  been  certified  as  an  independent  laboratory 

or  if  it  has  an  arrangement  with  a  certified  independent

laboratory. 

i  . 
Aborted  surgery  occurs  when  a  medical  crisis,  on  the  scheduled 

day  of  surgery,  prevents  the  procedure  from  being  completed. 

The  ASC  has  usually  incurred  some  supply  and  staff  expenses,

but  payment  of  the  entire  facility  fee  is  not  justified. 

A  national  payment  policy  has  not  been  developed. 

To  gather  information  about  current  medical  practices  and  the 

costs  associated  with  cataract  surgery  in  ASCs,  the  inspection 

team  visited  29  facilities  in  7  States  and  interviewed  ASC 

administrators,  ophthalmologists,  representatives  of  trade 

associations  and  lens  manufacturers. 

MAJOR FINDINGS: 

1. 	 CATARACT  EXTRACTION  WITH  IMPLANT  IS  NOT A  MULTIPLE 
PROCEDURE.  None  of  the  ASCs  reported  any  additional 
facility  costs  when  the  extraction  and  implant 
are  done  during  the  same  operation. 
2. 	 DISCOUNTS,  REBATES  AND  INCENTIVES  ARE  ROUTINELY  OFFERED BY 
LENS  MANUFACTURERS AND  THEIR  SALES  REPRESENTATIVES.  The 
problems  regarding  IOL  payments  that  were  discussed  in  the 
OIG  March  1986  inspection  report  on  Medicare  cataract 
surgery  have  not  been  resolved.  Manufacturers  continue  to 
offer  discounts,  incentives  and  rebates  which  are  not 
reflected  in  the  Medicare  payments  for  IOLs. 
3. 	 FACILITY  COSTS VARY  SIGNIFICANTLY;  SUPPLY  AND  EQUIPMENT 
COSTS CAN BE  REDUCED BY  GROUP BUYING  AND  COMPARISON' 
SHOPPING.  Some  ASCs  are  unable  to  control  costs,  while 
others  have  successfully  lowered  their  supply  costs  by
joining  buying  groups  and  negotiating  with  vendors. 
4. 	 ASCs  REQUIRE,  BUT  RARELY  PROVIDE,  ROUTINE  LABORATORY TESTS 
FOR CATARACT  SURGERY PATIENTS.  Routine  lab  tests  are 
required  prior  to  cataract  surgery.  Normally,  the  patient 
is  referred  to  his  attending  physician,  a  hospital  or  an 
independent  laboratory  for  the  tests.  We found  no 
instances  where  the  ASC  billed  separately  for  lab  services 
furnished  in  connection  with  cataract  surgery.  None  of 
the  sampled  ASCs  billed  for  lab  services  provided  under 
contract  with  an  independent  laboratory. 
5.  ABORTED SURGERY WAS RARE  IN  ALL  BUT  ONE OF  THE  SAMPLED 
ASCs.  In  most  instances,  when  a  surgery  is  aborted,  the 
ASC  absorbs  the  cost  instead  of  filing  a  claim.  Frequent 
instances  of  aborted  surgery  may  indicate  a  quality  of 
care  problem. 
ii  RECOMMENDATIONS: 
1. 	 THE  HCFA  SHOULD TREAT  CATARACT  EXTRACTION  WITH  IOL  IMPLANT 
AS  ONE PROCEDURE AND  REIMBURSE  IT  AT  100  PERCENT OF  THE 
APPROPRIATE  FACILITY  PAYMENT RATE  EFFECTIVE  JULY  1988. 
2. 	 THE  HCFA  SHOULD ESTABLISH  A  NATIONAL  PART  B  REIMBURSEMENT 
CAP  OF  $200,  WITH  A  HANDLING  FEE  NOT  TO  EXCEED  10  PERCENT 
($20),  FOR ANY  IOL  BILLED  TO MEDICARE. 
3. 	 THE  HCFA  SHOULD BUNDLE  THE  IOL  PAYMENT WITH  THE  ASC 
FACILITY  FEE. 
4. 	 THE  HCFA  SHOULD (A)  AUTHORIZE  CARRIERS  TO  PAY  ASCs  THE  FULL 
FACILITY  FEE  OR A  PERCENTAGE OF  THE  FACILITY  FEE  WHEN 
SURGERY IS  ABORTED,  PROVIDED  THAT  AN  OPERATIVE  REPORT IS 
SUBMITTED  WITH  THE  CLAIM  AND  (B)  REQUIRE  CARRIERS  TO 
REPORT ALL  CLAIMS  FOR ABORTED SURGERY TO  THE  APPROPRIATE 
PEER  REVIEW  ORGANIZATION  FOR QUALITY  OF  CARE REVIEW. 
iii  TABLE  OF  CONTENTS 
Page 
EXECUTIVE  SUMMARY 
 i 
INTRODUCTION 
 1 
FINDINGS 
 4 
CATARACT  EXTRACTION  WITH  IMPLANT  IS  NOT A 

MULTIPLE  PROCEDURE 
 4 
FIVE  COMPANIES  DOMINATE  THE  INTRAOCULAR  LENS 

INDUSTRY 
 6 
DISCOUNTS,  REBATES  AND  INCENTIVES  ARE  ROUTINELY 

OFFERED BY  LENS  MANUFACTURERS AND  THEIR  SALES 

REPRESENTATIVES 
 9 
FACILITY  COSTS VARY  SIGNIFICANTLY;  SUPPLY  AND 

EQUIPMENT  COSTS CAN BE  REDUCED BY  GROUP BUYING 

AND  COMPARISON SHOPPING 
 13 
ASCs  REQUIRE,  BUT  RARELY  PROVIDE,  ROUTINE 

DIAGNOSTIC  TESTS  FOR CATARACT  SURGERY PATIENTS 
 15 
ABORTED SURGERY IS  RARE  IN  ALL  BUT  ONE OF 

THE  SAMPLED ASCs 
 15 
RECOMMENDATIONS 
 17 
APPENDICES 
APPENDIX  A:  METHODOLOGY 

APPENDIX  B:  INTRAOCULAR  LENS  DETAILS 
 . 
INTRODUCTION 

Ambulatory  surgical  centers  (ASCs)  are  discrete  entities 

operating  exclusively  for  the  purpose  of  furnishing  outpatient

surgical  services  to  patients.  Nearly  75  percent  of  all  ASCs 

are  independently  owned. 

The  first  ASCs  were  established  in  1970,  but  their  numbers 

increased  dramatically  in  the  early  1980s.  This  growth  was  due 

in  part  to  the  Omnibus  Budget  Reconciliation  Act  of  1980  (OBRA)

and  the  American  College  of  Surgeons'  approval  of  freestanding 

surgery  centers  in  1981.  'As  of  December  1987,  893  ASCs  were 

certified  to  participate  in  the  Medicare  program. 

The  Health  Care  Financing  Administration  (HCFA)  defines  an  ASC 

as  a  distinct  entity  that  (1)  operates  exclusively  for  the 

purpose  of  providing  surgical  services  to  patients  who  do  not 

require  hospitalization,  (2)  has  an  agreement  with  HCFA  to 

participate  in  the  Medicare  program  as  an  ASC  and  (3)  meets 

prescribed  conditions  for  coverage. 

The  OBRA amended  Title  XVIII  of  the  Social  Security  Act  to 

authorize  Medicare  Part  B  coverage  and  routine  waiver  of  the 

Part  B  deductible  and  coinsurance  for  facility  services 

furnished  in  connection  with  certain  surgical  procedures

performed  in  an  ASC.  The  Secretary  of  Health  and  Human 

Services  was  required  to  develop  conditions  of  participation,

establish  payment  rates  and  specify  the  surgical  procedures

that  could  be  performed  safely  in  ASCs. 

The  Omnibus  Budget  Reconciliation  Act  of  1986  directed  the 

Secretary  to  review  and  update  payment  rates  for  ASCs  by

July  1,  1987  and  annually  thereafter.  The  law  also  mandated 

that  HCFA  review  and  update  the  list  of  covered  procedures  by

April  21,  1987  and  every  2  years  thereafter.  The  waiver  of 

Medicare  Part  B  deductible  and  coinsurance  requirements  for  ASC 

facility  services  was  repealed,  and  peer  review  organizations 

(PROS)  were  directed  to  conduct  quality  of  care  reviews  of  ASCs 

and  hospital  outpatient  departments.  These  provisions  also 

became  effective  on  July  1,  1987. 

The  Medicare  program  reimburses  ASCs  for  facility  and  physician

services.  Facility  services  include  those  services  that  would 

be  covered  otherwise  under  Medicare  if  furnished  on  an 

inpatient  or  outpatient  basis  in  connection  with  a  covered 

surgical  procedure.  ASC  facility  services  include,  but  are  not 

limited  to: 

1.  nursing,  technician  and  related  services; 
2.  use  of  ASC  facilities; 
1  3. 	 drugs,  biologicals,  surgical  dressings,  supplies, 
splints,  casts  and  appliances  and  equipment  directly 
related  to  the  provision  of  surgical  procedures; 
4. 	 diagnostic  or  therapeutic  services  or  items  directly 
related  to  the  provision  of  a  surgical  procedure: 
5. 	 administrative,  recordkeeping,  and  housekeeping  items 
and  services; 
6.  materials  for  anesthesia:  and 
7. 	 blood,  blood  plasma,  platelets,  etc.,  except  for  those 
to  which,the  blood  deductible  applies. 
Excluded  from  facility  services  are  physician  services  and 
medical  and  other  health  services  for  which  payment  can  be  made 
under  other  Medicare  provisions  (primarily  Part  B).  The  HCFA 
regulations  specifically  exclude  the  following  medical  and 
other  health  services  from  ASC  facility  reimbursement: 
1. 	 laboratory,  x-ray  or  diagnostic  procedures  (other  than 
those  directly  related  to  performance  of  the  surgical
procedure); 
2.  prosthetic  devices; 
3.  ambulance  services; 
4.  leg,  arm,  back  and  neck  braces; 
5.  artificial  limbs:  and 
6. 	 durable  medical  equipment  for  use  in  the  patient's
home. 
Payment  is  made  for  facility  services  on  the  basis  of  a 

prospectively  determined  rate,  called  a  "standard  overhead 

amount,"  determined  by  the  Secretary  of  Health  and  Human 

Services  for  each  covered  procedure.  In  1982,  HCFA  developed  a 

four-group  classification  system  for  facility  payment.  All 

procedures  within  each  group  are  reimbursed  at  a  single  rate, 

adjusted  for  geographic  variations  in  labor  costs.  Between 

September  1982  and  July  1987,  the  four  groups  were  reimbursed 

as  follows: 

Group  1  - $231 
Group  2  - $275 
Group  3  - $296 
Group  4  - $336 
Group  1  covers  the  least  complex  procedures:  Group  4  covers 
the  most  complex.  For  multiple  procedures,  ASCs  receive 
100  percent  of  the  highest  rate  applicable  and  50  percent  of 
the  rate  for  the  second  procedure. 
Because  an  audit  of  the  existing  prospective  payment  rates  had 
not  been  completed,  HCFA  based  the  1987  ASC  rates  on  a 
projected  increase  of  18.7  percent  in  the  consumer  price  index 
for  urban  consumers.  The  new  payment  rates  are: 
2  c 
Group  1  - $274 
Group  2  - $326 
Group  3  - $351 
Group  4  - $399 
Between  May  and  August  1986,  HCFA  distributed  the  Ambulatory 

Surgical  Center  Payment  Rate  Survey  Form  (Form  HCFA-452)  to  all 

Medicare-participating  ASCs  to  determine  facility  overhead 

expenses  and  procedure-specific  charges.  In  addition,  in 

January  and  February  1987,  HCFA  conducted  an  audit  of  97  ASCs 

to  verify  reported  data.  The  July  1988  update  will  reflect  the 

results  of  this  survey  and  audit. 

Almost  71  percent  of  the  estimated  1.3  million  cataract 

surgeries  performed  nationwide  in  1987  were  performed  in 

hospital  outpatient  departments.  Ambulatory  surgical  centers 

account  for  approximately  22  percent  of  the  surgeries.  The 

remaining  surgeries  were  performed  in  doctors'  offices  and 

inpatient  hospitals.  We estimate  that  more  than  138,000  of 

approximately  1  million  Medicare  cataract  surgeries  were 

performed  in  ASCs  in  1986,  and  nearly  178,000  were  performed  in 

1987.  Cataract  surgery  is  the  most  common  Medicare-covered 

procedure  performed  in  ASCs. 

In  March  1986,  the  Office  of  Inspector  General  issued  a  report 

describing  trends  in  cataract  surgery  as  well  as  the  costs  of 

the  procedure  in  different  surgical  settings,  including  the 

ASC.  The  report,  entitled  "Medicare  Cataract  Implant  Surgery," 

noted  that  Medicare  reimbursement  policy  encouraged  inflated 

prices  for  intraocular  lenses  (IOLs)  and  that  discounts 

negotiated  between  providers  and  suppliers  were  not  passed  on 

to  the  Medicare  program.  The  report  recommended  establishing  a 

national  cap  for  lens  reimbursement. 

Methodology 

The  inspection  sample  was  drawn  from  a  universe  of 

591  Medicare-certified  ASCs  that  perform  ophthalmic  surgery.

The  team  visited  29  facilities  in  7  States  (California,

Arizona,  North  Carolina,  Ohio,  New  Jersey,  West  Virginia  and 

Nebraska)  and  collected  information  about  the  ASCs'  costs  and 

standard  operating  procedures.  The  team  interviewed 

representatives  of  six  carriers  that  process  claims  for  the 

sampled  ASCs,  the  Federated  Ambulatory  Surgical  Association, 

other  trade  and  professional  associations  and  lens 

manufacturers.  (See  Appendix  A  for  a  detailed  description  of 

the  methodology.) 

3 
 FINDINGS 
CATARACT  EXTRACTION  WITH  IMPLANT  IS  NOT A  MULTIPLE  PROCEDURE 

Since  1982,  when  HCFA  began  paying  ASCs  a  facility  fee,  HCFA 

has  treated  cataract  extraction  with  IOL  implant  as  a  multiple 

procedure  and  reimbursed  it  at  150  percent  of  the  Group  4 

payment  rate,  which  covers  the  most  complex  procedures 

performed  in  ASCs.  The  Group  4  rate  is  currently  $399.  This 

rate  is  adjusted  for  geographical  variations  in  labor  costs. 

The  current  allowances  for  cataract  extraction  with  IOL  implant 

range  from  approximately  $584  to  $659. 

All  of  the  sampled  ASCs  reported  that,  in  nearly  all  Medicare 

cases,  cataract  extraction  and  insertion  of  the  IOL  are 

performed  during  the  same  operation.  An  IOL  would  not  be 

implanted  if  the  patient  had  certain  health  problems,  such  as 

uncontrolled  diabetes  or  glaucoma.  Secondary  implants,  or 

cases  where  a  patient  whose  cataract  was  removed  in  a  previous

operation  undergoes  surgery  for  an  IOL  implant,  account  for 

very  few  cases  in  ASCs.  Aside  from  the  cost  of  the  lens 

itself,  which  is  reimbursed  separately,  facilities  reported  no 

additional  costs  attributable  to  inserting  the  lens  during 

cataract  surgery.  Supply  and  labor  costs  are  the  same  for  an 

extraction  with  or  without  IOL  implant. 

Extracapsular  Cataract  Extraction  is  the  Method  of  Choice 

Currently,  there  are  three  methods  of  cataract  extraction-

intracapsular,  extracapsular  and  phacoemulsification.  In  an 

intracapsular  extraction,  the  entire  lens,  including  its 

surrounding  capsule,  is  removed.  This  type  of  surgery  is  more 

invasive  than  the  other-two  types  because  the  incision  is 

longer.  During  an  extracapsular  extraction,  the  surgeon  makes 

a  smaller  incision,  removes  the  anterior  portion  of  the  lens 

capsule  and  the  lens  cortex  and  nucleus,  but  leaves  the 

posterior  portion  of  the  lens  capsule  intact.  Many  ophthal

mologists  believe  that  leaving  the  posterior  portion  of  the 

capsule  intact  helps  prevent  damage  to  the  retina  and  provides 

support  for  the  intraocular  lens  implant.  Regardless  of  which 

method  of  extraction  is  used,  the  surgeon  must  either  use  an 

air  bubble  or  some  other  material,  such  as  Healon,  to  cushion 

the  cornea  when  inserting  the  IOL. 

Phacoemulsification  is  a  form  of  extracapsular  extraction, 

because  the  posterior  portion  of  the  lens  capsule  is  left 

intact.  The  key  difference  between  this  method  and 

extracapsular  extraction  is  that  phacoemulsification  involves 

the  use  of  an  ultrasonic  needle  to  soften  and  liquify  the 

cortex  so  that  it  can  be  aspirated  through  the  hollow  needle. 

During  extracapsular  extraction,  the  cortex  is  manually 

4  expressed  from  the  eye.  Another  difference  is  that  the 
phacoemulsification  technique  requires  a  smaller  incision  than 
extracapsular  extraction.  Phacoemulsification  may  become  more 
popular  in  the  future  because  lens  manufacturers  are  developing 
lenses  that  can  be  implanted  through  this  smaller  incision. 
Regardless  of  surgical  setting,  extracapsular  cataract  surgery 
is  the  procedure  used  in  approximately  95  percent  of  surgeries. 
In  the  first  half  of  1987,  surgeons  used  the  phacoemulsification
technique  in  16  percent  of  all  extracapsular  surgeries.  In  the 
sampled  ASCs,  extracapsular  cataract  extraction  is  clearly  the 
planned  method  for  removing  cataracts.  If  the  capsule  is 
damaged  during  surgery,  however,  intracapsular  surgery  must  be 
performed. 
METHODS  OF  CATARACT  EXTRACTION 
IN SAMPLED  ASCs 
ACOEMULSIFICI\TION 
21% 
INTRAWFSULAR 
7% 
The  choice  between  performing  extracapsular  extraction  and 
phacoemulsification  depends  more  on  surgeons'  preferences  than 
on  patients'  needs.  Surgeons  in  two  of  the  sampled  ASCs  prefer 
phacoemulsification  because  they  believe  that  patients  heal 
more  quickly  after  surgery.  In  contrast,  the  surgeon  in 
another  ASC  does  not  use  the  phacoemulsification  technique
because  he  believes  that  it  causes  too  much  trauma  to  the  lens 
capsule.  The  expense  of  the  technique  is  also  a  consideration 
for  surgeons  and  ASCs.  Phacoemulsification  can  cost  nearly 
$100  per  case  for  supplies  alone.  The  cost  of  a  phaco
emulsification  unit  from  one  equipment  manufacturer  ranges  from 
$50,000  to  $70,000,  and  a  repair  contract  for  the  machine  can 
cost  up  to  $6,000  per  year. 
5 
 FIVE  COMPANIES  DOMINATE  THE  INTRAOCULAR  LENS  INDUSTRY 
In  1986,  an  estimated  1.25  million  lenses  were  sold  in  the 
United  States.  The  intraocular  lens  industry  is  a  $265  million 
annual  market  dominated  by  five  companies--Iolab,  Cilco, 
Optical  Radiation,  Coburn  and  Allergan.  Together  these  five 
companies  accounted  for  74  percent  of  the  U.S.  lens  market 
during  1985-1986. 
MARKET  SHARE  OF  IOL  COMPANIES 
Three  of  the  top  lens  companies  are  part  of  large  medical  and 
health  care  concerns.  In  1980,  most  of  the  lens  industry  was 
controlled  by  small  independent  companies.  Since  then,  large 
health  care  companies,  attracted  in  part  by  healthy  profit 
margins  in  the  lens  business,  entered  the  market.  Johnson  & 
Johnson  acquired  Iolab  in  1980  and  recently  bought  another  lens 
company,  Precision-Cosmet.  The  Rorer  Group  acquired  Cilco  in 
1981  and  sold  it  to  CooperVision  in  1986.  American  Hospital 
Supply  owned  American  Medical  Optics  until  1986,  when  it  sold 
the  company  to  SmithKline  Beckman,  which  changed  the  name  to 
Allergan  Medical  Optics.  Johnson  &  Johnson  and  SmithKline 
Beckman  rank  first  and  seventh,  respectively,  among  the  top
U.S.  medical  and  health  care  companies  in  terms  of  annual 
revenues. 
Parent  Company  Operatinq  Unit  Revenues* 
CooperVision,  Inc.  Cilco  $  6OM 
Johnson  &  Johnson  Iolab  60 
Optical  Radiation  Optical  Radiation  30 
Revlon  Group,  Inc.  Coburn  25 
SmithKline  Beckman  Allergan  20 
$lEM 
*Data  reflect  1985  or  1986  domestic  U.S.  sales  or  the  last 
year  for  which  complete  financial  data  are  available. 
6  . 
All  five  companies  manufacture  and  sell  ophthalmic  supplies  and 
equipment  as  well  as  lenses: 
Company  Other  Ophthalmic  Products 
CooperVision,  Inc.  phacoemulsifier,  irrigation/aspiration 
equipment,  disposable  packs* 
Johnson  &  Johnson  diagnostic  equipment,  supplies  and 
accessories 
Optical  Radiation  diagnostic  equipment 
Revlon  Group,  Inc.  ophthalmic  lasers 
SmithKline  Beckman  ophthalmic  lasers 
*A  disposable  pack  is  a  package  of  accessories  used  during 
cataract  surgery.  Packs  include  tips  to  direct  ultrasonic 
vibrations  during  surgery  as  well  as  tubing,  irrigating 
solution  and  other  items  that  the  surgeon  needs. 
Three  of  these  companies  are  entering  the  lucrative  U.S.  market 

for  hyaluronic  acid  (a  viscoelastic  material,  such  as  Healon).

Annual  sales  of  this  product  are  estimated  at  $70  million. 

Nearly  90  percent  of  all  surgeons  use  viscoelastic  material 

during  cataract  surgery  to  protect  the  cornea.  Pharmacia 

Intermedics  Ophthalmics,  which  manufactures  Healon  (made  from 

the  cockscombs  of  roosters),  currently  dominates  the  market, 

but  competition  is  increasing.  Another  company  developed  a 

product  called  Occucoat  and  is  exploring  the  possibility  of 

packaging  it  with  its  lenses:  the  package  would  be  called 

Oculens.  Pharmacia  Intermedics  was  the  first  company  to 

package  viscoelastic  material'with  its  lens.  The  package, 

called  a  Viscolens,  consists  of  an  intraocular  lens  and  a 

0.75  milliliter  (ml)  syringe  of  Healon.  CooperVision's  Cilco 

Division  developed  a  viscoelastic  material  that  has  a  lower 

molecular  weight  than  Healon  and  is  therefore  less  viscous. 

In  January  1987,  Optical  Radiation  Corporation  received 

approval  from  the  Food  and  Drug  Administration  (FDA)  to  begin

limited  clinical  studies  on  Orcolon,  a  synthetic  viscoelastic 

gel.  The  company  anticipates  full  FDA  approval  by  mid-1988. 

Although  all  of  the  leading  lens  companies  sell  both  IOLs  and 

ophthalmic  equipment,  CooperVision  was  the  first  to  adopt  a 

marketing  strategy  specifically  designed  to  increase  sales  to 

providers,  such  as  ASCs,  that  are  subject  to  prospective 

reimbursement.  This  strategy,  known  as  cross-merchandising, 

involves  marketing  and  selling  multi-product  packages  with 

products  from  Coopervision's  many  eye  care  businesses  in  order 

to  reduce  customer  costs.  These  businesses  include  the  Cilco 

Division,  which  produces  IOLs,  CooperVison  Pharmaceuticals, 

which  manufactures  ophthalmic  drugs  and  CooperVision  Surgical,

which  manufactures  ophthalmic  equipment  and  disposable 

supplies. 

7 
 In  1984,  CooperVision  created  a  new  unit,  CooperVision
Professional  Resources,  which  is  an  umbrella  organization  for 
Rep
marketing  products  and  services  to  ophthalmologists. 
resentatives  of  this  unit  market  multi-product  packages  from 
CooperVision,  help  doctors  and  staff  members  design  and  select 
equipment  for  ASCs  and  advise  them  on  such  subjects  as 
reimbursement  and  facility  management.  In  its  first  10  months 
of  operation,  the  unit  signed  more  than  50  long-term  agreements 
with  providers. 
In  the  future,  IOL  companies  may  not  be  as  attractive  to  large 
health  care  companies  and  investors  as  they  have  been  in  the 
past.  While  formerly  regarded  as  a  growth  industry,  the  market 
has  been  reassessed,  and  the  growth  rate  is  now  projected  to  be 
only  2  to  3  percent  a  year,  a  growth  rate  too  low  to  attract 
investors.  In  September  1986,  Ioptex,  which  manufactures  and 
sells  IOLs,  tried  to  go  public,  but  investor  interest  was 
absent.  Investors  did  not  believe  that  the  company's  large 
profit  margins  were  sustainable  (Ioptex  reported  a  22  percent 
The 
profit  for  the  g-month  period  ending  June  30,  1986). 
prospectus  for  the  stock  offering  cited  government  regulation 
as  a  risk  factor  that  should  be  considered  before  buying  stock 
and  noted  that  future  changes  in  reimbursement  for  cataract 
surgery  could  have  an  adverse  effect  on  the  growth  and 
profitability  of  Ioptex'  business  and  the  IOL  industry. 
8 
 DISCOUNTS,  REBATES  AND  INCENTIVES  ARE  ROUTINELY  OFFERED BY  LENS 
MANUFACTURERS AND THEIR  SALES  REPRESENTATIVES 
In  the  March  1986  OIG  report  entitled  "Medicare  Cataract 
Implant  Surgery,"  we  noted  that: 
Lens  and  equipment  manufacturers  are  competing  aggressively 
for  sales  and  market  domination.  Large  discounts  are  common 
and  include  equipment  rebates  or  credits....  Although  these 
intense  marketing  activities  have  sometimes  resulted 
in..  .reduced  costs,  the  savings  have  not  been  passed  on  to 
the  Federal  government. 
For  the  most  part,  these  marketing  practices  have  not  changed. 

The  HCFA  Medicare  Carriers  Manual  instructs  carriers  to 

consider  factors  such  as  actual  acquisition  costs  and  nominal 

handling  or  dispensing  fees  to  determine  if  the  prevailing 

charges  for  IOLs  are  inherently  reasonable.  To  calculate  a 

lens  payment  price  that  is  "inherently  reasonable  is 

particularly  difficult  because  of  the  different  types  of 

incentives  that  are  offered  in  exchange  for  the  purchase  of 

lenses.  While  most,  if  not  all,  of  the  manufacturers'  invoices 

contain  a  statement  advising  the  purchaser  that  it  must 

disclose  discounts  to  Medicare,  many  of  the  arrangements  are 

not  easily  quantified.  For  example,  one  lens  company  offers  to 

create  a  custom  videotape  for  the  surgeon  to  use  in  his  office 

or  ASC,  while  another  company  offers  to  pay  for  training  or 

attendance  at  a  conference. 

Lens  companies  that  manufacture,  or  have  a  subsidiary  or 

sister  company  that  manufactures,  ophthalmic  equipment  or 

supplies  can  usually  offer  equipment  allowances  or  free 

supplies  in  exchange  for  a  contract  which  obligates  the  ASC  or 

ophthalmologist  to  buy  a  minimum  number  of  lenses  during  a 

specified  period  of  time.  These  offers  are  especially  tempting 

given  the  cost  of  high-tech  ophthalmic  equipment  and  the  fact 

that  supplies  are  considered  a  part  of  the  ASC  facility  rate 

and  cannot  be  billed  separately.  By  taking  advantage  of  an 

equipment  allowance,  the  purchaser  can  avoid  the  entire  capital 

expenditure  for  phacoemulsification  units,  microscopes,  lasers 

and/or  irrigation  and  aspiration  machines. 

Specific  equipment  allowances  and  free  supplies  that  have  been 

accepted  by  the  ASCs  in  our  sample  include: 

1. 	 microscopes  and  phacoemulsification  machine  valued  at 
$135,000  in  exchange  for  purchasing  1,260  lenses: 
2. 	 a  phacoemulsification  machine  and  microscope  worth 
$94,000  in  exchange  for  a  3-year  contract  to  buy
lenses; 
9  3. 	 a  post-operative  kit,  sunglasses  and  eye
drops  with  each  lens; 
4.  viscoelastic  material  and  syringe  with  each  lens;  and 
5. 	 lens  discounts  in  exchange  for  agreement  to  purchase 
disposables. 
The  ASCs  usually  do  not  distinguish  between  the  cost  of  the 

lens  and  the  value  of  the  free  or  discounted  items  when  they 

bill  Medicare.  Also,  the  carriers  that  require  invoices  have 

not  developed  imputed  values  which  are  subtracted  from  the  lens 

allowance  when  they  process  the  ASC's  or  physician's  claims. 

While  many  ASCs  and  ophthalmologists  have  taken  advantage  of 

manufacturer  or  sales  representative  incentives,  others  have 

not  because  they  are  under  the  impression  that  acceptance  would 

be  in  violation  of  the  Medicare  law. 

Volume  discounts  may  be  offered  to  one  ASC  while  another  ASC 

cannot,  or  has  not  tried  to,  negotiate  a  discount  for  the  same 

lenses.  Volume  discounts  are  available  for  all  lenses 

including  those  with  special  features  such  as  ultraviolet 

blocker  or  laser  ridge.  Invoice  prices  from  the  five  major 

lens  manufacturers  that  have  approximately  74  percent  of  the 

domestic  market  ranged  from  a  low  of  $150  per  lens  to  a  high  of 

$475  in  the  sampled  facilities.  These  figures  do  not  reflect 

any  equipment  credits  or  free  supplies.  Based  on  equipment 

credits  and  imputed  values  for  free  supplies,  the  lowest  lens 

price  from  one  of  the  five  major  manufacturers  is  $85. 

Of  the  six  carriers  in  the  OIG  sample  (representing  seven 

States),  two  require  invoices  to  determine  the  Medicare  allowed 

amount,  two  have  established  ceilings  that  can  only  be  exceeded 

if  an  invoice  is  submitted  and  two  have  established  ceilings 

that  cannot  be  exceeded  even  if  an  invoice  accompanies  the 

Medicare  claim.  The  ceiling,  in  at  least  two  cases,  was 

determined  by  obtaining  list  prices  from-the  major  lens 

companies.  Based  on  the  previous  OIG  inspection  and 

information  that  was  obtained  in  this  inspection,  list  prices 

do  not  reflect  actual  acquisition  costs. 

For  the  sampled  carriers,  IOL  payment  ceilings  ranged  from  $275 

to  $387.50.  One  of  the  carriers,  whose  ceiling  without  invoice 

is  $335,  will  allow  up  to  $500  with  an  invoice.  Another 

carrier  in  the  sample  will  pay  a  maximum  of  $275  for  a 

posterior  chamber  lens  (the  most  popular  lens)  even  with  the 

submission  of  an  invoice.  None  of  the  six  carriers  in  the 

inspection  sample  allows  separate  charges  for  facility  handling

fees.  Nationally,  however,  some  carriers  allow  from  $10  to 

$90.  The  sampled  ASCs  billed  from  $0  to  $75.  The  Medicare 

Carriers  Manual  suggests  that  a  nominal  handling  fee  is 

appropriate. 

10 
 To  determine  true  acquisition  costs,  we  obtained  current 

discount  prices  which  have  been  negotiated  by  some  ASCs.  We 

also  deducted  from  the  invoice  price  any  equipment  purchase 

allowances  and  the  value  of  free  supplies,  if  possible: 

Equipment  credits  Free  supplies 

ASC  #7  - $91  per  lens  ASC  #2  - $15  (post-op  kit) 

ASC  #ll  - (not  determined)  ASC  #4  - $115  (175  ml  Healon) 

ASC  #12  - (not  determined)  ASC  #15  - $115  (.75  ml  Healon) 

ASC  #13  - $20  per  lens  ASC  #25  - $115  (.75  ml  Healon) 

ASC  k25  - (not  determined) 

ASC  #26  - $75  per  lens 

In  addition  to  the  nine  sampled  ASCs  that  receive  equipment 

credits  or  free  supplies  in  exchange  for  purchasing  lenses,  six 

other  sampled  ASCs  have  negotiated  discounts  with  lens 
manufacturers.  The  sample  included  12  ASCs  that  have  not _
attempted  to  negotiate  prices  and  are  paying  as  much  as  $390 
for  each  lens  without  receiving  any  free  supplies  or  equipment
allowance.  The  same  lens  that  is  costing  one  ASC  $390  is  being 
purchased  by  another  ASC  for  $249.  Another  sampled  ASC  found 
that  when  it  requested  a  discount,  it  was  able  to  save  40 
percent:  the  lens  that  has  a  list  price  of  $400  is  now  sold  to 
the  ASC  for  $235. 
IOL  INVOICE  PRICE  COMPARED 
TO  ACTUAL  COST 
Asco 
0  100  200  300  400  600 
DOLLAAS 
-INVOICE  PRICE  m  ACTUAL  COST 
Multispecialty  ASCs  often  are  unable  to  take  advantage  of 
discount  arrangements  because  they  rely  on  community  physicians 
11  I  : 
to  use  the  ASC  and  these  physicians  may  have  diverse  lens 
preferences.  The  surgeons  may  bring  their  own  lenses,  or  the 
ASC  must  stock  a  few  lenses  from  several  manufacturers  to  meet 
the  surgeons'  requirements. 
Because  HCFA  has  not  required  the  carriers  to  limit  their  lens 
payments  and  the  lens  is  not  included  in  the  ASC  facility 
payment  rate,  there  is  no  real  incentive  for  providers  to 
negotiate  discounts.  One  respondent  told  us  that  when  he 
requested  a  discount  on  IOLs  from  a  sales  representative,  he 
was  told:  "Why  not  leave  the  lens  price  alone?  We can 
negotiate  on  other  things,  and  besides,  Medicare  pays  the  full 
non-discounted  invoice  price,  so  why  are  you  concerned?" 
The  sampled  ASCs  pay  an  average  price  of  $254  per  lens, 
regardless  of  manufacturer.  The  average  price  per  lens  for 
ASCs  that  do  not  negotiate  any  discounts,  credits  or  free 
supplies  is  $272,  while  the  average  price  for  those  that 
negotiate  is  $239.  Nearly  75  percent  of  the  facilities  that 
negotiate  pay  under  $300;  for  these  facilities,  the  average 
price  per  lens  is  $200  (see  Appendix  B  for  details). 
12 
 FACILITY  COSTS VARY  SIGNIFICANTLY;  SUPPLY  AND EQUIPMENT  COSTS 

CAN BE  REDUCED BY  GROUP BUYING  AND  COMPARISON SHOPPING 

The  costs  of  cataract  surgery  in  an  ASC  depend  in  large  part 

on  the  surgeon  performing  the  surgery.  In  multispecialty 

facilities,  where  more  than  one  ophthalmologist  performs 

cataract  surgery,  costs  vary  among  surgeons.  These  ASCs  are 

reluctant  to  dictate  the  drugs  and  supplies  that  a  surgeon  can 

use,  because  their  financial  success  depends  on  attracting 

surgeons  who  are  willing  to  perform  surgery  at  an  ASC  rather 

than  a  hospital  outpatient  department. 

For  example,  one  sampled  multispecialty  facility  reported  that 

the  supply  costs  associated  with  extracapsular  cataract 

extraction  ranged  from  $158.61  to  $186.74  per  case. 

In  another  multispecialty  facility,  supply  costs  ranged  from 

$127.54  to  $163.48  per  case.  Supply  costs  vary  because 

surgeons  prefer  different  drugs  and  supplies.  In  contrast,  in 

single  specialty  facilities,  which  are  frequently  extensions  of 

an  ophthalmology  practice,  costs  are  determined  by  the 

preferences  of  the  ophthalmologist  who  owns  and  operates  the 

facility. 

Since  single  specialty  facilities  are  often  extensions  of  an 

existing  practice,  they  may  not  distinguish  between  ASC-

related  costs  and  revenues  and  office-related  costs  and

revenues.  Since  the  Medicare  regulations  governing  ASCs  do 
not  prescribe  cost  accounting methods,  single  specialty
facilities  can  commingle  funds.  One  sampled  single  specialty 
ASC  based  its  estimate  of  the  cost  per  cataract  surgery  on  the 
assumption  that  half  the  total  expenses  incurred  by  both  the 
the
,office  and  ASC  portion of  the  practice  were  attributable  to 
ASC.  The  costs  per  case  in  1986  were  $1,038.35,  which 
for 
includes  $87.77  for  advertising  and  marketing,  $20.50 
legal  and  accounting services  and  $10.50  for  travel  and 
entertainment. 
Ophthalmologists  often  open  an  ASC  not  to  make  money,  but  to 
remain  competitive  with  other  ophthalmologists  and  hospital 
outpatient  departments as  well  as  to  avoid  the  operating  room 
scheduling  problems  that  they have  in  a  hospital setting.
In  fact,  ophthalmologists  in  four  sampled  ASCs  reported  that 
the  facility  fee  does  not  cover  all  their  costs; two  of  the
surgeons  noted  that  their  professional  fees  subsidize the  ASC. 
Two  other  ASCs  commented  that  they  "break  even." 
13 
 ASCs  Can  Reduce  the  Costs  of  Cataract  Surgery  by  Joining
Buying  Groups,  Substituting  Supplies  and  Comparison  Shopping 
Drugs  and  surgical  supplies  for  cataract  surgery  can  account 
for  more  than  50  percent  of  an  ASC's  total  costs  per  case. 
FOUR  COMPONENTS  OF  ASC  COSTS 
PERCENT  OF COSTS 
100% 
25% 
AsCl  ASc2  ASc3  ASc4 
FOUR SAMPLED ASCs 
m  LA~~OR  m  EQUIPMENT  EQ  DtwGs  SUPPLIES 
Since  ASCs  receive  a  fixed  fee  for  performing  the  surgery  and 
cannot  bill  separately  for  drugs  and  supplies,  facilities  have 
an  incentive  to  find  ways  to  lower  the  costs  of  these  two 
items.  One  way  is  to  join  a  buying  group.  By  paying  monthly 
dues,  the  ASC  can  take  advantage  of  the  lower  prices  that  the 
buying  group  negotiates  with  suppliers.  One  sampled  ASC  that 
belongs  to  a  national  buying  group  saves  30  percent  when  it 
buys  a  0.75  ml  syringe  of  Healon.  The  manufacturer's  list 
price  for  Healon  is  $65  for  a  0.4  ml  syringe  and  $115  for  a 
0.75  ml  syringe.  The  ASC  pays  $83  instead  of  $115. 
Another  way  to  lower  supply  costs  is  to  buy  less  expensive
supplies.  For  example,  two  sampled  facilities  use  Amvisc 
instead  of  Healon  to  save  money.  One  of  these  facilities 
previously  used  Healon,  which  cost  $90  per  surgery,  but 
The  surgeons  in 
switched  to  Amvisc  and  saved  $35  per  surgery. 
two  other  sampled  ASCs  do  not  incur  any  costs  for  viscoelastic 
material,  because  they  inject  an  air  bubble  into  the  eye  to 
protect  the  cornea  during  cataract  surgery. 
Eight  facilities  found  they  could  obtain  lower  prices  by
comparison  shopping  among  suppliers.  They  saved  more  money 
One 
than  if  they  purchased  supplies  through  buying  groups. 
sampled  facility  annually  solicits  bids  for  surgical  supplies 
to  find  out  which  companies  offer  the  lowest  prices,  while 
another  ASC  decreased  its  costs  by  67  percent  for  balanced 
salt  solution  (an  irrigating  solution)  and  by  25  percent  for 
Amvisc  by  negotiating  reductions  with  its  suppliers. 
14  ASCs  REQUIRE,  BUT  RARELY  PROVIDE,  ROUTINE  DIAGNOSTIC  TESTS  FOR 

CATARACT  SURGERY PATIENTS 

Medicare  regulations  specify  that  ASCs  can  receive 

reimbursement  for  simple  tests  provided  only  on  the  day  of 

surgery,  primarily  urinalysis  and  blood  hemoglobin  or 

hematocrit,  which  must  be  included  in  their  facility  charges. 

Medicare  will  not  reimburse  an  ASC  for  other  diagnostic  tests, 

such  as  an  electrocardiogram  (EKG),  chest  x-ray  or  a  complete 

blood  count  (CBC),  unless  the  ASC  is  certified  as  an 

independent  laboratory. 

As  the  following  table  illustrates,  the  sampled  ASCs'  policies 

on  the  diagnostic  tests  required  prior  to  cataract  surgery  are 

not  uniform: 

Diagnostic  Test(s)  #  of  ASCs  Where  Required 
CBC  19 
EKG  .  17 
CBC  and  EKG  15 
Chest  x-ray  5 
CBC,  EKG  and  chest  x-ray  4 
Most  of  the  sampled  ASCs  reported  that  they  require  patients 

to  undergo  a  history  and  physical  exam  prior  to  surgery. 

However,  the  ASCs  have  no  standard  set  of  diagnostic  tests 

that  they  require  before  surgery.  Sixty-six  percent  of  the 

ASCs  require  a  CBC,  59  percent  require  an  EKG and  17  percent 

require  a  chest  x-ray.  Normally,  the  ASC  refers  patients  to 

their  attending  physicians,  a  hospital  or  an  independent 

laboratory  for  the  tests.  Ten  percent  of  the  facilities 

reported  that  the  required  services  depend  on  the  results  of 

the  history  and  physical. 

There  is  far  more  uniformity  among  ASCs  concerning  the  tests 

that  are  performed  on  the  day  of  surgery.  Nearly  80  percent 

of  the  sampled  facilities  perform  either  no  laboratory  tests 

at  all  or  only  simple  tests,  consisting  of  a  hematocrit  and 

urinalysis.  About  half  of  the  ASCs  perform  these  tests  at  a 

combined  cost  not  exceeding  $2.00.  There  is  no  separate 

charge  for  these  tests;  the  costs  are  incorporated  in  the 

facility  fee.  None  of  the  sampled  ASCs  had  sophisticated 

diagnostic  equipment  on  the  premises  that  would  enable  them  to 

perform  tests  other  than  a  hematocrit  and  urinalysis. 

ABORTED SURGERY IS  RARE  IN  ALL  BUT  ONE OF  THE  SAMPLED ASCs 

Sometimes  ASCs  must  cancel  or  abort  surgery.  The  ASCs  must 

cancel  surgery  if  a  patient  is  ill  or  eats  after  midnight  on 

the  day  of  surgery.  ASCs  must  abort  surgery  if  a  patient 

develops  complications  during  preparation  for  surgery  or 

15  during  the  procedure  itself.  Common medical  indications  that 

surgery  should  be  aborted  include  an  increase  in  pressure  in 

the  eye,  elevated  blood  pressure  and  cardiac  or  respiratory 

arrest.  In  the  event  of  cardiac  or  respiratory  arrest,  the 

ASC  would  transfer  the  patient  to  a  local  hospital. 

Aborted  surgery  is  rare  because  facilities  screen  their 

patients  before  surgery  and  require  patients  to  undergo

certain  diagnostic  tests  to  determine  if  they  are  good

candidates  for  outpatient  surgery.  Nearly  90  percent  of  the 

sampled  ASCs  reported  8  or  fewer  cases  of  aborted  surgery

since  opening.  Forty-one  percent  of  the  ASCs  reported  no 

cases  of  aborted  surgery.  In  one  sampled  facility,  aborted 

surgery  was  more  common.  According  to  that  ASC's 

administrator,  the  aborted  surgeries  occurred  because  the 

facility's  preoperative  screening  procedures  were  inadequate. 

Reportedly,  procedures  have  been  changed,  and  instances  of 

aborted  surgery  have  declined. 

In  most  instances,  ASCs  absorb  any  costs  incurred  in 

connection  with  a  case  of  aborted  surgery  instead  of  filing  a 

claim.  These  costs  could  include  any  preoperative  supplies, 

such  as  drapes,  gowns  and  medications,  and  the  staff  time 

spent  admitting  and  preparing  the  patient  for  surgery.  Three 

of  the  six  carriers  for  the  ASCs  in  the  sample  reported 

receiving  no  claims  for  reimbursement  for  aborted  surgery.

Another  carrier  estimated  that  claims  for  reimbursement 

totaled  only  10  a  year.  Three  carriers  noted  that  they  would 

reimburse  facilities  for  aborted  surgery  after  reviewing  their 

claims.  Two  of  these  carriers  reported  that  if  a  claim  were 

approved,  the  facility  would  receive  a  percentage  of  its  usual 

rate. 

16 
 . 
RECOMMENDATIONS 
RECOMMENDATION #I-- THE  ASC  PAYMENT RATE  FOR CATARACT  SURGERY 
FINDING:  None  of  the  sampled  ASCs  incurs  additional  facility 
costs  when  cataract  extraction  and  IOL  implant  are  done  during 
the  same  operation. 
RECOMMENDATION:  The  HCFA  should  discontinue  regarding 
cataract  extraction  with  implant  as  a  multiple  procedure. 
Reimbursement  should  be  100  percent  of  the  appropriate 
facility  payment  rate  effective  July  1988. 
IMPACT:  Medicare  reimbursement  for  cataract  surgery  would 
reflect  current  medical  practice.  Program  savings  cannot  be 
projected  until  the  1988  update  rates  are  established. 
HCFA  RESPONSE:  The  HCFA will  implement  this  recommendation 
when  the  ASC  payment  rates  are  updated. 
RECOMMENDATION #Z--LENS  REIMBURSEMENT 
FINDING:  The  problems  regarding  lens  payments  that  were 
discussed  in  the  OIG  March  1986  inspection  report  on  ,Medicare 
cataract  surgery  have  not  been  resolved.  Manufacturers 
continue  to  offer  discounts,  incentives  and  rebates  that  are 
not  passed  on  to  the  Medicare  program.  Current  reimbursement 
policy  does  not  provide  an  incentive  for  providers  to  be 
prudent  buyers. 
RECOMMENDATION:  The  HCFA  should  establish  a  national  Part  B 
reimbursement  cap  of  $200,  with  a  handling  fee  not  to  exceed 
10  percent  ($20),  for  any  intraocular  lens  billed  to  Medicare. 
IMPACT:  As  a  result  of  this  recommendation,  which  was 
contained  in  our  draft  report,  the  Omnibus  Budget 
Reconciliation  Act  of  1987  (OBRA  1987)  mandated  that  payment
for  IOLs  be  limited  to  the  acquisition  cost,  taking  into 
account  any  discount,  plus  a  handling  fee  not  to  exceed  5 
percent  of  that  cost. 
We estimate  that  more  than  $14  million  in  ASC  payments  alone 
The
could  be  saved  annually  if  HCFA  established  a  cap  of  $200. 
savings  per  IOL  would  be  $107.  Assuming  that  71  percent  of 
cataract  surgeries  (approximately  710,000  Medicare  surgeries) 
are  performed  in  outpatient  departments  of  hospitals,  applying 
the  cap  would  yield  additional  annual  program  savings  of  more 
than  $75  million  in  payments  to  hospitals. 
HCFA  RESPONSE:  The  HCFA will  study  the  OIG  data  base  for 
purposes  of  proposing  a  national  cap  for  IOL  reimbursement. 
17  _  . 
RECOMMENDATION #s--BUNDLED  LENS  PAYMENTS 

FINDING:  Prospective  payment  rates  encourage  ASCs  to  be 

prudent  buyers.  Through  negotiations  and  comparison  shopping, 

some  ASCs  have  realized  significant  savings  for  supplies. 

RECOMMENDATION:  The  capped  lens  payment  should  be  bundled 

with  the  ASC  facility  prospective  payment  rate  for  cataract 

extraction  with  IOL  implant. 

IMPACT:  The  OBRA 1987  has  incorporated  this  recommendation  by 

requiring  that  HCFA  bundle  the  IOL  payment  with  the  facility 

fee.  This  will  encourage  the  ASCs  to  negotiate  lower  lens 

prices.  In  addition,  bundling  will  reduce  carrier 

administrative  costs  by  eliminating  the  need  for  separate 

payment  determinations  for  IOLs. 

HCFA  RESPONSE:  The  HCFA  intends  to  implement  this 

recommendation  when  the  ASC  payment  rates  are  updated. 

RECOMMENDATION #I--ABORTED  SURGERY 

FINDING:  Aborted  surgery  was  rare  in  all  but  one  of  the 

sampled  ASCs.  In  most  instances,  when  surgery  is  aborted,  the 

ASC  absorbs  the  cost  instead  of  filing  a  claim.  Frequent 

instances  of  aborted  surgery  may  indicate  a  quality  of  care 

problem. 

RECOMMENDATION:  The  HCFA  should  (a)  authorize  carriers  to  pay 

ASCs  the  full  facility  fee  or  a  percentage  of  the  fee  when 

surgery  is  aborted,  provided  that  an  operative  report  is 

submitted  with  the  claim  to  justify  the  payment  amount  and 

(b)  require  carriers  to  report  all  claims  for  aborted  surgery 

to  the  appropriate  peer  review  organization  (PRO)  for  quality

of  care  review. 

IMPACT:  A  uniform  national  policy  would  allow  ASCs  to  receive 

reimbursement  for  legitimate  costs  that  have  been  incurred.  In 

addition,  PROS could  determine  if  the  aborted  surgery  indicates 

a  quality  of  care  problem  that  warrants  disciplinary  action. 

HCFA  RESPONSE:  The  HCFA  agrees  that  there  should  be  a  uniform 

national  policy  with  respect  to  payment  for  aborted  surgery.

The  HCFA  also  agrees  that  information  on  aborted  procedures

should  be  furnished  to  the  PROS. 

18 
 . 
. 
APPENDIX  A 

METHODOLOGY 

The  inspection  team  used  a  two-stage  cluster  sample  with 
stratification  at  the  second  stage  to  identify  ASCs  for  data 
collection.  Using  a  list  of  all  ASCs  currently  certified  to 
provide  Medicare  services,  we  identified  a  universe  of 
591  facilities  that  met  the  following  conditions: 
1.  the  facility  provided  ophthalmology  services, 
2. 	 the  facility's  service  date  was  prior  to 
January  1,  1987  and 
3. 	 the  facility  had  not  been  terminated  as  of 
September  30,  1987,  when  the  facilities  were 
selected. 
At  the  first  stage,  we  selected  States  with  probability 

proportional  to  size  with  replacement.  The  size  of  each  State 

was  determined  by  the  number  of  ASCs  in  each  State  that  met  the 

three  conditions.  We selected  seven  States  in  this  manner  and 

selected  one  State,  California,  three  times.  Within  each 

State,  the  ASCs  were  arrayed  by  location  (urban  versus  rural). 

Where  possible,  we  selected  one  rural  and  three  urban  ASCs  in 

each  State.  If  there  were  fewer  than  four  ASCs  meeting  the 

three  conditions  in  a  given  State,  all  of  the  ASCs  were 

selected  for  the  sample.  Three  States--Ohio,  New  Jersey  and 

Nebraska--did  not  have  any  rural  ASCs  certified  by  HCFA.  Three 

separate  subsamples  were  selected  in  California.  The  following 

table  lists  the  States  selected  along  with  the  number  of  urban 

and  rural  ASCs  in  each: 

#  of  ASCs  Percent  of 
- State  Urban  Rural  Total  Universe 
California  115  5  120  20.3 
Arizona  27  10  37  6.3 
North  Carolina  15  z  20  3.4 
Ohio  15  15  2.5 
New  Jersey  15  0  15  2.5 
West  Virginia  1  2  3  0.5 
Nebraska  2  0  2  0.3 
TOTAL  190  22  212  35.8 
#  sampled  26  7  33  5.6 
Of  the  33  ASCs  selected  for  the  sample,  5  were  found  not  to 
perform  cataract  surgery.  We substituted  one  facility  for  one 
of  the  excluded  ASCs,  because  it  is  located  nearby  and  is  owned 
by  the  same  party.  Of  the  29  facilities  visited,  two  were 
unable  to  supply  data  on  the  costs  of  intraocular  lenses 
because  the  surgeons  bring  their  own  lenses  and  bill  for  them 
under  their  individual  provider  numbers. 
A-l  1 
- . 
The  following  projections  were  calculated  using  the  appropriate 
weighting  based  on  the  sampling  design  described  above.  All 
averages  reported  are  weighted  averages  and  appropriate  to  the 
universe  of  591  facilities.  We calculated  savings  under  three 
scenarios.  The  first  scenario  assumes  that  reimbursement  is 
capped  at  $200  per  IOL.  The  second  scenario  assumes  a  $200  cap
and  a  handling  fee  of  $25.  The  third  scenario  assumes  a  $200 
cap  and  a  handling  fee  of  $15.  The  expected  expenditures  under 
current  pricing  are  based  on  the  allowed  amounts  reported  by
the  carriers  serving  the  universe  of  591  ASCs.  The  following
tables  show  projected  surgeries  and  savings  under  the  three 
scenarios: 
PROJECTED SURGERIES 
90%  Conf.  Interval 
Estimated  Number  of  Cataract  Surgeries  Lower  Upper  p* 
138,527  (1986)  92,557  184,497  20.2% 
177,985  (1987)  141,147  213,823  12.6% 
PROJECTED EXPENDITURES  AND  SAVINGS  ($  in  000s) 
Expenditures/  90%  Conf.  Interval 
Savings  Lower  Upper  p" 
Expenditures: 
o  under  Current  Pricing  $54,043  $42,413  $65,672  13.1% 
o  under  Cap  of  $200  35,597  28,229  42,964  12.3% 
o  with  $25  handling  fee  40,047  31,758  48,335  12.6% 
o  with  $15  handling  fee  39,867  31,544  48,208  12.7% 
Savings: 
o  under  Cap  of  $200  $18,446  $12,001  $24,890  21.2% 
o  with  $25  handling  fee  13,996  7,877  20,116  26.6% 
o  with  $15  handling  fee  14,167  7,989  20,344  26.5% 
*Precision  of  the  estimate. 
Based  on  the  above  data,  the  average  savings  per  ASC  is-$34,800 
with  a  $200  cap,  $26,400  if  a  $25  handling  fee  is  allowed  and 
$26,700  if  a  $15  handling  fee  is  allowed.  The  savings  per  IOL, 
assuming  the  cap  is  $200,  is  $107  if  no  handling  fee  is  paid 
(90%  confidence  interval,,  $73  to  $141),  $84  if  the  fee  is  $25 
(90%  confidence  interval,  $51  to  $116)  and  $93  if  the  fee  is 
$15  (90%  confidence  interval,  $60  to  $126). 
A-2 
 APPENDIX  B 

INTRAOCULAR  LENS  DETAILS 
We collected  information  on  the  types  and  costs  of  intraocular 
lenses  used  in  the  29  sampled  facilities.  We obtained  usable 
data  from  27  ASCs  because  in  two  facilities  (#5  and  #18),  the 
lenses  are  not  supplied  or  billed  by  the  ASCs  and  no  specific
lens  information  was  available.  Both  facilities  are 
multispecialty  ASCs  that  are  used  by  community  ophthalmologists. 
In  another  multispecialty  ASC,  the  lenses  are  provided  by  the 
surgeon  but  are  billed  to  Medicare  by  the  ASC.  For  this 
reason,  data  from  the  facility  was  included  in  the  calculations. 
Some  of  the  sampled  ASCs  are  extensions  of  an  ophthalmologist's 
office,  and  the  IOLs  are  billed  using  the  physician's  provider 
number  rather  than  the  ASC's.  For  these  ASCs,  the  carriers 
were  able  to  obtain  the  data  we  needed  by  accessing  the 
physician's  provider  number  profile. 
We found  that  15  ASCs  negotiated  lower  lens  prices  or  received 
equipment  credits  or  supplies  from  the  lens  manufacturers: 
ASC  Invoice  price1  Actual  price2 
#2  $275  $260 
213  213 
fi  295  205 
401  310 
,ill  380  380  less  undetermined  equipment credit 
380  380  less  undetermined  equipment  credit 
#12 
#13  150  130 
#15  175  85 
#16  235  235 
300  300 
#20 
#22  235  235 
#23  205  205 
250  250 
#24 
#25  276  161 
300  225 
#26 
Six  of  these  facilities  negotiated  lower  prices.  The  remaining 
nine  ASCs  received  either  equipment  credits  or  free  supplies,  but 
lThe  lowest  invoice  price  for  any  lens  used  in  the  ASC. 
2The  invoice  price  less  any  discount,  equipment  allowance 
or  free  supply  (of  a  known  value)  that  had  not  been 
subtracted  by  the  lens  company  from  the  invoice  price  for 
each  IOL. 
B-l  the  invoices  did  not  reflect  actual  acquisition  costs  because 
the  company  did  not  deduct  the  value  of  the  credit  or  supplies
from  the  price  shown.  Twelve  ASCs  did  not  obtain  any  discounts 
and  did  not  mention  any  equipment  credits  or  free  supplies: 
ASC  Invoice  price 
$275 
It6 
290 
280 
f;
195 
#lO 
195 
#14  294 
#17  390 
#19  205 
#21  375 
#27  265 
#28  255 
#29  240 
Eleven  of  the  15  ASCs  (73.3  percent)  that  negotiated  lower  lens 
prices  or  receive  equipment  credits/free  supplies  pay  less  than 
$300  per  lens.  The  average  lens  acquisition  cost  for  these  11 
ASCs  is  $200.  The  four  ASCs  that  pay  $300  or  more  are  considered 
to  be  paying  inflated  lens  prices  for  the  following  reasons: 
ASC  Reason 
#7 	 This  ASC  received  a  phacoemulsification  machine  and  two 
microscopes  worth  at  least  $135,000  from  a  lens  company
in  exchange  for  a  contract  to  purchase  lenses.  For  each 
lens  purchased;  the  ASC  receives  a  $91  equipment  credit 
which  is  mentioned  at  the  top  of  the  invoice  but  is  not 
subtracted  from  the  prices  shown  for  the  itemized  lenses. 
#ll 	 This  ASC  received  a  phacoemulsification  machine  and  a 
microscope  from  a  lens  company  in  exchange  for  an 
agreement  to  purchase  lenses.  The  ASC  receives  an 
equipment  credit  which  is  not  shown  on  the  invoice. 
#12 	 This  ASC  received  a  phacoemulsification  machine  and  a 
microscope  valued  at  $94,000  in  exchange  for  an  agreement 
to  purchase  lenses.  The  ASC  receives  an  equipment  credit 
which  is  not  shown  on  the  invoice. 
#20 	 This  ASC  is  receiving  a  discount  price  of  $300  for  a  lens 
that  lists  for  $370.  Another  ASC  in  our  sample  is  paying 
$213  for  a  comparable  lens  from  the  same  manufacturer. 
Since  nearly  75  percent  of  the  ASCs  that  negotiated  lower 
prices  or  receive  equipment  credits/free  supplies  pay  an 
average  price  of  $200  per  lens  and  since  the  remaining  25 
percent  pay  what  we  consider  inflated  lens  prices,  we  believe 
that  a  cap  of  $200  is  reasonable  and  appropriate. 
B-2