The Rise of Managed Care in Audiology Warrants a Different Economic Model with Separate KPIs



Dan Quall, MS and Brian Taylor, Au.D.

The business of providing hearing services is changing. Unlike days of yore, when a licensed hearing care professional could fit a dozen hearing aids per month and earn a living, today’s audiologists are faced with numerous issues that are impacting the top and bottom lines on their profit and loss statements. The availability of hearing aids through big box stores, third party contracts and over-the-counter devices is changing the way audiologists, especially those in private practice are dispensing products and services.

Let’s take one of those issues, third party contracts and examine it more closely. We know, for example, that Medicare Advantage programs offering a hearing aid benefit to their members have increased from 47% in 2015 to 73% in 2018 and, given the astronomical numbers of baby-boomers turning 65 every day (10,000 per day in the US), that percentage is expected to increase. Additionally, recent industry reports1 suggest that by 2023 15% to 20% of hearing aid purchases in the US private market could be partly insured with a third party benefit, and that percentage is expected to grow throughout the 2020’s.

To understand both the threat and opportunity facing audiologists with respect to third party contracts, it is helpful to compare the economic model of managed care contracts with the traditional private pay economic model for the commercial distribution of hearing aids.
Figure 1. The out-of-pocket private pay economic model: where the money goes


Figure 1 outlines the traditional economic model of the private-pay hearing aid business in which the patient incurs 100% of the out-of-pocket expenses. Using an industry benchmark for retail average selling price of $2200, Figure 1 shows how the gross revenue per unit is distributed. Note that about 40% of the gross revenue per unit is distributed to the hearing aid manufacturer, while approximately 22% of the gross revenue accounts for acquisition costs accrued by the practice. Although acquisition costs vary widely, conventional wisdom suggests a typical stand-alone private practice spends a substantial percentage on marketing costs such as direct mail advertising, physician outreach, and maintenance of a website – all of which are acquisition costs. At the end the day, the traditional private pay economic model leaves about 35% of gross revenue as a margin for the practice.

This gross margin is then used to pay several costs, including salaries, rent and utlilities.

The rise of managed care contracts, with their mandate to control costs and improve utilization of services for their members, necessitates the need for audiologists to manage their business using a different economic model. That model is shown in Figure 2.
Figure 1. The managed care economic model: where the money goes


Note that the patient’s out-of-pocket costs are about two-thirds less compared to the traditional model, with the remaining costs shared by the managed care company (spread across its entire membership in the form of a monthly fee). Also, notice that per-unit gross revenue, on average, is substantially lower than the traditional private pay market. This lower gross revenue number, compared to the traditional economic model, is a by-product of the managed care company’s involvement in the transaction, which is obligated to control costs for their membership. (Without the ability to control the overall costs, and thereby provide their members with a “better deal” on hearing aids,the incentive for consumers to purchase through a managed care contract would be nearly zero.)

As Figure 2 shows, gross revenue is lower in the managed care economic model, providers have zero acquisition costs. Importantly, managed care contracts, with their lower out-of-pocket costs for members, are believed to have the ability to attract new, motivated hearing aid users into a practice. This is a benefit to all stakeholders in the economic relationship (manufacturers, insurance companies and clinics) as survey data from MarkeTrak 9 suggests that patients with a hearing aid benefit are 20% to 50% more likely to purchase hearing aids if they have an insurance benefit.2

In essence, a managed care economic model asks providers (and manufacturers) for a trade-off. In exchange for access to a pool of new, motivated hearing aid users, providers must give up some margin. It must be noted, however, that the managed care economic model complements, but does not replace, the traditional private pay economic model for hearing aids. Over the next decade or more, these two models are likely to stand side-by-side, each with advantages and limitations for both the patient and the business.

Since managed care contracts use a different economic model to attract patients and distribute revenue, a separate set of key performance indicators (KPIs) are needed to effectively manage this growing part of the business.

Table 1 outlines some of the KPIs that need to be managed in an audiology practice that accepts third party contracts. Each of these KPIs should be compared to similar data from patients that move through the business in the traditional 100% out-of-pocket” route. In addition to managing a different set of KPIs, clinical time spent with each patient, rather than simply the number of hearing aid units dispensed, must be managed carefully. Given the lower revenue per unit in the managed care economic model, clinicians must be cognizant of how much clinical time they are spending with each patient, and thus must work to optimize their time spent with each patient without compromising quality of care. Now, more than ever, time equals money.
Table 1. Examples of KPIs for a Managed Care Business Model
Managed Care KPIs Benchmarks
New Patients Per Month8
Acceptance Rate85%
Revenue for Practice Per Patient (fitting fee per ear and testing fee) $990
Number of Appointments Per Patient Over First Year (post fitting)4
Time Spent Per Appointment (average)45


The benchmarks shown in Table 1 serve as rough examples of the types of KPIs that need to be measured in a practice that accepts Medicare Advantage contracts intended to supplement their traditional bread and butter private pay business. Each practice is advised to devise their own set of KPIs that are specific to the needs of the practice. Those shown in Table 1 serve only to make a critical teaching point: Revenue per patient, which is derived from the fitting fee, needs to be measured in relation to the number of appointments per patient and time spent per patient. In the example above, the practice has established the benchmark for appointments over the course of the year at 4, along with a time allotment of 45 minutes per visit. Of course, these are benchmarks and some patients will indeed require more time, but the practice should create and train staff to meet the established benchmarks whenever possible. The use of these KPIs for the managed care side of the business culminate in the all-important use of revenue per hour as a KPI to gauge the financial health of an audiology practice. We examine this KPI next.
Revenue Per Hour is a KPI
The previous section should make it apparent that benchmarking and calculating revenue per clinical hour is an essential KPI in a business that accepts managed care. As the business model changes, and managed care contracts become more widespread, there is a need to change the manner in which we benchmark and measure business outcomes. The standard KPI of gross revenue, units sold and average sale price (ASP), historically utilized to measure success may no longer provide all financial information necessary to make critical business decisions.

Given the current industry trend toward tighter margins, unbundling, and fee for service models, the one financial indicator that bridges both economic models discussed in the first section of this article that providers may consider adding to their financial analytic toolbox of KPIs would be the measure of Revenue Per Hour (RPH).

To understand the relevance of RPH, it is important for clinical managers to recognize how RPH would apply for a traditionally “bundled” hearing aid sale. To make the RPH calculation two data values are required, service time and gross margin*.

The service vs. time model in Table 2 was developed to understand the total clinic hours spent by a clinician with a typical patient purchasing hearing aids and subsequent services for a five-year period. The following assumptions were made for this model:
  • First time wearer of product
  • Binaural purchase
  • The model represents an “average” or “typical” treatment plan (Some patients require more visits, some fewer)
  • A binaural set of hearing aids will require three repairs within a 5-year period. One repair each year after year 2. (based on manufacturer repair rates)
  • Repair costs and margins for the out of warranty repairs are not included in the calculation
Table 2. Service vs Time Model
5 Year Model
Appointment Type (time in Hours)
Years
Test/HAE
Fit
CHK1
CHK2
6-month Check-up
Annual Check-up
Repair
Total
Cumulative Total
Y1
1
1
.5
.5
.5
1
-
4.5
4.5
Y2
-
-
-
-
.5
1
-
1.5
6
Y3
-
-
-
-
.5
1
.5
2
8
Y4
-
-
-
-
.5
1
.5
2
10
Y5
-
-
-
-
.5
1
.5
2
12
Total
1
1
.5
.5
2.5
5
1.5
12
40.5


The model shows a total of 17 patient visits with 12 hours of clinician time spent with the patient over five years. Two of the appointments were directly related to the dispensing of the product and 15 were provided as follow-up and continuing service. The model was validated as “typical” for a first-time wearer of hearing aids with more than 30 practice owners in a continuing education class by the author in 2015. Additionally, representatives of Amplifon, in a presentation to the FDA in 20174, reported an average of 15.1 visits for follow-up and check-up appointments (excluding the dispensing appointment) based on analysis of 21,881 patients receiving products in 2010 and receiving continuing services through 2015.

Next, financial analysis must be completed for a bundled sale to obtain the gross margin (not the gross revenue) per fitting. In the 2017 survey data from Phonak3, results provided for the median bundled hearing aid sale was reported as $2,297 monaural or $4,594 binaural. Assuming a wholesale cost of goods of $758 per unit or $1516 for two units (33% COG, use your specific business data) the gross margin for this “Advanced” set of hearing aids would be $3,078.

The RPH for this treatment plan, given new hearing aids are not purchased before five years, would be as follows:
Gross Margin, $3,078, divided by clinical hours (12) = $257/hour or $257 RPH.

A summarization of what we know using this calculation: If a bundled hearing aid treatment plan is dispensed at $4,594 and the patient follows the typical follow-up and treatment plan, the clinic will have realized gross margin of $257 for each hour spent with the patient.

The next two questions:
  • Is $257 RPH healthy for the clinic?
  • Why is this rate important to a clinical manager?
To answer the first question a macro gross margin was calculated to determine an aggregate RPH for a full year of financial data. Again, utilizing data from the recent Phonak3 study the following was calculated for a median practice:
Median Gross Revenue $510,000
Median Gross Revenue from Hearing Aid sales: 71% ** $362,100


RPH calculation:
Gross Margin from hearing aid sales: 68% of hearing aid sales $246,228
Gross Margin from services and other products: 27.5% $140,250
Total Gross Margin for all sales and service $386,478
Median Hours reported per clinic 2080
Median Aggregate Gross Margin per hour $186 RPH


A summarization of what we know using an annual RPH calculation: Given an office that grosses $510,000 annually, based on median reported clinical activity, the providers are generating $186 for each hour spent with a patient for all activities provided by the clinic. The difference between the Gross Margin by product vs. gross margin aggregate is $71 per hour. This difference is possibly due to lack of efficiency by appointment type, giving away services for no charge, billing inefficiency or some combination of all them.

Of more relevance is our second question. Why is this important? As a hearing healthcare business contemplates inclusion into healthcare/hearing aid contracts or expansion to a multi-disciplinary model, the business manager needs a metric that provides an “apples to apples” comparison of revenue by potential services. Using the RPH metric, we can finally compare our bundled hearing aid service models with other non-bundled services whether it is cochlear implants, tinnitus therapy, balance assessment or a fitting fee. Consider the following example.

Should a clinic sign up in network to accept the following fitting/service fee for contracted hearing aid services?
  • Testing fee: $75
  • Fitting fee: $425 per ear
  • Required visits for the fitting fee: Dispensing session, and three follow-up appointments
  • Additional appts: $65 per visit or an annual service contract of $250
Based on the service model above and assuming a binaural fitting, a calculation of required hours vs. reimbursement for the initial fit and follow-up would look like this:
Clinical Time Reimbursement
Test 1 hour $75
Fit 1 hour $850 (bilateral)
CHK 1 .5 hour $0
CHK 2 .5 hour $0
CHK 3 .5 hour $0
Total 3.5 hours $925


The RPH, $925/3.5hrs, equals $264 RPH. Compared to an Advance Bundled RPH of $257 or an aggregate RPH of $186, this would appear to be excellent. The difference is, however, in a bundled scenario the patient has “pre-paid” for nine additional hours of service, in the future, at a rate of $257 per hour. The calculation for the contracted services should also be done looking at revenue over five years. That calculation would look like this:

Clinical Time Reimbursement
Test 1 hour $75
Fit 1 hour $850 (bilateral)
CHK 1 .5 hour $0
CHK 2 .5 hour $0
CHK 3 .5 hour $0
5 years 5 hours $1250 (5 yrs X $250)
Total 12 hours $2175


The RPH, $2175/12hrs, equals $181 RPH. Compared to an Advance Bundled RPH of $257 or an aggregate RPH of $186, this would appear to still be reasonable. It becomes even more attractive with the additional value of the “three R’s” provided by a new patient; Repeat business, Related purchases (batteries, repairs, ear wax removal, etc.) and Referrals. When it comes to analysis of contracts it’s not what you are reimbursed, it’s how much time is required for what you are reimbursed. This article hopes to provide some of the essential elements of calculating revenue per hour and KPIs that need to be measured in a business that accepts third party contracts.    

Dan Quall, MS, is Director of Managed Health Services for Fuel Medical Group, Camas, Wash, and has worked since the 1970s in private practice, dispensing networks, and hearing aid manufacturing.
References
Bernstein Report, 2018

Abrams HB, Kihm J. An Introduction to MarkeTrak IX: A New Baseline for the Hearing Aid Market. Hearing Review. 2015;22(6):16.

http://www.audiologist.org/about/ada-news-archive/1797-phonak-benchmarking-survey

https://www.ftc.gov/system/files/documents/public_comments/2017/05/00125-140808.pdf