Third-Party Referrals: Do They Provide Enough Financial Value?



Authors: Austin Singleton, Au.D. and Patty Greene, MA

For the independent provider, the need to maintain a profitable clinic is a daily concern. Even the most successful independents must focus on how to acquire and retain customers, stay competitive, and increase the bottom line. As a result, one of the most important questions to ask when making business decisions is, “How will this affect my clinic’s profitability?” Third-party referrals have been one of the more controversial topics of debate among providers over the past few years. Are they a positive—and have the potential to increase overall profitability—or a negative because they compete directly with the retail business? To answer that question, every independent provider needs to be able to calculate the economic value a third-party referral offers their clinic. To do this accurately, it is important to account for all factors related to profitability rather than only looking at topline revenue per sale. The most accurate way to do this is to calculate the profit per patient per hour (PPPPH). How to perform this calculation is explored in detail later in this article, but first it’s important to understand today’s consumer mentality and why third-parties are attracting them.
Why Hearing Aid Consumers Go Through Third Parties
The internet has played a major role in creating a hearing aid consumer who is more knowledgeable about hearing aid technology, pricing, and the many avenues available for purchasing them. Readily available information and online consumer reviews and recommendations often compete directly with the independent provider’s marketing in attracting consumers to a non-traditional path for purchasing hearing aids. Some of these paths include the provider and some do not. For example, direct-to-consumer options—like iHear Medical, BuyHear and Audicus—exclude audiologists altogether. On the other hand, many third-party referral companies—like TruHearing, EPIC, Hearing Care Solutions, and Hear.com, do include providers in the hearing care process. However, not all third-party companies attract the same types of consumers or operate in the same manner. Some use online direct-to-consumer marketing practices to generate leads, which are then funneled to the providers within their network. Others operate using a managed-care model by partnering with insurers to offer their services to members in the form of a benefit or discount. In both cases, audiologists are paid a professional fee—which varies by company—for dispensing hearing aids to these third-party referrals. Consumers who decide to go through third-parties may do so for some or all of the following reasons: (a) they believe their insurer, or the online channel is a trusted resource for hearing healthcare information and/or services, (b) they are attracted by the promise of saving money on their hearing healthcare, and (c) they believe they will receive the best overall value. 
Comparing Profit from a Retail Patient versus a Third-party Referral
Historically, average selling price (ASP) and total number of hearing aids sold have been strong indicators of the financial health of a retail clinic. However, this is no longer accurate because competitive market pressures have compressed margins on hearing aid sales and because not all hearing aid sales are out-of-pocket. Today, many providers work with a mix of hearing aid buyers - third-party referrals for which a professional fitting fee is paid to the provider and those patients who pay out-of-pocket. These market changes have made it necessary for providers to calculate profit in a new way – profit per patient per hour (PPPPH).

Audiologists who know their PPPPH, will be able to utilize this data to make informed financial decisions to maintain a successful clinic. For example, understanding their practices’ PPPPH can help audiologists determine if third-party referrals are a good financial fit for their practices, the financial impact of offering free hearing tests, or whether to shift their business to a medical model where patients are charged for value-based services, rather than continuing to focus on the income from the sale of a consumer product.
Gathering the Right Data to Measure Profit Accurately
It’s important to note that calculating profit per patient per hour (PPPPH) is not the same calculation or the same numerical value as how much profit your clinic needs to keep its doors open.

To calculate profit from retail patients and from third-party referrals, all factors which influence profitability must be measured and tracked independently for each type of patient. This is because not all metrics apply to both types of patients. For example, there is no customer acquisition cost or cost of goods for third-party referrals but there is for retail patients. Also, it’s important to keep in mind that these metrics will be different for each third-party referral company, therefore, PPPPH must be calculated independently for each third-party company as well. A closer look at what data points must be measured and whether they influence retail profitability, third-party referral profitability or both are shown in Table 1.
Table 1: Data needed to calculate profit per patient per hour
Metric Definition Track for retail, third-party or both patient types
Average Customer acquisition cost (CAC) Annual marketing spend divided by total # of sales opportunities, which include:
• All patients seen who were tested, screened, demo’d, trialed or recommended hearing aids even if they did not purchase
• Applies to retail patients only
• No cost to acquire a third-party referral
Average selling price (ASP) • Average sales price of hearing aids sold in the clinic
• Include all price points when averaging
• Retail sales: track ASP
• Third party referrals: track average professional fees paid
Average cost of goods sold (COGS) • Average cost to provider for all hearing aids sold in the clinic • Applies to retail patients only
• Providers don’t pay for hearing aids sold to third-party referrals
Average closing rate • Of the total number of patients seen in your clinic annually, what percentage buy hearing aids? • Track independently for both retail and third-party referrals
Average return rate • Of the total number of hearing aids sold annually, what percentage are returned? • Track independently for both retail and third-party referrals
Average number of hearing aids sold per patient • Total # of hearing aids sold divided by total # of patients who purchased
• Note – industry retail average is 1.721
• Track independently for both retail and third-party referrals
Average number of times the patient is seen after the fitting • Average # of visits per patient during the first 12 months, after the initial fitting? • Track independently for both retail and third-party referrals
Time spent on: hearing exam, fitting visit, follow up visit • Hearing exam
• Fitting visit
• Follow up visit
• Track independently for both retail and third-party referrals
Amount paid for: hearing exam, fitting, follow-up visit What is the average fee you are paid for:
• Hearing exam
• Fitting visit
• Follow up visit
• Applies to retail and third party referrals
• Track each type independently
Average transaction fees incurred for patient financing • Average fee incurred by the provider for patient hearing aid financing • Applies to retail patients only
• Provider does not incur a transaction fee for third-party sales


As Table 1 indicates, a multitude of factors influence profitability. Although it is not expected that the profit from a third-party referral will be greater than from a retail sale in the first year, many providers who have performed this calculation have been surprised that the profit margin was much closer than expected. Becoming knowledgeable about their specific clinic’s data further supported their decision to accept third-party referrals.
Calculating Profit per Patient per Hour
Once the data outlined in Table 1 is gathered, the profit per patient per hour (PPPPH) calculation can be completed. Providers are encouraged to contact their business or financial advisor for assistance with performing the calculation. Alternatively, for providers who wish to perform the calculations on their own, TruHearing has developed a simple-to-use tool, the “TruHearing Financial Calculator.” A short video demonstration of the calculator and how one provider uses it in his clinics can be viewed on YouTube titled “TruHearing Financial Calculator.”

Providers are invited to contact TruHearing Provider Outreach for a copy of the calculator at 855.286.0550 or provider.outreach@truhearing.com.

For a more in-depth look at managed care, its expansion in the hearing industry and how consumers are driving change, read “Managed Care: Threat or Opportunity” published in The Hearing Review, January 20183.    

This article first appeared at the Hearing Healthcare and Technology Matter (HHTM) blog in April 2019. It has been republished with permission from HHTM.
Dr. Austin Singleton, AuD., F-AAA, is Vice President of Provider Relations and Audiological Director at TruHearing.
Patty Greene, M.A., F-AAA, is Director of Provider Engagement, TruHearing and can be contacted at patty.g@truhearing.com.
References
  1. Strom Karl. 4MyBiz/Hearing Review, May 2016. The Hearing Review: Introduction to MT9, May 15, 2015.
  2. Abrams HB, Kihm J. An introduction to MarkeTrak IX: A new baseline for the hearing aid market. Hearing Review. 2015;22(6):16-23.
  3. Singleton A, Greene P. Managed care: Threat or opportunity? Hearing Review. 2018;25(1):24-26.