Some of the most familiar brands in hearing health care today — Beltone, Audibel, and HearUSA — are controlled by the largest hearing aid manufacturers in America. So, too, are many lesser known provider networks and smaller dispensing operations. Over the past decade, the big hearing aid manufacturers have been acquiring or aligning with hearing health practitioners, often quietly, in markets across the country. As a result, manufacturers aren't just suppliers of hearing instruments anymore but are practice owners and financiers. To many independents, they are the competition.
Manufacturers are getting involved in the distribution side of the business for one simple reason: “You have a high-margin product in a growth industry,” said Alan P. Dozier, a Raleigh, N.C.-based consultant and former global chief operating officer of GN ReSound and president of the North American business. “You do what you need to do to wrap up distribution because if you do so, you sell more of your high-margin product,” he said.
The Hearing Journal requested interviews with top U.S. executives of the manufacturers to better understand recent trends. How has consolidation among manufacturers affected their bottom lines? What types of acquisitions are they considering next? How is manufacturer control of various distribution channels affecting the delivery of patient care?
We contacted the Big Six — William Demant Holding Group's Oticon and Sonic, Sonova Group's Unitron, GN ReSound Group's ReSound, Siemens Healthcare's Siemens Hearing Instruments, Widex USA, Inc., and Starkey Laboratories, Inc. — but only Starkey President Jerry Ruzicka spoke with HJ, and Siemens' CEO Scott Davis prepared a written response. The remaining companies declined to participate. We also interviewed several independent practitioners, executives of a large consolidator, the leaders of professional and membership organizations, a former manufacturing executive, and an equity research analyst.
Whether manufacturers' close ties with practitioners is a positive or negative trend is a matter of opinion. Arguments swing both ways. But one thing is certain: The business of hearing health care delivery is in the midst of an evolution. Much like the corner pharmacy and Main Street hardware store, small independents may find it increasingly difficult to compete with the giants.
The grab for market share follows more than two decades of consolidation in the manufacturing sector. In The Hearing Aid Handbook, 2011, author Jeffrey J. DiGiovanni, PhD, an associate professor in the School of Rehabilitation and Communications Sciences at Ohio University in Athens, described how consolidation in the hearing instrument industry has altered the marketplace. Twenty different manufacturers held 80 percent of global market share in 1994. More recently (based on various data sources from 2003 to 2008), six companies controlled 95 percent of the market.
Because the merged companies often retain separate brand names, understanding the hearing instrument industry is still a challenge, Dr. DiGiovanni said. “Nevertheless, consolidation in the hearing instrument industry brought greater market share to fewer players,” he wrote.
Competitive pressures, the financial realities of funding research and development, and in the case of publicly traded companies, shareholder demands, fueled the consolidation boom, according to industry observers. “One of the big benefits in consolidation is being able to merge businesses, take out overlap or duplicative costs, and increase the investment in product development,” Mr. Dozier explained.
Denmark's William Demant and Switzerland's Sonova are clear beneficiaries of consolidation. They “have definitely gained share in the marketplace in part due to that process,” said Alex Morozov, CFA, the director of Global Healthcare Research for Morningstar's Equity Research operation.
A few of the Big Six have diversified their operations by acquiring related businesses, such as diagnostic equipment and cochlear implant makers. In announcing third-quarter results this past November, William Demant noted that recent revenue growth in the diagnostic instruments segment of its business was due in part to acquisitions, including MedRx, a Largo, FL, manufacturer of PC-based audiometer boxes and other devices.
“I see no sign that consolidation in the hearing industry will slow. There are still niche companies and smaller manufacturers that are ripe for acquisition by the Big Six and others as each eyes a larger market share,” observed Eric N. Hagberg, AuD, the president of the Academy of Doctors of Audiology. “I would expect we will see an even greater quest to buy ancillary companies before they have the opportunity to compete or be acquired by someone else,” he added.
“I think everyone is trying to find a way to secure their customer base,” said Mr. Ruzicka.
Whether manufacturers profit on buying hearing care practices remains on open question. Mr. Morozov said he doubts it's a strategy that will boost manufacturer margins over the long run, considering the cost and difficulty of running retail operations.
FOLLOW THE MONEY
Manufacturers are using a variety of strategies to expand and secure channels of product distribution. Some of the deals involve significant investments in or outright purchases of hearing care practices.
GN Nord Store, now ReSound, acquired Beltone in 2000, and its distribution network today has more than 1,400 locations. A number of deals have been completed since then. William Demant, for example, acquired a 49 percent stake in American Hearing Aid Associates, a network of hearing health providers, for $50 million in 2001. It now has nearly 2,000 providers nationwide. Demant invested another $53.8 million for a 47 percent stake in Avada Audiology and Hearing Care Centers, with 280 locations in 20 states.
Sonova purchased Newport Audiology Centers for a reported $65 million in 2009, and it boasts more than 2,000 locations. The following year, the manufacturer acquired Hearing Planet for an undisclosed sum, and it now operates 1,200 hearing clinics nationwide.
The assets of Widex Hearing Aid Company, Inc., which operated for many years as an independent distributorship, were transferred into a newly created subsidiary, Widex USA, in May 2010. Widex blamed “market dynamics” in the United States for “overwhelming challenges” facing Widex Hearing Aid Co., including eroding margins and the need for significant investments.
A subsidiary of Siemens Hearing Instruments last summer swooped in with a winning bid of approximately $129 million to acquire HearUSA of West Palm Beach, FL, out of Chapter 11 bankruptcy. The Piscataway, NJ, manufacturer snatched HearUSA, a 2,000-member provider network, from a stalking horse bidder, William Demant, whose U.S. operations include Oticon, Bernafon, and Sonic Innovations. HearUSA had tapped Demant to be the initial bidder for its assets.
Siemens CEO Scott Davis maintained that the acquisition was the result of a few specific factors, not a shift in strategy or focus. The deal avoided layoffs of Siemens employees that would have resulted with the loss of the HearUSA business, and preserved the value of the manufacturer's investment in the network. Siemens was reportedly HearUSA's biggest supplier and one of its largest creditors. The deal also positions Siemens to leverage HearUSA's managed care contracts and exclusive relationship with AARP on behalf of its existing customers. (See FastLinks.)
“Unlike many other manufacturers who have made a strategic decision to own retail, Siemens is committed on being the world's leading hearing aid manufacturer,” Mr. Davis continued. He noted that Siemens launched the Aspire Rewards Program this past year, which provides free shipping, extended warranties, rebates, and marketing support to assist individual practices but not practice ownership.
Mainly the large transactions between manufacturers and providers get press, but how many deals slip under the radar? One manufacturer, in particular, buys out practices but doesn't brand them, according to a source familiar with the strategy. The true identity of its clinics remains hidden.
And many deals do not involve buyouts at all. Need cash to launch a practice or upgrade equipment? Most of the largest manufacturers will provide financing to health care providers in exchange for a share of a provider's hearing aid business, observers said. The money is readily available if the practitioner guarantees a certain percentage of his hearing aid sales to the manufacturer (often 80% to 95%, according to sources) or buys a certain number of the manufacturer's units.
Hearing aid manufacturers have had “the deepest pockets in the entire industry,” noted Alan L. Lowell, BC-HIS, the president of the International Hearing Society. “The little guy who didn't really have the funding was almost able to get that funding overnight,” he noted. Banks are often much less willing to write loans or extend lines of credit against existing practices or start-ups, especially in a skittish economy.
“If you wanted to open up an audiology practice, and you went to your Joe Banker and asked him for the funds to do that, you'll get rejected,” said Starkey's president, Mr. Ruzicka “There isn't enough of an asset base to support the request for funding to develop a business.” By contrast, the manufacturers look at it as an opportunity to establish “some type of relationship where we get a return on that investment,” he said.
From a provider point of view, dealing with one major manufacturer isn't necessarily a bad thing. “Keep in mind, for the most part, with all the major manufacturers, you've got excellent technology and there's tremendous similarities” from one company's product line to the next, Mr. Lowell added. “It becomes a lot easier to be able to familiarize yourself with the nuances of the technologies and the different models within that product line,” he said.
And practitioners can wrest a better price by agreeing to buy a certain number of hearing aids from a manufacturer. “If you buy quantity, you're going to pay a little less,” he said.
Given the many challenges facing today's providers of hearing health services — heightened competition, changes in the insurance market, and the coming glut of aging Baby Boomers, to name a few — having a partner that can provide marketing and business support services can help sustain a practitioner's business.
Amplifon USA, a unit of the Italian hearing aid distributor Amplifon SpA, acquired Sonus, a network of hearing health clinics, in 2002. In the years that followed, the company realized that running large networks of corporately owned stores would not be a successful strategy in the United States. By 2008, executives of the Italian parent company were citing problems with the Sonus clinics, from higher marketing expenses related to the brand's first television campaign to clinics lagging in sales and profitability, according to financial documents.
Over the past three years, Amplifon has been converting its Sonus stores into franchises. “We believe that a franchise model suits better the mentality in the U.S. market because there is still the desire and wish of the American people to have their own business and live the American dream. The other reason is that a business owner has a lot of skin in the game to successfully operate its business,” said Heinz Ruch, Amplifon USA's president and CEO.
Having restructured, the company is now poised to expand the medical franchise over the next couple of years, Mr. Ruch said. “We're offering opportunities for start-ups for people coming out of college and for existing practices to become part of the Sonus franchise,” he said.
From Amplifon's perspective, manufacturers moving into distribution poses challenges and opportunities. “If you are a large retailer, you never like to see that you are in competition with the manufacturer, your vendor,” Mr. Ruch said. On the other hand, “competition is also sometimes good for the business because it forces us all to do a more professional job.”
DWINDLING RANKS OF INDEPENDENTS
In the current environment, independent ownership is becoming less common. Determining the number of practices that remain truly independent, with no financial ties to a manufacturer, however, is difficult. “That's the best-kept secret in this industry,” Mr. Ruch noted.
A pair of analyses by David Smriga, the founder and president of AuDNet, Inc., a national network of audiology practices, provides some estimate of the dwindling ranks of nonaffiliated practitioners. Forty-six percent of 11,000 provider outlets in 2004 were independent practices with autonomous decision-making, he reported. By 2011, the provider universe increased to 12,000 outlets, but the ranks of independently owned providers fell to just 23 percent. The largest growth occurred among branded outlets and those that are affiliated with a corporation.
Corporate ownership of hearing care distribution does not bode well for audiology practice in the United States, according to Mr. Smriga, who argued that young audiology graduates will have fewer opportunities to start their own practices. “They're going to be wage-based employees whose salaries will be dictated by their employer, who could be a manufacturer or a corporate distribution company,” he said. Unlike AuDNet, the motivation of the corporations that distribute hearing aids is not to advance the practice of audiology but “to sell more hearing aids,” he said.
“If consumers saw this as health care and not as a product purchase, they may be inclined to look at the credentials of the provider as a key part of their decision-making,” Mr. Smriga added. “As long as that message is in control of people whose motivation is to sell hearing aids, that message isn't going to change,” he said.
Not everyone shares Mr. Smriga's pro-audiology point of view. A bigger concern for many independent practitioners is the difficulty of competing against corporations with fat marketing and advertising budgets. One Tampa Bay, FL, hearing health specialist, who asked not to be identified, said he sees “the Phonaks of the world or the Starkeys with Audibel listing 10 or 12 or 14 different locations in an advertisement” in the Tampa Bay Times. “It's very hard for us to compete, to even spend that kind of money, and if we do, we're taking a real risk in that, and we're having smaller black-and-white ads versus their full-page color ads,” the source explained.
When a hearing health practice agrees to turn over a majority of its business to a single manufacturer, “the consumer is not aware of the lack of choice,” the Tampa Bay practitioner added.
But Mr. Lowell of the IHS said he doesn't see a huge problem. “That dispenser is probably going to have marketing materials on the wall and in the office that will show that they're pretty much aligned with one or two manufacturers,” he said. “You go to the dentist for a crown. The last thing you're going to ask is, ‘Who makes that crown?’” he said. “You want to know that you're going to get great medical attention, and you're going to pay a fair price for that crown. Hearing aids should actually be marketed that way.”
Practitioners recognize that the business of hearing health care is changing and that efforts by manufacturers and other corporate giants to secure a slice of the distribution pie is just part of the evolution.
In the St. Petersburg, FL, marketplace, Karen L. Kuntz, HAS, the owner of Bay Area Hearing Care Professionals, said she experienced 22 percent growth on her four-store operation in 2011. Still, she said Sonova's practice acquisitions in the local market were “very stressful” because those clinics are getting a better price on products than she does.
Faced with reduced reimbursements, competition from hearing instrument specialists and insurance company requirements make it “a much more challenging marketplace,” agreed Susan E. Terry, AuD, the owner of Broadwater Hearing Care, also in St. Petersburg. “I have a nice practice with people who recognize that doing business with a local audiologist is a good thing,” she said, “but if I had not been doing this [for 23 years], I don't know that I would look at it the same way today that I did then.”
Dr. Terry and others said the most disconcerting aspect was another wrinkle in the distribution chain. This past October United HealthGroup's hi HealthInnovations unit announced a plan to make low-cost hearing aids available directly to consumers via a hearing test they can take on their home computers or eventually by using a mobile application designed for tablets and smartphones. The American Academy of Audiology, the ADA, and the American Speech-Language-Hearing Association have all been in contact with the company and the U.S. Food and Drug Administration to express concerns with the model and to inquire about its compliance with federal regulations.
“When you're ordering your hearing aid over the Internet, you've got a page of instructions, and that's it. You're not going to be successful,” she said. “And then people are going to be saying hearing aids are no good, when it's not the hearing aids necessarily that are no good; it's the fact that they didn't get any counseling or instruction. So I think it's going to affect everyone adversely.”
• Read HJ's cover story on AARP and HearUSA at http://bit.ly/AARP-HearUSA.
• The Hearing Journal article, “The consolidation of hearing aid manufacturing: Its causes and effects” is available at http://bit.ly/ConsolidationCauses.
• Read The Hearing Journal article, “In an era of corporate consolidation, can the independent still thrive?” at http://bit.ly/CorporateConsolidation.
• Comments about this article? Write to HJ at HJ@wolterskluwer.com.
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