The Centers for Medicare and Medicaid Services (CMS) posted a long anticipated final rule changing Medicare’s ambulatory surgery center (ASC) payment system. The article summarizes the key aspects of the new payment system and its changes and improvements that will go into effect once the new system is implemented.

On July 16, 2007, the Centers for Medicare and Medicaid Services (CMS) posted a long anticipated final rule changing Medicare’s ambulatory surgery center (ASC) payment system. The new payment system, once implemented, will profoundly change how and how much Medicare pays ASCs for the facility component of surgical services furnished to program beneficiaries.


Under CMS’s current ASC payment methodology, Medicare pays ASCs on the basis of a fee schedule. All surgical procedures approved for the ASC setting are assigned to one of nine payment groups that range from $333 to $1,339 based on the resource "costs" associated with the procedure.

This payment system has been only minimally updated since the inception of the Medicare ASC payment benefit in 1982. In recent years, it has come under considerable criticism from policymakers and the ASC community for being out-of-step with current ASC costs and practices. Responding to these concerns, Congress set in motion the development of a new ASC payment system through provisions included in the Medicare Modernization Act of 2003 (MMA) that directed CMS to devise and implement a new payment methodology by January 1, 2008.

In August 2006, CMS published a proposal to implement a new payment methodology as required by the MMA. Generally, CMS proposed to use its hospital outpatient prospective payment system (OPPS) as the basis for determining payments to ASCs for surgical services. The notice published this week finalizes those changes, and sets a course to begin implementation effective January 1, 2008.

Procedure Classification and Payment

CMS will replace the current nine-group procedure classification and payment system with a new system that will base ASC facility payments on the amount Medicare pays a hospital for the same procedure. Specifically, CMS will use the same ambulatory payment classifications (APCs), used to classify OPPS items and services as the mechanism for grouping ASC procedures. Likewise, CMS will use the same APC relative payment weights devised under the OPPS as the basis for calculating ASC payment rates.

However, ASCs will not be paid on par with hospitals. CMS is obliged by the MMA 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 will use a significantly lower conversion factor multiplied by the ASC/OPPS relative weights to determine the payment for an individual procedure. CMS estimates that the 2008 ASC conversion factor will be $42.543. By comparison, the 2008 hospital conversion factor under the OPPS is $63.693. Consequently, CMS estimates that ASCs will be paid approximately 67 percent of what hospitals are paid for corresponding procedures in 2008.

While this 67 percent estimate will be viewed by some as a significant improvement over the 62 percent relationship that was proposed in August 2006, the actual percentage relationship that will be implemented next year is likely to be lower. At this juncture, CMS was able to provide only an estimate of the 2008 ASC conversion factor, because many of the variables—including final OPPS relative payment weights and final Physician Fee Schedule non-facility practice expense payment amounts for 2008—that are needed to determine the conversion factor are not finalized or known at this time. Consequently, the final ASC and OPPS conversion factors for 2008 will be different than the numbers published this week, as will the percentage relationship between the two. It is expected, based on current estimates that ASCs will be paid 65 percent of what hospitals are paid for corresponding procedures. CMS is expected to publish a final conversion factor later this fall, probably in early November.

It is important to note that the percent relationship, whatever it is, will not be permanent. Under the new methodology, CMS will recalculate the two conversion factors each year, and the hospital-ASC payment relationship will vary annually accordingly.

Updates to ASC List

CMS likewise will significantly change how it determines which procedures will be reimbursable when furnished in the ASC setting. CMS historically has determined which procedures are appropriate for the ASC setting using a complex—and some would say out-of-date—set of criteria. At present, there are approximately 2,500 procedures approved for the ASC setting on what is commonly referred to as the "ASC List."

The Medicare Payment Advisory Commission (MedPAC), a non-partisan panel that advises Congress on Medicare payment matters, has been recommending that CMS replace the current "inclusive" approach to identifying procedures with an "exclusionary" approach. That is, rather than limiting payment of an ASC facility fee to a list of procedures that CMS specifies, Medicare would instead allow payment to an ASC facility for any surgical procedure, except those that CMS explicitly excludes from payment.

CMS has decided to embrace these recommendations. Under the revised ASC payment system, Medicare will allow payment of an ASC facility fee for any surgical procedure performed at an ASC, except those surgical procedures that CMS determines are either not safe when furnished in an ASC or that require an overnight stay.

Effective January 1, 2008, CMS will add nearly 800 procedures to the ASC List, an improvement over the approximately 760 that CMS had proposed to add in August 2006. Nonetheless, CMS still plans to exclude nearly 270 procedures because of perceived safety-related concerns.

Office-Based Procedures

While this expansion of the ASC list is welcome news in theory, the practical effect is less exciting. CMS remains concerned about paying a facility fee for procedures that either require limited facility resources or are primarily performed in physician offices. As such, CMS will cap payment for "office-based" procedures for which payment of an ASC facility fee would be allowed under the revised payment system as of January 1, 2008, at the lesser of the Medicare Physician Fee Schedule non-facility practice expense payment or the ASC rate under the revised ASC payment system. Procedures that are on the ASC List as of January 1, 2008 will be exempt from the cap. Approximately 350 of the 800 newly added procedures are subject to this payment cap and will be paid at amounts established under the Physician Fee Schedule. Reimbursement for many of the procedures subject to the cap may be too low to justify utilization of ASC resources.

Geographic Adjustments

CMS adjusts a portion of the ASC payment to account for geographic variations in labor costs. The agency uses the same wage index used to adjust payments to hospitals. However, CMS has traditionally adjusted a much smaller portion of the ASC payment amount, reasoning that labor costs account for a smaller portion of total costs in ASCs than in hospitals. Specifically, CMS has historically adjusted only 34.45 percent of the total payment amount by the wage index. CMS had previously proposed to maintain this labor portion ratio in the new payment system.

In a study released in November 2006, the Government Accountability Office found that labor-related costs were actually much higher, and ranged from 43 percent to 57 percent of total costs. As such, CMS will now adjust 50 percent of the total payment amount by the applicable wage index. For facilities in areas with a wage index of 1.0 or more, which includes most large metropolitan areas, this development will improve payment.

Payment "Packaging"

CMS also is substantially revising its payment "packaging" policies—i.e., which ancillary items and services will be included in the ASC facility payment—and in many instances expanding the categories of items and services for which ASCs may separately bill the Medicare program.

As a general rule, CMS will 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 and anesthesia materials. CMS will cease making separate payment for implantable prosthetic devices and implantable durable medical equipment (DME) inserted surgically at an ASC. Instead, consistent with how Medicare pays hospitals, CMS will begin including reimbursement for these costs into the ASC facility fee payment when the devices are surgically inserted.

However, CMS also is making numerous exceptions for broad categories of ancillary services and items furnished in conjunction with surgical procedures.

Radiology Services

As radiology and surgical procedures increasingly become intertwined, ASCs have faced a Medicare reimbursement conundrum. The current regulatory definition of an ASC does not allow the ASC and another entity to mix functions and operations in a common space during concurrent or overlapping hours of operation. Historically, CMS has made an exception to this rule when the imaging services are integral to the performance of the surgical procedure. In such instances, if the ASC is also enrolled as an Independent Diagnostic Testing Facility (IDTF) and bills as that supplier when furnishing a radiology service that is reasonable and necessary and directly related to and furnished in conjunction with a covered surgical procedure, the IDTF may bill and receive payment for imaging and guidance services, even though they are being provided during the ASC’s designated hours.

Under the final rule, CMS is further clarifying and hopefully simplifying this tension by providing separate payment to ASCs for certain ancillary radiology services when they are integral to the performance of a covered surgical procedure billed by the ASC on the same day, provided that separate payment for the radiology service would be made under the OPPS. CMS will regard a radiology service as integral to the performance of a covered surgical procedure if it is required for the successful performance of the surgery, and it is performed in the ASC immediately preceding, during or immediately following the covered surgical procedure. The separate ASC payments for these radiology services will be made at the lower of the amount calculated according to the standard methodology of the revised ASC payment system or the Medicare Physician Fee Schedule non-facility practice expense amount for the service.

ASCs that previously enrolled as IDTFs to capture reimbursement for these imaging services will now want to reconsider IDTF status. Under the new policy, payment will no longer be available to IDTFs or any other supplier for covered ancillary radiology services furnished integral to covered surgical procedures in ASCs; only an ASC can receive payment for providing the ancillary radiology services.


ASCs have long struggled with whether and how to furnish brachytherapy sources implanted in ASCs, where the needles and catheters to implant the sources are implanted during surgical procedures that are on the ASC List. Under the existing ASC payment system, payment is not available to ASCs for brachytherapy sources, because the source application codes are not defined as surgery and consequently are not on the existing ASC List.

CMS has decided to provide separate payment to ASCs for the brachytherapy sources implanted in conjunction with covered surgical procedures billed by ASCs on the same day. The payment amount for the brachytherapy source will be the same as the OPPS payment rate without application of the ASC budget neutrality adjustment factor, nor with adjustment for geographic wage differences. If a specific OPPS rate is unavailable, the brachytherapy sources will be contractor-priced.

Drugs and Biologicals

CMS also is revising its prior position concerning payment for drugs and biologicals, and now allowing separate payment for relatively costly drugs and biologicals that are integral to covered surgical procedures that are billed by ASCs and whose payments are not packaged into the base OPPS payment rates. Therefore, effective January 1, 2008, Medicare will pay separately for all OPPS pass-through and non-pass-through drugs and biologicals that are separately paid under the OPPS when they are provided in association with a covered surgical procedure that is billed by the ASC to Medicare. Consistent with other policies, CMS defines a drug or biological as integral to the performance of a covered surgical procedure if it is required for the successful performance of the surgery and is provided in the ASC immediately preceding, during or immediately following the covered surgical procedure. The payments for separately payable drugs and biologicals under the revised ASC payment system will equal the OPPS payment, without application of the ASC budget neutrality adjustment, nor the geographic wage adjustment.

Implantable Devices with Pass-Through Status under the OPPS

Similarly, Medicare will now provide separate payment to ASCs for devices that are included in device categories with pass-through status under the OPPS. Medicare will pay ASCs for such devices at contractor-priced rates when they are implanted in ASCs during a covered surgical procedure. ASC payment for these devices would not be subject to the geographic wage adjustment, nor would the uniform ASC conversion factor be applied.

Implantable Devices without Pass-Through Status under the OPPS

Many commentators objected to CMS’s proposal to package payment for devices without pass-through status on the basis that, where the device cost is close to or exceeds 62 percent, the proposed discount rate, of the total APC payment rate, the ASC would not be paid enough to cover the cost of the device, let alone the other service costs of the implantation procedure. Some commentators suggested that CMS continue to pay separately for devices and provide payment through the ASC payment for only the non-device portion of the implantation procedure.

CMS rejected this recommendation. However, the agency did acknowledge these concerns and agreed to provide a special payment accommodation for "device-intensive" procedures. For qualifying procedures, CMS will isolate the device-related costs and apply the uniform ASC discount factor to the service (non-device) portion of the OPPS relative payment weight. The payment amount will then be the sum of the device portion and service portion.

CMS will define device-intensive procedures as all those ASC covered surgical procedures that are assigned to device-dependent APCs under the OPPS, where the APC device cost is greater than 50 percent of the median APC cost. According to CMS, there are 40 such procedures that fall into this group based on 2007 APC assignments, 25 of which are on the 2007 ASC List and 15 of which will be newly recognized for ASC payment beginning in 2008.

Inflation Adjustments

Under current law, CMS is required to annually inflate ASC payments by the consumer price index for urban areas, although inflation adjustments were suspended under the MMA through 2009. The same law requires CMS to inflate OPPS payments by the hospital market basket index, a separate inflation adjustment. Commentators complained that the market basket is traditionally higher than the CPI-U, and that the gap between ASC and hospital payments would continue to diverge because of this disparity. CMS rejected these complaints concluding that it had inadequate statutory discretion to use the market basket index to update ASC rates. ASC trade associations are likely to appeal to Congress for relief on this point.


CMS proposed to transition to 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. Commentators complained that a two-year phase-in left facilities inadequate time to adjust. CMS concurred, and decided to instead phase in the new rates over a four-year period. CMS will use a 25/75, 50/50, 75/25 and 100/0 blend beginning in 2008. Procedures added to the ASC List beginning in 2008 will be paid the full amount calculated under the revised payment methodology rather than a blended amount. The new payment rates will be fully implemented in 2011.

Implications for ASCs

From a high-level policy perspective, the new ASC payment methodology includes many important and welcome improvements over the existing payment system. At ground-level, however, the new payment system will yield mixed results for ASCs. Those ASCs specializing in orthopedic procedures will benefit substantially under the new system, while those facilities specializing in gastroenterology and pain management will likely see dramatic (more than 20 percent) revenue decreases under the new system. Following is a chart illustrating the current and new payments for five high-volume ASC procedures.

[see table]

The changes to the ASC List further illustrate this tension. While the new approach to defining covered surgical procedures permits many more procedures to be furnished in the ASC setting, the "office-based" cap limits the ability of many ASCs to furnish these services.

The final rule is presently available on CMS’s website at It will be published in the Federal Register on August 2, 2007.