Are You Being Blindsided by Unexpected Competition?
By John Latsko A trend recently noted by a few practitioners
specializing in orthotics and prosthetics is worthy of concern for
most in the O&P business. This trend has been growing over the
years and has reached such a dimension that it deserves
consideration of a proactive strategy now on the part of O&P
practitioners. Individual facilities cannot effectively deal with
it. It will require the concerted efforts of all practitioners
specializing in O&P. The trend that I speak of is the
ever-increasing involvement of significant new competitors in the
business of supplying orthopedic appliances to
patients.
 The most important recent entry into
orthotics is the physician and the medical group employing the
physician. It is disturbing that an orthotic suppliers
best "customer" - the referring physician - may also be the
suppliers biggest competitor. We have all heard that a physician
may not make a referral to an entity in which the physician has a
financial arrangement because of federal and state laws. Under the
federal physician anti-self referral law, commonly called the Stark
Law, a physician is prohibited from making referrals for
"designated health services," or DHS, which may be paid for by
Medicare or Medicaid to any entity with which the physician or a
member of his or her immediate family has a financial relationship.
The Stark Law defines "financial relationship" broadly to include
both compensation arrangements and ownership or investment
interests. If a "financial relationship" exists between an entity
and a physician, all referrals from the physician to the entity for
DHS (which list includes durable medical equipment and supplies,
prosthetics, orthotics, and prosthetic devices and supplies) paid
for in whole or part by Medicare or Medicaid are prohibited unless
the financial relationship satisfies one of the "exceptions"
contained in the law.
Stark 'Exception' Opens the Door
It is the "exception" provision that opens the door for
physician competition in supplying orthopedic appliances. The
relevant exception used by physicians is called the "in-office
ancillary services" exception. This exception has a number of
specific criteria that must be met, including that the service must
be provided by the referring physician, a physician in the same
group practice as the referring physician, or an individual who is
supervised by either the referring physician or another physician
in the same group practice. The services also must be furnished in
the same building in which the referring physician (or another
physician who is a member of the same group practice) furnishes
substantial physician services that are unrelated to the furnishing
of DHS or in a centralized building used by the group practice for
the provision of DHS. The services must be billed by the physician
performing or supervising or the group practice under the group
practice billing number.
Further, the definition of "group practice" requires that it be
a single entity composed of two or more physicians with expenses
and revenues shared through a defined formula that does not allow a
physician to benefit directly from the revenues generated from his
or her referrals for DHS. Finally, if the physician who orders the
orthoses is also the person who personally supplies the orthoses to
the patient, there is no referral at all. Without a referral, there
is no problem with the Stark Law.
This detail is provided for the purpose of showing that while
the Stark Law was intended to control overutilization of certain
DHS by discouraging referrals from physicians who would benefit
financially from unnecessary referrals, these referrals are not
totally prohibited. Physicians may use this exception to make
referrals to facilities they own that provide laboratory,
radiology, physical therapy, and orthotic devices within the
parameters permitted by the Stark Law. So long as a medical group
is willing to enroll as a supplier under Medicare law, rules, and
regulations, it can lawfully seek and obtain reimbursement under
Medicare for supplying orthotic devices to the patients they
refer.
The risk to orthotics facilities of losing market share
will grow as physicians search out new ways to increase revenues in
their practices through practice consolidation and diversification
into new ancillary services such as orthotics. It is a relatively
simple matter for a large orthopedic group to acquire an orthotics
practice or employ orthotics practitioners, integrate orthotics
into the practice as an ancillary revenue-generating service, and,
in effect, lock out other orthotic facilities from the groups
orthotics referrals. It is done with rehabilitative therapy
services and has occurred in orthotics in some
markets.
Hospitals, UPS: More Competition
If this is not enough to consider, hospital administrators are
recognizing that hospitals too can supply orthoses to its
outpatients and obtain reimbursement directly from Medicare or
other third-party payers for the device without use of outside
sources. Of course, this generally is limited to prefabricated
off-the-shelf type orthotic devices. If a device is available in
the hospitals inventory, supplying the device is a cost-effective,
profitable activity for the hospital.
While hospitals have been reluctant in the past to carry large
inventories of orthotic devices, this may change as new
distribution sources become players in the healthcare delivery
system. UPS Supply Chain Solutions announced in October that it was
building a large facility in Louisville, Kentucky, for the sole
purpose of distributing healthcare products. This facility will
receive, store, and ship medical devices and pharmaceutical
products.
There has been concern expressed in the hospital supply and
pharmaceutical distribution industry that UPS is moving more into
medical device and pharmaceutical distribution because of its
experience and in-place logistics in moving products quickly and
efficiently from manufacturer to hospitals and physicians. While
UPS Supply Chain Solutions does not take ownership over the devices
warehoused in its facilities, it does promise on-time delivery,
tighter inventory control, and supply chain flexibility for its
healthcare customers. These are the attributes that a hospital
looks for in a distributor in deciding to expand the products it
maintains in its inventory, such as orthotic devices.
In summary, orthotic suppliers in tomorrows market will include
more physicians and hospitals because manufacturers and
distributors will make it easier and more cost-effective for
hospitals and physicians to maintain an inventory level
commensurate with its use of orthotic devices.
Why Is This Happening?
What is causing all of this competition in O&P? The answer
is found in the movement away from custom-fabricated and
custom-fitted devices toward more prefabricated orthotics. It is
too simplistic to say that off-the-shelf devices are less expensive
and therefore the device of choice of payers. Few would argue that
cost plays a significant role in what a payer determines to be
medically necessary for a patient. How a device is determined to be
medically necessary is multifaceted and all too often subjective,
especially in orthotics.
Proving the Worth of Custom Devices
It is recognized that empirical data is lacking in many
instances to evidence how custom-fabricated orthoses at possibly
two or three times the cost of prefabricated orthoses results in
better patient care and a better patient outcome. Did the patient
recover faster? Did the patient have less discomfort? Is the
patients longer-term prognosis better? Is there less risk of
complications? Is there less likelihood of a repeat episode? Did
the patient return to work sooner? Did the device last longer or
need replacement less often? Was the patient better able to use the
device as instructed? Just as in other fields of medicine, payers
want evidence that shows that more expensive devices or treatments
are worth the additional cost. In this instance, is the costlier
fabricated device worth the additional cost - and can that worth be
measured?
We have all heard the excuse that this type of data is nearly
impossible to obtain. Some say the data is far too subjective to be
reliable. Others say that custom-made devices are almost always
better for a patient than off-the-shelf devices, and that cost
should not be a factor. Cost is a factor - a major factor - and
cost will be a bigger factor tomorrow than it is today.
The only given is that a payer wants the least costly device
that does what the patient needs. That is not to say that age,
physical condition, and lifestyle and interests are not relevant.
They are, but those factors need to be objective, documented, and
supportable for a payer to take note. Only through valid studies
conducted as impartial research will the data satisfy payer
scrutiny.
Ease of entry, lack of objective standards, and
profitable opportunities are the very reasons why various
competitors are entering into the business of supplying
orthotics. So long as custom fabrication is not shown to be
necessary, physicians, hospitals, therapists, and even
manufacturers and distributors will continue to supply and bill for
orthotics without the involvement of orthotic practitioners and
facilities.
Any medical group which agrees to the conditions of
participating to be a Medicare supplier can obtain reimbursement
from Medicare as an orthotic supplier. If specialized orthotics
facilities cannot evidence objectively the proven benefit of a
custom-made device, the prefabricated device will more and more be
the preference of payers. This is one of the reasons why the
competitive bidding program is being initiated by Medicare.
Don't Ignore Competitive Bidding
There is little reason to believe that competitive bidding will
not expand to more devices that today may usually be custom
fabricated. Do not ignore the competitive bidding plan, as it will
have a major impact on supplying orthotic devices. There will be
pressure to add new codes for devices that were thought to be
customized devices in the past. It is very easy for a payer to move
an orthotic code into a prefabricated category if appropriate
prefabricated devices are available and there is no evidence that
custom fabrication is better for the patient. This is happening
more and more often as payers look at cost-containment
alternatives.
Convincing Payers
Some have recognized this already. Linkia, created by Hanger
Orthopedics, may be expected to address this lack of empirical data
through some of its planned initiatives. Prefabricated devices are
clearly the device of choice in many instances. So long as there is
not a clear line of delineation between custom fabrication and
prefabrication, orthotic suppliers will continue to see new
competitors who can obtain devices directly from manufacturers and
distributors. Manufacturers are making better and better devices to
meet patients orthotic needs.
This trend will grow until payers can be convinced that the less
costly devices supplied by physicians, hospitals, therapists, and
others are not what the patient needs, or that custom-made is a
better alternative. This concern also applies to orthotic
distributors who may soon find themselves competing with UPS.
Orthotic suppliers and distributors need to observe how hospital
supply and pharmaceutical distributors are affected by UPS and
others entering the medical supply distribution business.
Healthcare delivery continues to change each year. O&P
practitioners need to address the benefits patients derive from
their individualized services with objective data just as
hospitals, physicians, and other healthcare providers are required
to do.
While prefabricated orthoses can never replace the need
for customized devices in individual circumstances, O&P
facilities stand to lose market share to their very own customers
who are able to control the flow of patient referrals. Those who
are involved with custom fabrication must join in supporting
programs that can help justify custom fabrication of devices that
best serve the interests of the patients. There is no reversing the
trend to control healthcare cost escalation, but quality and
appropriate patient care must be the final objective for providers
and payers alike. John Latsko is a partner in the health law practice area of Schottenstein, Zox & Dunn, Columbus, Ohio. He is the past editor of the Ohio Health Law Update. Before joining the firm, he was general counsel to a large teaching hospital and healthcare system, chief operating officer to a 500-bed not-for-profit hospital, and CEO of a physician practice management company. He can be contacted at 614.462.2329; jlatsko@szd.com 
Table Of Contents - February 2005
|
