April 2004 Bulletin

Opportunities for revenue diversification: Durable medical equipment

By Robert H. Haralson III, MD, MBA, and Joe Fox


Robert H. Haralson III, MD, MBA
In these days of decreasing revenue from the traditional practice of orthopaedic surgery, orthopaedists are looking to supplement their standard reimbursements from office visits and surgery with other sources of revenue. One of these sources is designated health services (DHS). DHS includes any radiologic service such as standard radiographs, MRI, CT or DEXA; physical and/or occupational therapy, and durable medical equipment (DME). Physician-ownership of ambulatory surgical centers and specialty or “boutique” hospitals is another alternative revenue source.


This is the first in a series of articles examining the utility of some of these services. This article will focus on DME; subsequent articles will deal with other avenues of revenue diversification.

Why offer DME?
Several years ago, many physicians supplied splints and braces as a convenience to their patients. However, reimbursements began to dwindle. Medicare local payer policy was to pay 85 percent of the invoice cost for DME. This meant that physicians were actually losing money on the devices. As a result, most offices discontinued that service and physicians wrote prescriptions that patients filled at the local drug store or an orthotics and prosthetics (O&P) shop.

Naturally, it is more convenient for the patients to have these services immediately available at the physician's office. Patients appreciate being fitted with a splint by their physician or a staff member rather than by someone they don't know at a hospital, drug store or O&P shop. It's easier for patients to be fitted with ambulatory aids in the office rather than limp to a drug store to get them.
Orthodic devices such as these can be a source of additional practice revenue through DME sales.

In addition, offering DME services enables you to control the quality of the device. Hospitals and drug stores tend to purchase the least expensive devices. Depending on the established revenue arrangement and with current reimbursement levels, the physician's office can afford to use quality items, which are more adjustable, fit better and last longer.

There are three ways that physicians can offer DME. Each has advantages and disadvantages. After reading the scenarios described below, consider which would be best for your practice.

Stock and bill
“Stock-and-bill” companies developed in response to decreasing Medicare reimbursements. Medicare allowed suppliers and distributors of DME to bill at a profit, while physicians, as explained above, lost money. So firms would rent a closet in a physician's office and use it as a stock room. The physician would then complete and sign a prescription or request form for a splint or brace, and supply it to the patient from the stock in the closet. The stock-and-bill company would then bill Medicare for the device. This arrangement offered convenience; often, a physician's employee would actually fit the brace. In addition, the company relieved the physician's office of the responsibility for billing, collecting and inventory control.

This arrangement proved costly for Medicare and other payers. The stock-and-bill companies charged top dollar for their products. In an attempt to maximize profits, they used less than top quality. The result was a very lucrative business.

Approved supplier
In 1999, the government reconsidered the in-office exemption for designated health services. At that time, some physicians, convinced that the exemption would become law, acted quickly, obtained a Part B supplier number (a fairly complicated process) and began billing directly for DME.

On Jan. 4, 2001, the in-office exemption became law and the Centers for Medicare and Medicaid Services (CMS) simplified the process for obtaining a Part B supplier number. Now, a physician can simply log on to the CMS Web site, download and print the application form and fax the completed form to CMS. You can often obtain multiple numbers in a matter of two to three weeks. The numbers are address-specific, so you must have a different number for every office where you plan to fit devices.

This new law resulted in several changes in the industry and the development of different business arrangements. The stock-and-bill companies were unaffected. Other companies formed agreements with physicians to supply, fit and bill for the device under the physician's supplier number, and then share the revenue with the physician. This enables the physician to enjoy the convenience of the stock-and-bill arrangement and a share of the revenue.

The disadvantages
Both the stock-and-bill and approved supplier arrangement have several disadvantages. For example, with a stock-and-bill arrangement, the physician and staff are often doing the work. The physician writes the prescription and, in many cases, actually fits the device. But the stock-and-bill company gets the revenue. The rent paid by the company to the physician for the closet must be at market rates and is usually not worth the accounting.

Under the second arrangement, the physician only gets part of the revenue without any increase in convenience. In addition, because the device is fitted at the physician's office, the patient assumes the physician is responsible. Any billing disagreements are directed to the physician, not the distributor.

The consignment alternative
There is a third scenario, which not only provides more profits for the physician but also benefits patients, payers and manufacturers. Under this arrangement, a manufacturer supplies the inventory directly, often on consignment, to a physician's office and allows the physician to collect the revenue directly. This eliminates the middlemen and enables the physician to net the total difference between the cost of the item and the revenue.

The manufacturer gets his/her standard fee for the device (which can be negotiated down in the face of significant volume). The physician can generate a significant revenue stream ($20,000 to $30,000 per doctor per year without altering prescription frequency). The patient is happy because of the convenience of being fitted as part of the office visit (and the physician has the option of reducing the fee or giving the device away for patients who have limited resources). Finally, the payers are happy because this is less expensive than paying an O&P shop (CMS, being the largest payer, is especially happy).

The disadvantage of this arrangement is that the physician is now responsible for the entire process. The physician or staff must fit the device, bill and collect. In addition, inventory control is now essential because the loss of any item is now the practice's loss. Physicians who give materials to their friends and patients must be restrained, or profits will quickly disappear.

Controlling inventory loss

The first step in controlling inventory losses is to have a good inventory control system. One company has developed an efficient bar code and Internet-based system. A bar code label is placed on each box that contains a brace or splint. When the device is fitted, the bar code sticker is peeled off and placed on a three-page NCR paper-billing sheet. The top sheet, with the bar code sticker, goes to the billing office; the second sheet goes in the chart file, and the last sheet goes to the patient. The reverse side of the patient page lists required information and supplier standards.

In the billing office, the billing clerk logs onto the manufacturer's Web site and enters the day's billings with a light pen. The manufacturer then knows to send an invoice and restock the inventory. New supplies arrive within 24 to 48 hours.

Although this system does not prevent physicians from giving away braces, it does enable you to monitor the inventory and identify the culprit. Locking the supply closet and educating both physicians and employees about the importance of inventory controls are also helpful.

With a consignment arrangement, the physician has essentially no up-front costs. The inventory is not billed until it is fitted. Unless there are more than 20 physicians in the practice, you will probably not have to hire any other employees. A single employee can do the pre-certification and billing. If you have only one office, that employee also can control the storage room.

However, you must be sure that your office is efficient in working accounts receivable. At Southeastern Orthopaedics, every payer has agreed to reimburse us for DME at Medicare rates or better.

Is it for your practice?
Deciding whether to offer DME through your practice requires that you do a pro forma. First, obtain the list of the 101 ICD codes that map to the L-codes, which are used to bill for DME. Then count the number of matching ICD codes in your billing system for one year. Divide that number by six. This assumes that you see a patient three times a year for each ICD code, and that you fit only one-half of the patients with a DME product.

Now, get a list of costs for each device and a copy of the Medicare DME fee schedule and do the math. You can estimate the possible net revenue and make varying estimates based on how frequently you predict you will fit the devices.

In summary, you can diversify your practice revenues by offering DME. If you have an efficient office, do the pro forma and select one of the above approaches. The stock-and-bill scenario provides convenience but no income to the practice. The approved supplier approach provides the convenience of the first and adds some revenue to the practice. The consignment approach requires very little additional work and provides significant income. At Southeastern Orthopaedics we have been using the consignment approach for a full year and have found it to be very lucrative with little trouble.

Robert H. Haralson, MD, is the Medical Director of Southeastern Orthopaedics, a 42-physician orthopaedic practice in Knoxville, Tenn. Under his direction, Southeastern Orthopaedics has implemented several revenue diversification services. He is the director of the AAOS course on Practice Enhancements and serves as a consultant to DeRoyal Industries, a DME manufacturer.

Joe Fox is vice president of Conexus Management Group, a medical services organization in Knoxville, Tenn. Mr. Fox has been the leading organizer of the DME program at Southeastern Orthopaedics and is a faculty member of the AAOS Practice Enhancements course. He also serves as a consultant for DeRoyal Industries.


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