Medicare O&P Utilization: A Longitudinal Review
February 2015 Issue
The common myth in O&P is that the increasing incidence of obesity and diabetes indicates a promising outlook for patient volume in O&P. However, a review of Medicare utilization data over an 18-year period tells a distinctly different story.
In Phil Stevens' article, "Declining Amputation Rates Secondary to Diabetes and PVD: The Role of Time, Geography, Risk, and Race" (The O&P EDGE, September 2014), he reports on the declining amputation rate, which correlates with this 18-year longitudinal review of Medicare utilization rates in key O&P categories. Taking this information and the changes being made in healthcare in general into consideration, as well as the financial performance of the industry, allows for predictive models that indicate what the future may hold for the evolution of the O&P delivery model.
The following charts and graphs tell the story of Medicare utilization by device types, determined by grouping base procedure codes, from 1992 through 2010. This data can be predictive of utilization across all third-party payers in that Medicare traditionally represents about 30 percent of the total volume of an O&P practice, according to a longitudinal review of the American Orthotic & Prosthetic Association (AOPA) Operating and Performance Survey from 2008 through 2012.
Figure 1 depicts the number of people with new transtibial or transfemoral limb loss who received a prosthetic device. The assumption being made is that only people with a new amputation receive a preparatory prosthesis. While this is not entirely accurate as there are instances in which someone undergoes a revision surgery and may subsequently receive a preparatory device, these situations are the exception and should not have a significant impact on the data. It is the number of people with limb loss who actually receive a prosthesis that matters to a prosthetic practice and not just the number of people who experience limb loss. Figures 1a and 1b depict the Medicare utilization of transtibial and transfemoral devices, respectively. (NOTE: to view the figures as a pdf follow this link: Figure 1 graphs [opens in a new window])
What is evident is that the number of people with new transtibial limb loss who received a prosthesis has been declining since 1995, and the number of people with new transfemoral limb loss who received a prosthesis has been declining since 1998; in both cases 2003 and 2004 represent an exception to this trend. Nevertheless, the trends indicate noticeable declines in utilization of the base procedure codes for these device types.
As mentioned earlier, since the profession reports that Medicare beneficiaries represent a significant share of their patient volume, Medicare utilization is predictive of overall utilization. Figure 1c shows the total transtibial and transfemoral preparatory utilization of 28,095 in 1992 compared to 19,323 in 2010, which represents an overall decline of 31 percent. (Editor's note: Percentages in the remainder of this article have been rounded for simplicity. Refer to accompanying graphic documentation for more detail.) More striking, from the high in 2003 to the low in 2010, the decline is 56 percent. Remember, it is the preparatory category that is the pipeline for definitive and subsequent replacement devices. Capturing this long-term patient is the lifeblood of the current O&P delivery and business model. With this number on the decline, an operational change is critical for the industry's sustainability. Principally, fewer O&P practitioners are required, and given the changing economics of the entire healthcare system, the current delivery model is antiquated and costly.
We can also predict the percentage of people who experience a lower-limb amputation who will actually receive a prosthesis. As stated previously, the number of people receiving a prosthesis is the number that matters to an O&P practice, not the number of people who have an amputation. The Amputee Coalition, as well as Ziegler-Graham ("Estimating the Prevalence of Limb Loss in the United States: 2005 to 2050." Archives of Physical Medicine and Rehabilitation, March 2008 vol. 89), report that about 185,000 amputations occur annually. Thus, we know that in 2010, 19,323 people, or 10 percent, received an initial lower-limb prosthesis (based upon the utilization of a preparatory device). This is compared to 28,095 people in 1992, or 15 percent. Therefore, the number of people who experienced an amputation and actually received a prosthesis (prosthetic acquisition rate) declined in 2010 as compared to 1992 as well. The assumption with this model is that all 185,000 amputations are lower-limb amputations, which of course they are not. Therefore, the actual lower-limb prosthetic acquisition rate is lower than the above numbers would suggest. The exact breakdown of amputation levels is unknown; nevertheless the example shown is a best-case scenario in terms of the potential number of patients who could receive a lower-limb prosthetic device. The prosthetic acquisition rate will also have an effect on the future O&P workforce demand, which will be discussed in later sections. The other matter to consider is: Why has the amputation rate dropped over this 18-year period?
One explanation is advances in limb salvage techniques to a point that when an amputation does occur, the patient is no longer a prosthetic candidate given his or her comorbidities. This declining prosthetic acquisition rate also needs to be factored into the business planning efforts of all O&P business models.
What becomes evident is that growth for any practice will only occur through gaining market share. However, how the practice captures market share should be considered carefully and is dependent on how overall healthcare is delivered in a particular area or region. In order for O&P to grow up into provider status, it must consider its value proposition as opposed to the current pricing strategies, which continue to relegate O&P to supplier or vendor status.
Similarly, Figures 2 and 2a depict the trends in the non-preparatory codes, which traditionally have represented those individuals who have already received some sort of a preparatory device and have transitioned to a more definitive prosthesis, or who have received some sort of a replacement device. (NOTE: to view the figures as a pdf follow this link: Figure 2 graphs [opens in a new window])
Again, using Medicare data as a baseline for market trends, 43,787 (145,955 total market projection) transtibial and transfemoral non-preparatory devices were provided in 1992. In 2010 there were 36,619 (122,063 total market projection) transtibial and transfemoral non-preparatory devices provided-a 16 percent decline. From the high in 2004 to the low in 2010 the decline was 31 percent.
Despite the fact that there have been increased obesity and diabetes diagnoses, the amputation rate has remained steady to slightly declining over almost two decades, which would indicate that the medical profession has been somewhat successful in preventing limb loss through education and wound care centers. Despite the steady state of limb loss, the prosthetic acquisition rate has declined precipitously over the same period of time while costs have continued to skyrocket. It is the increasing costs during a period of declining utilization that has captured the attention of payers and policymakers who question the cost-benefit ratio of the technological innovations. O&P as a whole needs to answer these questions in light of the Affordable Care Act (ACA) and accountable care organizations (ACOs), which have been created to provide a clinically effective and cost-efficient healthcare delivery system, including prosthetic devices.
Another issue for O&P to wrestle with is the projected workforce demand given these declining utilization and acquisition rates. In September 2011, the American Board for Certification in Orthotics, Prosthetics and Pedorthics (ABC) reported that there were 3,640 separate and unique certified prosthetists. In 2010, there were 5,797 people with a new transtibial or transfemoral limb loss who received a prosthesis for the first time (i.e. preparatory) through Medicare. If Medicare is the sample population, then one can project the total population at 19,322 new individuals who received an initial prosthesis represented by a preparatory base code. Therefore, each certified prosthetist has only 0.44 new patient billable events per month, or 5.3 per year.
This demand does not take into account the existing population with limb loss who need ongoing care and replacement devices. All nonpreparatory base code utilizations for 2010 reveal that Medicare paid for 30,822 lower-limb devices. Projected to the total population, there were 102,740 devices provided across all payer types. Therefore, each certified prosthetist had only 2.35 existing patient billable events per month, or 28.2 per year. Given this, it can be estimated that each certified prosthetist has 2.79 billable new device events per month. Of course not all 3,640 certified prosthetists are practicing, so the real average will be slightly higher if only ABC-certified practitioners are counted. It should be noted that the number of Board of Certification/Accreditation (BOC)-certified prosthetists was not available for this analysis; however taking those practitioners into consideration will further decrease the demand for practitioners. From an asset utilization standpoint, the question to ask is: How effective has O&P management been at generating revenue with the available assets? To reword the question: Are there too many assets for the available revenue?
While the volume of patients in need of lower-limb orthoses is greater than that for lower-limb prostheses, the trend in lower-limb orthosis utilization rates has also declined precipitously in recent years. Over the ten-year period from 1992 to 2001, the utilization of all AFOs increased 91 percent. Then in a period of just five years, from 2001 through 2005, utilization soared 150 percent. However, from 2005 through 2010, utilization fell steadily year-overyear by 29 percent, to a level about equal to 2004 rates (Figure 3).
Within the AFO category, the utilization of custom devices grew at a slower rate from 1992 to 2001 than did the entire category, increasing just 58 percent; from 2001 to 2005, the utilization of custom devices grew only 19 percent. Then from 2005 to 2010, the utilization declined 5 percent to a level just slightly greater than the 2001 utilization (Figure 3a).
The utilization rate and the growth rate of non-custom AFO devices are particularly interesting. From 1992 to 2001, this category grew 172 percent, but the overall utilization rate was lower than for the custom category. In fact, the utilization rate of noncustom devices in 2005 approximated the 1992 rate of custom devices. Then, from 2001 to 2005, the non-custom rate increased yet again by 361 percent to a level the custom category has not yet achieved. But like the category as a whole and the custom category, the utilization of non-custom devices fell 41 percent from 2005 to 2010; however, the overall utilization rate in 2010 was still at a level the custom category has not yet achieved (Figure 3b).
The common theme with the AFO category, and to some extent with prostheses, is the declining utilization rate from about 2003/2004 to 2010. It is also interesting to note the provider types within the lower-limb orthosis category. ABC-certified practitioners provide the vast majority of custom devices, but far fewer of the non-custom devices. By contrast, non-certified providers are providing the vast majority of non-custom devices, which are more than double the custom category.
Figure 3c depicts the low and slightly declining utilization of the KAFO category. Indeed, from 1992 through 2010, the utilization of KAFOs declined 19 percent.
The other lower-limb orthosis category generally considered of import is knee orthotics (KOs). However, while the total utilization category is significant, it is insignificant to O&P as a whole. The reason being, from 2003 through 2007 (the period for which provider type data is available), all but two of the KO codes were provided by a majority of providers other than an ABC-certified orthotist (CO) or ABC-certified prosthetist/orthotist (CPO). Within this category there are 18 codes describing a KO of some type, only five of the 18 are described as "custom" devices. The other 13 are non-custom and are provided primarily by another provider type other than a CO or CPO. In fact, only two of the five custom devices are provided by a CO or CPO the majority of the time.
So what is the impact of all of this on the O&P industry as a whole and on the individual practice? First, it is obvious from the utilization data that there is and will be a decreasing demand for certified practitioners. Despite this data, the 2014 AOPA Operating and Performance Survey indicates the trend is toward more O&P practitioners being hired (Figure 4). Why?
The 2014 AOPA Operating and Performance Survey also indicates that the total number of full-time equivalent (FTE) positions have increased since 2007, but have flattened off since 2011 despite the increased administrative burdens (Figure 5). The flattening of total FTEs would point to a decreasing patient volume demand. What is curious, however, is that patient volume is down while the number of practitioner positions is up slightly. At the same time, administrative positions are declining even though the administrative burden required to process claims accurately and assure that audits and payment recoupments are avoided has increased since the issuance of the "Dear Physician" letter in August 2011 (Figure 6). Again, I would pose the question, "Why?"
Despite the year-over-year fee increase to the O&P fee schedule, the impact of declining demand for services combined with the increasing administrative burden has had a profound impact on the industry's financial performance. Business is measured in terms of profitability and sustainability. It sounds odd to say that a business can be profitable but not sustainable, but that is exactly what the industry income statement indicates. Adding practitioner staff when patient volume is declining, and decreasing the administrative staff that now has more documentation to process leads to declining profits and an unsustainable future. In short, a business can show profits year-over-year but analysis should not stop with profitability measures alone. For instance, a key profitability measure is return on assets (ROA), which is a measure of how well management is using the company's assets to generate revenue. Figure 7 indicates a positive ROA, but it is steadily declining.
Net profit margin, a significant profitability measure, is still positive at 5 percent, but has been declining steadily since a high in 2009 (Figure 8). This correlates to declining patient volumes. Driving the ROA and net profitability decline is the rapid increase in overall employee payroll and fringe benefits (Figure 9). This correlates with continued hiring of clinical staff and is also responsible, in part, for the declining net profit margin.
Another key profitability measure, which is of major concern for O&P practice shareholders, is return on net worth (RONW). RONW is a measure of shareholder value. We see the same pattern as in the other profitability measures-a positive but steadily declining result (Figure 10). The collective industry RONW has declined 67 percent since the high in 2010 and was at 13 percent in 2013. In real-life terms, the value of an individual O&P practice is worth less today than it was at any other time since 2007, yet the risks in continuing to operate an individual practice have increased.
While the industry is still profitable, that profitability is unsustainable because two of the key measures are declining rapidly. These declining sustainability measures are the current ratio and the quick ratio, often referred to as the "acid test" (Figures 11 and 12). The current ratio is a measure of the current assets (those aged one year or less) over current liabilities, and is a sign of how readily available liquid assets can be accessed. The quick ratio is the assets that can be converted quickly to cash (cash, marketable securities, accounts receivable, etc.) minus inventory. When times get tough, organizations need to rely on this cash to sustain operations. A prime example of this need for accessible cash is the prepayment reviews of Medicare claims in some regions, which have caused a cash flow issue for many practices, and the demise of some.
The healthcare landscape has changed, but O&P is making every effort to maintain the status quo. This is a problem. O&P has allowed the doctrines of its past (i.e. how and what devices we provide) to become dogma, thus preventing change. O&P has focused its value on the quality of the devices it provides and yet recoils when referred to as a vendor or supplier rather than as a provider. An increased educational component and industry protection measures, guised as patient protection through licensure efforts, along with the focus on the device, does not bring recognition in the broader healthcare landscape as a provider. Only when the focus is on treating a patient population through definable and repeatable processes-which not only include a device, but a series of services as well, and educational standards focused on the patient-will the perception of those outside of O&P be changed. There is a strong argument to be made for the delivery and operational model of O&P to change given the changed economics of all healthcare. Yet we seem to have adopted the motto "forward, into the past" by handcuffing ourselves to licensure laws that restrict how and by whom devices can be provided, rather than focusing on the services that O&P providers can provide to patients.
The utilization statistics demonstrate that there are fewer people receiving O&P care, and not all of those who do receive O&P care receive it from a traditional O&P center. To ensconce O&P's place in healthcare as an effective treatment, the local patient care center must do its own comparative effectiveness analysis. If you want to change the financial performance of your practice, you must first look at what is going on in the market as a whole from a utilization standpoint, and then at how you are performing relative to that market. O&P cannot do much about the declining utilization rate other than demonstrate its effectiveness in ways meaningful to payers and policy makers. However, O&P does have complete control over its operational structure. Clinging to the past in hopes that the "good old days" return is futile.
Take a look at your clinical and technical processes and examine your current financial performance. There is a direct linkage between your financials and the operational tasks that generated those results. If you do not like what you see, think about what operational tasks relate to various categories on your income statement, review your profitability and sustainability ratios, and determine if you need to focus on the numerator or denominator of these ratios.
O&P is not a simple business anymore. Only by understanding your past and present as compared to the rest of the industry and healthcare in general can you begin to map your future with some degree of predictability.
Brian Gustin, CP, is the CEO of Forensic Prosthetic & Orthotic Consulting, Suamico, Wisconsin. He has owned and operated many O&P practices either individually or with other investors and brings the unique experience of being a practicing clinical practitioner with a strong background in business statistics and engineered processes to assist and guide other O&P practice owners, private equity and venture capital investors, insurance companies, manufacturers, and law enforcement agencies. Gustin is the senior member of the AOPA Coding Committee and is a co-presenter of the AOPA Coding and Reimbursement Seminar Series.