Separate payment systems are used in each ambulatory setting where care is provided to Medicare beneficiaries: hospital outpatient departments, ambulatory surgical centers and physician offices. For most services, Medicare pays different amounts for the facility-related component of providing comparable services in the different settings. The payment differentials have raised questions about what types of potentially perverse financial incentives exist that could influence a provider’s choice of ambulatory setting and whether Medicare is paying a premium for services that could appropriately be provided in a less costly setting (MedPAC, 2004). The Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services asked RAND to analyze issues related to modifying Medicare payment policy for health care services delivered in various ambulatory settings so that payment rates reflect the costs of delivering the services in each setting. This report describes the findings with respect to the payment and cost differentials for a set of high volume procedures provided in multiple ambulatory settings and discusses potential policy options.