audiology practice economics

The Economic Realities of Tomorrow’s Independent Hearing Health Practice: Part 1

by Dave Smirga, MA, and Greg Frazier, PhD, AuD

What makes owning and operating an independent hearing health practice financially successful?  The simplistic answer would be “when the practice makes more money than it spends.”  Through the nineties and even through the early 2000’s, the engine that could be relied on to deliver this equation was hearing aid sales.  

Even when the introduction of digital hearing technology in the early nineties dramatically increased both the wholesale and retail price of hearing aids, all participating constituencies – the consumer, the provider and the manufacturer – transitioned seamlessly through this change without any evidence of disruption in the flow of products and services.  

In fact, sales dramatically increased, likely as a result of the advantages offered by this new technology.

 

Then, three things happened:

  • First, due to the effectiveness of digital feedback management technology which allowed a broad range of more open fittings without feedback, new designs such as thin-tube and receiver-in-the-ear (RITE) products emerged.  These products eventually supplanted the market dominance of custom ITE devices, and created a hearing aid fitting option that no longer required an ear impression.
  • Second, Costco started selling conventionally branded hearing aids to consumers at prices significantly lower than those offered by the typical entrepreneur/clinical practice.  Indeed, in several documentable cases, Costco’s retail price was at or below the entrepreneur/clinical practice’s wholesale cost for the same product. (It is worth noting that this cost reality has never been meaningfully brought to the attention of the consumer or the government.)  
  • Third, to justify their sales strategy, internet hearing aid sales companies started propagandizing that hearing health care professionals are gouging consumers.  That they are profiteers, whose services are unnecessary and should be bypassed.

 

Lobbying Efforts towards a Direct-to-Consumer Channel

 

In the face of market penetration statistics within the hearing care industry that have been a perennial point of discontent and hand-wringing within and outside of the hearing health care community, the above three events provided fuel for lobbying effort by companies seeking to sell hearing aids over the counter directly to consumers.  

And, it was these lobbying efforts that resulted in congress directing the FDA in 2016 to create a new category of over-the-counter (OTC) hearing aids for the self-treatment of some hearing losses – a category that this law requires must be in place by no later than April of 2020.

With these events as the backdrop, entrepreneurs and independent clinical practitioners interested in thriving in this new environment should recognize the following key additional realities.

 

Consumers Know Better

 

Despite the efforts of both the OTC lobbyists and the internet hearing aid marketers, consumers prefer to maintain their own opinions about the value and importance of professional care when dealing with hearing issues.  

In an effort to test the validity of the assumption that providing a low-cost OTC hearing aid to the public will prove to be the “missing link” in increasing hearing device usage, Healthy Hearing conducted a nationwide survey in early 20171,2.  A total of 809 participants aged 50 years and older were selected from a nationwide panel of more than 30 million people balanced to be representative of the overall population.  The vast majority of respondents reported having normal hearing ability. Of those who reported hearing loss, only 28% wore hearing aids. Therefore, the majority of respondents had little hearing aid experience – the presumed target market for OTC hearing aids.

When asked how important it would be to have a hearing care professional thoroughly evaluate their hearing condition and make recommendations, 59.7% of respondents indicated it was “absolutely important” and 33.62% indicated it was “very important”.  That leaves 6.68% where it is of average, little or no importance to have a hearing care professional involved in the process.

When asked how important it would be to have a hearing care professional select, fit and program hearing devices specifically for their needs, 60.32% of respondents indicated it was “absolutely important” and 33.5% indicted it was “very important”.  That leaves only 6.18% where it is of average, little or no importance.

It certainly seems that consumers see the value of professional care, even if they have yet to experience that professional care. And, in Harvey Abrams’ summary of MarkeTrak 9 survey data3, 81% of hearing aid users report satisfaction with their current hearing aids, and that number rises to 85% for hearing aids four years old or newer.  Ninety percent of hearing aid consumers are satisfied with their professional care.

The “hearing aid in a drawer” percentage is now down to 3%, whereas the return for credit rate of PSAP ‘s and hearing aids purchased through the internet hovers between 45 and 50%.  

These statistics would suggest that hearing health care professionals are valued by ALL consumers, despite the demonization efforts of online, direct-to-consumer sellers. In fact, this data would indicate that direct-to-consumer suppliers may be competing with each other for a piece of a market that in total may be less than 10% of potential users.  

This is not to suggest that the cost associated with hearing aids sold through professional channels isn’t an issue.  It is. Both consumers and the government, having been so alerted, have now weighed in on this matter. But, instead of lowering consumer costs by providing a Medicare hearing aid benefit (which consumers have been asking for), the government has chosen to follow the lobbyists recommendations, and create a sales channel that, in fact, consumers appear not to have asked for.  

 

For the Entrepreneur/Clinical Practice, Managing Hearing Aid Costs Remains a Challenge

 

As was alluded to earlier, what an entrepreneur/clinical practice pays for a hearing aid is different than what a large corporation (like Costco) pays for the same hearing aid.  The manufacturer of these hearing aids is making these pricing decisions. So, what drives these decisions?

Altruism would argue that these manufacturers should recognize and nurture the entrepreneur/clinical practice, whose grit, passion and dogged pursuit of excellence defined several generations of hearing health care excellence, and upon which the fortunes of these very manufacturers have been built. Capitalism however, argues something different. Capitalism argues that if a big corporation like Costco, which represents thousands of sales each month, can be locked up with a low price, thus preventing competitors from gaining access to that volume, then a low price is what that corporation will get.  Capitalism also argues to keep prices higher for smaller volume customers.  

To better compete in this type of environment, entrepreneur/clinical practices have attempted to increase their “volume-value” to the manufacturer by forming buying groups. On paper, this approach should work. If 600 independent outlets buy as one combined customer, this should represent the same volume-value to the manufacturer as say, 600 Costco stores.  And therefore, this kind of purchasing strategy should yield a similar price result. Unfortunately, for a number of reasons this is not the case.

  • First, unlike Costco who is willing to limit the number of manufacturers they contract with, thus creating an environment where a manufacturer has the opportunity to lock out some competition by offering a competitive price, entrepreneur/clinical practices often would rather not restrict their supplier options.  One could argue about the validity of this opinion, but one fact seems clear: most providers want access to most of the Big 5 products, even within the buying group structure.
  • Second, Costco initially came to manufacturers representing a new sales opportunity.  Members of buying groups are coming to manufacturers for the most part as current customers, currently providing that manufacturer with their highest margin business. So, the manufacturer’s pricing calculation in this scenario is based on more than just volume. It is based on how much current margin could be lost vs. how much new business could be gained. And with members of the buying group loath to restrict their purchasing power to a limited number of manufacturers, the “new business” part of that calculation may not be there like it is in the Costco model.
  • Third, there are too many buying groups. Some estimates put the number as high as 80.  It is likely that the reason manufacturers are willing to offer token price concession deals with many buying groups is that by keeping the entrepreneur/clinical practices divided even under the buying group model, they can keep the prices to those entrepreneur/clinical practices higher. Add to this that some buying groups add their own margins to the price they have negotiated from a manufacturer in order to pay for the services they bundle into their particular buying group value proposition, serious cost lowering through the buying group approach becomes very difficult.

To make the buying group channel more productive from a cost-of-goods perspective, it seems two things need to happen. First, more buying groups need to merge to form a single larger buying group. Second, the members of that larger buying group should limit the number of manufacturers they will contract with, thus increasing the “new business” aspect of their negotiating position.  

All of that said, unless the entrepreneur/clinical practice alone represents decent volume buying from the manufacturer directly (let’s say 50-100 unit a month), the current buying group approach is probably the best alternative to get at least some cost-of-goods reductions for those practices buying lower numbers.

Editor Note: In Part 2 of this series, these same authors will enlighten readers with revenue-generating considerations of the traditional hearing aid channel given the changing economic landscape.  

                                                   

References:

  1. Consumers value professional care in a post-OTC hearing aid world

  2. OTC hearing aids – survey says consumers aren’t sold

  3. An Introduction to MarkeTrak IX: A New Baseline for the Hearing Aid Market

 

About the Authors

David J. Smriga, M.A., founded AuDNet, Inc. in 2001, a group purchasing company, prior to merging that company in 2018 with Marcon to form AUDNET Hearing Group. Mr. Smriga is both Vice-President of Corporate Communications for AUDNET Hearing Group, as well as Senior Audiology Consultant for Audioscan.

Gregory Frazer, PhD, AuD, entered private practice Audiology and Hearing Aid Dispensing in 1982. For 14 years he owned and operated Hearing Care Associates. In 1996, Dr. Frazer co-founded Sonus USA. Dr. Frazer is currently the CEO of a hearing aid group purchasing organization, AUDNET Hearing Group.



About Amyn Amlani

Amyn M. Amlani, PhD, is Director of New Practice Development at Audigy, a data-driven, management group for audiology and hearing care, ENT group, and allergy practices. Prior to this position, Dr. Amlani was an academician for 18 years, where he educated future Doctor of Audiology professionals and directed a research laboratory funded primarily from extramural grants and corporate sponsors.

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