In our last article, we discussed some anecdotal suggestions that hearing aid dispensers in California are likely working far below full capacity. In this post, we’ll dig into the evidence. While this topic may be pretty far removed from the mind of the average consumer considering a hearing aid purchase, it’s important to understand nonetheless – when you pay high hearing aid prices, you’re not paying for $6,000 of electronics… you’re paying your hearing aid dispenser’s rent and other fixed costs of doing business!

Thanks to publicly available data at the Hearing Aid Dispenser portal, we know that there are approximately 1,967 licensed hearing aid dispenser and dispensing audiologists in California, as of July 2013. With a few assumptions, we can also arrive at a rough estimate of the amount of time spent fitting hearing aids.

Hearing Aid Assumptions:

-          California’s rate of hearing aid adoption is approximately the same as America’s

-          The average hearing aid wearer visits a dispenser twice per year. (This may be overstating things – recall that the average hearing aid purchaser returns for a follow-on visit less than twice in the year immediately following a hearing aid purchase – and visit rates are almost certainly lower after the first year)

-          The average visit takes 60 minutes

This back-of-the-envelope analysis suggests that California’s hearing aid dispensing system is operating at only 31% of capacity – or said another way, that the typical hearing aid dispenser or dispensing audiologist spends only 614 hours in a full 2,000 hour work-year actually fitting hearing aids.

But before we hang our hat on these numbers, a few disclaimers!

First – dispensing audiologists offer many important services in addition to fitting and dispensing hearing aids – so we would not expect their practices to work anywhere close to 100% capacity with respect to dispensing hearing aids.

Second, 100% capacity isn’t realistic, plenty of time has to go into running a practice. (That said, a realistic goal might be in the 80% range, which would imply 32 hours per week spent fitting hearing aids).

And third, since there are several assumptions involved, there is also significant uncertainty. Below is what the numbers might look at if key assumptions were adjusted one way or the other.

 

All caveats aside – in our view, the data do seem to confirm that the hearing aid dispensing industry operates far below capacity. As an independent check, a recent survey of hearing care professionals funded by Phonak suggests an average workweek among full-time hearing care professionals of less than 30 hours per week – or less than 75% of full-time capacity.

So why does this matter?

Well, in most oversaturated retail categories, some individual stores decide, sooner or later, to compete on price. These stores tend to attract more customers, and the stores that decide to keep prices high are eventually forced to shut their doors as customers shop elsewhere. Thanks to concentrated customer demand, the remaining locations are pushed closer to full capacity, enabling them to turn a healthy profit, despite charging lower prices. While consumers may not have as many store locations to shop at, they benefit from lower prices.

So in an industry characterized by both overcapacity and high prices – such as hearing aids – we’d eventually expect some participants to exit the market as competition for scarce customers pushes down prices. Instead, we see this!

 

Even in an industry plagued by overcapacity, the number of dispensers has actually increased by over 30% since 2001. Typically, industries expand when there is so much demand everyone has to work overtime – not when there is so much slack that 30-hour weeks are the norm. But hearing aids don’t appear to follow the rules at all!

Unfortunately, this expansion of practices has not led to lower prices, nor is it likely to. We believe that this is because hearing aid dispensers are forced to charge high prices to those that can afford them just to cover their fixed costs stay in business, even if it means everyone else is priced out of the market.

Paradoxically, the more hearing aid dispensers have entered the market, the more prices have climbed –more dispensers means fewer customers per dispenser, which means increasing hearing aid prices is the only way to stay in business.

The only way that hearing aid dispensers can both lower prices and remain economical, is if they can manage to operate closer to full capacity – but as long as the market for hearing care is oversaturated with practices, sub-30-hour weeks will remain the norm and hearing aid prices will stay high to pay inefficient fixed costs in underutilized offices.

In our next post we’ll try to get a sense of just how much money is being spent to maintain the overcapacity of the system. In the meantime, we’ll end with this thought: The manufacturing cost of a typical high-end hearing aid is less than $100, and the wholesale cost is around $500. Any system that charges customers $5,000 for hearing aids is a broken system.

This is the second of a three-part article on the California hearing aid market, and the contribution of an inefficient distribution network to high hearing aid prices.