Closing Shop: RAC Audits Take Their Toll

Some O&P business owners are closing their businesses or are struggling to keep their businesses afloat because of a lack of cash flow that they say stems from prepayment and Recovery Audit Program audits.

Bill Neu, CPO, has more than 30 years of experience in the O&P field, but his business, Neu Prosthetic & Orthotic Services, which opened in 2008, will be closing its doors soon.

“It all has to do with cash flow,” Neu said. “It started with the audits and not getting paid for the work that we did. Then it escalated to the grab-backs, where Medicare was asking for money back from the limbs that were made 2, 3 or 4 years ago. It got to the point where I was not getting paid for the work I was doing, and I had to give money back for work I already accomplished.”

Neu is not alone in the struggle with Recovery Audit Contractors (RACs). Joel Kempfer, CP, FAAOP, president of Kempfer Prosthetics Orthotics Inc., said that prior to the audits, his practice was financially stable and had no issues with Medicare in the 15 years since he opened the business. “We had a good cash flow and a good business plan, but then the audits started appearing,” he said. “We have not been exposed to RAC audits as much as prepayment audits, but unfortunately, we are guilty until we can prove ourselves innocent, and that takes time. We supply the appropriate documentation, but it takes awhile for us to get paid now.”

As with any small business, Kempfer is having difficulty managing his business financially and carrying over expenses until he receives payment. “It is the small businesses and the small practitioners that are being squeezed by this,” he said.

“O&P facilities across the board are having cash flow interruptions and are having their profits decreased because of all the headwinds, including RAC audits, the possible CMS coding changes for off-the-shelf orthotics, the threat of competitive bidding for off-the-shelf orthotic products, and the whole health insurance uncertainty and rising cost that can be associated with that,” Rob Benedetti, a consultant with Promise Consulting and controller for De La Torre Orthotics & Prosthetics Inc., told O&P Business News.

It is not just RAC audits that threaten otherwise successful O&P businesses. Most are tied to the Medicare fee schedule and are not able to increase the cost of their products, although the cost of running the business is increasing.

“Product cost does not increase often,” Benedetti said. “And when it does, it is a small amount. This is coupled with the cost of everything else increasing, whether it is energy costs, material costs or overhead costs. All of these expenses seem to go on unabated, but an O&P company really cannot raise its prices, so we have to combat that with trying to increase volume or trying to create a niche division or niche business.”

According to Neu, when the audits first began, O&P practitioners were taken by surprise, but “then we learned what needed to be done to work within the system they thrust upon us,” he said. “We learned how to get the proper paperwork they were looking for, and we were prepared for that. So going forward, that is not as much of an issue as it is the money that is currently tied up in audits that we are not getting back.”

To keep the business going, Kempfer has had to make hard decisions.

“We have done things that we never had to do before, like open lines of credit with the bank, put our personal money into the business to keep it afloat, to make payday,” he said. “It is a balancing act. We are robbing Peter to pay Paul, but in the meantime, we are furthering our debt.”

Kempfer always based his practice on providing good service, which would ordinarily lead to successful business, but he said that basis has shifted slightly.

“Our ideology was if you treat your patients well and take care of them and all their needs and make sure they are satisfied, then ensure their doctors and therapists are going to be satisfied, you will get more referrals. But now, we are in survival mode,” he said. “Our whole concept, rather than treating patients, has come to surviving and making sure we can make ends meet in the practice.”

Keeping your business profitable

Some practitioners have remained profitable through the audits. Jeffrey M. Brandt, CPO, CEO, and founder of Ability Prosthetics & Orthotics Inc., which recently marked its 10-year anniversary and has grown to 10 offices, feels that the extra scrutiny from the audits is not necessarily all bad. “It is forcing us to practice more in the medical model,” he said. “I think that if you were paying for a $12,000 leg, wouldn’t you want the patient to at least see his doctor first? Can you blame Medicare for wanting the physician to have something in their clinical notes that references why the patient is getting the leg they are getting? I think we have had such minimal standards for so long that this has been a shock to the industry.”

For Brandt, the keys to successful business have been rooted in high-quality staffing and in the use of the electronic medical records software system. “I attribute a lot of success to our software because it keeps all of the offices connected, it ensures quality hand-offs between job duties and tasks, and follows a case from the time you meet a patient to the time you deliver them a product or device, including the follow-up care,” he said. “We have done well with RAC audits and prepayment service reviews, and I attribute a lot of that to the fact that we have had a system to operate in during the last 10 years.”

His staff also includes an advanced device authorization specialist, who specifically handles more complex authorizations.

“Having dedicated personnel to handle the more complex cases allows the rest of the staff to handle the more mundane or sort of ‘check the box’ authorizations,” Brandt said.

When hiring practitioners, Brandt only profiles the top 5% of practitioners who have graduated from a program accredited by the National Commission on Orthotic and Prosthetic Education.

“I want the best of the best running our offices, even if it costs a little more, because they will make up for that five to 10 times over the rehiring costs if I went with a less expensive practitioner and had to deal with the fallout of going with a less expensive staff,” he said.

Ability has acquired new patients from some O&P businesses closing in its surrounding geographic area. “That is not proactive on our part, but we have positioned ourselves to be ready for that opportunity too,” Brandt said.

Ensure compliance

To increase profit collection and be prepared for audits, practitioners need to ensure they are documenting the proper paperwork and physician’s notes.

Kempfer added that practitioners should make sure the referring physicians are completing proper evaluations of patients and are documenting all information. “On our end, we have always done what we thought was appropriate, getting a signed certificate of medical necessity. Our documentation has always been good, but now we have to find the doctors and make sure they are documenting,” he said. “Sometimes that is difficult. Unfortunately, some doctors are noncompliant.”

O&P businesses should also conduct their own internal audit checks to ensure they have physician’s notes and justification for prescribing certain devices.

“I think the industry is finding that in some cases, we are not putting on the more expensive devices in fear that Medicare will reject them,” Benedetti said. “So we go with the lower-end device, which also decreases revenue. It is like anything else — I am sure there have been cases of abuse, but now the whole industry is paying for it.”

Increase revenue

Practitioners can also increase revenue by pursuing new niche areas.

“Perhaps you have someone on staff who is good at something like cranial helmeting or pediatric bracing, or someone on your staff really has the heart to do some sort of new device,” Benedetti said. “Businesses need to pursue new opportunities at the same time they are looking at their expenses.”

In addition, businesses can adopt new products and new protocols to continue to reinvent the business. “You have to find a way to stay relevant,” Brandt said. “I don’t think there is a silver bullet, but if you are focused and concentrating on growing your business, then you are going to have to have a plan. It is critical right now that you have a budget and reserves and you are planning accordingly against some of these headwinds.”

On the expense side, businesses need to eliminate any wasteful spending.

“If you look hard enough, you’ll find wasteful spending — a thing I call ‘incumbent expenses,’” Benedetti said. “These are costs that have been allowed to exist for years and years and they don’t matter in the course of the life of a business and can be eliminated.”

An example of these “incumbent expenses” includes brokers for different insurance policies, such as worker’s compensation, health insurance, and liability or property insurance. In his capacity as a consultant, Benedetti often finds that companies have had a broker in place for a long period of time, but the broker is not doing due diligence to obtain the best policy for the practitioner’s business.

Starting a new O&P business

In today’s market, many O&P business owners may not recommend that others start new O&P businesses — but this was not always the case. When Kempfer would lecture at meetings and talk with those considering a job in the health care field, he said he would always encourage them to go into O&P, but that all changed a year and half ago when the audits began.

“Most people would say we had the greatest job in the world until a year and a half ago,” he said. “Now it just isn’t fun anymore. We can’t treat patients; we can’t do what we came into this profession to do.”

Neu suggested that practitioners entering the O&P field consider joining a larger organization rather than opening their own business. “I think the day of mom-and-pop organizations will be coming to a close,” he said. “If someone wanted to own their own business today, I would suggest they look at some of the larger companies and consider becoming a part of them with partial ownership.”

Brandt echoed this prediction. “This profession is consolidating rapidly right now. As the field consolidates, I think within 3 years, there will be 20 to 30 players,” he said. “There will always be mom-and-pop smaller practices, but you just won’t see the midsized-type companies. A $5 million to $15 million company is going to consolidate.”

For those entering the O&P field, if starting their own business, Brandt advised to “get big quickly” or to offer a proprietary niche to keep the business in the top 1% or 2%. “If you’re not out there right now creating value, then you are just another provider,” he said.

Administratively, to open an O&P practice, practitioners need a physical location, Medicare number and certification through the American Board for Certification in Orthotics, Prosthetics & Pedorthics. However, more importantly, they also need to determine their revenue source ahead of time.

“You have to have contracts in place and you have to have referring sources,” Benedetti said. “I may be able to make a better brace than the next guy, but it is those referring physicians, physical therapists and occupational therapists who are going to be referring business to you and contracts that will make you successful.” – by Tina DiMarcantonio

Disclosures: Benedetti, Brandt, Kempfer and Neu have no financial disclosures.