Can You Hear Me Now? Another Health Market that Really Works
Hearing aids have been expensive — until now.
An interesting story in The New York Times a little over a year ago relayed the journey of a woman who had broken the shell of one of her hearing aids. Shocked at the price of hearing aids from private audiologists — at least $2,000 for a set, and usually $3,000, she sought another solution. Learning that about 70 percent of this price is retail mark up, the woman searched online and found hearing aids available at reputable online stores — such as Audicis or Costco — for as little as $399. Searching a little more, she found an audiologist who offered to repair the shell of her old hearing aid for $100. So, that’s the choice she made.
But it gets even better. Only one year later, new technology has allowed entrepreneurs to develop hearing aids that they plan to sell for $300, and that have better sound quality than ever, according to neutral reporters.
But wait — there’s more!
This good news comes in a fascinating article by a venture capitalist published at VentureBeat just last month. The author, who invests in health technology ventures, sketches out the economics of the hearing-aid industry. It has been high margin and low volume. Traditionally, the manufacturer would sell a pair of hearing aids to an audiologist for $1,000, earning a gross margin of 43 percent. At a retail price of $3,000, after buying the device and incurring sales and other costs, the audiologist’s gross margin has been 55 percent. On the other hand, the average audiologist only sells 16 pairs a month.
But that is all changing. Not only are online vendors and innovating hearing-aid manufacturers cutting costs and improving quality and service times, but digital developers are offering online hearing apps via iTunes and other virtual stores for as little as $3.99. (Yes: There is a decimal after that 3.)
It has taken a long time, but the price of hearing aids is in the process of falling dramatically. How has this happened? Technological innovation, of course, but there is more. There’s no shortage of technological innovation in U.S. health care. However, because third-party payers, that is, health insurers and governments, determine prices, there is no mechanism for customers to signal value to providers.
This is not the case for hearing aids: Although some states have mandated insurance coverage for hearing aids, this is usually limited to disabled children. The big market for hearing aids is seniors, and Medicare does not cover hearing aids.
This is another case of a phenomenon observed elsewhere by NCPA Senior Fellow Devon Herrick: Where patients pay directly for medical care, prices fall like they do in every other market.
Seniors who want highly personalized service from an audiologist in his own practice can get it, and they will pay for it. Those who want to order online can save money by doing that. Those who want to get their old hearing aids repaired can make that choice. And the most adventurous seniors, who don’t mind running an earpiece into an iPhone, can get a functional hearing aid almost for free.
We are on the verge of enjoying universal access to hearing aids — but only because the government restrained itself from interfering and let the market operate.
“Where patients pay directly for medical care, prices fall like they do in every other market.”
This is why we need consumer driven health care!
“We are on the verge of enjoying universal access to hearing aids — but only because the government restrained itself from interfering and let the market operate.”
Exactly. This is something the people just aren’t hearing enough of. Good universal health care is the result of a real market that expands scientific frontiers. The more push out new technology, the more the old becomes universally available.
Wow, this is really a stunning shift. Good thing the government didn’t step in and “make hearing aids affordable”. They would still be around $3,000 and we would be calling it a success.
Not “we” — only “they” would be calling it a success. 😉
That’s fine, but what is really needed is an app that graphs the hearing of the patient by frequency and orders hearing aids tuned to compensate for the losses. Then, along with am ambient-noise-cancelling app, a person could carry on a normal conversation.
Mere amplification of all the ambient sound is not quite enough.
True, although the advancement over the years is still remarkable. Maybe we’ll see expanded access to what you’re talking about in the near future.
Excellent article. The free market is the only mechanism we know of to reduce costs and improve quality. I wonder what repference pricing with a 50/50 split on the savings with the patient would do to the cost of some of these big ticket items like knee replacements?
California’s public employee retirement system actually found out what happens with reference pricing – prices/charges drop. See: http://theselfpaypatient.com/2013/09/04/california-turns-public-employees-and-retirees-into-partial-self-pay-patients-sees-prices-drop/
They didn’t do it the way that would really promote markets, allowing the patient to keep the difference if the procedure was under the $30,000 reference price, but it was still an eye-opener for a lot of people.
Hi John,
Ah, the power of the free market when there is cost-based pricing!
Compare your post with the Kaiser study showing the insane variability of the cost of an appendectomy. We have been performing appendectomies since the time of the Pharoahs. There are mummies with appendectomy scars. By this time we should know what the procedure costs, but prices varied by tens of thousands of dollars–not only from institution to institution, but from payor to payor at the same institution. What a way to run a health care system!!
While it is unlikely that there will be an app for an appendectomy, technology is being developed that has the potential ofreducing the cost of health care dramatically on many fronts. Innovation, however, is often stifled because the technology does not have a reimbursement code, and so the innovators have difficulty monetizing their advancement. Providers are inhibited in their adaptation to cost-saving technologies.
While we can expect to see innovation for out-of-pocket devices and procedures, such as the one you cite, the only mechanisms of incentivizing innovation for medical care in our current reimbursement system are capitation or gainsharing contracts. In neither of those systems is the patient rewarded for choosing a newer lower cost alternative; the savings go to the payor and the provider (mostly to the payor). It is for this reason that the Patient-Physician Alliance (patientphysicianalliance.org) is advocating the creation of Accountable Care Organizations that are accountable to patients and reward patients for selecting cost-conscious care. The good news is that there is an app for that! Anyone interested should feel free to contact me.
Cheers,
Charlie Bond
Excellent post.
Great news, I personally have spent a round $25-$30,000 over the last 25 years trying my best to improve my hearing and that’s the reason that I always asked the staff at NCPA to set me up close to the speaker. There’s not much that can be done for my hearing at this stage but you are correct Costco is a very good source and told me that my hearing aids that I bought about two years ago were as good as I could get at the time and they didn’t recommend that I buy any new ones, which in that business is highly unusual. I have received some information from phonak about some improvements. I appreciate this information.
John, great information!
I’ve often wondered why hearing aids are as pricy as they are for no apparent reason. Maybe a combination of the digital revolution, tech-savvy Baby Boomers and good old fashioned competition will drive down the cost.
Another case study is the market for eye glasses. The last two times I went to the eye doctor, he convinced me his prices were as good as big box retail outlets. Yet, when I left I could hardly comprehend why glasses that I barely needed somehow costs $400. Later, after friends told me about the online glasses dealers, I discovered I could have gotten the same amenities for $125.
Devon Herrick,
Thank you for your comment. Due to constraints on theme (i.e. wanting to focus on innovation) I did not explore state professional regulation of audiology. It may be, in some states, that it is difficult to get hearing aids without going to an office-based audiologist.
I have not researched this and the Internet-based dealers do not appear to have any public advocacy documents urging states to reform their laws, so this may not be a problem.
Contacts are similar. It is not possible to get contacts without a prescription. So, 1-800 CONTACTS had to train customers how to read the prescriptions on the lens cases. When the business model was emerging, eye doctors resisted giving patients prescriptions on paper because that meant they would be able to buy contacts online. This resulted in a political struggle: “Who owns the prescription?”, and many states mandated that eye doctors hand over the prescription, sometimes for a nominal extra cost.
I doubt these changes would have happened without the Internet. Many professions are being disrupted because of it – even lawyers.
Several years ago I purchased a $20 pair of battery powered, active noise cancelling headphones. They work great. While on an airplane I can reach up and toggle the one/off switch and hear a huge difference between active and passive noise blocking. While other passengers wear their $300 Bose/Sony headphones, I wear my $20 pair.
Many companies now make similar noise cancelling headphones that are priced lower than the high-end originals; but that wasn’t the case when I bought mine. An enterprising Chinese company figured out there was a market for headphones selling at a lower price than the high-end ones. They developed a model using cheaper, but effective components that sold for 93% less. I cannot help but think that the same thing could occur with hearing aids.
A New York Times article claimed 85% of people with hearing loss never seek treatment. The article asserted that untreated hearing loss places people at increased risk of dementia. That got me thinking.
The iPhone App amplifies sound. That’s neat: but why can’t a firm create a audiology app that helps people identify frequencies of hearing loss? The hearing score could be used to pre-program an over-the-counter hearing aid. Such an app could come with a pair of cheap noise cancelling headphones that are used to conduct the hearing test.
I’m not diminishing the value of audiologists. But, the most highly-skilled audiologist in the world doesn’t help when people cannot afford their services. Of course, the industry would fight to ban such an app. The App would need the following disclaimer: note to FDA, this is for entertainment purposes only)
Great article on the power of competition.
I forgot where I read this, but eye doctors fought tooth and nail against Pearle Vision and places like that. But as John just said, that was bricks and mortar to fight against, not the internet.
Hearing aids can be examined by the customer and to some extent tested by the customer. The real challenge is what to do about over-pricing with heart devices and orthopedic devices and advanced drugs, which really have to come from a doctor.
When you study the most expensive patients with chronic illnesses, a lot of their expense is driven by grotesquely priced drugs and devices. Instead of attacking the price gougers, we seek to expand insurance policies that go on paying high prices.
Hi Bob Hertz,
My urgings in favor of cost-based pricing for health care are not limited to medical or hospital services, but extend to drugs and devices as well.
Cheers,
Charlie Bond
Happy birthday Lila. I wish that I could attend. Love ya, Grandpa Paul
Charlie, I should add the following:
Hearing aids and lasik surgery are goods that can fall in price because they are postponable. If the buyer does not like the price charged by a local monopolist, they can take their time finding a better price.
Whereas stents and pacemakers and chemotherapy are not postponable. And that is where the greatest price gouging occurs. I do not know how free markets can correct this area – I think you need federal price controls as exist in almost all other advanced nations.
If someone can convince me otherwise, I am listening.
http://pilgrimed.com/medical-tourism-procedures/cardiac-procedures/angioplasty-stents-via-medical-travel.html
http://www.medicaltourismco.com/cardiology/pacemaker-installation-surgery-abroad.php
http://www.mtmweb.biz/cancer/chemotherapy-oncologist
The implications should be clear – if people can travel abroad to receive all of the three treatments you cite (and they can), that seems to suggest that patients are not wholly at the mercy of whatever their local ‘monopolist’ (and with the exception of a few of the more remote areas in the country, there aren’t too many local monopolies in health care provision).
The communications failures of pro-free market health care advocates are numerous, but there is one that stands above the rest – the continued use of LASIK surgery as the best example of free market health care at work. Most people are, like Bob here, going to hear someone like John Goodman talk about LASIK surgery and say something along the lines of “oh, that’s nice, but it’s not really an important health care treatment, like heart stents or cancer treatment, that stuff is different.”
If I were in a position to direct free-market health care advocates in how they talk, my first order of business would be to absolutely prohibit them from ever talking about LASIK surgery again. Not because it’s false – it isn’t – but because it doesn’t strike most people as ‘real’ health care, it’s seen as ‘optional’ or relatively unimportant. Talk about this guy getting a colonoscopy for $800 http://theselfpaypatient.com/2013/10/02/an-auction-for-medical-procedures-medibid-breaks-new-ground-in-healthcare/ or this guy getting his hernia repaired for $3,000 (when the other local ‘monopolist’ – gotta love the misuse of that term) wanted to charge $23,000 http://theselfpaypatient.com/2013/08/22/fixed-benefit-insurance-policies-an-alternative-to-comprehensive-insurance/. Talk about any procedure that people are going to stand back and say ‘Oh, yes, that is really important health care.’
Thus endeth the rant.
Darned good rant.
IMHO, as long as most people have health insurance, they are not going to be motivated to learn about the cash-based alternatives to insured benefits that you describe.
I think the reason LASIK and other uninsured procedures are useful for an American audience is that they are within the ordinary American’s experience.
As an intermediate step, it would be beneficial for more insurers to contract with overseas providers. Did you see “Best Exotic Madrigal Hotel”? The English National Health Service contracted for a hip replacement with a hospital in India. That’s how Maggie Smith’s character ended up in the hotel!
Pacemakers and stents are items that are frequently considered long before they are required so a good portion of your argument fails with two of the three examples you presented.
With regard to the third example, chemotherapy, that too fails since many of the countries you refer to delay chemotherapy as part of the health care experience.
Take note patients look at other patient’s experiences long before they have a need for any medical treatment so gradually physicians get a reputation with regard to cost. In fact some of the highest priced physicians that you call gougers don’t even accept insurance yet despite their known high prices they are sought out for their perceived quality.
That really pis-s some people off. Imagine that, ‘the rich are able to get a doctor that I can’t have because I don’t want to pay OOP. I’d rather spend that money on Starbucks.’
I am not sure where you are going Al.
Can a heart patient actually order his cardiologist to get the cheapest decent pacemaker, and can he decline the pacemaker once he is told the price for it?
I had a drug coated stent during a 2006 heart attack. I do not remember being given price quotes.
Can a cancer patient ask his oncologist to find the cheapest locale for chemotherapy?
it is understandable that we do not make medicine like comparing i-phone prices at Target vs Walmart vs Best Buy. I am not sure we can.
I go back to the idea of national fee schedules. Please comment, because you have not sold me yet.
Yes, one can actually find someone that charges less to put in a pacemaker and since there are multiple brands that are updated all the time perhaps one could find a less expensive pacemaker as well. Did you ever think of what happens to old expensive replacement parts when the newer more expensive parts come out?
“I had a drug coated stent during a 2006 heart attack. I do not remember being given price quotes.”
Do you remember asking for the price? That might be the answer.
“Can a cancer patient ask his oncologist to find the cheapest locale for chemotherapy?”
There are many different meds to treat cancers, but most people like the newest med which generally is the most expensive. I like the newest TV when new models and significant updates are created, but I generally scale back my request when I ask for the price.
“it is understandable that we do not make medicine like comparing i-phone prices at Target vs Walmart vs Best Buy. I am not sure we can.”
Some docs post their prices. Here is one actually posted on the net.
http://www.patmosemergiclinic.com/Fee_schedule.pdf
As soon as people start asking for the prices they will appear, because people don’t like to face sticker shock and service businesses service their clients.
“you have not sold me yet.”
I’m not looking to sell you Bob, because you already know most of these things that have been stated over and over again. You still need those extra wheels on your bike, not because you don’t know how to ride, rather you don’t have confidence in yourself.
Currently, these devices are purchased by the hospitals and the costs are bundled into the DRG (Diagnosis-Related Group). So, the doctor is the target of aggressive sales tactics by the device makers, because he does not directly concern himself with the cost.
Instead, there is a struggle between the surgeons and the hospitals as to how much power the surgeons should have over the inventory (i.e. how tolerated “physician-preferred” devices are).
In a properly functioning market, we don’t now how low prices would fall. If it cost only a few thousand dollars to have a pacemaker or stent implanted, the price range between models might be only a few hundred dollars. For the patient who needs a more expensive model (once in his life), the difference might not be substantive.
Note to Al:
In your efforts to create price sensitivity — which I applaud – I fear your last comment went a little over the top.
a. No one with heart disease is going to replace their cardiologist – who they trust with their life — because that doctor did not aggressively shop for the cheapest pacemaker.
That would be a terrible insult.
b. I did not ask the price of my drug-coated stent because I was unconscious from my severe heart attack.
John Graham has offered a good description of how the hospitals buy the devices, and roll the price into their total charge to insurers.
After reading John’s post, I still think that a national fee schedule like Germany’s or Taiwan’s makes some sense for these complex devices.
Libertarians have a tendency to always look at the patient as the agent of cost control. That is often valid but it is not always valid.
“That would be a terrible insult.”
I am a physician and I don’t find that insulting at all when the patient is paying the bill and has limited resources. In fact I would do that type of thing voluntarily. I think one that jeopardizes the financial security of their family by not discussing such a thing with their physician is an idiot.
“Libertarians have a tendency to always look at the patient as the agent of cost control. That is often valid but it is not always valid.”
I understand what you are saying, but I would prefer to be right most of the time and not just when the clock hits 12.