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The U.S. Department of Health and Human Services Office of Inspector General (HHS OIG) has issued an April 2014 report recommending a significant payment change. The report boasts a rather impressive title:

“Medicare and Beneficiaries Could Save Billions If CMS Reduces Hospital Outpatient Department Payment Rates for Ambulatory Surgical Center-Approved Procedures to Ambulatory Surgical Center Payment Rates”

The basic idea is that, for hospital outpatient surgical procedures that could be performed safely in an ASC (ambulatory surgical center), the hospital payment would be reduced to the ASC payment rate. The OIG touts potential savings in the billions of dollars for both the Medicare program as well as for Medicare beneficiary copayments. Given the current national imperative that Medicare expenditures be reduced, this recommendation could gain traction at the congressional level. The Centers for Medicare & Medicaid Services (CMS) has rejected this recommendation. However, prudent assessment indicates a strong likelihood that some form of this issue will be implemented in the coming years.

There are two key factors for consideration:

  1. The payment reduction process
  2. Medical necessity for services performed in an outpatient setting

The OIG report correctly recognizes that only certain hospital outpatient surgeries could be performed safely in an ASC. The figure listed in the report is 68 percent for services performed at hospitals. How this will translate to individual hospitals is very much an open question.

From the report:

“We (OIG) recognize that not all procedures can be performed in an ASC because a procedure might pose a significant safety risk to the patient. To account for this, we obtained patient-risk statistics from the Agency for Healthcare Research and Quality. The risk statistics showed that 33 percent of hospital patients 65 and older were considered to have no- risk medical profiles and an additional 35 percent were considered to be at low risk for procedures performed at an ASC. In total, 68 percent of patients had either low- or no-risk medical profiles. We used these risk profiles to estimate the range of potential savings to be between $7 billion and $15 billion for Medicare for CYs 2012 through 2017.”

For hospitals, if 68 percent of outpatient surgical procedures were deemed to be able to be performed safely at an ASC and the ASC payment rate is applied, the reduced reimbursement would be significant.

The ASC payments rates use a hybrid of MPFS (Medicare Physician Fee Schedule) and APCs (Ambulatory Payment Classifications). While the payment formula for ASCs is somewhat convoluted, the basic algorithm is this:

ASC payment is the lesser of:

65 percent of the APC payment or
Non-Facility PE RVU from MPFS.

This formula applies to “office-based” surgeries, that is, surgeries that can be performed in a physician’s office. For other ASC-level surgeries, the payment is based on a percentage of the APC payment. Also note that the 65 percent figure listed in the above algorithm is misleading, because the actual percentage changes from year to year. The 65 percent marked the starting point when this hybrid process was initiated. For 2014 the figure is 59 percent when comparing the conversion factors for APCs and ASCs.

For payment purposes, there are basically three surgical categories:

  • Surgical procedures safely performed in an office setting;
  • Surgical procedures safely performed at an ASC; and
  • Surgical procedures safely performed in the hospital outpatient setting.

This sequence is hierarchical. There are procedures that can be performed at an ASC that are not appropriate for a physician’s office. Likewise, there are surgical procedures that should be performed in the hospital setting and not at an ASC. For ASCs, there is a list of surgeries that are appropriate for performance in such a setting. Obviously, all of the surgical procedures under consideration can be provided in a hospital outpatient setting.

The financial impact of the change recommended by the OIG would be significant. Taking a very simple example of a colonoscopy with the snare removal of a polyp, the normal payment under APCs is about $740. Applying the 59 percent payment rate for an ASC reduces this payment to about $437, a reduction of about $300. This kind of reduction, if multiplied by thousands of encounters, will be significant.

The OIG recommendation is to pay for those surgical procedures that can be performed in an ASC at ASC payment levels, even if they are performed at a hospital on an outpatient basis. The real issue is how to determine which procedures are performed at a no-risk or low-risk basis and thus should be paid at the lower ASC rate. This means that the overarching compliance issue (that is, medical necessity) is central to this whole process. If this plan is implemented, the RACs certainly will become involved in challenging medical necessity for performing services in a hospital at the full APC payment rate.

The medical necessity issues involved with this potential payment change are reminiscent of the ongoing medical necessity challenges involving inpatient admissions. The real issue will be how CMS provides guidance for hospitals and the RAC auditors. In other words, exactly how would risk be determined and gauged in order to justify full hospital APC payment?


Again, CMS’s response to this report was to disagree, citing payment system issues. CMS indicated that legislation would be required in order to implement this kind of change. In past years this report probably would have been shelved for possible future reference. Yet with Congress becoming more active in this area and the amount of projected savings involved, the recommendations in this report eventually will receive close attention.

Note: One of the fundamental issues involved with this type of recommendation is the way in which the payment systems interface (or, in this case, how they do not properly interface). This fundamental issue drives much of the RACs’ activities relative to outpatient APCs interfacing to inpatient DRGs. Note also that this issue is similar to the issue associated with provider-based clinics being reimbursed more than freestanding clinics. While the process of addressing these issues must be measured in years, there is now some movement for data collection relative to provider-based clinics.

Considering the significant degrees of savings projected by the OIG, again, this recommendation likely will be implemented in some form eventually. Hospitals should conduct financial analyses of the potential impact using historical data. Differentiating no-risk and low-risk cases will be difficult; if nothing else, the 68 percent figure used by the OIG can be applied. Secondly, hospitals should carefully track how CMS addresses this issue in the coming years. One of the main issues for CMS will be promulgating the assessment of risk. The clarity of the CMS guidance is the big question. Certainly, if and when it is implemented, the RACs will be very interested in auditing in this area.

If you read the aforementioned report carefully, you will find that one of CMS’s objections to this recommendation is that the OIG did not provide explicit delineation of the risk levels. The OIG, of course, considers the development of explicit levels to fall within the purview of CMS. For CMS (or for anyone else for that matter) to develop the risk levels would require significant effort, and controversy will certainly arise.

About the Author

Duane C. Abbey, Ph.D., CFP, is an educator, author and management consultant working in the healthcare field. He is President of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University.

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To comment on this article go to editor@racmonitor.com


Duane C. Abbey, PhD, CFP

Duane C. Abbey, PhD, CFP, is an educator, author, and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University. Dr. Abbey is a member of the RACmonitor editorial board and is a frequent guest on Monitor Mondays.

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