Medicare makes no apologies if its proposed ASC payment policy shortchanges, slights or snubs surgical centers. The agency says it set forth the major tenets of its revamped reimbursement plan in the name of budget neutrality:

• ASCs should receive 38 percent less for the same type of procedures done in hospital outpatient settings, beginning Jan. 1, 2008. (Today, by some estimates, ASCs are reimbursed on average 31 percent less than what hospitals are paid.)
• ASCs should be able to do 750 more procedures, two-thirds of which are performed primarily in physicians offices and for which already-low payment rates should be capped at the office-based rate.
• ASCs shouldn't receive annual payment rate updates, the same wage index adjustments or the same add-ons that hospitals receive for innovative pharmaceuticals, medical devices and implants.

"Not at all what we wanted, expected or hoped for," says Kathy Bryant, president of FASA, which now stands for Foundation for Ambulatory Surgery in America.

"Arbitrary, penurious, short-sighted and unacceptable," says the American Association of Ambulatory Surgery Centers of the proposal.

"Draconian and irrational," says ASC lobbyist Michael A. Romansky.

The ASC industry was counting on the government to do more than correct the longstanding imbalance in how surgical centers are reimbursed for the same procedures performed in hospitals. Besides the rightsized fees that they now might not get, the lobbyists and trade groups also wanted CMS to put ASCs on the same payment pedestal as hospitals. They weren't asking for equality, but equity, for "a payment policy that paralleled the way CMS reimburses hospitals," the emphasis always on the word parallel, as if this and only this could result in a fair payment policy and validate the legitimacy of ASCs.

"We had argued that if we are paid based on the hospital system, everything needs to be the same," says Ms. Bryant. "CMS lost an opportunity to put ASCs and HOPDs on basically the same system with just a variation in the amounts paid."

If parallel to hospitals is what the ASC industry wanted, perpendicular is more like what they got. Here are five of the biggest letdowns ASCs will find in the proposed payment policy.

1 ASCs would receive only 62 percent of the HOPD rates
All along, the ASC community recommended that if Medicare wanted to pay ASCs a percentage of the hospital outpatient department rate, it should pay ASCs on the basis of 75 percent. Currently, surgery center fees aren't tied to hospital outpatient fees at all, but on average Medicare pays surgery centers about 69 percent as much. Medicare's proposed rule would pay ASCs 62 percent of the hospital outpatient department rate.

"Could ASCs perform services for 62 percent of what a hospital does?" asks Ms. Bryant. "If that's true, hospital rates are way too high. ASCs can definitely do procedures cheaper, but to think they can do them 38 percent cheaper is ludicrous. That's unacceptably low."

Ms. Bryant dismissed the theory that Medicare was punishing ASCs for being more efficient than hospitals when it comes to providing surgical services, saying instead that the low percentage is driven by CMS's narrow interpretation of the Medicare Modernization Act's requirement that the new system be implemented in a budget-neutral manner. "ASCs do procedures more efficiently than hospitals," she says, "but ASCs can't hire nurses at 62 percent of the salary that hospitals do nor buy capital equipment at 62 percent of what hospitals do."

CMS says it considered many options for setting ASC payment rates under a revised payment system, including requiring ASCs to submit modified cost reports as a basis for establishing ASC costs and simply expanding the number and payment range of the current nine ASC payment groups. In the end, "as advocated by representatives of several ASC associations," CMS decided to base payments to ASCs on a flat percentage of the payment for the same services established under the OPPS. CMS says it will use the APC groups and the relative payment weights for surgical procedures established under the OPPS as the basis of the payment groups and the relative payment weights for surgical procedures performed at ASCs. These payment weights would be multiplied by an ASC conversion factor in order to calculate the ASC payment rates.

CMS is obliged by statute to implement the new payment system so that payments under the new payment methodology will neither increase nor decrease aggregate Medicare spending for ASC services, says healthcare lawyer Eric Zimmerman, a partner in the Washington, D.C., office of law firm of McDermott Will & Emery LLP. 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. That's how CMS reaches its proposal to pay ASCs 62 percent of what it pays hospitals for corresponding procedures in 2008.

ASCs specializing in orthopedic (38 percent higher facility fees, says FASA) or ophthalmology (particularly retina) procedures would benefit substantially under the proposed system, while those facilities specializing in such common ASC procedures as gastroenterology, urology and pain management could see dramatic - more than 30 percent - revenue decreases under the new system.

"The proposed rule would have a chilling effect on ASCs," says Craig Jeffries, executive director of AAASC.

Here's a look at how the proposed payment system would affect five high-volume ASC procedures.

2 The new payment rates would be phased in over a two-year transition period
CMS is proposing a two-year transition from the current ASC payment rates to the new payment rates. The ASC community had recommended a four-year transition to soften the blow for those centers that specialize in or perform high volumes of procedures for which payment under the new system would decrease. Given the significant payment changes for some procedures under the revised payment system, many worry that the proposed short transition period could seriously threaten the viability of many centers. Under the proposal, CMS is planning to pay a blended amount equal to 50 percent of the rate under the existing payment system and 50 percent of the rate under the new system in 2008; starting in 2009, payment rates would be tied entirely to the new methodology. "The system should be phased in over four years and 'hold harmless' those services that would be reduced below current facility fee levels to ameliorate disruption in facility operations," says Mr. Romansky.

CMS acknowledges that some ASCs may be left vulnerable, saying that it wants to ensure that the revised payment system doesn't cause "a sudden, unwarranted migration of services from ASCs to other ambulatory settings, or the reverse." CMS also wants to give ASCs the opportunity to balance their Medicare case mix between procedures whose rates decrease and procedures whose rates increase.

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, notes Mr. Zimmerman.

3 An inadequate expansion of the ASC list
The ASC industry had hoped that CMS would expand - or eliminate altogether - the ASC list to allow payment for all surgical procedures, except those procedures that pose a significant safety risk or require an overnight stay.

CMS proposed to expand the list of approved surgical procedures, but stopped short of a nearly all-inclusive list. CMS's policy would allow payment of an ASC facility fee for all procedures within the surgical range of CPT codes that don't pose a safety risk to Medicare beneficiaries or require an overnight stay, but would exclude from payment of an ASC facility fee procedures that are performed 80 percent of the time or more in the hospital inpatient setting, even if those procedures aren't included on the OPPS inpatient list. CMS says it selected an 80 percent threshold because "we believe that an 80 percent level of inpatient performance is a fair indicator that a procedure is most appropriately performed on an inpatient basis and as such, would pose significant safety risks for Medicare beneficiaries if performed in an ASC."

"I am incredulous about that," says Ms. Bryant. "Are they admitting that they paid for procedures 20 percent of the time on an outpatient basis that weren't safe for patients?"

CMS is proposing to expand the ASC list by 30 percent from 2,546 to 3,308, adding 762 procedures, but excluding nearly 270 procedures because of perceived safety-related concerns. Nearly 550 of the proposed additions are procedures that are now considered office-based and slightly more than 200 are hospital-only procedures. These latter procedures range in worth from $10,631.92 (manipulate elbow w/anesthesia) to $24.65 (closure of eyelid by suture). The highest dollar procedure is $16,146.03 for 69930, implant cochlear device. Beginning in 2008, CMS is proposing to cap facility payments at the practice expense reimbursement received by physicians in their offices for the 550 or so lower-intensity services added to the ASC list (more on this later).

The ASC payment rate for 274 procedures will be reduced under the proposed rule. This reduction is a result of a law passed by Congress in 2006 that limits the maximum ASC payment rate for any procedure to the HOPD payment rate for that same procedure.

4 ASCs would be tied to different inflation factors than hospitals
CMS is proposing to use different inflation factors to update the ASC and HOPD payment systems: the Consumer Price Index as the basis for annual updates for ASCs (this begins in 2010; under a five-year freeze enacted in 2003, ASCs will receive no updates in 2008 or 2009) and the hospital market basket for HOPDs. The hospital market basket measures the increase in the cost of goods and services purchased by hospitals in a given year. As a result, the 62 percent relationship wouldn't be permanent. Under the proposed methodology, CMS would recalculate the two conversion factors each year, and the hospital-ASC payment relationship would vary accordingly. "This might be good or it might be bad," says a reimbursement analyst. "Each and every year will be different, so we won't always be tied to (62 percent of) HOPD rates."

5 Many procedures would be capped at office-based rates
CMS says it doesn't want to pay a facility for procedures that either require very limited facility resources or are primarily performed in physicians offices. CMS also says that it doesn't want to give surgeons a financial incentive to inappropriately convert their offices into ASCs or to move all their office surgery to an ASC.

These are the two reasons CMS is proposing to cap payment to an ASC for procedures commonly performed in physicians offices so that it doesn't exceed the physician office payment rate. Payment for these "office-based" surgical procedures would be at the lesser of the Medicare physician fee schedule non-facility practice expense payment or the ASC rate under the revised ASC payment system.

Mr. Zimmerman offers an example. CMS is proposing to add to the ASC list CPT code 51736, a urine flow measurement procedure. The proposed national unadjusted Medicare hospital payment for this procedure for 2007 is $66.75. Under CMS's proposed new payment methodology, Medicare would pay an ASC $41.39 for this same procedure ($66.75 x 0.62). However, because CMS regards this procedure as "office-based" (performed in physicians offices more than 50 percent of the time), CMS would cap payment for it at the amount it pays a physician when performed in the office setting, $25.28. CMS would exempt procedures that are on the ASC list as of Jan.1, 2007, says Mr. Zimmerman.

Since the inception of the ASC benefit, procedures that are commonly performed or that can be safely performed in a physicians office have generally been excluded from the ASC list. Over the past 15 years, physicians and ASC associations have urged CMS to add office-based procedures to the ASC list or to retain on the ASC list procedures that were originally and most commonly performed in an institutional setting, but that have subsequently moved to an office setting as surgical techniques and technology have advanced. CMS says it might exclude office-based procedures or procedures that require relatively inexpensive resources to perform from the approved ASC list of procedures.

"We recognize that paying an ASC facility fee for office-based procedures based on OPPS relative payment weights could have a significant impact on Medicare program costs," says CMS.

CMS's proposal to cap payment for office-based procedures could greatly reduce the ability of many ASCs to furnish these services. Nearly 360 procedures could be subject to this payment cap. Worse yet, CMS suggested that it might instead simply exclude procedures that it regards as "office-based" from the ASC list. Fewer than 400 procedures would be added if CMS excludes procedures based on site-of-service or resource-utilization-related criteria, says Mr. Zimmerman.

"I'm most disappointed in the physicians office limitation," says Ms. Bryant. "It doesn't let the patient get the procedure where he should."

Fair and equitable payment rates?
In many meetings with CMS over the past several years, the ASC industry has voiced its preference for a payment system that parallels the OPPS for the sake of promoting transparency across sites of service and to streamline and modernize how Medicare sets payments and determines what is payable under the ASC benefit. Yet despite the fact that ASC payments will be linked to hospitals, there's little else in Medicare's long-awaited proposed ASC payment system that suggests the systems will be parallel.

"In 1982, when the ASC list was limited to about 100 procedures, having a totally different payment system for ASCs probably made some sense," says Ms. Bryant. "But today the differences between ASCs and HOPDs do not warrant two totally different payment systems. This affects competition and sends the wrong message for the future."

The public comment period expires Nov. 6. CMS expects that a final rule implementing the revised ASC payment system will be published next spring and that the new payment system will be implemented effective Jan. 1, 2008. "What emanates from CMS in the final regulation will be the payment and regulatory system under which we operate until yours truly is well into retirement," writes Mr. Romansky in an analysis to members of the Outpatient Ophthalmic Surgery Society. "The changes we persuade the agency to make in the year ahead will be worth literally hundreds of millions of dollars annually to our industry."

To which Ms. Bryant says, "I'm really happy that we have 90 days to comment."