A COMPARISON OF AMBULATORY SURGERY CENTER PRODUCTION COSTS AND MEDICARE PAYMENTS

Ambulatory surgery centers (ASCs), freestanding facilities that specialize in surgical and/or diagnostic procedures that do not require an overnight stay, have grown at unprecedented rates in recent years.  According to MedPAC, the number of Medicare-certified ASCs increased at an annual rate of 6.7%, from about 3,600 in 2002 to over 5,300 in 2011.  This growth has been accompanied by substantial increases in expenditures on ASC services.  Medicare payments to ASCs jumped from $1.9 billion in 2002 to $3.4 billion by 2011. Over this time period, ASC spending per beneficiary rose more than 8% per year.

Medicare substantially revamped the payment system for ASCs in January 2008, moving from nine broad payment categories to more than 2,400 groups.  Surprisingly, this new ASC payment schedule was established without critical data – reliable and accurate estimates of costs.  Thus, lacking accurate data on costs, it is unknown whether payments under the new reimbursement system are in alignment with the costs of producing each surgical service.  Despite the rapid expansion of ASCs coupled with the new payment system, to our knowledge, empirical studies documenting the costs of performing outpatient surgery in an ASC do not exist.

To address this significant gap in knowledge, we estimate cost functions for gastrointestinal, ophthalmic, and orthopedic specialty ASCs using financial cost and patient discharge data spanning the years 2004 thru 2011 for ASCs located in Pennsylvania. For each ASC type we specify a multiple output cost function which accounts for the primary procedures performed at each facility type. Our output measures recognize that a simple count of each procedure type (i.e. colonoscopy; colonoscopy with biopsy; colonoscopy with removal of tumor) does not recognize procedure complexity. Hence, we apply practice expense RVU weights to each procedure to transform potentially heterogeneous services into homogenous outputs. We employ a generalized estimating equation approach to the cost function estimations to account for correlation among observations on individual facilities over time.  We then use the cost function parameter estimates to calculate average production costs of each major procedure.  Finally, for the most commonly performed outpatient surgical procedures, we compare these average production costs to Medicare payments for those procedures.

In an environment in which cost saving to the Medicare program is essential to the success of health care reform, it is critical to understand how payment rates to ASCs, which have become the dominant provider of outpatient surgical procedures, compare with actual production costs.  A focus on Pennsylvania offers significant insights on these questions for at least three reasons.  First, Pennsylvania is the only state that collects operating expenses for ASCs. The data collection procedures, which began in 1996, are standardized and well-established suggesting that reporting reliability and accuracy is high.  Second, the state has many ASCs (270 in 2010) that compete with hospitals in the provision of outpatient surgical procedures.  More than half of all outpatient surgeries statewide are performed in ASCs. Third, Pennsylvania has a large and growing elderly population, suggesting the results have significant implications for the Medicare program.