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Gastroenterol Hepatol (N Y). 2006 September; 2(9): 664–668.
PMCID: PMC5350579

Changing the Payment Structure for Ambulatory Surgical Centers

Ambulatory surgical centers (ASCs) play a unique role in providing outpatient healthcare to the US population. By providing specialized services outside of the hospital setting, ASCs allow patients greater access, a higher level of convenience, and more focused and cost-effective care when undergoing procedures that do not require overnight stays.

Since the first multi-specialty ASC was opened by a group of anesthesiologists in Phoenix, Arizona in 1970, there has been an explosion in the number of ASCs in operation.1 Two factors that encouraged the rapid spread of ASCs in the 1980s were the development of accreditation programs and standards and Medicare approval in 1982 on the grounds that they were low-risk surgeries provided in less expensive settings. The most important single development that made outpatient surgery increasingly safe was the development of new anesthetic agents combined with better techniques for administering sedation.2 Current estimates cite over 5,000 ASCs in the United States, in which gastroenterologic services comprise 23% of overall procedures.3-5

Billing for services performed in an ASC is similar to a hospital, where the physician submits one bill for professional services, and the hospital or ASC submits a separate bill to cover the costs of the facility. In comparison, procedural services performed in the office setting are reimbursed by Medicare and several insurers with an additional site-of-service differential calculated into the payment to cover the physician’s expenses related to staff, equipment, and overhead to provide the service.6,7

Section 1877 of the Social Security Act (the Stark self-referral law) prohibits physicians from making referrals for certain types of services to entities with which they have financial relationships.8 It also prohibits those entities from submitting claims to Medicare or Medicaid for those services. The law applies to several types of services, such as clinical laboratory, radiology, physical therapy, and home health. However, it does not apply to surgical procedures provided in an ASC.9 The anti-kickback statute prohibits healthcare providers from receiving or paying anything of value to influence the referral of services covered by federal health programs. The Office of the Inspector General (OIG) has published safe harbor regulations that protect physicians who invest in ASCs from prosecution under the anti-kickback statute, if certain conditions are met. Among other requirements, the safe harbor regulations generally protect physician investors for whom the ASC is an extension of their office practice.10 In other words, the physician investors must be in a position to refer patients directly to the ASC and to perform the procedures themselves. The share of an ASC’s profits received by physician investors must be related to their portion of the overall investment rather than their volume of referrals. Nevertheless, because ASCs treat only outpatients and because doctors must perform most of the services themselves, hospitals have not expressed strong opposition. The fact that hospitals are part owners of many ASCs could explain their support for this exception.11

Physician self-referral puts the hospital at a potentially significant disadvantage when it competes with physician-owned ASCs for patients. General hospitals have expressed concern that ASC facilities will take away their most profitable procedures and most lucrative patients.12 At the extreme, a referring physician who responds entirely to these personal financial incentives could send all of his patients to the facility that he owns and none to the hospital at which he practices, with two principal exceptions; the first being in the case of patients who needs facility services that the hospital has but which the physician-owned ASC does not (for example, overnight inpatient care), and the second in the case of the patient who, based upon the level of insurance reimbursement and the severity of illness, is unlikely to pay enough to cover the physician-owned facility’s incremental cost of treatment. These unprofitable patients also get referred to the hospital.13

Ownership of a specialized facility enables physicians to collect fees for their own professional services and to share in any profit generated from the facility fee paid to the organization that operates the facility—a fee that historically has gone entirely to hospitals. As health plans have moved away from selective contracting, risk contracting, and tight utilization management, and due to the fact that some hospitals were operating at or near capacity, the likelihood that ASCs would have enough volume to be profitable has increased.14

ASCs and CMS Regulations

Historic Perspective

The Centers for Medicare and Medicaid Services (CMS) first developed a list in 1982 of allowable procedures and a payment schedule with nine categories for the ASC setting. To receive payments from Medicare, ASCs must meet Medicare’s conditions of coverage for ASCs, which require compliance with state licensure law and specify minimum standards for administration of anesthesia, quality evaluation, operating and recovery rooms, the medical staff, nursing services, and other areas.15 ASCs are deemed to be in compliance with the conditions of coverage if they are licensed by a state agency or accredited by a private accreditation body. Although CMS is required by law to update the list of allowable procedures every two years in consultation with appropriate medical organizations, this list has not been modified since 1995, with the exception of updates resulting from coding changes. In addition, Medicare did not adequately create a mechanism for payment of new technology within the ASC setting.

CMS has been statutorily required to conduct a survey of costs and charges for individual procedures from a sample of ASCs every five years. This data was to be used to revise ASC payment rates. Although the most recent cost survey was conducted in 1994, the payment rates based on this survey were never implemented because of legislative action. Thus, current payment rates are based on a 1986 cost survey and are no longer consistent with ASC costs.16

Most of the nine ASC payment groups include at least 100 services, which are often clinically unrelated. The use of such broad groups made it difficult for CMS to classify new services and increased the likelihood that many services are over- or underpaid. Due in part to delays in revising the ASC payment system, there are significant disparities between ASC and hospital outpatient department rates for many services. As a result, ASC facility reimbursement for many gastrointestinal endoscopic procedures approach 87–92% of hospital outpatient rates.17

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) eliminated the payment update for ASC services for fiscal year 2005, changed the update cycle to a calendar year, and eliminated the updates for calendar years 2006 through 2009. CMS had implemented a 2% increase to ASC payment rates for fiscal year 2004. The MMA also eliminated this increase for the second half of 2004, thereby returning rates to their 2003 levels.18 The MMA eliminated the provision that CMS survey ASCs’ costs and charges every five years. It required the Government Accountability Office (GAO) to study the relative costs of services in ASCs and hospital outpatient departments and whether the outpatient prospective payment system’s (OPPS) procedure groups reflect ASC procedures.19

In 2005, the ambulatory surgery center industry sponsored the introduction of the Ambulatory Surgery Center Medicare Payment Modernization Act.20 The legislation called for ASCs to be paid at 75% of the Hospital Outpatient Department (HOPD) fee-schedule amount for each covered service, and for ASCs to receive pass-through payments made to HOPDs for the additional costs of innovative medical devices, drugs and biologicals, and other additional payments. HOPDs are paid based on 221 ambulatory payment classifications (APCs).

In December 2005, Health and Human Services (HHS) Secretary Michael Leavitt wrote to Senator Mike Crapo of Idaho stating that he intended to include all safe outpatient surgical procedures on the ASC list, with a “full and complete airing of all the issues through a public notice and comment rulemaking process.”21

The Proposed Rule

The time for that “airing” has come with the August 2006 posting of the Proposed Rule for ASC-certified procedures and reimbursement schedule.22 Under the proposal, CMS would replace the current procedure classification and payment system with a new system that would base ASC facility payments on the amount Medicare pays a hospital for the same procedure. CMS is proposing to use the APCs as the mechanism for grouping ASC procedures. It plans to use the APC-relative payment weights as the basis for calculating ASC payment rates under the revised payment system.

CMS is obliged by statute to implement the new payment system in a budget-neutral manner so that payments under the new payment methodology neither increase nor decrease aggregate Medicare spending for ASC services. As such, CMS proposes to use a conversion factor of $39.688 multiplied by the ASC-relative weights to determine the payment for an individual procedure. By comparison, CMS’s proposed conversion factor for hospitals under the outpatient prospective payment system is $64.013. Consequently, CMS is proposing to pay ASCs approximately 62 percent of what it pays hospitals for corresponding procedures in 2008.23 It is important to note that the 62% relationship would not be permanent. Under the proposed methodology, CMS would recalculate the two conversion factors each year, and the hospital/ASC payment relationship would vary accordingly.24

CMS would continue the current policy of packaging the ASC facility fee payment with all direct and indirect costs related to a surgical procedure, including payment for all drugs, biologicals, contrast agents, anesthesia materials, and imaging services. CMS would package the costs for implantable prosthetic devices and durable medical equipment into the ASC facility fee payment when the devices are surgically inserted. CMS proposes to transition in the revised ASC payment system in 2008 using a 50/50 blend of the payment rate applicable in 2007 under the existing methodology and the payment rate determined under the revised payment methodology. Procedures added for payment of an ASC facility fee beginning in 2008 would be paid the full amount calculated under the revised payment methodology for 2008 rather than a blended amount. The new payment rates would be fully implemented in 2009 (Table 1).

Table 1.
Projected ASC Reimbursement Rates Based on the CMS-Proposed Rule

CMS is proposing to significantly change how it determines which procedures will be reimbursable when furnished in the ASC setting. Historically, CMS has determined which procedures are appropriate for the ASC setting using a complex set of criteria, with approximately 2,500 procedures approved for the ASC setting in an “inclusive” approach. Rather than limiting payment of an ASC facility fee to a list of procedures that CMS specifies, Medicare has proposed under the revised ASC payment system to allow payment of an ASC facility fee for any surgical procedure, except those surgical procedures that CMS determines to be either not safe when furnished in an ASC or that require an overnight stay. CMS is proposing to expand the ASC list by more than 760 procedures but to exclude nearly 270 procedures because of perceived safety-related concerns (Table 2) in an “exclusionary” approach.

Table 2.
Proposed Exclusionary Criteria for CMS-Authorized Procedures in the ASC Setting

CMS remains concerned about paying a facility for procedures that either require very limited facility resources or are primarily performed in physician offices. CMS has proposed to cap payment for “office-based” surgical procedures for which payment of an ASC facility fee would be allowed under the revised payment system, at the lesser of either the Medicare physician fee schedule non-facility-practice expense payment or the ASC rate under the revised ASC payment system.25 For example, CMS is proposing to add to the ASC List CPT code 45330, flexible sigmoidoscopy. The proposed national unadjusted Medicare hospital payment for this procedure for 2007 is $295.48. Under CMS’s proposed new payment methodology, Medicare would pay an ASC $183.20 for this same procedure ($295.48*0.62). However, because CMS regards this procedure as “office-based,” CMS would cap payment for this procedure at the amount it pays a physician when it is performed in the office setting, $81.85.26 CMS would exempt procedures that are on the ASC List as of January 1, 2007 from this.

In the meantime, CMS is required by the Deficit Reduction Act of 2005 to cap ASC payment at the corresponding amount paid to a hospital for the same procedure. Effective 2007, Medicare cannot pay an ASC more than it pays a hospital for a procedure.27

Controversies in Payment Structure

The expansion of the list of authorized procedures creates new opportunities to utilize ASCs but, paradoxically, may discourage the offering of these procedures from a fiscal standpoint. In a budget-neutral environment, if 750 new procedures are authorized in the ASC setting, the number of total procedures performed will rise with the net effect of less money for each individual procedure. This is particularly true with the migration of more complex and expensive procedures to ASCs. Further, without the provision of funding for new technology, the economic feasibility of providing the latest procedures at an ASC will be greatly reduced.

The cost of this technological component must be recognized in any revision to the proposed rules. When physicians use additional equipment or resources to perform in-office endoscopic procedures, those costs are built into the practice expense and reimbursement for the procedure. Those who manage ASCs understand there is a basic cost of care to provide an EGD or colonoscopy examination. If other services are provided, such as biopsy, polypectomy, ablation, ultrasound, or stent placement, then the ASC payment methodology should account for the costs of medical technology. There needs to be a mechanism to pass additional costs through in the ASC payment model, particularly with one-time-use technologies like stents.

Whether this proposal by CMS to reform ASC payment methodology will be implemented in its current form remains to be seen. Without a mechanism to cover the cost of technology associated with complex procedures in the ASC setting, ASCs simply will not offer these procedures to patients. As a result, procedures will remain in the hospital, which is the costliest setting, thereby further depleting funds in a budget-neutral environment. In the end, no one wins: patients have fewer options and higher co-pays, payer and purchaser costs are higher, and the hospital burden is potentially exacerbated due to the influx of new patients. Marginally profitable ASCs may elect to adjust their patient mix, expand their focus to embrace new specialties and procedures, joint venture with hospitals, sell out, or close their doors.

Equipment Investment and Quality of Care

Facets of care not acknowledged by CMS in the proposed rule are issues of sedation28 and quality of care and patient safety related to re-use of endoscopes.29 As Medicare and insurers attempt to limit use of anesthesiologists to administer sedation,30,31 new sedative agents32 and machines for delivery of propofol are under development.33 These devices would monitor vital signs and respiratory effort automatically, monitor sedation level by sensory feedback systems, and titrate propofol to moderate levels of sedation. Adoption of these drugs and devices may be limited if payment is not forthcoming.

There have been several incidents of transmission of infectious agents through inadequate or ineffective cleansing of endoscopes in recent years.34-37 As a result, the OIG expressed, in 2002, concerns regarding state and accreditation agency quality oversight of ASC services.38-40 Should a state elect to mandate use of disposable instruments in procedures, the proposed payment rule contains no mechanism to address this.

Shaping Policy Through Physician Advocacy

Physicians should keep in mind that this is a proposed rule; associations and professional societies have responded by setting up mechanisms for commenting. The marketplace is already responding, with some ASC management/development companies evincing euphoria,41 others cutting earnings projections,42 and still others exploring options to exit the business.43 It is important for physicians to embrace advocacy and provide feedback to CMS on their own behalves, whether by directly addressing the agency44 or by sending comments to their societies to be forwarded. Otherwise, this proposal, if enacted in its current form, would radically restructure the gastroenterology ASC marketplace and could countermand efforts to promote high quality patient care in cost-effective settings.

References

4. 2005 Outpatient Surgery Center Market Report, Verispan LLC.
11. Shactman D. Health Affairs. 2005 May-Jun;24:868–873. [PubMed]
12. Winter A. Health Affairs. 2003 Nov-Dec;22:68–75. [PubMed]
13. Lynk WJ, Longley CS. Health Affairs. 2002 Jul-Aug;21(4):215–221. [PubMed]
14. Casalino LP, Devers KJ, Brewster LR. Health Affairs. 2003 Nov-Dec;22(6):56–67. [PubMed]
15. Medicare Program part 416–Ambulatory surgical services Subpart A–general provisions and definitions and secs. 416.1 basis and scope/416.2 definitions.

Articles from Gastroenterology & Hepatology are provided here courtesy of Millenium Medical Publishing