Hearing aid sales slip back to norm, but leaders see growth potential (2005)

FigureAfter several years of relatively sharp ups and downs, the hearing aid market returned this year to its default mode: frustratingly slow growth. Through September 30, net unit sales in the U.S. totaled 1,673,713, just 2.7% more than the 1,629,478 hearing aids sold by manufacturers during the first 9 months of 2004, according to the latest statistical report of the Hearing Industries Association (HIA). Based on the typical relationship in recent years between the fourth quarter and the preceding three quarters, The Hearing Journal projects that 540,710 hearing aids will be sold in the final quarter of this year, bringing the total for 2005 to 2,214,423, or 3.22% ahead of 2004, when a record 2,145,378 instruments were sold (see Figure 1).Figure 1: U.S. hearing aid sales, 1995–2005. Information is derived from the Hearing Industries Association's quarterly statistical reports of unit sales reported by manufacturers. The 2005 figure includes a projection by The Hearing Journal of sales in the fourth quarter.Both the actual sales through September and the projected annual figure represent a departure from the recent past. In 2003 and 2004, sales increased by 4.9% and 7.5%, respectively, while in 2001 and 2002 the market shrank by 0.1% and 1.3%. However, the picture in 2005 was fairly typical of the past decade. Indeed, over the 10-year period from 1995 through 2004, the market increased by 35.7%, which reflected an average annual growth rate of just under 3.5%. The period of July through September 2005, in which 582,064 hearing aids were sold, broke the all-time record for a quarter of 573,788 set in the third quarter of 2004. However, the latest quarter's increase over 2004 was only 1.4%, less than the year-to-year gains in the first (+2.5%) and second quarters (+4.3%) of 2005. The typical annual growth rate of around 3.5% represents little or no change in the percentage of hearing-impaired people who wear hearing aids. That's because the increase in the nation's senior population plus the increasing prevalence of binaural fittings largely account for the modest gains seen this year and over the past 10 years. So, when it comes to market size and penetration, the story in 2005 is an old one. That's not to say there were no significant changes in other areas, such as technology, hearing aid styles, and the balance between the public and private sector shares of the market. In fact, there were some interesting developments. And, while it's easy to conclude that the market is permanently stuck in a rut of 3%-4% annual growth interrupted only by the occasional FDA action (see 1993–1994), recession (see 2001–2002), or recovery from one of the above (see 1995–1997, 2003–2004), that isn't necessarily so. In fact, as you will read, quite a few of the industry leaders interviewed for this article see trends and developments that have the potential to accelerate the market's growth rate in the future. But before looking at their comments, let's analyze the numbers for 2005. VA SALES DECLINE In most recent years, the Department of Veterans Affairs (VA) has accounted for a large share of overall expansion in the market (see Figure 2). This year, though, the opposite was true. Through September 2005, the VA purchased 5.1% fewer heading aids than during the same period last year. Since this agency is by far the largest single customer for U.S. hearing aids, accounting for almost as many sales as purchasers in the two biggest states (California and Florida) combined, the downturn in VA activity impacted overall market growth.Figure 2: The graph shows the rapid growth (until this year) of VA hearing aid purchases and of that agency's share of the total domestic market.As of September 30, hearing aid sales to everyone except the VA had risen by 4.0%. However the decline in VA purchases cut the overall increase to 2.7%, and its share of the total domestic market shrank from 14.9% in 2004 to 13.8% this year. This is one of the few recent years when VA hearing aid purchases declined from the previous year and the first in a decade that they represented a diminished share of the total domestic hearing aid market. From 1998 through 2004, the number of hearing aids sold each year to the VA more than doubled, rising from 148,795 to 319,799, and its portion of the U.S. market climbed from 7.9% to 14.9%. Possible reasons for the downturn While VA hearing aid purchases declined from 242,935 in the first 9 months of 2004 to 230,497 this year, Lucille Beck, PhD, the director of the VA's Audiology and Speech Pathology Services, noted that during the agency's fiscal year, which ended September 30, 2005, its purchases were essentially unchanged from the previous fiscal year. However, that was still quite different from the recent past in which VA audiologists had fitted significantly more hearing aids almost every year. Beck cited several factors that may help explain the lack of growth in the latest fiscal year, but added that it's difficult to determine how much each of them contributed to the outcome. One possibility, she said, is that after a long period of serving an increasing number of people each year, the VA may have caught up with the pent-up demand for audiology services among eligible veterans. She observed that the waiting time for services has become shorter recently, which suggests a reduced backlog. Another possible factor, said Beck, is that the VA's increased focus on maintenance and repair of hearing aids has extended their average lifetime and deferred the fitting of replacement instruments.FigureThe former American Academy of Audiology president also noted that, as was widely reported, the entire agency was underfunded by nearly $1 billion for 2005. In testimony last June before a House Veteran Affairs Committee hearing, Jonathan Perlin, VA undersecretary for health, explained that because of a flawed forecasting model the agency had greatly underestimated demand for its healthcare services, especially from veterans and reservists injured in Iraq and Afghanistan. The VA had predicted a 2.5% increase in the cost of providing healthcare in 2005, but that turned out to be only half the actual increase. Congress approved $975 million in supplemental funding to cover the 2005 shortfall, and the VA requested another $1.9 billion supplement to its 2006 budget to cover healthcare services. Beck said that budget issues caused the VA to cut back on contracting out audiologic services to private clinics, thereby reducing its dispensing capacity in 2005. However, she is uncertain how much that affected the number of hearing aids dispensed. MARKET NEARS 90% DIGITAL On a more predictable note, the hearing industry moved closer than ever in 2005 to becoming entirely digital. Some 88.6% of hearing aids sold during the first 9 months used digital signal processing (DSP), compared with 83.2% last year (see Table 1). In this area, the VA led the way, with 99.5% of the instruments it bought this year being digital. The agency's 2005 contracts with manufacturers require them to supply DSP products.Table 1: Breakdown of domestic sales by product type, for January-September 2005 and for all of 2004. Information is derived from the Hearing Industries Association Statistical Reports for 2004 and 2005. Note, as of this year, HIA no longer collects statistics on the small number (fewer than 1000) of eyeglass and body-worn hearing aids sold.As recently as 2002, fewer than half the hearing aids manufactured in this country were digital. However, this technology has quickly gained dominance. During the third quarter of 2005, 89.8% of sales were digital, an all-time high. BTE RESURGENCE ACCELERATES The continuing comeback of the behind-the-ear hearing aid picked up steam in 2005, as this oldest of still-popular styles increased its market share from 26.4% in 2004 to 31.3% thus far this year (see Table 2). In the third quarter, BTEs represented more than a third of the instruments sold in the U.S.Table 2: Unit sales by state, with % of increase (or decrease) from previous equivalent time period. (Δ =difference). Information is derived from the Hearing Industries Association Statistical Reports for 2004 and 2005.After being the dominant style of hearing aid in the 1970s, BTEs lost ground in the 1980s and early 1990s to custom in-the-ear and in-the canal styles. In 1992, their share dipped to 17% in the U.S., though they always remained popular in Europe. In the 1990s, BTEs began to regain ground, in part because it was easier to fit digitally programmable and DSP circuitry into the larger space provided by this type of device. More recently, the increasing use of directional-microphone technology was another factor. However, this year's sharp increase in BTE sales was fueled largely by the fastest growing trend in hearing aids—the wide use of inconspicuous mini-BTEs (and “on-the-ear” devices, which HIA categorizes as BTEs), most of them using open fittings. Not coincidentally, completely-in-the-canal (CIC) devices, previously seen as the least visible style of hearing aid, lost popularity in 2005, as their share of the market declined to 12.2% from 14.3% last year. MOST STATES REGISTER GROWTH Although the hearing aid market has seen only modest expansion thus far this year, 38 of the 50 states and the District of Columbia recorded gains through September (see Table 2). The most pronounced regional pattern was strong growth along the south Atlantic coast, from Florida, where sales increased by 9.7% over 2004, all the way north to Maryland (+9.0%) and Delaware (+13.9%). Georgia (+13.6%), South Carolina (+9.3%), North Carolina (+12.0%), and Virginia (+11.6%) all enjoyed double-digit or close to double-digit increases in unit sales. Otherwise it was hard to discern any regional trends. While sales declined in two of the Great Lakes states (Minnesota and Indiana) and gained slowly in most of the rest, Michigan posted a whopping 15.2% increase. The largest percentage gains came in two small states: Maine (+24.6%) and Alaska (+15.3). The biggest losses were in Oklahoma (−12.0%) and North Dakota (−10.3%). While Hurricane Katrina seems certain to cut severely into 2005 sales in Louisiana and somewhat in Mississippi, most of its impact will not appear until the fourth quarter. California won the prize for consistency. By September 30, 2004, customers in that state had purchased 159,313 hearing aids; this year the figure was 159,318. INDUSTRY LEADERS EXAMINE TODAY'S REALITIES AND TOMORROW'S PROMISE Despite improvements in technology and advances in education and training of hearing professionals, the 20% or so of the U.S. hearing-impaired population that had hearing aids 15 years ago when the first MarkeTrak consumer survey was conducted remains essentially unchanged. Why has there been no meaningful growth? And, more important, what are the prospects for increasing market penetration in the future? Leaders of the major U.S. hearing aid companies were invited to weigh in on these issues. And, while those interviewed are all industry veterans who know from experience how elusive market growth is, several see grounds to believe that the future will be better than the past. But first let's look at some of their thoughts about the lackluster performance of 2005. SHORT-TERM, LITTLE CHANGE ANTICIPATED Randy Raymond, chairman of HIA, said, “Overall, we are going in a positive direction,” but he acknowledged, “The growth is not as strong as we would like.” Between slow economic growth, the war in Iraq, and Hurricane Katrina and other catastrophes, he said that consumers are feeling “unsettled,” which is bad for hearing aid sales. Raymond, who is vice-president and general manager for global hearing aid batteries at Spectrum Brands (formerly Rayovac), said that the sharp drop in consumer confidence in October reported by the Conference Board reflected the public's uncertainty.FigureAlan Dozier, chief operating officer of the GN ReSound Group, said, “With all the performance improvements, the question is, why do we continue to get 2%, 3%, and 4% growth?” Dozier admitted, “I don't have any magical answer,” but noted, “It's one thing to improve technology, but translating that to consumers so they understand the benefits is quite another matter.” He said that the basic problem is that “we're selling a product that people don't want to wear.” And, despite continuing improvements, he said, none of them stimulates a “wow” response from most consumers. The GN ReSound executive also said, “As an industry, we still are not reaching out to the consumer. Not a lot of consumer advertising is being done to build confidence in hearing instruments and build brand awareness.” Peer Lauritsen, president of Oticon, Inc., said, “It's disappointing to see that the penetration rate has not changed even though we all believe we are doing a better job and consumer satisfaction rates are the best we've ever had.” Moreover, said Lauritsen, the price of hearing aids has increased very little over the past decade. Since the average lifetime of hearing aids has risen by more than 6 months, he calculates that, despite the rise in the price they pay, today's hearing aids are costing their owners only about $100 a year more than they did in 1995. “I'd like to know what other medical device has increased so little in price in 10 years,” he said. Lauritsen pointed out that the current slow growth is nothing new, but rather is about average for the past 15 years. While, as will be discussed, the Oticon leader expressed hopes for future growth, he said he doesn't expect any significant change in 2006. Three executives from Amplifon U.S.A. offered a somewhat different perspective, as they discussed how steps their company, the U.S. division of the Italian-based Amplifon, has taken have led to growth greater than the market as a whole. Bob Wabler, president of the company; Paul Erickson, senior vice-president of non-corporate sales; and Michele Fusco, senior vice-president of professional development, emphasized Amplifon's focus on consumer satisfaction and on training its dispensing partners to share that focus. Although Amplifon U.S.A. does not manufacture hearing aids, through its ownership of Miracle-Ear, Sonus Corp., and National Hearing Centers, it is the nation's largest distributor of hearing aids, with nearly 250 company-owned practices and about 1100 independently owned affiliated practices.Figure“We are completely focused on the customer,” said Erickson, who believes that's the crucial factor in the company's 6% growth in revenues in the first half of 2005 (mostly organic) and the 13% growth in Miracle-Ear (all organic). Wabler especially emphasized the importance of after care. He said, “Sergei Kochkin has shown that even minimal post-fitting rehabilitation increases patient satisfaction. We've taken what he has taught us and put it into practice.” Doing this requires extensive training of dispensers in Amplifon's networks, said Fusco, since “the key to consumer satisfaction is the person who fits the hearing aid and follows up.” While he joked that he didn't necessarily want competitors following Amplifon's lead, Wabler said that more focus on customer satisfaction could lead to market growth throughout the industry. Notwithstanding the small up tick in the HIA statistics for this year, Jerry Ruzicka, president of Starkey Laboratories, said, “I view what's happening as no growth at all.” What's more, he sees no reason to expect better in 2006.FigureHe explained what he believes is a primary factor holding the industry back: “One thing we see is that the technology has outpaced our ability to apply it effectively. The first digital hearing aids were not much different from analog in what they could do. But now digital signal processing allows us to do many things that we were not capable of doing with analog.” However, said Ruzicka, “We are not consistently delivering the level of performance to consumers that we are capable of.” That, he said, is because when today's DSP hearing aids are fitted, often the fitting does not take full advantage of their capabilities. That's not surprising, he said, since modern digital signal processing has fundamentally affected how hearing aids are fitted and verified. IN THE FUTURE, GREATER POTENTIAL SEEN Despite the hearing industry's past and present failure to make greater inroads into its target market, the consensus of the leaders who spoke with The Hearing Journal is that substantial growth in the future is a realistic goal. What's more, they have firm ideas of what could fuel it. Given his belief that the industry's delivery system has fallen behind the technology, Ruzicka sees an ongoing HIA-led initiative as holding out promise for improving the delivery of hearing instruments to consumers. The initiative, called “Exploring the Consumer's Journey,” was conceived during Ruzicka's term as chairman of HIA and began last May with a series of focus groups of hearing-impaired persons, some who wore hearing aids and some who remained unaided. The purpose was to learn directly from consumers about their experiences in accessing and using hearing care. On November 16, representatives of HIA and all the major professional organizations in hearing care were scheduled to meet in Washington to review the results of the focus groups and develop a new agenda aimed at improving the delivery of hearing care services. Carole Rogin, executive director of HIA, said that participants at the meeting would seek to identify the two or three most critical priorities for achieving this. Ruzicka, among others, places particular importance on consumer input because, he explained, the existing consumer base is the best source of future referrals of new patients. The Starkey president also believes firmly in the potential of the Hearing Aid Assistance Tax Credit Bill (HR 414) to increase the use of hearing aids. The bill would provide a $500 tax credit for each hearing aid purchased for a person over age 55 or for a child 18 and under. HIA has been a leading advocate for the measure, which also has strong support from most professional organizations and consumer advocacy groups. While the bill, which was introduced by Jim Ryun (R, KS) and has 83 sponsors in the House of Representatives, is unlikely to become law this year, Ruzicka said the industry must make an all-out effort to get it passed in 2006. He said that enactment of HR 414 would not only make hearing aids more affordable to millions of Americans, but would have the additional benefit of raising hearing health awareness. Lauritsen was one of several industry executives who pointed to the emergence of high-quality, very inconspicuous BTE hearing aids as a driver of future growth in the industry. While he said it's too soon to know if these devices are attracting new users or being dispensed to people who would otherwise have bought some other style of instruments, the Oticon president considers them an encouraging development.FigureHowever, in his view, the industry faces two fundamental tasks if it is to get beyond its history of slow growth. He said, it must “increase the confidence of the consumer in the delivery system” and “attract younger people, who may be especially health-conscious.” The latter goal will become especially relevant over the upcoming decade as the oldest members of the giant baby boom generation start moving into their 60s. HIA chairman Raymond identified various factors that could add up to greater long-term growth. Among these are the continuing educational efforts of the Better Hearing Institute, the aging of the baby boom generation, and increased awareness of health issues among Americans. Alan Dozier does not expect any particular breakthrough in hearing aids to create the kind of “wow” reaction among consumers that could generate a dramatic growth spurt. However, he pointed to a “continuum of incremental improvements” that together have the potential to expand the market significantly. One of these advances, which GN ReSound helped pioneer and that Dozier expects will continue to win consumer acceptance, is the increased use of open-fitting hearing aids, which provide more natural sound and address the occlusion effect. These, often packaged in smaller, more discreet BTE models, are a positive trend, said Dozier.FigureAnother aspect of the “continuum of improvements,” he said, is the trend toward providing more features in less expensive hearing aids. He said, “A mid-price hearing aid of today is far more feature-rich than it was only 12 to 15 months ago.” He added, “This phenomenon is still in its very early stages. I think we are going to see better and better technology at more and more affordable prices.” HOPE TEMPERED BY CAUTION So, what do these comments from some of the hearing industry's leading figures add up to? Certainly none of them anticipates some revolutionary product suddenly emerging that will give wearers back the hearing they had at age 18. Nor does anyone expect the widespread societal stigma toward hearing aids to disappear. However, despite having watched the hearing market grow at a painfully slow and unsteady pace over the past or years, the executives interviewed for this article see a of factors emerging that, in an for those who manufacture and hearing aids to make inroads into the of with hearing to that the of the generation time for and there seems reason for that the hearing aid market's future will be than its past.