by Amyn M Amlani, PhD
Today’s blog, Part 3, is the last in the series, “Pricing in Hearing Healthcare: Which Race are You Running?” Thus far, we have covered the:
- Developing market segmentation occurring in hearing healthcare (Part 1), and the
- Negative effect (i.e., cannibalization) of reduced retail pricing on total revenue, consumer purchase intent, and market brand within the retail segment (Part 2).
In Part 3, we address the principles of health insurance and its effect on consumer demand, and then apply these principles to hearing healthcare.
Why Do Consumers Purchase Health Insurance?
Fundamentally, consumers purchase economic goods (i.e., physical object or service) to satisfy a need. Health, however, does not fit the definition of an economic good; it is neither a physical object nor a service. Instead, health is a condition or state.
Consumers, therefore, demand other economic goods or services—for instance, pharmaceuticals and medical care—to meet their desired health state. Stated differently, consumers do not value medical care directly; instead, they value medical care because it improves (or maintains) their health and quality of life.
To achieve healthy living, many consumers acquire health insurance. Health insurance is any program—public or private—that provides protection to a consumer equally whether healthy or sick.
The demand for health insurance is predicated on: (1) future health is uncertain (i.e., probability of sickness), (2) magnitude of potential economic loss, and (3) risk aversion. These points are described below.
Presume that consumers were able to foresee their entire health future (i.e., absence of uncertainty). They could financial plan accordingly to cover the costs of future medical expenses (i.e., potential economic loss). Because knowledge of the future is known, uncertainty is an essential consideration (i.e., planning for the future) in the demand for health insurance.
When the individual becomes sick, insurance is utilized to lessen future uncertainty (i.e., the unanticipated expenses associated with medical services and income loss). That is, insurance engenders a smaller gap in terms of risk. In the private and public markets, the degree to which a consumer perceives risk will determine whether they enroll in insurance and supplemental insurance, respectively, and which medical protections to acquire.
Consumers who are risk averse (i.e., prefer certainty to avoid risk) are more likely to purchase insurance and pay a higher premium for increased protection. Consumers who are risk seeking (i.e., willing to assume risk) and risk neutral (i.e., insensitive to risk) are less likely to purchase insurance, and if they do, they purchase insurance with lower premiums with a lower degree of protection.
Health Insurance and Demand for Hearing Healthcare
In today’s hearing healthcare market, insurance programs—both private and public—often limit the provider’s ability to render diagnostic and treatment options to the consumer. The limited options can include non-coverage of test procedures, non-coverage or limited coverage of amplification technology, and limited follow-up visits.
Research suggests that limiting demand-side options increases the inelastic demand, which constrains the average individual from moving forward with improving (or maintaining) their health and quality of life.1 From the supplier-side, limited insurance coverage prohibits the provider from making the most of their scope of practice, which can also influence negatively the practice’s brand and revenue stream.
With respect to the occurring market segmentation in hearing healthcare (Figure 1 below), the following assumptions should be considered with respect to health insurance and demand:
- Consumers who lack hearing health protection and who are risk averse will:
- Strongly consider options in all three tiers, with purchase intent based primarily on value and not price.
- Consumers who are enrolled in health insurance that includes hearing health protection and who are risk averse will:
- Strongly consider options in the value-based segment, with purchase intent based primarily on value and not price. If the perceived value displayed by the provider does not meet the expectations of the consumer, interest could potentially shift downward to the behavioral and demographic segments. Here, the intention is to improve the state of well-being, even at the cost of utilizing personal resources.
- Consumers who lack hearing health protection and who are risk seeking or risk neutral will:
- Consider options in the demographic segment, followed by the behavioral and value-based segments. For this consumer type, decisions are based primarily on price as opposed to value.
- Consumers who are enrolled in health insurance that includes hearing health protection and who are risk seeking or risk neutral will:
- Consider options in the value-based segment, with purchase intent based primarily on price and not value. If the criterion of price is not met, the likelihood of expending personal resources is small. This consumer type is the least likely to move forward with improving their hearing healthcare.
Use of a Clinical Application to Determine Risk
In order to improve patient flow and conversion rates in hearing healthcare, providers should become keenly aware of consumer demand towards the willingness to accept health-related risk. To that end, a blog in February 2019 provided readers with a resource that quantified risk preference as it related to purchase intent.
As the landscape in audiology continues to evolve, and as the number of options for treatment of hearing difficulties expands, having such a resource will aid the provider in managing consumer motivation. This resource can also be used by the provider to self-evaluate and reflect on whether their demeanor is impacting consumer demand.
- Pendzialek JB, Simic D, Stock S. (2016). Differences in price elasticities of demand for health insurance: A systematic review. European Journal of Economics, 17 (1):5-21.