Earlier this week, I had to go to the dentist as I was having a sharp pain in the same tooth which had a root canal performed on it earlier this year. I checked in, and the basic dental coverage I get through Duke basically is a buyer’s club discount card coverage. The in-network dentist office accepts the insurer’s fee schedule as the maximum allowable rate and the insurer pays a very small percentage of the claims. I paid the rest out of pocket. Forty minutes, an X-ray and
Dr. Marika Cabel’s award winning paper on post-facto adverse selection explains why dental insurance is barely an insurance product and it is more of a buyers club card. A significant portion of dental conditions that require treatment can be delayed into a future contract year if there are richer benefits available.
Because insurance coverage is typically determined by the treatment date, individuals may have
incentives to strategically delay treatments to minimize out-of-pocket costs. The strategic delay of treatment—a particular form of moral hazard— can be an important source of subsequent adverse selection, in which ex ante identical individuals select insurance coverage based on their differing accumulation of previously delayed treatments. This paper investigates these forces empirically in the context of the missing market for dental insurance. Using rich claim-level data, my analysis reveals that approximately 40% of individuals strategically delay dental treatments when incentivized to do so, and this flexibility in delaying treatment can explain why the market for dental insurance has largely unraveled.
When I signed up for dental insurance, I had no knowledge of my future claims probabilities besides two regular cleanings and an X-ray as I was going to be a new patient for the North Carolina practice. I was not a prospectively adverse selection risk. I could make a decision on the basis of premium and coverage.
40% of individuals have any dental coverage, and those with coverage actually have little insurance against dental risk. The typical dental “insurance” policy provides very incomplete coverage owing to a low annual maximum benefit, which is on average $1,100. Above this maximum benefit, “insured” individuals must pay the full cost of services.4 Although dental care can involve considerable uncertainty and financial cost, available policies tend to offer no coverage for
large, urgent dental expenditures.
Instead dental “insurance” is a combination of a pre-paid maintenance schedule where a significant proportion of premiums are used to pay for routine preventive office visits where the insurer leverages its membership pool to get good rates, and minimal limited insurance for bad things that surprisingly happen like the need for a root canal after tooth pain had limited me to sleeping only a few hours a night for several weeks straight.
Most dental expenses excluding root canals (as Dr. Cabel demonstrates) are deferable for a couple of months. If there was a policy that offered great benefits with a low deductible and a very high out of pocket cost, the people who are told that they need an implant or a cavity filled or anything else that can be delayed for a couple of months would delay treatment from the low cost and skimpy plans to the rich benefit plan.
She notes that most dental contracts are one year contracts. This one year contract feature offers a potential policy solution; extending the length of a dental insurance contract would most likely allow insurers to add insurance like functionality to the dental coverage. People may be willing to wait six months for better coverage to get a cavity treated but they are less likely to wait twenty three months for the better coverage to kick in. Also, fewer switching opportunities and longer shadows of the future will change behavior.
This paper has been stuck in my head for a while and as I was waiting for the dentist to check out my teeth earlier this week, I figured that I needed to share why dental insurance is mostly a buyer’s discount club card rather than decent insurance.