Medicare: Payment for Ambulatory Surgical Centers Should Be Based
on the Hospital Outpatient Payment System (30-NOV-06, GAO-07-86).
                                                                 
Medicare pays for surgical procedures performed at ambulatory	 
surgical centers (ASC) and hospital outpatient departments	 
through different payment systems. Although they perform a	 
similar set of procedures, no comparison of ASC and hospital	 
outpatient per-procedure costs has been conducted. The Medicare  
Prescription Drug, Improvement, and Modernization Act of 2003	 
directed GAO to compare the relative costs of procedures	 
furnished in ASCs to the relative costs of those procedures	 
furnished in hospital outpatient departments, in particular, how 
accurately the payment groups used in the hospital outpatient	 
prospective payment system (OPPS) reflect the relative costs of  
procedures performed in ASCs. To do this, GAO collected data from
ASCs through a survey. GAO also obtained hospital outpatient data
from the Centers for Medicare & Medicaid Services (CMS).	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-86						        
    ACCNO:   A63766						        
  TITLE:     Medicare: Payment for Ambulatory Surgical Centers Should 
Be Based on the Hospital Outpatient Payment System		 
     DATE:   11/30/2006 
  SUBJECT:   Cost analysis					 
	     Health care costs					 
	     Health care facilities				 
	     Health surveys					 
	     Hospital care services				 
	     Medical procedures 				 
	     Medicare						 
	     Outpatient care					 
	     Payments						 
	     Cost estimates					 
	     Medicare Hospital Outpatient Prospective		 
	     Payment System					 
                                                                 

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GAO-07-86

   

     * [1]Background

          * [2]Structure of the ASC Payment System
          * [3]Structure of the OPPS
          * [4]History of the ASC System Rate Setting
          * [5]History of OPPS Rate Setting

     * [6]Results in Brief
     * [7]Many Additional Billed Services Were Similar; Few Resulted i

          * [8]Many Additional Services Billed in Each Setting Were Similar
          * [9]Additional Services Resulted in Few Additional Payments to A

     * [10]APC Groups Accurately Reflect ASC Procedure Costs

          * [11]APC Groups Accurately Reflect the Relative Costs of ASC Proc
          * [12]ASC Procedures' Median Costs Are Generally Lower Than Those

     * [13]Conclusions
     * [14]Recommendation for Executive Action
     * [15]Agency and External Reviewer Comments and Our Evaluation

          * [16]CMS Comments
          * [17]Industry Comments and Our Evaluation

     * [18]Analysis of Additional Services
     * [19]Comparison of Per-Procedure Costs
     * [20]Analysis of Labor-Related Costs
     * [21]GAO Contact
     * [22]Acknowledgments
     * [23]GAO's Mission
     * [24]Obtaining Copies of GAO Reports and Testimony

          * [25]Order by Mail or Phone

     * [26]To Report Fraud, Waste, and Abuse in Federal Programs
     * [27]Congressional Relations
     * [28]Public Affairs

Report to Congressional Committees

United States Government Accountability Office

GAO

November 2006

MEDICARE

Payment for Ambulatory Surgical Centers Should Be Based on the Hospital
Outpatient Payment System

GAO-07-86

Contents

Letter 1

Background 4
Results in Brief 8
Many Additional Billed Services Were Similar; Few Resulted in Additional
Payments to ASCs or Hospital Outpatient Departments 9
APC Groups Accurately Reflect ASC Procedure Costs 12
Conclusions 15
Recommendation for Executive Action 15
Agency and External Reviewer Comments and Our Evaluation 15
Appendix I Analysis of the Proportion of Labor-Related Costs for
Ambulatory Surgical Centers 17
Appendix II Scope and Methodology 18
Appendix III Additional Procedures Billed with the Top 20 ASC Procedures,
2003 23
Appendix IV Comments from the Centers for Medicare & Medicaid Services 25
Appendix V GAO Contact and Staff Acknowledgments 27

Figures

Figure 1: ASC Procedure Median Cost to APC Median Cost Ratios, Distributed
by Percentage in 0.05 Increments, 2004 13
Figure 2: OPPS Procedure Median Cost to APC Median Cost Ratios,
Distributed by Percentage in 0.05 Increments, 2004 14
Figure 3: ASC Per-Procedure Cost Calculations from ASC Survey 21

Abbreviations

AAASC American Association of Ambulatory Surgery Centers APC ambulatory
payment classification ASC ambulatory surgical center CMS Centers for
Medicare & Medicaid Services GI gastrointestinal MMA Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 NCH National Claims
History ORA Omnibus Reconciliation Act of 1980 OPPS outpatient prospective
payment system

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United States Government Accountability Office

Washington, DC 20548

November 30, 2006

The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate

The Honorable Joe Barton Chairman The Honorable John D. Dingell Ranking
Minority Member Committee on Energy and Commerce House of Representatives

The Honorable William M. Thomas Chairman The Honorable Charles B. Rangel
Ranking Minority Member Committee on Ways and Means House of
Representatives

In 1982, Medicare began paying ambulatory surgical centers (ASC) to
perform certain surgical procedures on an outpatient basis. ASCs were
established as an alternative to hospital inpatient care, which was
considered a more costly setting. Medicare's initial ASC payment rates
were based on ASC cost and charge data from 1979 and 1980. The Centers for
Medicare & Medicaid Services (CMS), the agency that administers Medicare,
was required by law to review the ASC payment rates periodically and
adjust them as appropriate.^1 CMS last revised the ASC payment rates in
1990 using ASC data on costs and charges that CMS collected in 1986.^2
Since the payment rates were last revised, there has been substantial
growth in both the number of ASC facilities and procedures they perform,
as well as changes in medical practice and technology. In 2004, there were
approximately 4,100 Medicare-participating ASCs, a number that has grown
substantially since 2000 when there were about 2,900
Medicare-participating ASCs. In 2004, ASCs received approximately $2.5
billion in total Medicare payments, a 79 percent increase since 2000 when
Medicare payments to ASCs totaled approximately $1.4 billion.

^1Omnibus Reconciliation Act of 1980 (ORA), Pub. L. No. 96-499, S 934(b),
94 Stat. 2599, 2637 (codified, as amended, at 42 U.S.C. S 1395l(i)).

^2ASC payment rates have been periodically updated for inflation.

While the ASC setting was originally intended to be an alternative to
hospital inpatient care, the procedures performed in ASCs are now
frequently performed in the hospital outpatient setting. Medicare pays
ASCs and hospital outpatient departments through different payment
systems. While procedures performed in ASCs are placed into payment groups
based on similar costs, hospital outpatient department procedures are
placed into payment groups, known as ambulatory payment classification
(APC) groups, based on both cost and clinical similarity. Unlike the ASC
payment system, the payment rates for hospital outpatient departments are
revised annually based on cost and charge data included in reports
hospitals are required to submit to CMS each year.

Although ASCs and hospital outpatient departments perform a similar set of
procedures, no comparison between the Medicare ASC payment system and the
Medicare hospital outpatient department payment system, known as the
outpatient prospective payment system (OPPS), has been conducted. The
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) directed us to conduct a study that compares the relative costs of
procedures performed in ASCs to the relative costs of procedures performed
in hospital outpatient departments.^3 As discussed with the committees of
jurisdiction, we compared (1) additional services billed with procedures
performed in ASCs with those billed with procedures performed in hospital
outpatient departments and whether there were any Medicare payments
associated with those services and (2) the relative costs of procedures
when performed in ASCs to the relative costs of those procedures when
performed in hospital outpatient departments, in particular, how
accurately the APC groups used in the OPPS reflect the relative costs of
procedures performed in the ASC setting. In addition, we examined the
proportion of ASCs' costs that are labor-related; this information is
provided in appendix I.

^3MMA, Pub. L. No. 108-173, S 626(d), 117 Stat. 2066, 2319-2320 (codified
at 42 U.S.C. S 1395l note).

To compare the delivery of additional services provided with procedures
performed in ASCs and hospital outpatient departments, we identified all
additional services frequently provided in each setting with one of the
top 20 procedures based on highest Medicare ASC claims volume,^4 which, as
a group, represented approximately 75 percent of all Medicare ASC claims
volume in 2003.^5 Using Medicare claims data for 2003, we identified
beneficiaries receiving one of the top 20 procedures performed in either
an ASC or hospital outpatient department, then identified any other claims
for those beneficiaries submitted by ASCs, hospital outpatient
departments, durable medical equipment suppliers, and other Medicare part
B providers. We identified claims for the beneficiaries on the day the
procedure was performed and the day after.^6 We created a list that
included all additional services that were billed at least 10 percent of
the time with each of the top 20 procedures when they were performed in
ASCs. We created a similar list of additional services for each of the top
20 procedures when they were performed in hospital outpatient departments.
We then compared the lists to determine if the additional services
provided by ASCs and hospital outpatient departments with each of those
procedures were similar. To compare the Medicare payments for additional
services provided with procedures performed in ASCs and hospital
outpatient departments, we identified whether any additional services
included in our analysis resulted in an additional payment.

To compare the costs of procedures performed in ASCs and hospital
outpatient departments, we first compiled information on ASCs' costs and
procedures performed. We conducted a survey of 600 ASCs to obtain 2004
cost and procedure data. We received responses from 397 ASC facilities,
and through our data reliability testing, determined that data from 290
responding facilities were sufficiently reliable for our purposes.

To allocate ASCs' costs among the individual procedures they perform, we
first separated ASCs' direct and indirect costs. We then allocated each
ASC's direct costs among procedures it performed using a relative weight
scale we constructed with data from CMS, supplemented by information from
medical specialty societies and clinicians who work for CMS. The relative
weight scale captures the general variation in costs associated with
performing the different procedures. We allocated each ASC's indirect
costs equally across all procedures it performed. For each procedure, we
summed the direct and indirect costs for each ASC and arrayed the total
cost for each of the ASCs performing that procedure. To obtain a
per-procedure cost across all ASCs, we then identified the median cost for
each procedure from the array.

^4For the remainder of the report, we refer to these as the top 20
procedures.

^5For Medicare payment purposes, the bills that providers submit for
payment are referred to as claims.

^6We included services delivered the day after a procedure to allow for
the inclusion of services, such as laboratory services, that may not be
provided immediately following the procedure.

To compare per-procedure costs for ASCs and hospital outpatient
departments, we first obtained from CMS the list of APC groups included in
the OPPS and the procedures assigned to each APC group. We also obtained
from CMS the OPPS median cost of each procedure and the median cost of
each APC group. We then calculated a ratio between the median cost for
each procedure performed at an ASC, as determined by the survey, and the
median cost of each procedure's corresponding APC group under the OPPS.
For the same procedures, we also calculated a ratio between the median
cost of each procedure under the OPPS and the median cost of the
procedure's APC group, using the data obtained from CMS. To evaluate the
difference in procedure costs between the two settings, we compared the
ASC-to-APC and OPPS-to-APC cost ratios. To assess how well the relative
costs of procedures in the OPPS, defined by their assignment to APC
groups, reflect the relative costs of procedures in the ASC setting, we
evaluated the distribution of the ASC-to-APC and OPPS-to-APC cost ratios.

We also conducted interviews with CMS officials and representatives from
ASC industry organizations, specifically, the American Association of
Ambulatory Surgery Centers (AAASC) and FASA, as well as physician
specialty societies, and individual ASCs. For details on our methods, see
appendix II. We performed our work from April 2004 through October 2006 in
accordance with generally accepted government auditing standards.

Background

There are some similarities in how Medicare pays ASCs and hospital
outpatient departments for the procedures they perform. However, the
methods used by CMS to calculate the payment rates in each system, as well
as the mechanisms used to revise the Medicare payment rates, differ.

Structure of the ASC Payment System

In 1980, legislation was enacted that enabled ASCs to bill Medicare for
certain surgical procedures provided to Medicare beneficiaries.^7 Under
the ASC payment system, Medicare pays a predetermined, and generally
all-inclusive, amount per procedure to the facility. The approximately
2,500 surgical procedures that ASCs may bill for under Medicare are
assigned to one of nine payment groups that contain procedures with
similar costs, but not necessarily clinical similarities. All procedures
assigned to one payment group are paid at the same rate. Under the
Medicare payment system, when more than one procedure is performed at the
same time, the ASC receives a payment for each of the procedures. However,
the procedure that has the highest payment rate receives 100 percent of
the applicable payment, and each additional procedure receives 50 percent
of the applicable payment.

The Medicare payment for a procedure performed at an ASC is intended to
cover the direct costs for a procedure, such as nursing and technician
services, drugs, medical and surgical supplies and equipment, anesthesia
materials, and diagnostic services (including imaging services), and the
indirect costs associated with the procedure, including use of the
facility and related administrative services. The ASC payment for a
procedure does not include payment for implantable devices or prosthetics
related to the procedure; ASCs may bill separately for those items. In
addition, the payment to the ASC does not include payment for professional
services associated with the procedure; the physician who performs the
procedure and the anesthesiologist or anesthetist bill Medicare directly
for their services. Finally, the ASC payment does not include payment for
certain other services that are not directly related to performing the
procedure and do not occur during the time that the procedure takes place,
such as some laboratory, X-ray, and other diagnostic tests. Because these
additional services are not ASC procedures, they may be performed by
another provider. In those cases, Medicare makes payments to those
providers for the additional services. For example, a laboratory service
needed to evaluate a tissue sample removed during an ASC procedure is not
included in the ASC payment. The provider that evaluated the tissue sample
would bill and receive payment from Medicare for that service. Because
ASCs receive one inclusive payment for the procedure performed and its
associated services, such as drugs, they generally include on their
Medicare claim only the procedure performed.

^7ORA, Pub. L. No. 96-499, S 934, 94 Stat. 2599, 2637-2639 (codified, as
amended, at 42 U.S.C. S 1395l(i)).

Structure of the OPPS

In 1997, legislation was enacted that required the implementation of a
prospective payment system for hospital outpatient departments;^8 the OPPS
was implemented in August 2000. Although ASCs perform only procedures,
hospital outpatient departments provide a much broader array of services,
including diagnostic services, such as X-rays and laboratory tests, and
emergency room and clinic visits. Each of the approximately 5,500
services, including procedures, that hospital outpatient departments
perform is assigned to one of over 800 APC groups with other services with
clinical and cost similarities for payment under the OPPS. All services
assigned to one APC group are paid the same rate. Similar to ASCs, when
hospitals perform multiple procedures at the same time, they receive 100
percent of the applicable payment for the procedure that has the highest
payment rate, and 50 percent of the applicable payment for each additional
procedure, subject to certain exceptions.

Like payments to ASCs, payment for a procedure under the OPPS is intended
to cover the costs of the use of the facility, nursing and technician
services, most drugs, medical and surgical supplies and equipment,
anesthesia materials, and administrative costs. Medicare payment to a
hospital for a procedure does not include professional services for
physicians or other nonphysician practitioners. These services are paid
for separately by Medicare. However, there are some differences between
ASC and OPPS payments for procedures. Under the OPPS, hospital outpatient
departments generally may not bill separately for implantable devices
related to the procedure, but they may bill separately for additional
services that are directly related to the procedure, such as certain drugs
and diagnostic services, including X-rays.^9 Hospital outpatient
departments also may bill separately for additional services that are not
directly related to the procedure and do not occur during the procedure,
such as laboratory services to evaluate a tissue sample. Because they
provide a broader array of services, and because CMS has encouraged
hospitals to report all services provided during a procedure on their
Medicare claims for rate-setting purposes, hospital claims may provide
more detail about the services delivered during a procedure than ASC
claims do.

^8Balanced Budget Act of 1997, Pub. L. No. 105-33, S 4523, 111 Stat. 251,
445-450 (codified, as amended, at 42 U.S.C. S 1395l(t)).

^9There are a limited number of implantable devices that are considered
new technology devices for which the hospital outpatient department may
bill and receive separate payment.

History of the ASC System Rate Setting

CMS set the initial 1982 ASC payment rates based on cost and charge data
from 40 ASCs. At that time, there were about 125 ASCs in operation.
Procedures were placed into four payment groups, and all procedures in a
group were paid the same rate. When the ASC payment system was first
established, federal law required CMS to review the payment rates
periodically.^10 In 1986, CMS conducted an ASC survey to gather cost and
charge data. In 1990, using these data, CMS revised the payment rates and
increased the number of payment groups to eight. A ninth payment group was
established in 1991. These groups are still in use, although some
procedures have been added to or deleted from the ASC-approved list.

Although payments have not been revised using ASC cost data since 1990,
the payment rates have been periodically updated for inflation. In 1994,
Congress required that CMS conduct a survey of ASC costs no later than
January 1, 1995, and thereafter every 5 years, to revise ASC payment
rates.^11 CMS conducted a survey in 1994 to collect ASC cost data. In
1998, CMS proposed revising ASC payment rates based on the 1994 survey
data and assigned procedures performed at ASCs into payment groups that
were comparable to the payment groups it was developing for the same
procedures under the OPPS.^12 However, CMS did not implement the proposal,
and, as a result, the ASC payment system was not revised using the 1994
data. In 2003, MMA eliminated the requirement to conduct ASC surveys every
5 years and required CMS to implement a revised ASC payment system no
later than January 1, 2008.^13 During the course of our work, in August
2006, CMS published a proposed rule that would revise the ASC payment
system effective January 1, 2008.^14 In this proposed rule, CMS bases the
revised ASC payment rates on the OPPS APC groups. However, the payment
rates would be lower for ASCs.

^10ORA, Pub. L. No. 96-499, S 934(b), 94 Stat. 2599, 2637 (codified, as
amended, at 42 U.S.C. S 1395l(i)). Congress later changed this requirement
to an annual review and update of ASC payment rates. Omnibus Budget
Reconciliation Act of 1986, Pub. L. No. 99-509, S 9343(b), 100 Stat. 1874,
2040 (codified, as amended, at 42 U.S.C. S 1395l(i)).

^11Social Security Act Amendments of 1994, Pub. L. No. 103-432, S 141, 108
Stat. 4398, 4424-4426 (codified, as amended, at 42 U.S.C. S 1395l(i)).

^1263 Fed. Reg. 32,290, 32,307-308 (June 12, 1998).

^13MMA, Pub. L. No. 108-173, S 626(b), 117 Stat. 2066, 2319 (codified, as
amended, at 42 U.S.C. S 1395l(i)).

^1471 Fed. Reg. 49,505 (Aug. 23, 2006).

History of OPPS Rate Setting

The initial OPPS payment rates, implemented in August 2000, were based on
hospitals' 1996 costs. To determine the OPPS payment rates, CMS first
calculates each hospital's cost for each service by multiplying the charge
for that service by a cost-to-charge ratio computed from the hospital's
most recently reported data.^15 After calculating the cost of each service
for each hospital, the services are grouped by their APC assignment, and a
median cost for each APC group is calculated from the median costs of all
services assigned to it. Using the median cost, CMS assigns each APC group
a weight based on its median cost relative to the median cost of all other
APCs. To obtain a payment rate for each APC group, CMS multiplies the
relative weight by a factor that converts it to a dollar amount. Beginning
in 2002, as required by law, the APC group payment rates have been revised
annually based on the latest charge and cost data.^16 In addition, the
payment rates for services paid under the OPPS receive an annual inflation
update.

Results in Brief

For the top 20 procedures, we found many similarities in the additional
services billed with procedures performed by ASCs and hospital outpatient
departments.^17 Of the additional services billed in either setting with a
top 20 procedure, few are paid separately by Medicare in one setting but
not the other. Hospital outpatient departments received payment for some
of the additional services, such as X-rays, they billed with the
procedures, while in the ASC setting, other providers billed Medicare for
these services and received payment for them. This is a result of the
differences in the structure of the two payment systems; that is, while
ASCs may bill Medicare only for procedures, hospitals may bill for a
broader array of services.

The APC groups in the OPPS accurately reflect the relative costs of
procedures performed at ASCs. We compared each procedure's ASC median cost
to the median cost of the APC group in which it would be placed, which we
refer to as the ASC-to-APC cost ratio. We repeated this analysis by
comparing the costs of those same procedures under the OPPS with the
median costs of their APC groups, which we refer to as the OPPS-to-APC
cost ratio. Our analysis of the cost ratios showed that the ASC-to-APC
cost ratios were more tightly distributed around their median cost ratio
than were the OPPS-to-APC cost ratios; that is, more of them were closer
to their respective median. Specifically, 45 percent of all procedures in
our analysis fell within a 0.10 point range of the ASC-to-APC median cost
ratio, and 33 percent of procedures fell within a 0.10 point range of the
OPPS-to-APC median cost ratio. These similar patterns show that the APC
groups reflect the relative costs of procedures provided by ASCs as well
as they reflect the relative costs of procedures provided in the hospital
outpatient department setting and can be used as the basis for an ASC
payment system. While our analysis demonstrated that the APC groups
accurately reflect the relative cost of procedures performed in ASCs, it
also showed that procedures in the ASC setting had substantially lower
costs than those same procedures in the hospital outpatient department
setting. The median cost ratio among all ASC procedures was 0.39. The
median cost ratio among all OPPS procedures was 1.04.

^15Hospitals set charges for their services that are generally above the
costs of the services. A cost-to-charge ratio is a calculation that
describes the cost and charge relationship for services provided in a
specific hospital.

^16The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106-113, App. F, S 201(h), [29]113 Stat. 1501A-3 21,
1501A-340 (codified, as amended, at 42 U.S.C. S 1395l(t)).

^17In our analysis, we included only those services billed with a
procedure at least 10 percent of the time in either the ASC or hospital
outpatient department setting.

We recommend that the Administrator of CMS implement a payment system for
procedures performed in ASCs based on the OPPS, taking into account the
lower relative costs of procedures in ASCs compared to hospital outpatient
departments. In commenting on a draft of this report, CMS stated that our
recommendation is consistent with its August 2006 proposed revisions to
the ASC payment system. Representatives of AAASC and FASA, who reviewed a
draft of this report, provided comments, which we incorporated where
appropriate.

Many Additional Billed Services Were Similar; Few Resulted in Additional
Payments to ASCs or Hospital Outpatient Departments

We found many similarities in the additional services provided by ASCs and
hospital outpatient departments with the top 20 procedures. Of the
additional services billed with a procedure, few resulted in an additional
payment in one setting but not the other. Hospitals were paid for some of
the related additional services they billed with the procedures. In the
ASC setting, other providers billed Medicare for these services and
received payment for them.

Many Additional Services Billed in Each Setting Were Similar

In our analysis of Medicare claims, we found many similarities in the
additional services billed in the ASC or hospital outpatient department
setting with the top 20 procedures. The similar additional services are
illustrated in the following four categories of services: additional
procedures, laboratory services, radiology services, and anesthesia
services.

First, one or more additional procedures was billed with a procedure
performed in either the ASC or hospital outpatient department setting for
14 of the top 20 procedures. The proportion of time each additional
procedure was billed in each setting was similar. For example, when a
hammertoe repair procedure was performed, our analysis indicated that
another procedure to correct a bunion was billed 11 percent of the time in
the ASC setting, and in the hospital outpatient setting, the procedure to
correct a bunion was billed 13 percent of the time. Similarly, when a
diagnostic colonoscopy was performed, an upper gastrointestinal (GI)
endoscopy was billed 11 percent of the time in the ASC setting, and in the
hospital setting, the upper GI endoscopy was billed 12 percent of the
time. For 11 of these 14 procedures, the proportion of time each
additional procedure was billed differed by less than 10 percentage points
between the two settings. For the 3 remaining procedures, the percentage
of time that an additional procedure was billed did not vary by more than
25 percentage points between the two settings. See appendix III for a
complete list of the additional procedures billed and the proportion of
time they were billed in each setting.

Second, laboratory services were billed with 10 of the top 20 procedures
in the hospital outpatient department setting and 7 of the top 20
procedures in the ASC setting. While these services were almost always
billed by the hospital in the outpatient setting, they were typically not
billed by the ASCs. These laboratory services were present in our analysis
in the ASC setting because they were performed and billed by another
Medicare part B provider.

Third, four different radiology services were billed with 8 of the top 20
procedures. Radiology services were billed with 5 procedures in the ASC
setting and with 8 procedures in the hospital outpatient department
setting. The radiology services generally were included on the hospital
outpatient department bills but rarely were included on the ASC bills.
Similar to laboratory services, hospital outpatient departments billed for
radiology services that they performed in addition to the procedures. When
radiology services were billed with procedures in the ASC setting, these
services generally were performed and billed by another part B provider.

Fourth, anesthesia services were billed with 17 of the top 20 procedures
in either the ASC or hospital outpatient settings and with 14 procedures
in both settings. In virtually every case in the ASC setting, and most
cases in the hospital outpatient department setting, these services were
billed by another part B provider.

According to our analysis, ASCs did not generally include any services
other than the procedures they performed on their bills. However, in the
hospital outpatient setting, some additional services were included on the
hospitals' bills. We believe this is a result of the structure of the two
payment systems. As ASCs generally receive payment from Medicare only for
procedures, they typically include only those procedures on their bills.
In contrast, hospital outpatient departments' bills often include many of
the individual items or services they provide as a part of a procedure
because CMS has encouraged them to do so, whether the items or services
are included in the OPPS payment or paid separately.

Additional Services Resulted in Few Additional Payments to ASCs or Hospital
Outpatient Departments

With the exception of additional procedures, there were few separate
payments that could be made for additional services provided with the top
20 procedures because most of the services in our analysis were included
in the Medicare payment to the ASC or hospital. Under both the Medicare
ASC and OPPS payment systems, when more than one procedure is performed at
the same time, the facility receives 100 percent of the applicable payment
for the procedure that has the highest payment rate and 50 percent of the
applicable payment for each additional procedure. As this policy is
applicable to both settings, for those instances in our analysis when an
additional procedure was performed with one of the top 20 procedures in
either setting, the ASC or hospital outpatient department received 100
percent of the payment for the procedure with the highest payment rate and
50 percent of the payment for each lesser paid procedure.

Individual drugs were billed by hospital outpatient departments for most
of the top 20 procedures, although they were not present on the claims
from ASCs, likely because ASCs generally cannot receive separate Medicare
payments for individual drugs. However, none of the individual drugs
billed by the hospital outpatient departments in our analysis resulted in
an additional payment to the hospitals. In each case, the cost of the
particular drug was included in the Medicare payment for the procedure.

In the case of the laboratory services billed with procedures in the ASC
and hospital outpatient department settings, those services were not costs
included in the payment for the procedure in either setting and were paid
separately in each case. For both settings, the payment was made to the
provider that performed the service. In the case of the hospital
outpatient department setting, the payment was generally made to the
hospital, while, for procedures performed at ASCs, payment was made to
another provider who performed the service.

Of the four radiology services in our analysis, three were similar to the
laboratory services in that they are not included in the cost of the
procedure and are separately paid services under Medicare. Therefore, when
hospitals provided these services, they received payment for them. In the
ASC setting, these services were typically billed by a provider other than
the ASC, and the provider received payment for them. The fourth radiology
service is included in the payment for the procedure with which it was
associated. Therefore, no separate payment was made to either ASCs or
hospital outpatient departments. With regard to anesthesia services, most
services were billed by and paid to a provider other than an ASC or
hospital.

APC Groups Accurately Reflect ASC Procedure Costs

As a group, the costs of procedures performed in ASCs have a relatively
consistent relationship with the costs of the APC groups to which they
would be assigned under the OPPS. That is, the APC groups accurately
reflect the relative costs of procedures performed in ASCs. We found that
the ASC-to-APC cost ratios were more tightly distributed around their
median cost ratio than the OPPS-to-APC cost ratios were around their
median cost ratio. Specifically, 45 percent of all procedures in our
analysis fell within 0.10 points of the ASC-to-APC median cost ratio, and
33 percent of procedures fell within 0.10 points of the OPPS-to-APC median
cost ratio. However, the costs of procedures in ASCs are substantially
lower than costs for the same procedures in the hospital outpatient
setting.

APC Groups Accurately Reflect the Relative Costs of ASC Procedures

The APC groups reflect the relative costs of procedures provided by ASCs
as well as they reflect the relative costs of procedures provided in the
hospital outpatient department setting. In our analysis, we listed the
procedures performed at ASCs and calculated the ratio of the cost of each
procedure to the cost of the APC group to which it would have been
assigned, referred to as the ASC-to-APC cost ratio. We then calculated
similar cost ratios for the same procedures exclusively within the OPPS.
To determine an OPPS-to-APC cost ratio, we divided individual procedures'
median costs, as calculated by CMS for the OPPS, by the median cost of
their APC group. Our analysis of the cost ratios showed that the
ASC-to-APC cost ratios were more tightly distributed around their median
than were the OPPS-to-APC cost ratios; that is, there were more of them
closer to the median. Specifically, 45 percent of procedures performed in
ASCs fell within a 0.10 point range of the ASC-to-APC median cost ratio,
and 33 percent of those procedures fell within a 0.10 point range of the
OPPS-to-APC median cost ratio in the hospital outpatient department
setting (see figs. 1 and 2). Therefore, there is less variation in the ASC
setting between individual procedures' costs and the costs of their
assigned APC groups than there is in the hospital outpatient department
setting. From this outcome, we determined that the OPPS APC groups could
be used to pay for procedures in ASCs.

Figure 1: ASC Procedure Median Cost to APC Median Cost Ratios, Distributed
by Percentage in 0.05 Increments, 2004

Figure 2: OPPS Procedure Median Cost to APC Median Cost Ratios,
Distributed by Percentage in 0.05 Increments, 2004

ASC Procedures' Median Costs Are Generally Lower Than Those for OPPS Procedures

The median costs of procedures performed in ASCs were generally lower than
the median costs of their corresponding APC group under the OPPS.^18 Among
all procedures in our analysis, the median ASC-to-APC cost ratio was
0.39.^19 The ASC-to-APC cost ratios ranged from 0.02 to 3.34. When
weighted by Medicare volume based on 2004 claims data, the median
ASC-to-APC cost ratio was 0.84. We determined that the median OPPS-to-APC
cost ratio was 1.04. This analysis shows that when compared to the median
cost of the same APC group, procedures performed in ASCs had substantially
lower costs than when those same procedures were performed in hospital
outpatient departments.

^18APCs' median costs are determined from the costs of all of the services
included within the APC.

^19If the median cost of an ASC procedure and the median cost of its
respective APC group were equal, the cost ratio would be 1.00.

Conclusions

Generally, there are many similarities between the additional services
provided in ASCs and hospital outpatient departments with one of the top
20 procedures, and few resulted in an additional Medicare payment to ASCs
or hospital outpatient departments. Although costs for individual
procedures vary, in general, the median costs for procedures are lower in
ASCs, relative to the median costs of their APC groups, than the median
costs for the same procedures in the hospital outpatient department
setting. The APC groups in the OPPS reflect the relative costs of
procedures performed in ASCs in the same way that they reflect the
relative costs of the same procedures when they are performed in hospital
outpatient departments. Therefore, the APC groups could be applied to
procedures performed in ASCs, and the OPPS could be used as the basis for
an ASC payment system, eliminating the need for ASC surveys and providing
for an annual revision of the ASC payment groups.

Recommendation for Executive Action

We recommend that the Administrator of CMS implement a payment system for
procedures performed in ASCs based on the OPPS. The Administrator should
take into account the lower relative costs of procedures performed in ASCs
compared to hospital outpatient departments in determining ASC payment
rates.

Agency and External Reviewer Comments and Our Evaluation

We received written comments on a draft of this report from CMS (see app.
IV). We also received oral comments from external reviewers representing
two ASC industry organizations, AAASC and FASA.

CMS Comments

In commenting on a draft of this report, CMS stated that our
recommendation is consistent with its August 2006 proposed revisions to
the ASC payment system.

Industry Comments and Our Evaluation

Industry representatives who reviewed a draft of this report did not agree
or disagree with our recommendation for executive action. They did,
however, provide several comments on the draft report. The industry
representatives noted that we did not analyze the survey results to
examine differences in per-procedure costs among single-specialty and
multi-specialty ASCs. Regarding this comment, we initially considered
developing our survey sample stratified by ASC specialty type. However,
because accurate data identifying ASCs' specialties do not exist, we were
unable to stratify our survey sample by specialty type.

The industry representatives asked us to provide more explanation in our
scope and methodology regarding our development of a relative weight scale
for Medicare ASC-approved procedures to capture the general variation in
resources associated with performing different procedures. We expanded the
discussion of how we developed the relative weight scale in our
methodology section.

Reviewers also made technical comments, which we incorporated where
appropriate.

We are sending a copy of this report to the Administrator of CMS and
appropriate congressional committees. The report is available at no charge
on GAO's Web site at http://www.gao.gov. We will also make copies
available to others on request.

If you or your staff members have any questions about this report, please
contact me at (202) 512-7119 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff members who made significant
contributions to this report are listed in appendix V.

Kathleen King
Director, Health Care

Appendix I: Analysis of the Proportion of Labor-Related Costs for
Ambulatory Surgical Centers 

The Medicare payment rates for ambulatory surgical centers (ASC), along
with those of other facilities, are adjusted to account for the variation
in labor costs across the country. To calculate payment rates for
individual ASCs, the Centers for Medicare & Medicaid Services (CMS)
calculates the share of total costs that are labor-related and then
adjusts ASCs' labor-related share of costs based on a wage index
calculated for specific geographic areas across the country. The wage
index reflects how the average wage for health care personnel in each
geographic area compares to the national average health care personnel
wage. The geographic areas are intended to represent the separate labor
markets in which health care facilities compete for employees.

In setting the initial ASC payment rates for 1982, CMS determined from the
first survey of ASCs that one-third of their costs were labor-related. The
labor-related costs included employee salaries and fringe benefits,
contractual personnel, and owners' compensation for duties performed for
the facility. To determine the payment rates for each individual ASC, CMS
multiplied one-third of the payment rate for each procedure--the
labor-related portion--by the local area wage index. Each ASC received the
base payment rate for two-thirds of the payment rate--the nonlabor-related
portion--for each procedure. The sum of the labor-related and
nonlabor-related portions equaled each ASC's payment rate for each
procedure.

In 1990, when CMS revised the payment system based on a 1986 ASC survey,
CMS found ASCs' average labor-related share of costs to be 34.45 percent
and used this percentage as the labor-related portion of the payment rate.
In a 1998 proposed rule, CMS noted that ASCs' share of labor-related costs
as calculated from the 1994 ASC cost survey had increased to an average of
37.66 percent, slightly higher than the percentage calculated from the
1986 survey. However, CMS did not implement the 1998 proposal. Currently,
the labor-related proportion of costs from CMS's 1986 survey, 34.45
percent, is used for calculating ASC payment rates.

Using 2004 cost data we received from 290 ASCs that responded to our
survey request for information, we determined that the mean labor-related
proportion of costs was 50 percent, and the range of the labor-related
costs for the middle 50 percent of our ASC facilities was 43 percent to 57
percent of total costs.

Appendix II: Scope and Methodology

To compare the delivery of procedures between ASCs and hospital outpatient
departments, we analyzed Medicare claims data from 2003. To compare the
relative costs of procedures performed in ASCs and hospital outpatient
departments, we collected cost and procedure data from 2004 from a sample
of Medicare-participating ASCs. We also interviewed officials at CMS and
representatives from ASC industry organizations, specifically, the
American Association of Ambulatory Surgery Centers (AAASC) and FASA,
physician specialty societies, and nine ASCs.

Analysis of Additional Services

To compare the delivery of additional services provided with procedures
performed in ASCs and hospital outpatient departments, we identified all
additional services frequently billed in each setting when one of the top
20 procedures with the highest Medicare ASC claims volume is performed.
These procedures represented approximately 75 percent of all Medicare ASC
claims in 2003. Using Medicare claims data for 2003, we identified
beneficiaries receiving one of the top 20 procedures in either an ASC or
hospital outpatient department, then identified any other claims for those
beneficiaries from ASCs, hospital outpatient departments, durable medical
equipment suppliers, and other Medicare part B providers. We identified
claims for the beneficiaries on the day the procedure was performed and
the day after.^1 We created a list that included all additional services
that were billed at least 10 percent of the time with each of the top 20
procedures when they were performed in ASCs. We created a similar list of
additional services for each of the top 20 procedures when they were
performed in hospital outpatient departments. We then compared the lists
for each of the top 20 procedures between the two settings to determine
whether there were similarities in the additional services that were
billed to Medicare. To compare the Medicare payments for procedures
performed in ASCs and hospital outpatient departments, we identified
whether any additional services included in our analysis resulted in an
additional payment.

We used Medicare claims data from the National Claims History (NCH) files.
These data, which are used by the Medicare program to make payments to
health care providers, are closely monitored by both CMS and the Medicare
contractors that process, review, and pay claims for Medicare services.
The data are subject to various internal controls, including checks and
edits performed by the contractors before claims are submitted to CMS for
payment approval. Although we did not review these internal controls, we
did assess the reliability of the NCH data. First, we reviewed all
existing information about the data, including the data dictionary and
file layouts. We also interviewed experts at CMS who regularly use the
data for evaluation and analysis. We found the data to be sufficiently
reliable for the purposes of this report.

^1We included services delivered the day after a procedure to allow for
the inclusion of services, such as laboratory services, that may not be
provided immediately following the procedure.

Comparison of Per-Procedure Costs

To compare the relative costs of procedures performed in ASCs and hospital
outpatient departments, we first compiled information on ASCs' costs and
procedures performed. Because there were no recent existing data on ASC
costs, we surveyed 600 ASCs, randomly selected from all ASCs, to obtain
their 2004 cost and procedure data. We received response data from 397 ASC
facilities. We assessed the reliability of these data through several
means. We identified incomplete and inconsistent survey responses within
individual surveys and placed follow-up calls to respondents to complete
or verify their responses. To ensure that survey response data were
accurately transferred to electronic files for our analytic purposes, two
analysts independently entered all survey responses. Any discrepancies
between the two sets of entered responses were resolved. We performed
electronic testing for errors in accuracy and completeness, including an
analysis of costs per procedure. As a result of our data reliability
testing, we determined that data from 290 responding facilities were
sufficiently reliable for our purposes. Our nonresponse analysis showed
that there was no geographic bias among the facilities responding to our
survey. The responding facilities performed more Medicare services than
the average for all ASCs in our sample.

To allocate ASCs' total costs among the individual procedures they
perform, we developed a method to allocate the portion of an ASC's costs
accounted for by each procedure. We constructed a relative weight scale
for Medicare ASC-approved procedures that captures the general variation
in resources associated with performing different procedures. The
resources we used were the clinical staff time, surgical supplies, and
surgical equipment used during the procedures. We used cost and quantity
data on these resources from information CMS had collected for the purpose
of setting the practice expense component of physician payment rates. For
procedures for which CMS had no data on the resources used, we used
information we collected from medical specialty societies and physicians
who work for CMS. We summed the costs of the resources for each procedure
and created a relative weight scale by dividing the total cost of each
procedure by the average cost across all of the procedures. We assessed
the reliability of these data through several means. We compared
electronic CMS data with the original document sources for a large sample
of records, performed electronic testing for errors in accuracy and
completeness, and reviewed data for reasonableness. Based on these
efforts, we determined that data were sufficiently reliable for our
purposes.

To calculate per-procedure costs with the data from the surveyed ASC
facilities, we first deducted costs that Medicare considers unallowable,
such as advertising and entertainment costs. (See fig. 3 for our
per-procedure cost calculation methodology.) We also deducted costs for
services that Medicare pays for separately, such as physician and
nonphysician practitioner services. We then separated each facility's
total costs into its direct and indirect costs. We defined direct costs as
those associated with the clinical staff, equipment, and supplies used
during the procedure. Indirect costs included all remaining costs, such as
support and administrative staff, building expenses, and outside services
purchased. To allocate each facility's direct costs across the procedures
it performed, we applied our relative weight scale. We allocated indirect
costs equally across all procedures performed by the facility. For each
procedure performed by a responding ASC facility, we summed its allocated
direct and indirect costs to determine a total cost for the procedure. To
obtain a per-procedure cost across all ASCs, we arrayed the calculated
costs for all ASCs performing that procedure and identified the median
cost.

Figure 3: ASC Per-Procedure Cost Calculations from ASC Survey

To compare per-procedure costs for ASCs and hospital outpatient
departments, we first obtained from CMS the list of ambulatory payment
classification (APC) groups used for the outpatient prospective payment
system (OPPS) and the procedures assigned to each APC group. We also
obtained from CMS the OPPS median cost of each procedure and the median
cost of each APC group. We then calculated a ratio between each
procedure's ASC median cost, as determined by the survey, and the median
cost of each procedure's corresponding APC group under the OPPS, referred
to as the ASC-to-APC cost ratio. We also calculated a ratio between each
ASC procedure's median cost under the OPPS and the median cost of the
procedure's APC group, using the data obtained from CMS, referred to as
the OPPS-to-APC cost ratio. To evaluate the difference in procedure costs
between the two settings, we compared the ASC-to-APC and OPPS-to-APC cost
ratios. To assess how well the relative costs of procedures in the OPPS,
defined by their assignment to APC groups, reflect the relative costs of
procedures in the ASC setting, we evaluated the distribution of the
ASC-to-APC and OPPS-to-APC cost ratios.

Analysis of Labor-Related Costs

To calculate the percentage of labor-related costs among our sample ASCs,
for each ASC, we divided total labor costs by total costs, after deducting
costs not covered by Medicare's facility payment. We then determined the
range of the percentage of labor-related costs among all of our ASCs and
between the 25th percentile and the 75th percentile, as well as the mean
and median percentage of labor-related costs.

We performed our work from April 2004 through October 2006 in accordance
with generally accepted government auditing standards.

Appendix III: Additional Procedures Billed with the Top 20 ASC Procedures,
2003

                                                 Times additional  
                                                   procedure was   
                                                  performed with   
Medicare                                          procedure     
ASC                                             (percentage)    
procedure                                                         Hospital 
volume                     Additional                           outpatient 
ranking   Procedure        procedure                        ASC department 
1         Cataract surgery None                             N/A        N/A 
             with intraocular                                                 
             lens insertion,                                                  
             one stage                                                        
2         Colonoscopy,     Upper                             11         12 
             with diagnosis   gastrointestinal                                
                              (GI) endoscopy,                                 
                              with biopsy                                     
3         After cataract   None                             N/A        N/A 
             laser surgery                                                    
4         Upper GI         Colonoscopy, with                 12         14 
             endoscopy, with  diagnosis                                       
             biopsy                                                           
5         Colonoscopy,     Upper GI                          10         10 
             with lesion      endoscopy, with                                 
             removal, snare   biopsy                                          
             technique                                                        
                              Colonoscopy, with                 14         22 
                              biopsy                                          
                              Colonoscopy, with                 10         14 
                              lesion removal                                  
6         Spine injection, None                             N/A        N/A 
             lumbar, sacral                                                   
7         Colonoscopy,     Upper GI                          12         14 
             with biopsy      endoscopy, with                                 
                              biopsy                                          
                              Colonoscopy, with                 18         21 
                              lesion removal                                  
8         Colonoscopy,     Upper GI                          10         10 
             with lesion      endoscopy, with                                 
             removal          biopsy                                          
                              Colonoscopy, with                 11         15 
                              biopsy                                          
                              Colonoscopy, with                 23         32 
                              lesion removal,                                 
                              snare technique                                 
9         Paravertebral    Spine injection,                  13         12 
             injection,       lumbar, sacral                                  
             lumbar, sacral,                                                  
             add-on                                                           
                              Paravertebral                     99         99 
                              injection, lumbar,                              
                              sacral, single                                  
                              level                                           
10        Injection        Injection foramen                 39         36 
             foramen          epidural, lumbar,                               
             epidural,        sacral, add-on                                  
             lumbar, sacral,                                                  
             single level                                                     
11        Upper GI         Dilate esophagus                  12          9 
             endoscopy, with                                                  
             diagnosis                                                        
                              Colonoscopy, with                 17         19 
                              diagnosis                                       
12        Cystoscopy       None                             N/A        N/A 
13        Colon cancer     Colonoscopy, with                 21         38 
             screening, not   diagnosis                                       
             high-risk                                                        
             individual                                                       
14        Paravertebral    Spine injection,                  14         13 
             injection,       lumbar, sacral                                  
             lumbar, sacral,                                                  
             single level                                                     
                              Paravertebral                     86         79 
                              injection, lumbar,                              
                              sacral, add-on                                  
15        Colorectal       Colonoscopy, with                 24         49 
             screening for    diagnosis                                       
             high-risk                                                        
             individual                                                       
16        Carpal tunnel    None                             N/A        N/A 
             surgery                                                          
17        Repair of        Release of foot                   16         15 
             hammertoe        contracture                                     
                              Correction of                     11         13 
                              bunion                                          
                              Correction of                     18         20 
                              bunion with                                     
                              metatarsal                                      
                              osteotomy                                       
18        Injection        Injection foramen                 99         99 
             foramen          epidural, lumbar,                               
             epidural,        sacral, single                                  
             lumbar, sacral,  level                                           
             add-on                                                           
19        Upper GI         Upper GI                          50         39 
             endoscopy, with  endoscopy, with                                 
             insertion of     biopsy                                          
             guide wire                                                       
20        Spinal           None                             N/A        N/A 
             injection,                                                       
             cervical or                                                      
             thoracic                                                         

Source: GAO analysis of CMS data.

Note: N/A = not applicable.

Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Kathleen King, (202) 512-7119 or [email protected]

Acknowledgments

In addition to the contact named above, key contributors to this report
were Nancy A. Edwards, Assistant Director; Kevin Dietz; Beth Cameron
Feldpush; Marc Feuerberg; and Nora Hoban.

(290359)

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www.gao.gov/cgi-bin/getrpt?GAO-07-86 .

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Highlights of [39]GAO-07-86 , a report to congressional committees

November 2006

MEDICARE

Payment for Ambulatory Surgical Centers Should Be Based on the Hospital
Outpatient Payment System

Medicare pays for surgical procedures performed at ambulatory surgical
centers (ASC) and hospital outpatient departments through different
payment systems. Although they perform a similar set of procedures, no
comparison of ASC and hospital outpatient per-procedure costs has been
conducted. The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 directed GAO to compare the relative costs of procedures
furnished in ASCs to the relative costs of those procedures furnished in
hospital outpatient departments, in particular, how accurately the payment
groups used in the hospital outpatient prospective payment system (OPPS)
reflect the relative costs of procedures performed in ASCs. To do this,
GAO collected data from ASCs through a survey. GAO also obtained hospital
outpatient data from the Centers for Medicare & Medicaid Services (CMS).

[40]What GAO Recommends

The Administrator of CMS should implement a payment system for procedures
performed in ASCs based on the OPPS, taking into account the lower
relative costs of procedures performed in ASCs compared to hospital
outpatient departments. CMS stated that GAO's recommendation is consistent
with its August 2006 proposed revisions to the ASC payment system.

GAO determined that the payment groups in the OPPS, known as ambulatory
payment classification (APC) groups, accurately reflect the relative cost
of procedures performed in ASCs. GAO calculated the ratio between each
procedure's ASC median cost, as determined by GAO's survey, and the median
cost of each procedure's corresponding APC group under the OPPS, referred
to as the ASC-to-APC cost ratio. GAO also compared the OPPS median costs
of those same procedures with the median costs of their APC groups,
referred to as the OPPS-to-APC cost ratio. GAO's analysis of the
ASC-to-APC and OPPS-to-APC cost ratios showed that 45 percent of all
procedures in the analysis fell within a 0.10 point range of the
ASC-to-APC median cost ratio, and 33 percent of procedures fell within a
0.10 point range of the OPPS-to-APC median cost ratio. These similar
patterns of distribution around the median show that the APC groups
reflect the relative costs of procedures provided by ASCs as well as they
reflect the relative costs of procedures provided in hospital outpatient
departments and can be used as the basis for the ASC payment system. GAO's
analysis also identified differences in the cost of procedures in the two
settings. The median cost ratio among all ASC procedures was 0.39 and when
weighted by Medicare claims volume was 0.84. The median cost ratio for
OPPS procedures was 1.04. Thus, the cost of procedures in ASCs is
substantially lower than the corresponding cost in hospital outpatient
departments.

ASC Procedure Median Cost to APC Median Cost Ratios, Distributed by
Percentage in 0.05 Increments, 2004

OPPS Procedure Median Cost to APC Median Cost Ratios, Distributed by
Percentage in 0.05 Increments, 2004

References

Visible links
  29. http://www.heinonline.org/HOL/Page?handle=hein.statute/sal000&page=&collection=statute  
  39. http://www.gao.gov/cgi-bin/getrpt?GAO-07-86
*** End of document. ***