Outpatient Labs, Office-Based Labs and Ambulatory Surgery Centers

Over the past few decades, a growing range of procedures has moved from the hospital to outpatient settings. For physicians, these settings can mean more control over scheduling and equipment, more efficient days and, where the physician has an ownership interest, a share of the facility economics as well as the professional fee. For patients and insurers, they can mean lower cost. This guide explains the main models, how they are paid, and the legal guardrails around them.

The four settings, side by side

• Inpatient hospital. Paid by Medicare largely through diagnosis-related groups (DRGs) for the stay, plus the physician's professional fee.
• Hospital outpatient department (HOPD). The hospital bills a facility fee under Medicare's Outpatient Prospective Payment System, and the physician bills a professional fee.
• Ambulatory surgery center (ASC). A separately licensed and Medicare-certified facility for procedures that do not require a hospital stay. The ASC bills a facility fee under Medicare's ASC payment system, generally at lower rates than an HOPD, and the physician bills a professional fee. Medicare pays ASCs only for procedures on its ASC covered procedures list, which CMS updates each year.
• Office-based lab (OBL) or office procedure suite. A procedure room inside a physician practice, common in vascular and interventional care. There is no separate facility fee. Medicare pays the practice under the Physician Fee Schedule at the non-facility rate, which builds the practice's expenses for staff, supplies and equipment into one payment.

Some practices combine models, for example an OBL that later converts part of its space into a certified ASC, or a hybrid suite that is enrolled and operated as an ASC on some days and an office on others. Hybrids raise their own licensing and billing questions and need careful legal design.

Why outpatient settings grew

For many lower-risk procedures in appropriately selected patients, outpatient settings offer quicker turnover, predictable scheduling and lower facility costs. CMS has steadily expanded the ASC covered procedures list; diagnostic cardiac catheterization was added for 2019 and certain coronary interventions for 2020.

In The Dark Side of Medicine, Dr. Siddiqui describes the logic from his own career. In the hospital, the facility collects far more for a procedure and stay than the physician who performs it. He approached a large commercial insurer with a proposal to perform cardiac procedures in his own office-based facility, at a total cost the insurer would welcome compared with hospital charges. The insurer agreed. That work became what he calls the Private Insurance Operating Cardiac Model: partnering directly with private payers so that appropriate cardiac procedures could be done in an outpatient setting, within state and federal rules, with lower cost for the payer and patient. The model is now used nationally.

“Can it be done cheaper in the clinic? Yes. Everyone wins.”

Ownership models

Common structures include:

• Practice-owned OBL, inside a single group's offices, with equipment and staff owned by the practice.
• Physician-owned ASC, owned by a group of physicians who perform procedures there, sometimes alongside a management company that runs operations.
• Hospital and physician joint ventures, in which a hospital and physicians co-own an ASC or outpatient facility.
• Management or development partnerships, where a company provides capital, management and billing in exchange for an ownership share or a management fee.
• Shared or leased space, where physicians rent procedure time in a facility owned by someone else. See our guide to shared procedure suites.

Each model allocates capital, risk, control and profit differently. Before investing, understand the operating agreement, the buy-in and buy-out terms, how distributions are calculated, what happens if you leave the area or retire, and who has the authority to make decisions.

The regulatory guardrails, in general terms

The physician self-referral law (Stark Law). Stark prohibits a physician from referring Medicare patients for certain “designated health services” (such as clinical laboratory, imaging, physical therapy and hospital services) to an entity with which the physician or an immediate family member has a financial relationship, unless an exception applies. It is a strict-liability law: intent does not matter, and every element of the exception must be met. Exceptions cover, among other things, in-office ancillary services, rental of office space and equipment, employment and fair-market-value arrangements. Services that Medicare pays as part of the ASC facility payment are generally not designated health services, which is one reason ASC ownership is analyzed differently.

The federal Anti-Kickback Statute (AKS). The AKS makes it a crime to knowingly and willfully offer, pay, solicit or receive anything of value to induce or reward referrals of business paid by federal healthcare programs. Unlike Stark, intent matters. The HHS Office of Inspector General has published “safe harbors” that protect arrangements meeting every condition, including safe harbors for certain ASC investments and for space and equipment rentals. Arrangements outside a safe harbor are not automatically illegal but are judged on their facts, and the OIG issues advisory opinions on specific proposals.

State law. Many states have their own self-referral and anti-kickback laws, some of which apply to all payers, not only government programs. States also license facilities, some require a certificate of need, and some regulate office-based surgery and anesthesia.

The common thread: payments between people who can refer to each other should reflect fair market value for items or services actually provided, should be set in advance, and should not vary with the volume or value of referrals. Get a written agreement and legal review before any money changes hands.

Compliance is also ongoing, not a one-time event. Ownership percentages change, physicians join and leave, leases expire and are renewed, and payment rules shift. Revisit each arrangement on a regular schedule so it still matches the exception or safe harbor it was designed around.

Running an outpatient facility well

• Patient selection. Define which patients and procedures are appropriate for the setting, with clinical criteria everyone follows.
• Emergency planning. Have transfer agreements, equipment and drills for complications. Medicare's ASC conditions for coverage require arrangements for emergency care and transfer.
• Accreditation and quality. Pursue accreditation where it is required or valued, track outcomes and report quality measures.
• Payer contracts. Negotiate facility rates as well as professional fees. Confirm which codes each payer will reimburse in the setting.
• Capital and utilization. Equipment and build-out are expensive. Model realistic case volume before signing leases or loans.

Educational information only — not legal, financial, tax or billing advice. Consult qualified advisors. Laws and payer rules differ by state and change often; the descriptions here are general.