Disruptive Innovation
In the book “The Innovators Dilemma,” Clayton Christensen explains that no matter how good your company is and no matter how well you treat your customers, there are outside market elements that can come in and force change upon your industry. This is known as disruptive innovation. The term is used to describe goods or services that initially begin as a simple and rather straightforward product, and as competitors see potential in a market, expand from simple applications to more sophisticated versions. This process uproots established competitors and brings more accessibility to the consumer.
We have seen this over the past decade in the hearing industry. Historically, audiologists were offered new hearing aid devices approximately every 4-5 years. Now we see ReSound, Oticon, Starkey, Signia and Widex, the ‘big six’, releasing competitive products every nine months. This shift can be attributed to massive mergers and an uptick in acquisitions activity.
In the past 25 years, an industry with more than 30 hearing aid companies in the United States and even more across the world has dwindled down to these six major players. These industry leading manufacturers have utilized consolidation strategies within the market to ensure channels of distribution for their products. Furthermore, there has been a shift in how success is measured; because these companies are publicly owned, they are being measured on how much they are growing, which factors in the 10-15 percent of revenue spent on research and development and the constant release of new products. Stockholders expect reimbursement for their contribution, prompting manufacturers to oversaturate the market with products to ensure “market-share” growth.
Third-Party Payees
Third-party programs that offer hearing aids as a benefit include discount plans, worker’s compensation and insurance benefits. This is arguably one of the fastest-growing market segments in the hearing aid industry. As we break down trends affecting our industry, we find that 55 percent of consumers purchasing a hearing aid received financial assistance, a number that has climbed 13 percent in the last six years alone. We stress this statistic because the trend is likely to continue; therefore, turning a blind eye to third party plans will not be a beneficial strategy. The main sources of this assistance came from insurance, Medicare, Medicaid and/or HMO, and VA payees.
Considerations for Third Party Programs
It’s important to consider the following aspects of adopting third party programs.
1. Third-Party Reimbursement
When evaluating contracts with third party payees we must look at them as three-dimensional programs consisting of revenue, compensation plans and value. The value to the clinic must make sense, the value to the clinician must make sense and the value to the patient must make sense. To understand these contracts, we must first acknowledge that, when comparing a private pay gross margin to an insurance reimbursement gross margin, private pay always wins. But once we break down this margin in terms of what you must clinically provide, you may rethink this referral.
2. The Common Denominator: Revenue Per Hour (RPH)
Once we start breaking down revenue vs. clinical hours, you may change your perception on the gross margin. First let’s focus on the private pay gross margin and address the fact that the $2,860 price tag of consumer technology will not be an isolated transaction, but instead encompasses five years’ worth of clinical hours over a patient’s service plan in the form of the initial evaluation, fitting, various follow-ups, check-up and annual evaluation; for a total of 12 clinical hours spent with this patient (RPH- $2,860/12.0 = $238) *.
*Standard Hearing Aid Transaction RPH.
“Value is not what you pay…value is what you get for what you pay.”
3. Insurance Contract Reimbursements
Contract requirements from third party payees commonly require a test, fit and one year of service. The product distribution and one year of service will routinely include the evaluation, fitting and two follow-up appointments, along with a six-month checkup and an annual recheck. The average time spent with the patient totals 4.5 clinical hours vs. the 12 hours of clinical time we see in private pay (RHP- $1,000/4.5 = $222) **. Evaluating this reimbursement for the required one year of service provides a comparable return per clinical hour to our patient we service for five years. Once the patient with the insurance goes beyond the one-year mark then the clinic can charge per visit or discuss a service contract for a longer commitment. Remember, it’s not just what you get reimbursed; it’s what you must provide for the reimbursement that matters. Careful analysis of each contract may reveal contracts in which you choose not to participate.
**Binaural – Mid Level Technology.
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