Hospitals Look to Exclusive Arrangements
By John Latsko It should come as no surprise that many
hospitals have tried to reduce their costs by entering into
exclusive or semi-exclusive discounted contracts with their
vendors. Medicare pays hospitals for inpatient care under a
prospective payment system that fixes Medicare's payment based on
the patient's diagnostic related group (DRG). Similar methodology
has carried over into many of the hospital's managed-care
contracts. Of course, the intent of using a DRG methodology is to
make hospitals more cost conscious.
That leads us to the topic of hospital/O&P vendor
arrangements. Virtually every hospital purchases its medical
equipment, medical devices, and hospital supplies under one or more
volume-discount group-purchasing contracts. The hospital's
objective is to get the lowest price on the items that it uses.
Orthotic devices used primarily on hospital surgery patients are
not generally included in group-purchasing contracts. Reimbursement
for necessary orthotic braces are included in the global Medicare
Part A DRG payment to the hospital for inpatients.
Traditionally, hospitals have purchased devices based on the
physician's preference at vendor prices. This has changed. Some
orthotic vendors and hospitals have entered into exclusive or
semi-exclusive contracts, where a single vendor supplies most or
all of the orthotic devices required for hospital inpatients. When
the vendor is a manufacturer, these contracts allow the vendor to
supply its own devices, or a vendor may obtain devices from other
sources. Under these arrangements, the physician may have little
say about where a device is acquired. In some cases, this
arrangement extends to hospital outpatients even though in most
cases the hospital is not responsible for payment of these devices.
These contracts have significantly changed the competitive
environment in many markets.
The implications do not stop at orthotics. Because of the
arrangement, the same vendor may often be called upon when a
prosthetic device is needed. Quite often, other vendors are put at
an unfair competitive disadvantage by being frozen out of hospital
referrals. If you are the vendor who has the contract with the
hospital, this could be an excellent business opportunity depending
on the pricing, volume, and residual benefits.
But what if you are not the vendor that has the contract? What
can you do to protect yourself? Initially, the question has to be
whether the arrangement is legal under the federal anti-kickback
law. A vendor may not offer remuneration with the intent to induce
a referral of a patient for which payment is made by a governmental
program. The remuneration can be in cash or "in kind."
With regard to hospital/vendor contracts, the hospital is
certainly within its rights to try to get its best price and other
terms. The question is whether the hospital is accepting anything
of value besides a discount in return for the contract. For
instance, does the vendor provide administrative or other support
to the hospital at no charge? Does the vendor provide a larger
discount for patients who are hospital employees? Does the vendor
absorb the loss if the hospital is not paid by an insurer or a self
pay-patient? As for the Part B devices that are to be used only
outside the hospital, is it important that the patient be afforded
the opportunity to select a vendor of choice?
Another concern is the Medicare supplier status of the vendor.
If the site being used by the supplier is for patient-care services
and Medicare Part B is being billed for that care, does the
location have its own mandatory Medicare supplier number and meet
all supplier and accreditation standards? If a hospital wants to
enter into an exclusive arrangement with a supplier, it would be
advisable to make it competitive by putting out a carefully
developed request for proposal. To a hospital, an orthotic vendor
contract might be strictly a business arrangement, but every
hospital must recognize the impact it has on other vendors.
Hospitals must be wary of vendor offers that seem "too good to
be true." When a hospital receives a discount from a vendor to
which it makes referrals, the discount must meet all requirements
of the discount safe harbor to the anti-kickback law. The vendor
should not receive preferential access to hospital outpatients, and
a vendor, whether a supplier or a manufacturer, should have
carefully defined parameters of when a referral can be made to
itself. The hospital should pay the vendor in accordance with the
requirements of the personal services safe harbor if the vendor
provides services on behalf of the hospital. Access to inpatients
who will require a prosthesis after discharge should include
prosthetists selected by the surgeon or chosen by the patient.
Both large and small companies are interested in contracting
with hospitals. These are complicated arrangements that
significantly impact the prosthetic and orthotic market. Great care
needs to be taken when entering into them.
John Latsko is a partner in the health law practice of
Schottenstein, Zox & Dunn, Columbus, Ohio. He can be contacted
at 614.462.2329; jlatsko@szd.com 
Table Of Contents - November 2007
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