“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
― Upton Sinclair,
The American Dental Association’s (ADA) Health Policy Institute recently published a research paper1 addressing the need for a Loss Ratio for dental plans. In crafting their argument, the authors of the paper reveal their fundamental ignorance of how the dental insurance market works.
Using data made available by the State of California and through an exercise of tortured logic, the paper contends that because the dental insurance market is moderately concentrated, one solution to alleviating the effects of this moderate concentration would be to require all dental insurance companies to reach a minimum loss ratio for its dental policies sold in the state of California.
The study identifies that the dental insurance market is moderately concentrated based on the Herfindahl-Hirschman Index2. The major reason for this finding is the dominance of one company, Delta Dental of California. The authors identify two possible implications of a moderately concentrated market: higher premiums for consumers and lower reimbursement rates for providers.
Using the California data, they recognize that the dental premiums available to consumers has actually declined. over the two years of data they analyzed. Including data from a third year (made available after the paper was published) the trend of declining dental insurance rates is confirmed. So higher premiums is not the cause of their concern.
The American Dental Association’s concern is not the well-being of dental patients, but the well-being of dentists. Their primary goal is to protect the income of their members, dentists. With that in mind, they find some evidence that reimbursement rates for dental procedures paid by insurance companies may be declining modestly. The source of this data is from a lawsuit with Delta Dental of California. Reimbursement rates may be part of the problem.
Having been thwarted on their premium argument, and having inconclusive evidence on their reimbursement rate argument, they substitute medical loss ratio as a proxy. The medical loss ratio is simply:
Total claims paid
Total premium collected less taxes paid
The difference between Total Claims and Total Premium less taxes is administrative costs and profit.
In order to achieve the ADA’s goal of a medical loss ratio for dental insurance of 80% or 85%, there would have to be a decrease in administration costs, a decrease in profit, and/or an increase in provider payments.
Decreasing administration costs is most easily achieved through economies of scale. The bigger a company is and the more people it has to manage, the administrative cost per person will go down. So the large companies will have the advantage. Remember, Delta Dental of California is the largest.
Decreasing profitability can only be achieved through regulation. In economic parlance this is called price controls. Investors generally invest money in a business that has the possibility of making a return on their investment. Pension funds, like the California Public Employees’ Retirement System have a target return within their fund of 7%. So it stands to reason that investors in dental insurance companies would seek out a similar rate of return.
Right now, profitability for all dental insurance companies in California is around 6%. Limiting profitability beyond this level will only encourage business that are not achieving a sufficient return to leave the market. Fewer companies in the market will have the effect of causing additional concentration in the market, the cause of lower reimbursement rates according to the study authors.
Increasing provider payments, all things being equal, will require higher premiums. Clearly higher premiums is not good for the consumer. Higher premiums is also not good for the dentists. Higher costs means fewer people will spend money on dental insurance. Since most people rely on dental insurance to pay for their dental services, fewer people will seek out dental care. Lower demand without a concomitant reduction in supply will force dentists to charge lower prices, but since the prices are essentially fixed by the State, supply will have to shrink. Some dentists will either move out of state or just go do something else. The result is either lower income for dentists because of reduced demand, fewer dentists practicing or some mixture of both.
The Health Policy Institute, through its recommendations is more likely to harm the very constituency they aim to help, the dentists.