Where does an OEM hearing aid warranty stop, what are the benefits of extended warranties, and who is involved in each?
|John Ditzler is vice president of Ear Service Corporation (ESCO), Plymouth, Minn, a company that provides loss and damage coverage for hearing aids.|
In this series of articles, basic information on both hearing aid warranty and insurance policies will be offered to help hearing care professionals achieve a better understanding of the inherent differences and similarities between these products. We hope the reader will come away from this article better informed regarding the efficacy of these services, as well as the responsibilities to the end users.
The most basic type of warranty on any product is the Implied Warranty. These warranties offer assurances to consumers by manufacturers that products will perform as they are designed. When products fail to meet these standards, state laws require manufacturers to remedy the problem—namely, to either repair or replace the product or provide a refund for the returned merchandise.
For example, say you purchase a can opener. You have the reasonable expectation that it will open cans, because the manufacturer sells the opener for this purpose. If it does not, the cause for such a malfunction could be a design flaw. Such a mechanical defect is covered under the Implied Warranty, and the manufacturer is obligated to refund your money.
Imagine taking your shiny new opener out of the box to open a can of beans and having the machine fall apart in your hands. No beans, no opener. This defect is also covered under the Implied Warranty, and the manufacturer will likely send you a new, more solidly assembled opener. In both cases, the Implied Warranty covers consumers by assuring that the product will perform as intended.
An Express Warranty adds another layer of assurance to the consumer by specifically stating the manufacturer’s commitment to remedy problems with performance or defects in the product. These warranties are often incorporated in the paperwork received by consumers at the time of purchase, but can also include claims made in advertising and even verbal promises made at the time of purchase.
To extend our hypothetical case, when we open the box our can opener arrived in, we find an instruction booklet and a request for warranty registration. Our new product arrives with a written warranty, which outlines the manufacturer’s limits on what they will do in the event of product failure (and what constitutes a failure). These are commonly called the terms and conditions or, to use the industry lingo, the T’s & C’s. These list potential problems with the product and specifically outline what the manufacturer will do to fix them.
The 1975 passage of the Magnuson-Moss Warranty Act mandated the disclosure of warranty details by manufacturers to consumers. While the act applies only to written warranties, the transparency of warranties allows consumers to compare warranties and choose products based in part on the promises of manufacturers to stand behind their products. In effect, the act ensures a level of truth in advertising and strengthens the law protecting the end user. The act further mandates that manufacturers meet their warranty commitments within a reasonable time frame, assuring consumers that claims against the warranty will not be unduly delayed.
In regard to our industry, Express Warranties are required on hearing instruments by at least 20 states. Unique to our industry is the inclusion in many OEM (Original Equipment Manufacturer) Express Warranties of loss and accidental damage coverage, which is not required by Magnuson-Moss. In fact, the inclusion of this coverage is unusual when compared to the warranties of most consumer products. With comparison shopping in mind, hearing instrument OEMs have added this coverage as a value-added service to their products. This strategy is also employed in the lengthening of warranties from the industry standard of 1 year in 1995 to the current 3-year warranties offered on many high-end hearing instruments.
Extended Warranties and Hearing Aid Insurance
Express Warranties differ from Extended Warranties (often called service contracts) in that the latter require a separate purchase by the consumer for additional coverage on the product, and may be subject to regulation at state levels.
Some states regulate extended warranties just as they do insurance, while other states require vendors of extended warranties to meet specific minimum standards, such as maintaining financial reserves earmarked for the cost to cover claims and establishing underwriting guidelines. If those requirements are not met, the product may be considered by the state to be an insurance product and be subject to more stringent insurance regulations. Warranties that include loss can move the contract into the scope of insurance products, bringing whole new levels of regulation and requirements to all parties.
What’s important about this information is to understand the role of each player within the hearing health care industry when it comes to warranties.
Roles of Each Player
Manufacturers. As OEMs, hearing instrument manufacturers are required to offer Express Warranties to consumers. By increasing and expanding the coverage beyond any state requirement, it can be argued that OEMs in hearing care have established an inflated level of expectation (relative to other consumer products) in the market. Should warranties be brought back within the state requirements, there would probably be a backlash among consumers, and most particularly practitioners, to the perceived loss of value. Indeed, we have seen the power of buying groups and practitioner-based coalitions in recent years to pressure manufacturers into offering longer and more comprehensive warranties to add perceived value to the product. Apprehension about the potential negative repercussions to resisting this pressure has served to bind hearing instrument OEMs into providing costly warranties. The ultimate result is a higher price for hearing instruments.
Practitioners. Foremost for most hearing care professionals is consideration for practices that are in the best interest of their patients. From this perspective, offering extended warranties or service contracts is an easy decision. For literally a fraction of the cost of a new instrument, patients buy the assurance that their investments are protected and their out of pocket costs are limited. Patients value the service and the practitioner who recommends it. Selling peace of mind is always a great idea.
Weighing this principle against the objective of profitability, some practitioners question the astuteness of offering service contracts to their patients. After all, practitioners are skilled professionals and should be compensated as such. When a hearing instrument is replaced under an extended warranty or service contract, the practitioner may view the exchange as lost revenue to their practice.
Insure the Investment, by Tor Valenza. December 2006 HPR.
A Metamorphosis: How Changes in 1970s Marketing Transformed the Hearing Industry, by Steve Walsh. April 2001 HR Archives.
To offset this observation, third-party administrators (TPAs) often include both direct (from the insurer) and indirect (from the policyholder) fees paid to the practitioner when processing claims. The additional goodwill generated by the patient who believes the practitioner cares about them results in loyalty and helps to strengthen and build business. Additionally, if coverage is offered to every end user, rather than only those in higher-risk categories, the laws of probability work in the practitioner’s favor, and increase the potential to realize a net gain as well as the patient’s goodwill.
Third-party coverage. Third-party coverage offers benefits to both the OEM and the practitioner. By separating the contractual obligation from the OEM and practitioner, the TPA removes the obligation and risk from the other players, entering into a contract directly with the policyholder.
Imagine the practitioner who sells warranties independent of either the manufacturer or a TPA. What protection does the consumer have if, for example, the office goes out of business? Less dramatic but perhaps even more applicable, what happens when the practitioner wishes to sell the practice? Is the new owner obligated to honor the previously sold warranties? How will this burden impact the sale? Suddenly, what had been a revenue generator may become an unfunded liability.
Similarly, when manufacturers move toward TPAs to administer their extended warranties, liability shifts from the OEM to the TPA. OEMs are experts in their products; they are not insurance or service contract specialists. Shifting from the simple example of our can opener to any number of sophisticated electronics (not unlike a hearing instrument), there are numerous examples of OEMs and distribution networks that would never consider assumption of responsibility with this large of a scope. Even the Big Box retailers are reluctant to take on such a burden, in spite of the size and diversity of such stores.
This article has been designed to introduce HR readers to the rudimentary concepts behind hearing instrument warranties. The two articles to follow will answer more in-depth questions that are frequently asked about the subject. Specific questions from readers are also invited and can be addressed to the author (see e-mail address below).
Correspondence can be addressed to HR at [email protected] or John Ditzler, ESCO, 3215 Fernbrook Lane North, Plymouth, MN 55447; e-mail: .