Are You Being Blindsided by Unexpected Competition?

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

Are You Being Blindsided by Unexpected Competition?

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