Tuesday, October 16, 2012

Dispenser Sampler

Dispenser Sampler
Ed Belcher

Introduction
Buying a hearing aid requires many choices.  One can purchase a “hearing aid” for as little as $20 (shipping included!) or for more than $5000 at an audiologist’s practice.  Hearing aids vary a lot in quality.  They may be tiny amplifiers that have a number of distortions and frequency amplification very different from what the user needs.  Or they may be very sophisticated aids that even include features the user may never use.  Hearing aids are sold in private practices, big box stores such as Walmart and Costco, and over the internet.  Each retailer carries aids from a small subset of available manufacturers.  The author went to a number of retailers and was offered, as the best solution for him, very different aids at different prices.

Hardware Apple and Oranges
The quality and features of hearing devices cover a tremendous range from useless to exotic.  A minimum of the following six features need to be considered when matching an aid to a user.  Ask your dispenser to describe how her/his selection works relative to these six areas.

1) Programmable or fixed amplification versus frequency

2) Automatic gain control, Compression and/or manual control

3) Fixed or selectable directivity of microphones

4) Fidelity

5) Feedback Suppression

6) Analog or digital hardware

Sound Amplification Devices versus Hearing Aids
Sound Amplification Devices have a fixed frequency response and most have a manual gain, a single microphone, and no feedback suppression.  The fidelity can be good or bad depending on the engineering quality. Hearing aids have most or all of the elements 1-6 and some have more.  These elements need programming to configure these elements to your hearing needs.

Sound Amplification Devices are legally sold “over the counter” and by direct-mail where as “Hearing Aids” are controlled by state and federal laws requiring specialists to examine your hearing and fit the aids.  However, sophisticated aids are available over the web.  The web vendors generally need an audiogram from the customer to program the aids before shipping.  Getting a good fit and the many elements (some such as feedback suppression) configured for your case remotely may be difficult.

Distribution
The quality in engineering and the absence or presence of the six features above affect the selling price and of course the utility of the aid to the user. The dispenser’s acquisition cost is generally multiplied from 2 to 3 times to get the selling price. Premium aids generate more profit for the dispenser and provide motivation to move customers to the most expensive aids they are willing to buy.

The following section discusses various ways hearing aids are distributed including Veterans Affairs, European markets, and the U.S.A. commercial sector.

Veterans Affairs
Lucille Beck, Director, Audiology and Speech Pathology Service, Veterans Affairs, reported in 2011 that the VA dispensed 561,212 hearing aids in 2010, 20% of all hearing aids dispensed in the U.S.A. that year.  The average manufacturer cost of a hearing aid to the VA was $348.15.
 Meeting Challenges of VA Audiology Care in the 21st Century

The VA dispensed aids from the following companies on contract in 2009: Interon, Microtech Hearing Technologies, Phonak, Siemens AG, Starkey, and Unitron. The companies are among the best hearing aids manufacturers in the world, and the models purchased are among their best.  Earl E. Johnson, AuD, PhD obtained ratings of these aids from the audiologist staff in the VA. The aids were rated on the following criteria: Digital Signal Processing, Feedback Suppression, Noise Reduction, Wireless Technology (non-FM),   Automatic Functionality,   Data Logging, Acoustic Telephone Program, Music Program, Programming Software, Adaptive Directionality, FM System, Volume Control, Integrated Real-Ear, Telecoil, Protection Devices, Wax Guard Devices, Battery Life, and Remote Control.  Each of the companies’ aids was rated on all of the above features.

Determinants of Department of Veterans Affairs hearing aid brand dispensing by individual audiologists Earl E. Johnson, AuD, PhD , http://www.rehab.research.va.gov/jour/11/487/johnson487.html

Hearing aids are like other technologies. They get better and the manufacturer price drops.  In 2009, 2010, and 2011, the VA paid an average of $359, $348, and $333 per aid respectively.  The amount quoted above for 2009 and 2010 was an average over all aids purchased at the VA.  The 2011 price was from the Phonak contract FY2011-14. The contract was signed in November 2009.  2011 was its first option year. Veterans Affairs can order up to $10 million worth of hearing aids per month through 2014 under this contract.
http://thehill.com/business-a-lobbying/175349-under-contract

Europe
How do countries in Europe provide and administer hearing aid services?
A 2005 study by The British Society of Hearing Aid Audiologists reported that 90% of the UK and Denmark citizens use public hospitals to evaluate hearing and dispense their hearing aids. There is no charge to the customer for the exam or hearing aid(s), but the waiting times for the first appointment are 47 and 84 weeks respectively!  Most European countries have similar public services but also provide citizens vouchers to help pay for private enterprises to evaluate hearing, purchase, and fit their hearing aids. These vouchers or rebates average between $738 and $1149 per aid, and also allow approximately $245 for the fitting cost.  The aids and service may cost the customer some out-of-pocket expense depending on the chosen aid, but the wait is days versus many weeks.

Non-Veterans (U.S.A)
In 2010, non-veterans purchased 2.78 M aids in the U.S.A. They were dispensed through independent practices, health maintenance organizations, mail-order, and multiple-outlet businesses such as HearUSA, Costco Hearing Centers, and Miracle Ear.

Private Practices
 The author went to a private practice staffed by two Doctors of Audiology, an intern Audiologist, a receptionist, and a bookkeeper.  After the standard procedures of an ear examination, examining a current audiogram, and discussion of needs and preferences, the audiologist proposed the WIDEX Passion 440 ($3,065), Oticon Agil Mini Rite ($2,700), Oticon Pro Mini Rite ($2,170) and Oticon Mini Rite ($2,000).  She had demo versions of the WIDEX and Oticon Agil, fitted the author with both of them, and after he signed papers stating his financial responsibility for the aids, was able to test them at home for up to two weeks. The author’s favorite was the WIDEX but the price seemed ridiculously high when compared to smart phones and other complex electronics.  Many journal papers spanning over decades agreed, and cited that 75% of those in the USA that need hearing aids did not have them. Cost was sited as the most important reason.  This sticker shock started the author’s search to better understand the cost and profits of the manufacturing and distribution systems.

Managed Care – Group Health Corporation
The author is a member of Group Health, a managed care corporation in Washington State.  He got an appointment for a hearing exam and paid $20 copay for the exam.  He needed another appointment for the discussion of needs and preferences, and fitting.  Group Health offers Oticon, Phonak, WIDEX and Starkey. Price ranges are approximately from $1300 to $3000 per device depending on technology level.  Specifically the WIDEX Passion 440 hearing aid is $2760 for one and $5322 for two.  After a trial period, if the customer decides not to purchase the aids, s/he will be refunded all but $300.  A disadvantage was that the closest hearing exam was two months after the author made the appointment and the fitting appointment would have been another two months wait after the exam.

Multiple-Outlet Businesses – Can scale make a difference?
Costco Hearing Centers
Costco has 420 hearing centers worldwide with 360 in the United States. The author went to a center in Woodinville, WA. It has a fulltime licensed Hearing Instrument Specialist and a part-time Audiologist CCC-A, a fulltime receptionist and a part time receptionist. All staff took shifts to operate the center Monday through Saturday.  The center occupies approximately 500 square feet in the large warehouse. Selection of a hearing aid follows the standard procedure of hearing exam, audiogram, discussion of needs and preferences, and a demonstration of selected aids. The specialist programs demo aids and allows the customer to walk around the warehouse. If hearing aids are ordered, there is a 90-day trial period with money back guarantee; a manufacturer’s warranty for the hearing aids (3-yr) and damage or loss (2-yr). The two major brands sold are REXTON (made by Siemens) and ReSound with headquarters in Denmark. These brands have a number of styles. The BTE-RIC (Behind the Ear, Receiver in Canal) style varied in price from $1000 to $1,300 per aid. When an order is placed, the aids are shipped from the manufacturer and ready to fit in 2 days.
 
The Woodinville center sells between 60 and 100 aids per month. Assuming this is a typical number, Costco sells between 300,000 and 500,000 aids per year worldwide, similar to the VA in volume.  If Costco were to achieve the same deal as the VA ($350/aid cost), the corporate profit from all centers would average $192 million  annually, (41 % of their gross revenue) even when selling hearing aids nearly half the price quoted by private practices, Miracle Ear and HearUSA for similar models.  (See Appendix A for more details on the analysis).

HearUSA
HearUSA has more than 180 Hearing Care Centers nationwide plus nearly 2,000 independently practicing audiologists affiliated with their Hearing Care Network. In some markets, HearUSA may operate as HEARx or HEARx West. HearUSA was a privately owned company that distributed mainly Siemens hearing aids. On September 9, 2011, HearUSA was sold to Siemens through a bankruptcy auction.  According to the employee in Florida helping the author make an appointment, the change in operation was smooth.  Employees went home on Friday and continued their same work on Monday with new owners. Only the CEO and CFO were replaced.  HearUSA provides the AARP Hearing Care program. One calls HearUSA and they verify AARP membership, then make the first appointment to either a HearUSA Center or affiliate near the member.  The program brochures indicate that purchasers obtain a 20% savings on a wide range of digital hearing aids.  The prices for a BTE-RIC after the discount ranged from $1,280 to $2,600 per aid. There are no HearUSA centers in Washington State.  The author was directed to an affiliate private practice located in Mountlake Terrace, WA.  After the ear exam, audiogram, and discussion of needs and preferences, the author was offered two Siemens models and two ReSound models.  The ReSound Alera 9 was priced at $2,600/aid with the 3-yr warranty, 2-yr loss/damage, and life (of aid) adjustment service.

Miracle Ear
Miracle-Ear, Inc. is a network of retail outlets that distribute hearing aids manufactured by M-E Manufacturing and Services Inc. ("MEMSI"), a subsidiary of Siemens Medical Solutions. Miracle-Ear is a subsidiary of Amplifon S.p. A, a worldwide distributor of hearing aids based in Italy.  As of March 2011, Miracle-Ear had more than 1,200 locations in the United States, with many renting space in Sears stores. In 2000 Amplifon sold the manufacturing business of Miracle-Ear, Inc. to MEMSI, a Siemens company, for approximately $3.9 million. Miracle-Ear has an exclusive multi-year agreement with MEMSI for the supply of hearing aids. As a result of the agreement with MEMSI, Miracle Ear began selling rebranded Siemens hearing aids and hearing aid accessories.  After the ear exam, audiogram, and discussion of needs and preferences, the specialist offered the author three BTE hearing aids called ME-1, ME-2, and ME-3 with hollow tubes transmitting sound into the ear canal.    The specialist quoted retail prices ranging from $4390, $3990, and $3590 respectively per aid and with a promotion ranging from $3293, $2992, and $2742 respectively per aid.  ME-1 appears to be very similar to the Siemens BTE Life 701 which is sold on-line for $1710 including a 3-yr warranty and loss/damage insurance.

Walmart
Walmart contracted with Amplifon to staff Hearing Aid Centers in Walmart’s 4000 stores.  Amplifon, a public company headquartered in Milan, Italy, describes itself as a “world leader in hearing aid distribution.”  Amplifon owns 100% of Miracle Ear, Sonus, and the hearing centers in Walmart. They are affiliated with Beter Horen (Dutch), Elite Hearing Network, National Hearing Care, and Bay Audiology.

Who are the manufacturers of Amplifon Hearing Aids?  They purchase manufacturers around the world to build the products they want to distribute. Here are three examples which are probably the tip of the manufacturing iceberg.
1) Jan 16, 2012 
   …TURKEY - Amplifon SpA of Italy, a majority-owned subsidiary of Ampliter NV, acquired a ##% interest in Makstone Isitme Urunleri Perakende Satis Pazarlama AS, an Istanbul-based manufacturer and wholesaler of hearing aids, for an estimated TRY #.### mil…
2) Jul 25, 2006 
   GERMANY - Amplifon SPA (AS) of Italy, a unit of Ampliter NV, acquired AUDIMED GMBH Hoerzentrum, a Munich-based provider of hearing aid devices and services. Concurrently, AS acquired Schnabel.…

3) Jan 09, 2006 
   GERMANY - Amplifon SpA of Italy acquired the entire share capital of Dr. Haehle Hoerakustik GmbH, a Cottbus-based manufacturer of hearing aids.…


In addition to the Hearing Aid Centers, Walmart sells “over-the-counter” sound amplification systems.  Their most expensive item is priced at $999/pair and is a SimplicityTM  Hi Fi EP Hearing Aid Pair made by General Hearing Instruments, Inc., 175 Brookhollow, Harahan, LA 70123. (www.generalhearing.com).  The user manual states that it has a manual volume control but also has an automatic gain control around the set volume level as well as some compression to reduce the amplitude of loud sounds and increase amplification of soft sounds instantaneously.

Online Purchases
The web allows one to purchase hearing aids and sound amplifiers with qualities from excellent to awful.  The major and important drawback is the lack of personalized fitting and adjustments.

For higher-quality aids, one may go to http://www.discounthearingaidsofamerica.com.  As of January 30, 2012 it carried: Siemens, Rexton, Resound, Microtech, Phonak, and Starkey among others. It dropped two quality brands, WIDEX and OTICON because these companies claim they no longer sell to distribution lines that do not have face-to-face specialists as part of the pre and post-delivery service.  Sample prices per aid are: Phonak ($1000-$2100), ReSound ($1500-$2100), Siemens ($1100-$2100), and Starkey (“Too low to show, please call”.).  In spite of their website claim, WIDEX and OTICON could be found on http://www.discounthearingaidsny.com/Home_Page.php

For mid-range quality of mail-order choices, the author ordered two MDHearingAid Pros ($179 each).  This aid had 258 reviews on Amazon.com and 214 of them rated the aid with 5 out of 5 stars, a rare positive ranking for any kind of item! Amazon no longer carries these aids. They can still be purchased directly from mdhearingaid.com.  It is an analog sound amplifier with very good fidelity, forward facing microphone, and a manual volume control. When an audiologist saw it, she said it was similar to a 1980’s Starkey design.   People with a hearing loss over the entire frequency spectrum are benefited with its choices of relative flat or positive slope spectral responses. The author has high-frequency hearing loss.  He needed to over-amplify the mid and low frequencies to an intolerable amount to amplify the higher frequencies to his satisfaction. The author returned the aids and quickly got his money refunded.

On the low end of the mail-order business, the author purchased Invisi-Ear sound amplifiers for $20 each just to see what they were.  The author’s aids did amplify sound but also had 4 (left-ear-aid) and 5 (right-ear-aid) buzzing resonances over a range from 100 Hz to 1500 Hz that greatly distorted the sound. The engineering and fidelity were worth less than $20 to the author. On Amazon.com there were 6 reviews at the time of this writing: three gave it 5 out of 5 stars, and three gave it 1 and 2 stars out of 5. 
Mail-order sales from the web or print media provide lower prices. The ones that sell programmable frequency response hearing aids ask for your audiogram and program a factory-selected frequency response for that audiogram before mailing the aids to you.  A major failing of mail-order buying is the important face-to-face interaction and subsequent adjustments of the hearing aids over a number of appointments to best satisfy the customer.

Discussion
Private practices as a group offer the most variety of quality aids and generally require the highest retail price for those aids.  Businesses with multiple outlets have the advantage of efficiency, scale and better contracts with manufacturers.  With the exception of the VA, the multiple outlet stores mostly carry aids from only one or manufacturers.  All multi-outlet businesses studied in this paper carry Siemens, sometimes others also carried REXTON (owned by
Siemens) and ReSound.  The multiple outlet stores tend to have “Private Models” in that they are a bit different from models sold anywhere else.  For example Miracle Ear has the ME-1 which is like but not identical to the Siemens Life 701.  Costco has the ReSound Future which is somewhere in the ReSound Alera category, but specific comparisons are not divulged.

What are the pressures to keep hearing aid prices high? Lack of a competitor that sells aids which are both profitable for the company and equitable for the customer.  Premium aids could be sold between 25% and 50% current private practice prices with ample profits for manufacturers and distributors. 

The great variation in volume of sales should be a key factor.  Multiple outlet organizations can negotiate better contracts with suppliers, pool advertising and use web-based shared accounting systems. Costco sells aids at about half the price reported in private practices.  However HearUSA and Miracle Ear have prices similar to private practices. 

Private practices may raise their retail prices to offset low volume sales only to drive more customers to not use hearing aids or go to Costco or the web.  As a result of lower volume, private practices tend to raise prices higher, continuing the self-defeating cycle.  They argue that they have higher quality aids and better service than multiple-outlet stores and that this justifies the higher price. However in the author’s opinion the licensed specialists in the multiple-outlet stores discussed above were good and were able to help their customers hear as well as possible with the limited products they sold. 

Manufacturers of recognized, top-quality hearing aids are very profitable.  The mark-ups in the distribution chain are large.   Bundled fees obscure the separate provider prices of the hardware and services.   The $350/aid price negotiated by the VA shows how low premium hearing aids can be purchased from a number of manufacturers.  In an earlier post, I show that the cost of producing (materials and labor) a premium hearing aid is only $250.
Appendix A.
Sketchy Analysis of Costco Hearing Aid Centers
Many of the numbers below are estimates and give only an idea of the profitability of the Costco hearing aid centers.

Average Number if aids sold per month:  80
Average consumer price of an aid: $1,150
Average Revenue per year: $1,104,000 for one center

Expenses of a Costco Hearing Aid Center operated 6 days/week
Salaries:
2 audiologists:           160,000 (Each works only 5 days a week)
1.2 Receptionists        43,200
0.25 Bookkeeping      11,000  (Assume center shares Costco’s bookkeeping                                                                 system)
Rent                              10,000  (Cost of not using space for something else)
Equipment                   15,000  (Testing equipment, software, demo systems, …)
Advertising                   10,000  (Share with Costco advertising program)
FICA and benefits       47,124  (Social Security, Medicare, Health Ins., Retirement)
Total Expenses      $311,324          

Net Yearly Profit      Net Yearly Profit          Assumed    Profit/Revenue
One Center               420 Centers     Cost of Aid
$456,676                   $191,803,920                        $350               41.4 %
  360,676                       151,483,920                         450               32.7 %
  264,676                       111,163,920                         550               24.0 %
  168,676                         70,843,920                         650               15.3 %

Costco may buy over 400,000 hearing aids each year.  They buy from two manufacturers while the VA uses six.  The assumed cost of aid (above) varies from VA cost to almost double that cost. Costco orders hearing aids from the manufacturer as they sell them to customers. The manufacturer drop ships the aids to the center.

2 comments:

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