Medicare: Payment for Ambulatory Surgical Centers Should Be Based on the Hospital Outpatient Payment System
Published: 2006-11-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicare pays for surgical procedures performed at ambulatory surgical centers (ASC) and hospital outpatient departments through different payment systems. Although they perform a similar set of procedures, no comparison of ASC and hospital outpatient per-procedure costs has been conducted. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed GAO to compare the relative costs of procedures furnished in ASCs to the relative costs of those procedures furnished in hospital outpatient departments, in particular, how accurately the payment groups used in the hospital outpatient prospective payment system (OPPS) reflect the relative costs of procedures performed in ASCs. To do this, GAO collected data from ASCs through a survey. GAO also obtained hospital outpatient data from the Centers for Medicare & Medicaid Services (CMS).
section_title: What GAO Found
paragraphs: GAO determined that the payment groups in the OPPS, known as ambulatory payment classification (APC) groups, accurately reflect the relative cost of procedures performed in ASCs. GAO calculated the ratio between each procedure's ASC median cost, as determined by GAO's survey, and the median cost of each procedure's corresponding APC group under the OPPS, referred to as the ASC-to-APC cost ratio. GAO also compared the OPPS median costs of those same procedures with the median costs of their APC groups, referred to as the OPPS-to-APC cost ratio. GAO's analysis of the ASC-to-APC and OPPS-to-APC cost ratios showed that 45 percent of all procedures in the analysis fell within a 0.10 point range of the ASC-to-APC median cost ratio, and 33 percent of procedures fell within a 0.10 point range of the OPPS-to-APC median cost ratio. These similar patterns of distribution around the median show that the APC groups reflect the relative costs of procedures provided by ASCs as well as they reflect the relative costs of procedures provided in hospital outpatient departments and can be used as the basis for the ASC payment system. GAO's analysis also identified differences in the cost of procedures in the two settings. The median cost ratio among all ASC procedures was 0.39 and when weighted by Medicare claims volume was 0.84. The median cost ratio for OPPS procedures was 1.04. Thus, the cost of procedures in ASCs is substantially lower than the corresponding cost in hospital outpatient departments.

section_title: Letter
paragraphs: In 1982, Medicare began paying ambulatory surgical centers (ASC) to  perform certain surgical procedures on an outpatient basis. ASCs were  established as an alternative to hospital inpatient care, which was  considered a more costly setting. Medicare’s initial ASC payment rates  were based on ASC cost and charge data from 1979 and 1980. The Centers  for Medicare & Medicaid Services (CMS), the agency that administers  Medicare, was required by law to review the ASC payment rates  periodically and adjust them as appropriate. CMS last revised the ASC  payment rates in 1990 using ASC data on costs and charges that CMS  collected in 1986. Since the payment rates were last revised, there has  been substantial growth in both the number of ASC facilities and  procedures they perform, as well as changes in medical practice and  technology. In 2004, there were approximately 4,100 Medicare- participating ASCs, a number that has grown substantially since 2000  when there were about 2,900 Medicare-participating ASCs. In 2004, ASCs  received approximately $2.5 billion in total Medicare payments, a   79 percent increase since 2000 when Medicare payments to ASCs totaled  approximately $1.4 billion.
While the ASC setting was originally intended to be an alternative to  hospital inpatient care, the procedures performed in ASCs are now  frequently performed in the hospital outpatient setting. Medicare pays  ASCs and hospital outpatient departments through different payment  systems. While procedures performed in ASCs are placed into payment  groups based on similar costs, hospital outpatient department procedures  are placed into payment groups, known as ambulatory payment  classification (APC) groups, based on both cost and clinical similarity.  Unlike the ASC payment system, the payment rates for hospital outpatient  departments are revised annually based on cost and charge data included  in reports hospitals are required to submit to CMS each year.
Although ASCs and hospital outpatient departments perform a similar set  of procedures, no comparison between the Medicare ASC payment system  and the Medicare hospital outpatient department payment system, known  as the outpatient prospective payment system (OPPS), has been  conducted. The Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (MMA) directed us to conduct a study that  compares the relative costs of procedures performed in ASCs to the  relative costs of procedures performed in hospital outpatient  departments. As discussed with the committees of jurisdiction, we  compared (1) additional services billed with procedures performed in  ASCs with those billed with procedures performed in hospital outpatient  departments and whether there were any Medicare payments associated  with those services and (2) the relative costs of procedures when  performed in ASCs to the relative costs of those procedures when  performed in hospital outpatient departments, in particular, how  accurately the APC groups used in the OPPS reflect the relative costs of  procedures performed in the ASC setting. In addition, we examined the  proportion of ASCs’ costs that are labor-related; this information is  provided in appendix I.
To compare the delivery of additional services provided with procedures  performed in ASCs and hospital outpatient departments, we identified all  additional services frequently provided in each setting with one of the top  20 procedures based on highest Medicare ASC claims volume, which, as a  group, represented approximately 75 percent of all Medicare ASC claims  volume in 2003. Using Medicare claims data for 2003, we identified  beneficiaries receiving one of the top 20 procedures performed in either an  ASC or hospital outpatient department, then identified any other claims  for those beneficiaries submitted by ASCs, hospital outpatient  departments, durable medical equipment suppliers, and other Medicare  part B providers. We identified claims for the beneficiaries on the day the  procedure was performed and the day after. We created a list that  included all additional services that were billed at least 10 percent of the  time with each of the top 20 procedures when they were performed in  ASCs. We created a similar list of additional services for each of the top 20  procedures when they were performed in hospital outpatient departments.  We then compared the lists to determine if the additional services  provided by ASCs and hospital outpatient departments with each of those  procedures were similar. To compare the Medicare payments for  additional services provided with procedures performed in ASCs and  hospital outpatient departments, we identified whether any additional  services included in our analysis resulted in an additional payment.
To compare the costs of procedures performed in ASCs and hospital  outpatient departments, we first compiled information on ASCs’ costs and  procedures performed. We conducted a survey of 600 ASCs to obtain 2004  cost and procedure data. We received responses from 397 ASC facilities,  and through our data reliability testing, determined that data from 290  responding facilities were sufficiently reliable for our purposes.
To allocate ASCs’ costs among the individual procedures they perform, we  first separated ASCs’ direct and indirect costs. We then allocated each  ASC’s direct costs among procedures it performed using a relative weight  scale we constructed with data from CMS, supplemented by information  from medical specialty societies and clinicians who work for CMS. The  relative weight scale captures the general variation in costs associated  with performing the different procedures. We allocated each ASC’s  indirect costs equally across all procedures it performed. For each  procedure, we summed the direct and indirect costs for each ASC and  arrayed the total cost for each of the ASCs performing that procedure. To  obtain a per-procedure cost across all ASCs, we then identified the median  cost for each procedure from the array.
To compare per-procedure costs for ASCs and hospital outpatient  departments, we first obtained from CMS the list of APC groups included  in the OPPS and the procedures assigned to each APC group. We also  obtained from CMS the OPPS median cost of each procedure and the  median cost of each APC group. We then calculated a ratio between the  median cost for each procedure performed at an ASC, as determined by  the survey, and the median cost of each procedure’s corresponding APC  group under the OPPS. For the same procedures, we also calculated a  ratio between the median cost of each procedure under the OPPS and the  median cost of the procedure’s APC group, using the data obtained from  CMS. To evaluate the difference in procedure costs between the two  settings, we compared the ASC-to-APC and OPPS-to-APC cost ratios. To  assess how well the relative costs of procedures in the OPPS, defined by  their assignment to APC groups, reflect the relative costs of procedures in  the ASC setting, we evaluated the distribution of the ASC-to-APC and  OPPS-to-APC cost ratios.
We also conducted interviews with CMS officials and representatives from  ASC industry organizations, specifically, the American Association of  Ambulatory Surgery Centers (AAASC) and FASA, as well as physician  specialty societies, and individual ASCs. For details on our methods, see  appendix II. We performed our work from April 2004 through October  2006 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: There are some similarities in how Medicare pays ASCs and hospital  outpatient departments for the procedures they perform. However, the  methods used by CMS to calculate the payment rates in each system, as  well as the mechanisms used to revise the Medicare payment rates, differ.
subsections: section_title: Structure of the ASC Payment System
paragraphs: In 1980, legislation was enacted that enabled ASCs to bill Medicare for  certain surgical procedures provided to Medicare beneficiaries. Under the  ASC payment system, Medicare pays a predetermined, and generally all- inclusive, amount per procedure to the facility. The approximately 2,500  surgical procedures that ASCs may bill for under Medicare are assigned to  one of nine payment groups that contain procedures with similar costs,  but not necessarily clinical similarities. All procedures assigned to one  payment group are paid at the same rate. Under the Medicare payment  system, when more than one procedure is performed at the same time, the  ASC receives a payment for each of the procedures. However, the  procedure that has the highest payment rate receives 100 percent of the  applicable payment, and each additional procedure receives 50 percent of  the applicable payment.
The Medicare payment for a procedure performed at an ASC is intended to  cover the direct costs for a procedure, such as nursing and technician  services, drugs, medical and surgical supplies and equipment, anesthesia  materials, and diagnostic services (including imaging services), and the  indirect costs associated with the procedure, including use of the facility  and related administrative services. The ASC payment for a procedure  does not include payment for implantable devices or prosthetics related to  the procedure; ASCs may bill separately for those items. In addition, the  payment to the ASC does not include payment for professional services  associated with the procedure; the physician who performs the procedure  and the anesthesiologist or anesthetist bill Medicare directly for their  services. Finally, the ASC payment does not include payment for certain  other services that are not directly related to performing the procedure  and do not occur during the time that the procedure takes place, such as  some laboratory, X-ray, and other diagnostic tests. Because these  additional services are not ASC procedures, they may be performed by  another provider. In those cases, Medicare makes payments to those  providers for the additional services. For example, a laboratory service  needed to evaluate a tissue sample removed during an ASC procedure is  not included in the ASC payment. The provider that evaluated the tissue  sample would bill and receive payment from Medicare for that service.  Because ASCs receive one inclusive payment for the procedure performed  and its associated services, such as drugs, they generally include on their  Medicare claim only the procedure performed.
section_title: Structure of the OPPS
paragraphs: In 1997, legislation was enacted that required the implementation of a  prospective payment system for hospital outpatient departments; the  OPPS was implemented in August 2000. Although ASCs perform only  procedures, hospital outpatient departments provide a much broader array  of services, including diagnostic services, such as X-rays and laboratory  tests, and emergency room and clinic visits. Each of the approximately  5,500 services, including procedures, that hospital outpatient departments  perform is assigned to one of over 800 APC groups with other services  with clinical and cost similarities for payment under the OPPS. All services  assigned to one APC group are paid the same rate. Similar to ASCs, when  hospitals perform multiple procedures at the same time, they receive   100 percent of the applicable payment for the procedure that has the  highest payment rate, and 50 percent of the applicable payment for each  additional procedure, subject to certain exceptions.
Like payments to ASCs, payment for a procedure under the OPPS is  intended to cover the costs of the use of the facility, nursing and  technician services, most drugs, medical and surgical supplies and  equipment, anesthesia materials, and administrative costs. Medicare  payment to a hospital for a procedure does not include professional  services for physicians or other nonphysician practitioners. These services  are paid for separately by Medicare. However, there are some differences  between ASC and OPPS payments for procedures. Under the OPPS,  hospital outpatient departments generally may not bill separately for  implantable devices related to the procedure, but they may bill separately  for additional services that are directly related to the procedure, such as  certain drugs and diagnostic services, including X-rays. Hospital  outpatient departments also may bill separately for additional services that  are not directly related to the procedure and do not occur during the  procedure, such as laboratory services to evaluate a tissue sample.  Because they provide a broader array of services, and because CMS has  encouraged hospitals to report all services provided during a procedure on  their Medicare claims for rate-setting purposes, hospital claims may  provide more detail about the services delivered during a procedure than  ASC claims do.
section_title: History of the ASC System Rate Setting
paragraphs: CMS set the initial 1982 ASC payment rates based on cost and charge data  from 40 ASCs. At that time, there were about 125 ASCs in operation.  Procedures were placed into four payment groups, and all procedures in a  group were paid the same rate. When the ASC payment system was first  established, federal law required CMS to review the payment rates  periodically. In 1986, CMS conducted an ASC survey to gather cost and  charge data. In 1990, using these data, CMS revised the payment rates and  increased the number of payment groups to eight. A ninth payment group  was established in 1991. These groups are still in use, although some  procedures have been added to or deleted from the ASC-approved list.
Although payments have not been revised using ASC cost data since 1990,  the payment rates have been periodically updated for inflation. In 1994,  Congress required that CMS conduct a survey of ASC costs no later than  January 1, 1995, and thereafter every 5 years, to revise ASC payment  rates. CMS conducted a survey in 1994 to collect ASC cost data. In 1998,  CMS proposed revising ASC payment rates based on the 1994 survey data  and assigned procedures performed at ASCs into payment groups that  were comparable to the payment groups it was developing for the same  procedures under the OPPS. However, CMS did not implement the  proposal, and, as a result, the ASC payment system was not revised using  the 1994 data. In 2003, MMA eliminated the requirement to conduct ASC  surveys every 5 years and required CMS to implement a revised ASC  payment system no later than January 1, 2008. During the course of our  work, in August 2006, CMS published a proposed rule that would revise  the ASC payment system effective January 1, 2008. In this proposed rule,  CMS bases the revised ASC payment rates on the OPPS APC groups.  However, the payment rates would be lower for ASCs.
section_title: History of OPPS Rate Setting
paragraphs: The initial OPPS payment rates, implemented in August 2000, were based  on hospitals’ 1996 costs. To determine the OPPS payment rates, CMS first  calculates each hospital’s cost for each service by multiplying the charge  for that service by a cost-to-charge ratio computed from the hospital’s  most recently reported data. After calculating the cost of each service for  each hospital, the services are grouped by their APC assignment, and a  median cost for each APC group is calculated from the median costs of all  services assigned to it. Using the median cost, CMS assigns each APC  group a weight based on its median cost relative to the median cost of all  other APCs. To obtain a payment rate for each APC group, CMS multiplies  the relative weight by a factor that converts it to a dollar amount.  Beginning in 2002, as required by law, the APC group payment rates have  been revised annually based on the latest charge and cost data. In  addition, the payment rates for services paid under the OPPS receive an  annual inflation update.
section_title: Many Additional Billed Services Were Similar; Few Resulted in Additional Payments to ASCs or Hospital Outpatient Departments
paragraphs: We found many similarities in the additional services provided by ASCs  and hospital outpatient departments with the top 20 procedures. Of the  additional services billed with a procedure, few resulted in an additional  payment in one setting but not the other. Hospitals were paid for some of  the related additional services they billed with the procedures. In the ASC  setting, other providers billed Medicare for these services and received  payment for them.
subsections: section_title: Many Additional Services Billed in Each Setting Were Similar
paragraphs: In our analysis of Medicare claims, we found many similarities in the  additional services billed in the ASC or hospital outpatient department  setting with the top 20 procedures. The similar additional services are  illustrated in the following four categories of services: additional  procedures, laboratory services, radiology services, and anesthesia  services.
First, one or more additional procedures was billed with a procedure  performed in either the ASC or hospital outpatient department setting for  14 of the top 20 procedures. The proportion of time each additional  procedure was billed in each setting was similar. For example, when a  hammertoe repair procedure was performed, our analysis indicated that  another procedure to correct a bunion was billed 11 percent of the time in  the ASC setting, and in the hospital outpatient setting, the procedure to  correct a bunion was billed 13 percent of the time. Similarly, when a  diagnostic colonoscopy was performed, an upper gastrointestinal (GI)  endoscopy was billed 11 percent of the time in the ASC setting, and in the  hospital setting, the upper GI endoscopy was billed 12 percent of the time.  For 11 of these 14 procedures, the proportion of time each additional  procedure was billed differed by less than 10 percentage points between  the two settings. For the 3 remaining procedures, the percentage of time  that an additional procedure was billed did not vary by more than   25 percentage points between the two settings. See appendix III for a  complete list of the additional procedures billed and the proportion of  time they were billed in each setting.
Second, laboratory services were billed with 10 of the top 20 procedures in  the hospital outpatient department setting and 7 of the top 20 procedures  in the ASC setting. While these services were almost always billed by the  hospital in the outpatient setting, they were typically not billed by the  ASCs. These laboratory services were present in our analysis in the ASC  setting because they were performed and billed by another Medicare part  B provider.
Third, four different radiology services were billed with 8 of the top 20  procedures. Radiology services were billed with 5 procedures in the ASC  setting and with 8 procedures in the hospital outpatient department  setting. The radiology services generally were included on the hospital  outpatient department bills but rarely were included on the ASC bills.  Similar to laboratory services, hospital outpatient departments billed for  radiology services that they performed in addition to the procedures.  When radiology services were billed with procedures in the ASC setting,  these services generally were performed and billed by another part B  provider.
Fourth, anesthesia services were billed with 17 of the top 20 procedures in  either the ASC or hospital outpatient settings and with 14 procedures in  both settings. In virtually every case in the ASC setting, and most cases in  the hospital outpatient department setting, these services were billed by  another part B provider.
According to our analysis, ASCs did not generally include any services  other than the procedures they performed on their bills. However, in the  hospital outpatient setting, some additional services were included on the  hospitals’ bills. We believe this is a result of the structure of the two  payment systems. As ASCs generally receive payment from Medicare only  for procedures, they typically include only those procedures on their bills.  In contrast, hospital outpatient departments’ bills often include many of  the individual items or services they provide as a part of a procedure  because CMS has encouraged them to do so, whether the items or services  are included in the OPPS payment or paid separately.
section_title: Additional Services Resulted in Few Additional Payments to ASCs or Hospital Outpatient Departments
paragraphs: With the exception of additional procedures, there were few separate  payments that could be made for additional services provided with the top  20 procedures because most of the services in our analysis were included  in the Medicare payment to the ASC or hospital. Under both the Medicare  ASC and OPPS payment systems, when more than one procedure is  performed at the same time, the facility receives 100 percent of the  applicable payment for the procedure that has the highest payment rate  and 50 percent of the applicable payment for each additional procedure.  As this policy is applicable to both settings, for those instances in our  analysis when an additional procedure was performed with one of the top  20 procedures in either setting, the ASC or hospital outpatient department  received 100 percent of the payment for the procedure with the highest  payment rate and 50 percent of the payment for each lesser paid  procedure.
Individual drugs were billed by hospital outpatient departments for most  of the top 20 procedures, although they were not present on the claims  from ASCs, likely because ASCs generally cannot receive separate  Medicare payments for individual drugs. However, none of the individual  drugs billed by the hospital outpatient departments in our analysis  resulted in an additional payment to the hospitals. In each case, the cost of  the particular drug was included in the Medicare payment for the  procedure.
In the case of the laboratory services billed with procedures in the ASC  and hospital outpatient department settings, those services were not costs  included in the payment for the procedure in either setting and were paid  separately in each case. For both settings, the payment was made to the  provider that performed the service. In the case of the hospital outpatient  department setting, the payment was generally made to the hospital, while,  for procedures performed at ASCs, payment was made to another provider  who performed the service.
Of the four radiology services in our analysis, three were similar to the  laboratory services in that they are not included in the cost of the  procedure and are separately paid services under Medicare. Therefore,  when hospitals provided these services, they received payment for them.  In the ASC setting, these services were typically billed by a provider other  than the ASC, and the provider received payment for them. The fourth  radiology service is included in the payment for the procedure with which  it was associated. Therefore, no separate payment was made to either  ASCs or hospital outpatient departments. With regard to anesthesia  services, most services were billed by and paid to a provider other than an  ASC or hospital.
section_title: APC Groups Accurately Reflect ASC Procedure Costs
paragraphs: As a group, the costs of procedures performed in ASCs have a relatively  consistent relationship with the costs of the APC groups to which they  would be assigned under the OPPS. That is, the APC groups accurately  reflect the relative costs of procedures performed in ASCs. We found that  the ASC-to-APC cost ratios were more tightly distributed around their  median cost ratio than the OPPS-to-APC cost ratios were around their  median cost ratio. Specifically, 45 percent of all procedures in our analysis  fell within 0.10 points of the ASC-to-APC median cost ratio, and 33 percent  of procedures fell within 0.10 points of the OPPS-to-APC median cost  ratio. However, the costs of procedures in ASCs are substantially lower  than costs for the same procedures in the hospital outpatient setting.
subsections: section_title: APC Groups Accurately Reflect the Relative Costs of ASC Procedures
paragraphs: The APC groups reflect the relative costs of procedures provided by ASCs  as well as they reflect the relative costs of procedures provided in the  hospital outpatient department setting. In our analysis, we listed the  procedures performed at ASCs and calculated the ratio of the cost of each  procedure to the cost of the APC group to which it would have been  assigned, referred to as the ASC-to-APC cost ratio. We then calculated  similar cost ratios for the same procedures exclusively within the OPPS.  To determine an OPPS-to-APC cost ratio, we divided individual  procedures’ median costs, as calculated by CMS for the OPPS, by the  median cost of their APC group. Our analysis of the cost ratios showed  that the ASC-to-APC cost ratios were more tightly distributed around their  median than were the OPPS-to-APC cost ratios; that is, there were more of  them closer to the median. Specifically, 45 percent of procedures  performed in ASCs fell within a 0.10 point range of the ASC-to-APC median  cost ratio, and 33 percent of those procedures fell within a 0.10 point range  of the OPPS-to-APC median cost ratio in the hospital outpatient  department setting (see figs. 1 and 2). Therefore, there is less variation in  the ASC setting between individual procedures’ costs and the costs of their  assigned APC groups than there is in the hospital outpatient department  setting. From this outcome, we determined that the OPPS APC groups  could be used to pay for procedures in ASCs.
section_title: ASC Procedures’ Median Costs Are Generally Lower Than Those for OPPS Procedures
paragraphs: The median costs of procedures performed in ASCs were generally lower  than the median costs of their corresponding APC group under the OPPS.  Among all procedures in our analysis, the median ASC-to-APC cost ratio  was 0.39. The ASC-to-APC cost ratios ranged from 0.02 to 3.34. When  weighted by Medicare volume based on 2004 claims data, the median ASC- to-APC cost ratio was 0.84. We determined that the median OPPS-to-APC  cost ratio was 1.04. This analysis shows that when compared to the  median cost of the same APC group, procedures performed in ASCs had  substantially lower costs than when those same procedures were  performed in hospital outpatient departments.
section_title: Conclusions
paragraphs: Generally, there are many similarities between the additional services  provided in ASCs and hospital outpatient departments with one of the top  20 procedures, and few resulted in an additional Medicare payment to  ASCs or hospital outpatient departments. Although costs for individual  procedures vary, in general, the median costs for procedures are lower in  ASCs, relative to the median costs of their APC groups, than the median  costs for the same procedures in the hospital outpatient department  setting. The APC groups in the OPPS reflect the relative costs of  procedures performed in ASCs in the same way that they reflect the  relative costs of the same procedures when they are performed in hospital  outpatient departments. Therefore, the APC groups could be applied to  procedures performed in ASCs, and the OPPS could be used as the basis  for an ASC payment system, eliminating the need for ASC surveys and  providing for an annual revision of the ASC payment groups.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Administrator of CMS implement a payment  system for procedures performed in ASCs based on the OPPS. The  Administrator should take into account the lower relative costs of  procedures performed in ASCs compared to hospital outpatient  departments in determining ASC payment rates.
section_title: Agency and External Reviewer Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from CMS (see  app. IV). We also received oral comments from external reviewers  representing two ASC industry organizations, AAASC and FASA.
subsections: section_title: CMS Comments
paragraphs: In commenting on a draft of this report, CMS stated that our  recommendation is consistent with its August 2006 proposed revisions to  the ASC payment system.
section_title: Industry Comments and Our Evaluation
paragraphs: Industry representatives who reviewed a draft of this report did not agree  or disagree with our recommendation for executive action. They did,  however, provide several comments on the draft report. The industry  representatives noted that we did not analyze the survey results to  examine differences in per-procedure costs among single-specialty and  multi-specialty ASCs. Regarding this comment, we initially considered  developing our survey sample stratified by ASC specialty type. However,  because accurate data identifying ASCs’ specialties do not exist, we were  unable to stratify our survey sample by specialty type.
The industry representatives asked us to provide more explanation in our  scope and methodology regarding our development of a relative weight  scale for Medicare ASC-approved procedures to capture the general  variation in resources associated with performing different procedures.  We expanded the discussion of how we developed the relative weight  scale in our methodology section.
Reviewers also made technical comments, which we incorporated where  appropriate.
We are sending a copy of this report to the Administrator of CMS and  appropriate congressional committees. The report is available at no charge  on GAO’s Web site at http://www.gao.gov. We will also make copies  available to others on request.
If you or your staff members have any questions about this report, please  contact me at (202) 512-7119 or kingk@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff members who made significant  contributions to this report are listed in appendix V.
section_title: Appendix I: Analysis of the Proportion of Labor-Related Costs for Ambulatory Surgical Centers
paragraphs: The Medicare payment rates for ambulatory surgical centers (ASC), along  with those of other facilities, are adjusted to account for the variation in  labor costs across the country. To calculate payment rates for individual  ASCs, the Centers for Medicare & Medicaid Services (CMS) calculates the  share of total costs that are labor-related and then adjusts ASCs’ labor- related share of costs based on a wage index calculated for specific  geographic areas across the country. The wage index reflects how the  average wage for health care personnel in each geographic area compares  to the national average health care personnel wage. The geographic areas  are intended to represent the separate labor markets in which health care  facilities compete for employees.
In setting the initial ASC payment rates for 1982, CMS determined from the  first survey of ASCs that one-third of their costs were labor-related. The  labor-related costs included employee salaries and fringe benefits,  contractual personnel, and owners’ compensation for duties performed for  the facility. To determine the payment rates for each individual ASC, CMS  multiplied one-third of the payment rate for each procedure—the labor- related portion—by the local area wage index. Each ASC received the base  payment rate for two-thirds of the payment rate—the nonlabor-related  portion—for each procedure. The sum of the labor-related and nonlabor- related portions equaled each ASC’s payment rate for each procedure.
In 1990, when CMS revised the payment system based on a 1986 ASC  survey, CMS found ASCs’ average labor-related share of costs to be   34.45 percent and used this percentage as the labor-related portion of the  payment rate. In a 1998 proposed rule, CMS noted that ASCs’ share of  labor-related costs as calculated from the 1994 ASC cost survey had  increased to an average of 37.66 percent, slightly higher than the  percentage calculated from the 1986 survey. However, CMS did not  implement the 1998 proposal. Currently, the labor-related proportion of  costs from CMS’s 1986 survey, 34.45 percent, is used for calculating ASC  payment rates.
Using 2004 cost data we received from 290 ASCs that responded to our  survey request for information, we determined that the mean labor-related  proportion of costs was 50 percent, and the range of the labor-related  costs for the middle 50 percent of our ASC facilities was 43 percent to   57 percent of total costs.
section_title: Appendix II: Scope and Methodology
paragraphs: To compare the delivery of procedures between ASCs and hospital  outpatient departments, we analyzed Medicare claims data from 2003. To  compare the relative costs of procedures performed in ASCs and hospital  outpatient departments, we collected cost and procedure data from 2004  from a sample of Medicare-participating ASCs. We also interviewed  officials at CMS and representatives from ASC industry organizations,  specifically, the American Association of Ambulatory Surgery Centers  (AAASC) and FASA, physician specialty societies, and nine ASCs.
subsections: section_title: Analysis of Additional Services
paragraphs: To compare the delivery of additional services provided with procedures  performed in ASCs and hospital outpatient departments, we identified all  additional services frequently billed in each setting when one of the top 20  procedures with the highest Medicare ASC claims volume is performed.  These procedures represented approximately 75 percent of all Medicare  ASC claims in 2003. Using Medicare claims data for 2003, we identified  beneficiaries receiving one of the top 20 procedures in either an ASC or  hospital outpatient department, then identified any other claims for those  beneficiaries from ASCs, hospital outpatient departments, durable medical  equipment suppliers, and other Medicare part B providers. We identified  claims for the beneficiaries on the day the procedure was performed and  the day after. We created a list that included all additional services that  were billed at least 10 percent of the time with each of the top 20  procedures when they were performed in ASCs. We created a similar list  of additional services for each of the top 20 procedures when they were  performed in hospital outpatient departments. We then compared the lists  for each of the top 20 procedures between the two settings to determine  whether there were similarities in the additional services that were billed  to Medicare. To compare the Medicare payments for procedures  performed in ASCs and hospital outpatient departments, we identified  whether any additional services included in our analysis resulted in an  additional payment.
We used Medicare claims data from the National Claims History (NCH)  files. These data, which are used by the Medicare program to make  payments to health care providers, are closely monitored by both CMS and  the Medicare contractors that process, review, and pay claims for  Medicare services. The data are subject to various internal controls,  including checks and edits performed by the contractors before claims are  submitted to CMS for payment approval. Although we did not review these  internal controls, we did assess the reliability of the NCH data. First, we  reviewed all existing information about the data, including the data  dictionary and file layouts. We also interviewed experts at CMS who  regularly use the data for evaluation and analysis. We found the data to be  sufficiently reliable for the purposes of this report.
section_title: Comparison of Per- Procedure Costs
paragraphs: To compare the relative costs of procedures performed in ASCs and  hospital outpatient departments, we first compiled information on ASCs’  costs and procedures performed. Because there were no recent existing  data on ASC costs, we surveyed 600 ASCs, randomly selected from all  ASCs, to obtain their 2004 cost and procedure data. We received response  data from 397 ASC facilities. We assessed the reliability of these data  through several means. We identified incomplete and inconsistent survey  responses within individual surveys and placed follow-up calls to  respondents to complete or verify their responses. To ensure that survey  response data were accurately transferred to electronic files for our  analytic purposes, two analysts independently entered all survey  responses. Any discrepancies between the two sets of entered responses  were resolved. We performed electronic testing for errors in accuracy and  completeness, including an analysis of costs per procedure. As a result of  our data reliability testing, we determined that data from 290 responding  facilities were sufficiently reliable for our purposes. Our nonresponse  analysis showed that there was no geographic bias among the facilities  responding to our survey. The responding facilities performed more  Medicare services than the average for all ASCs in our sample.
To allocate ASCs’ total costs among the individual procedures they  perform, we developed a method to allocate the portion of an ASC’s costs  accounted for by each procedure. We constructed a relative weight scale  for Medicare ASC-approved procedures that captures the general variation  in resources associated with performing different procedures. The  resources we used were the clinical staff time, surgical supplies, and  surgical equipment used during the procedures. We used cost and quantity  data on these resources from information CMS had collected for the  purpose of setting the practice expense component of physician payment  rates. For procedures for which CMS had no data on the resources used,  we used information we collected from medical specialty societies and  physicians who work for CMS. We summed the costs of the resources for  each procedure and created a relative weight scale by dividing the total  cost of each procedure by the average cost across all of the procedures.  We assessed the reliability of these data through several means. We  compared electronic CMS data with the original document sources for a  large sample of records, performed electronic testing for errors in  accuracy and completeness, and reviewed data for reasonableness. Based  on these efforts, we determined that data were sufficiently reliable for our  purposes.
To calculate per-procedure costs with the data from the surveyed ASC  facilities, we first deducted costs that Medicare considers unallowable,  such as advertising and entertainment costs. (See fig. 3 for our per- procedure cost calculation methodology.) We also deducted costs for  services that Medicare pays for separately, such as physician and  nonphysician practitioner services. We then separated each facility’s total  costs into its direct and indirect costs. We defined direct costs as those  associated with the clinical staff, equipment, and supplies used during the  procedure. Indirect costs included all remaining costs, such as support  and administrative staff, building expenses, and outside services  purchased. To allocate each facility’s direct costs across the procedures it  performed, we applied our relative weight scale. We allocated indirect  costs equally across all procedures performed by the facility. For each  procedure performed by a responding ASC facility, we summed its  allocated direct and indirect costs to determine a total cost for the  procedure. To obtain a per-procedure cost across all ASCs, we arrayed the  calculated costs for all ASCs performing that procedure and identified the  median cost.
To compare per-procedure costs for ASCs and hospital outpatient  departments, we first obtained from CMS the list of ambulatory payment  classification (APC) groups used for the outpatient prospective payment  system (OPPS) and the procedures assigned to each APC group. We also  obtained from CMS the OPPS median cost of each procedure and the  median cost of each APC group. We then calculated a ratio between each  procedure’s ASC median cost, as determined by the survey, and the  median cost of each procedure’s corresponding APC group under the  OPPS, referred to as the ASC-to-APC cost ratio. We also calculated a ratio  between each ASC procedure’s median cost under the OPPS and the  median cost of the procedure’s APC group, using the data obtained from  CMS, referred to as the OPPS-to-APC cost ratio. To evaluate the difference  in procedure costs between the two settings, we compared the ASC-to- APC and OPPS-to-APC cost ratios. To assess how well the relative costs of  procedures in the OPPS, defined by their assignment to APC groups,  reflect the relative costs of procedures in the ASC setting, we evaluated  the distribution of the ASC-to-APC and OPPS-to-APC cost ratios.
section_title: Analysis of Labor- Related Costs
paragraphs: To calculate the percentage of labor-related costs among our sample  ASCs, for each ASC, we divided total labor costs by total costs, after  deducting costs not covered by Medicare’s facility payment. We then  determined the range of the percentage of labor-related costs among all of  our ASCs and between the 25th percentile and the 75th percentile, as well  as the mean and median percentage of labor-related costs.
We performed our work from April 2004 through October 2006 in  accordance with generally accepted government auditing standards.
section_title: Appendix III: Additional Procedures Billed with the Top 20 ASC Procedures, 2003
paragraphs: Appendix III: Additional Procedures Billed  with the Top 20 ASC Procedures, 2003  (percentage)
N/A (percentage)
section_title: Appendix IV: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, key contributors to this report  were Nancy A. Edwards, Assistant Director; Kevin Dietz; Beth Cameron  Feldpush; Marc Feuerberg; and Nora Hoban.