Anyone doing business in orthopedic softgoods faces ongoing competition from big box retailers and pharmacies, for sure, but HME companies can still compete by offering solid product knowledge and a broader variety of products, say category experts. Even as consolidation continues at the store level, and to a certain extent among manufacturers, demographic trends point to a growing demand among consumers who need these products.
An example of manufacturer consolidation is the purchase of Bell-Horn Orthopedics by DJO Global, which also offers the DonJoy brand. The acquisition combines Bell-Horn's strength in lower-end orthopedic softgoods with DonJoy's strength in providing reimbursable, higher-end products. It's an opportunity to expand and increase presence in the category as a whole, says Bell-Horn's Todd Katz.
"Once the store is well known, you get referrals in both categories," says Katz. He says that physicians concerned about Stark law restrictions increasingly do not carry or dispense orthopedic products and are looking to HME providers and pharmacies to fill in the gap.
Katz, Bell-Horn CEO, contends that orthopedic cash sales should generate 10 to 15 percent of a store's business. The fact that most HME companies do considerably less points to an optimistic outlook for growth. If a provider is not selling the category at all, Katz says, there's more good news because it's easy to get involved.
Plugging the Reimbursement Gaps
In situations involving insurance or Medicare/Medicaid reimbursement, providers tend to choose less expensive products with less regard for quality, according to Mike Murphy, national account manager for Alex Orthopedic. But quality matters much more in a cash sale situation that depends on repeat business.
"Lower quality products are migrating toward the reimbursable arena because it's the only way to make a profit [given low allowables]," says Murphy. "Traditional DMEs that may not have been so interested in these products in the past are looking to expand their lines with more cash items, especially if they are currently heavily dependent on reimbursements."
Because orthopedic softgoods are relatively inexpensive, they lend themselves to cash sales in lieu of the reimbursement hassle, he notes. For more expensive, custom-fitted items, reimbursement makes more sense, and margins can be larger. "The mid-range is the place to be," says Murphy. "There are decent margins, decent volume and less competition from big chains."
Ron Renchard of Best Orthopedic agrees that cash sales tend to dominate orthopedic softgoods business among HME companies that don't want to deal with reimbursement on a relatively inexpensive product. He points out that it's simply a question of how much effort any provider wants to put into the category — and how much business they want.
"As far as I'm concerned," he says, "[providers] know their market. We focus on … how we can keep up the quality up."
Price? Quality? Even Color? Consumers Want It All
In today's market, Renchard says, companies that focus only on less expensive products could actually lose customers who might venture beyond the standard items in a pharmacy aisle. He recounts a story he heard about a customer who purchased a back brace and then realized the materials were inferior after it was washed.
Renchard says Best, which manufactures products in eight groups with a total of 300 in all, uses foam cushions that meet the more stringent California and European standards related to fire retardancy and chemical content. The products are also latex-free, hypoallergenic and free of polybrominated diphenyl ethers (PBDE), chemicals that have been associated with health hazards. The company also provides product displays and packaging and offers privately labeled or customized products.
In a nod to the country's raised fashion sense, Best offers its cervical collars and arm slings in a variety of colors, which is a plus for customers who want to match their clothes or outfit, Renchard says. "If your wife is going to put on a dark blue dress or suit, she doesn't want a white collar," he says. The approach enables sales of more than one collar to a client, he adds, and showing off an assortment of colors appeals to shoppers.
As far as product design, Alex Orthopedic's Murphy says he sees few changes, usually no more than a variation in padding, for example. As for growth in specific products, he says, those for knee injuries are fast becoming more important as aging baby boomers seek to remain active.
"Down the road, the growth will be in knees and ankles," he says.
The manufacturer's products fall in the lower middle range in terms of price. "There are some super-cheap products we don't even try to compete with," Murphy says, adding that there is no shortcut for HME providers looking to assess the quality of orthopedic goods. "The only thing they can do it is to look at it and compare the product, the stitching, the seams and the quality of workmanship," he says.
Opportunities To Increase Business
With customers ranging the gamut from weekend athletes to office workers with back problems to those aging baby boomers, marketing of orthopedic softgoods requires a two-pronged approach, says Katz.
First, providers should reach out through direct mail or TV/radio advertising to build awareness. Second, in addition to the normal referral sources, providers should ensure their business and product lines are well known among nearby chain drugstores and large retailers. Consumers often start their search for orthopedic products at chain stores and then find the selection is incomplete.
"If a customer walks into a Walgreens or CVS and they know they can't handle a request, they are going to send that customer somewhere," Katz says.
He also emphasizes the value of appealing packaging, point-of-purchase displays and signage. Collateral material such as marketing pieces within a planogram and physician reference guides are also helpful, as are hanging signs, floor decals and location near related products to promote sales. Bell-Horn offers an array of POP materials and customizable planograms. Katz says, and each retail packaged product manufactured by the company displays fitting and sizing charts.
Murphy also points to product mix as a big factor in success with this category.
"A partial mix provides partial results," he says. "If you can handle 80-plus percent of the patients who walk in the door, you can do well in the category. If only it's 50 percent, word will get around and people won't look for that item in your store."
Murphy says larger retailers typically carry only the "top 2 percent" of available orthopedic softgoods items, which means there are advantages for an HME provider who offers greater selection.
Alex Orthopedic offers planograms in 2-ft. increments up to 8 feet, with smaller planograms geared toward higher-volume items and additional sections with more specialized items that can be added as the business grows.
"The only way to sell more product is to have more products available," says Murphy. "You can't sell what you don't have. If you have five or six items on your shelf, and you don't have what the customer needs, they will go somewhere else." Being able to order an item isn't good enough; consumers can order it themselves over the Internet.
That's another aspect of doing well with orthopedic softgoods sales, Murphy says. Consumers can now sit down at their computer terminal and compare prices for five items at five different outlets within seconds.
The Internet "has had a dramatic effect on non-technical items that can be shipped inexpensively," says Murphy. Even so, an HME provider has the advantage of immediate product availability. Also, excess shipping charges can offset the price advantages of even the most careful online comparison shopping.
"Another problem with the Internet is that you can't go in and see the item, touch it, feel it and judge the quality," Murphy points out.
Going After More
Despite the flood of changes coming at the industry's providers, Best's Renchard says he isn't seeing many among his clients who are trying anything different.
"They don't stick their heads up much," he says. "If I throw out a good idea, they say it's good to know, but they don't make a point to look around for something new."
The observation is telling, consultants say. The status quo may not be a sufficient strategy given the more challenging business climate for HME providers, and orthopedic softgoods is a category ripe for growth.
"You may have fewer outlets, but you have more business at the outlets," says Murphy. An aging population that seeks to remain active throughout their lives represents a healthy and growing market.
"It's a good time to get in the business," he says. "If your market is geared right, it can be profitable."
Key Facts
- In 2006, musculoskeletal symptoms were the No. 2 reason for physician visits.
- More than one in four Americans has a musculoskeletal impairment.
- Musculoskeletal conditions include injuries to the bones, joints, muscles, ligaments or tendons and conditions such as arthritis or osteoporosis.
- Arthritis is the leading chronic condition reported by the elderly.
- Back or knee injuries are the most prevalent musculoskeletal impairments.
- Approximately 21 million visits were made to physicians' offices due to back problems in 2006, including more than 8 million visits for low back problems.
- Approximately 12 million visits were made to physicians' offices due to knee problems in 2006.
- Almost 7.5 million visits were made to physicians' offices due to shoulder problems in 2006.
Source: American Academy of Orthopaedic Surgeons
Experts Interviewed
- Todd Katz, CEO, Bell-Horn Orthopedics (DJO Global), Carmel, Ind.
- Mike Murphy, national account manager, Alex Orthopedic, Grand Prairie, Texas
- Ron Renchard, manager, Best Orthopedic & Medical Services, Hickory, N.C.
