7 Financing Dental Care
Health care historically has been provided on a fee-for-service basis, in which the patient pays the provider directly for services. This two-party system is a private contract involving only the provider and the patient. Methods of financing health care in the United States, however, have progressed far beyond this traditional system since the mid-1930s and especially since 1965. A fundamental change has been the emergence of third parties, meaning that the financing of health services is no longer a matter of a purely private contract between provider and patient. In 2001, for example, 86% of the total outlays for health services and supplies involved a third party, and 46% of all health care services were paid for by government funds.57 Dentistry’s entry into the third-party system has been more recent, but third-party involvement in the payment for dental care is now a major and still-evolving part of dental practice.
To understand how dentistry fits into third-party payment, a review of insurance principles is helpful. During the years after World War II, when medical insurance was growing rapidly, dental care was one of the “fearful four” areas of health care (dental care, psychiatric care, prescription drugs, and long-term care) considered uninsurable by commercial insurers. This reasoning was based on the assumption that the nature of dental need violated the basic principles of insurance,22 which state that to be insurable a risk must be the following:
All health insurance violates some of these principles. For example, many of the benefits paid by health insurance represent relatively small amounts of money, and people with insurance are more likely to use care than those without it.37,42 Insurance carriers found they could get around these problems in several ways, such as the following:
Requiring patients to pay part of the cost of some services is an economic disincentive to overutilization. The portion of the cost of the service that a patient pays is either a deductible or coinsurance (sometimes called copayment). A deductible is a set amount of money that the patient must pay toward the cost of treatment before benefits of the program go into effect.4 A familiar example of a deductible is the “front-end” payment of a claim under automobile insurance. Coinsurance means that the patient pays a percentage of the total cost of treatment.4 For example, if a patient is to pay 20% of the cost of an amalgam restoration, the amount the patient must pay varies depending on the approved fee for an amalgam but in any case will be 20% of that fee.
Insurance carriers also limit the range of health care services covered: some services are paid for and some are not, according to the plan. This is termed coverage, covered charges, or schedule of benefits. Examples of services that are not usually covered in dental policies are implants (although this is changing as implants become more common), cosmetic procedures, and extensive treatment for temporomandibular joint disorder. A common point of confusion is that, when a service is not covered by insurance, some patients take it to mean that they cannot have it, that the insurance company is somehow denying this service to the patient. This is not the case; it is simply that the patient, rather than the insurer, is responsible for the payment.
An additional cost-control mechanism, preauthorization (sometimes called predetermination), means that treatment plans for more than a specified amount, or for especially costly services, must be reviewed by the carrier’s dental consultants to ensure that the proposed treatment is reasonable and that the same quality of care could not be achieved at less expense.
Health insurance was at first offered only to groups, because illness experience is reasonably predictable for a group but much less so for an individual. The risk of adverse selection, which means the inclusion of too many high-risk beneficiaries, was reduced because insuring only large groups averaged out the risks. Although a large group would likely include people with high levels of need, there would also be many who had little need for care and who would still pay premiums. In fact, this is the essence of insurance. The fact that the cost of care required for a few people far exceeds the premiums paid for them is irrelevant as long as the average cost of care across the group is in balance with the premium.
The probability of adverse selection was further reduced by the use of waiting periods after enrollment. The waiting period ensured that people with existing disease were not simply going to use the plan to have that condition treated and then drop out. As experience with the administration of health insurance grew, carriers were able to offer individual policies. Today, many commercial and nonprofit insurance carriers make individual policies available for hospital and major medical coverage, although premiums are considerably higher and benefits are often more limited than for group policies.
After looking at the list of insurance principles, one can see why dental care was for a long time considered uninsurable. Nearly everyone has some dental treatment needs. They tend to be frequent rather than infrequent, and unlike the cost of hospital care the cost of dental treatment is rarely catastrophic. Nevertheless, evaluations of some of the earliest group prepayment plans indicated that dental care indeed was insurable because cost was found to be not the only barrier to dental care;49–51 even when the cost barrier was removed, potential patients did not pour in as many had expected. Although utilization of dental service was increased, it stayed well short of 100%. In other words, although all members of the group may have needed dental care and all were paying a premium toward it, only some members were seeking treatment. Indeed, if 100% of the group seeks dental care on a regular basis, it might be less expensive for them to pay for their care individually rather than through prepayment.
Expenditures for health care have risen sharply in all industrialized countries over the last several decades, but nowhere has this pattern been as pronounced as in the United States. Fig. 7-1 shows that, in 1929, expenditures in the United States for health care (including dental care) accounted for 3.6% of the gross domestic product (GDP). Since 1929, the amount has gone steadily upward, reaching 14.9% of GDP in 2002.26,57 Predictions suggest that spending for health care could rise to 20% of the GDP in the next few decades,23,66 a level of national expenditure that is a cause for deep concern.
Fig. 7-2 shows how the per capita national health expenditures have risen since 1960. From an annual average of $141 in 1960, the average cost per person had risen to $5440 in 2002, a truly daunting figure.36,57 For insurance to be able to cover these kinds of costs, it is easy to see why premiums must be high. Fig. 7-2 also shows that the portion of the cost of health care paid by public funds has grown since 1960. In 2002, 46% of total national health expenditures were paid by public (government) funds.57 Some of the reasons given for this increase in the cost of health care in the United States include the following six factors:
Difficult Economies of Scale It is harder to achieve economies of scale in health care than in many other sectors of the economy. In many manufacturing industries, for example, it does not require 10% more workers to produce an additional 10% of a product. In health care, by contrast, increasing the amount of care provided requires a nearly proportional increase in the workforce.
The Aging Population An aging population causes an increase in per capita costs. Because older people use more health care services, the average cost of care will increase as the average age of the population increases. In addition, the expectation of longer life brings a greater willingness to provide heroic care for a person who in earlier days would not have been expected to live much longer even if healthy, but who today is thought to have a reasonable chance for more high-quality years of life.
Developments in Technology Some innovations reduce the costs of care because they are so much more effective than any available alternatives (antibiotics, for example, reduced the average length of a hospital stay when they were introduced in the 1940s and 1950s). Others, because they are providing care that was previously unavailable, can only add to aggregate costs. An example is treatment for end-stage renal disease for patients who in earlier days would have soon died. With dialysis they now live, but at a cost that was estimated to average $24,976 per patient per year as long ago as 1983.48
Third-Party Payment Insurance has provided large amounts of money for care that would otherwise have been unavailable. For example, many of the elderly and the poor who receive the benefits of Medicare and Medicaid would not otherwise have had the money to purchase this care. Without these programs, the total and per capita costs of care would undoubtedly be smaller. The same is true for private insurance, because many who otherwise would have faced large bills for hospitalization and other services would have been forced to do without.
The spiraling costs of health care present American society with a classic trade-off dilemma. On the one hand, if people go without health care that can improve or prolong their lives, both the individual and society suffer. On the other hand, it should be evident that the proportion of the GDP going to health care cannot continue to climb indefinitely, because as more of our available resources go to health care there is less for housing, education, recreation, and other necessities that contribute to health, wealth, and happiness. Although there is ample reason to be concerned for people who receive too little health care, there is also the possibility that a point can be reached at which, at least in the aggregate, there is too much health care relative to life’s other necessities. The dilemma is made even more difficult by the fact that, as of 2002, 43.6 million people in the United States had no health insurance.56 Although there is a justifiable outcry that some form of coverage should be provided for these people, it is also obvious that to do so will further increase national expenditures.30,42,78 Health care providers, in their honest desire to do the best for their patients, need to recognize that this tension between the individual and society will always exist.
Resolution of this dilemma is made even more complex by the inclusion of government and private third-party agencies in the equation. Because the total costs of care continue to climb and put more and more pressure on the economy, and because most health care costs are paid through third parties, the pressure for collective action to control these costs will continue. No one in health care should be surprised to see a continuing stream of proposals aimed at controlling or reforming the health care system.
Expenditures for dental care, although only a fraction of the total for health care, are nevertheless substantial. Fig. 7-3 illustrates that the total expenditures for dental care by Americans grew from less than $500 million in 1929 to an estimated $70.3 billion in 2002.16,36,57 This latter figure represents an average per capita expenditure for dental care of $250 in 2002.
Figs. 7-4 and 7-5 present two additional views of the cost of dental care. Fig. 7-4 shows that, relative to the total cost of personal health care expenditures, dental expenditures have fallen steadily from the 14% reported in 1929 to 4.5% in 2002.26,57 This pattern reflects the combination of the steep rise in the overall costs of medical care and the more modest rise in the costs of dental care. Fig. 7-5 presents the expenditures for dental care as a percentage of the GDP. The pattern here is especially interesting: the relative decline from 1929 to 1950 corresponds to the period of the Great Depression followed by World War II. Dental care is income and price elastic, so that, as real income fell during the depression and as the cost of other goods and services rose during and after the war, there was simply less money available for dental care. The rise since 1970 coincides with a period of growth in real income and also in the extent of dental insurance. Economic theory suggests that both of these changes should result in a relative growth in dental expenditures, a phenomenon that has indeed occurred. The relative growth in dental expenditures has continued up to the present, to about 0.67% of the GDP in 2002, even though the percentage of the population covered by dental insurance has plateaued.57 This is a sign that the dental sector continues to be a robust part of the national economy.
Private fee-for-service payment, the two-party arrangement, is the traditional form of reimbursement for dental services in the United States and elsewhere. Under this system, the patient decides when to visit a dentist, and the dentist suggests appropriate treatment and informs the patient of the fee for the service. If the patient chooses to follow the recommendations of the dentist and receives the services, the patient is then responsible for the fee. As shown in Fig. 7-6, as recently as 1970 almost all payments for dental services came directly from patients.36 However, by 2002, because of the substantial growth in prepayment, direct consumer payment had dropped to about 44% of all payments, with nearly 50% being paid by private insurance.57
In the language of contracts, the patient and dentist are the first and second parties, and the administrator of the finances is the third party, defined as the party to a dental prepayment contract that may collect premiums, assume financial risk, pay claims, and provide administrative services. Third-party payment for dental services therefore is payment for dental care that involves another party rather than payment directly by the patient. The third party is sometimes called the carrier, insurer, underwriter, or administrative agent. The purchaser of the plan can be an organized private group such as a union, or it can be an employer, a union-employer welfare fund, a governmental agency, or an individual. Usually, however, the term third party, without further qualification, refers to an insurance company. When the government acts as the third party, the term more commonly used is public financing of care.
In private third-party plans, periodic premiums are collected to meet the costs of providing care as well as the administrative costs of the third party. It has been argued that this arrangement should most properly be called prepayment rather than insurance, because it does not fulfill the classic definitions of insurance. Be that as it may, the term dental insurance has entered the language, and the terms dental prepayment and dental insurance as commonly used are virtually synonymous. The main difference between dental and some other forms of insurance is that traditional insurance involves a group of people making relatively small payments to cover the risk of a few suffering catastrophic loss, such as the loss of a home through fire. The expectation is that few of them will ever collect any insurance payments. Dental prepayment, on the other hand, is a mechanism to spread the financial load of dental care over a group and over time. Virtually all members of the group can reasonably expect to make regular and somewhat predictable use of the benefits.
For companies that administer these plans, the method for setting the premiums is essentially the same as it is for any other form of insurance. Based on the type of benefits involved and the characteristics and previous history of a group, the actuaries estimate how much dental care will be provided to the group in the coming period of time (usually at least 1 year). The expected reimbursable cost of that care plus the administrative expenses form the basis for premium calculations. Most private dental insurance in the United States is available only through group purchase; there are few individual policies. Individual policies that are available are characterized by high premiums or limited benefits. This is the carriers’ method of countering the risk of high use and adverse selection.
Who actually pays for third-party care? A union that negotiates a dental plan as a fringe benefit is choosing to accept the plan rather than cash wages, so the union members pay for it in wages foregone. Ultimately, if the companies employing the union members increase the price of their products to finance the plan, the purchasers of those products pay for it. Reference to the third-party agency as the “payer for services,” although common, is incorrect; nor are the union members getting “free” care, even if they do not pay directly out of pocket.
Passage of the Taft-Hartley Act in 1947 allowed labor unions to seek fringe benefits, in addition to wages, through collective bargaining. Since then, health care insurance has been a popular fringe benefit. One of the reasons for this popularity is that the premiums paid by the employer are not usually counted as taxable income for the employee. Each dollar of earnings taken in the form of health insurance therefore buys more health care than if it is taken as cash wages, because cash wages are taxed whereas the insurance benefits are not. (Health insurance as a fringe benefit, with protection from tax, is popular with the insurance and health care industries, too, because it actually is a subsidy for them.) There have been frequent unsuccessful attempts at the federal level to limit the amount of these health insurance premiums that are protected from taxes. It is reasonable to expect periodic attempts of this type in the future in times of budgetary difficulty. Such a “tax cap,” if it were enacted, would reduce the popularity of dental insurance. It is assumed that if such a limit were to be placed on the tax deductibility of health insurance premiums, most people would apply the tax-deductible amount to their hospitalization and medical insurance. This would mean that the money paid by employers for dental insurance would be treated as taxable income, and additional wages would be deducted from each paycheck to pay this tax. Dental insurers fear that this change would cause some individuals and groups to drop their dental insurance.
By the late 1960s, with some 85% of the American population covered by hospital and surgical expense insurance,33 coverage for dental expenses emerged as a popular area for negotiation by labor groups seeking additional fringe benefits. Growth of dental prepayment plans through the 1970s and 1980s therefore can be seen as an evolutionary step in the growth of employment fringe benefits.
The rapid growth of prepayment since 1970 has changed the nature of dental practice. The growth is illustrated in Fig. 7-6, which shows that the portion of dental care costs paid by prepayment plans increased more than tenfold between 1970 and 2002. The proportion of the U.S. population covered by some sort of dental insurance increased from less than 5% in 1970 to well over one half by the turn of the century. Today it is a rare dental practice indeed that sees no insured patients at all. In many parts of the country, the majority of the patients in most practices have dental insurance.
Although the growth in dental insurance has been spectacular since 1970, further rapid growth in the immediate future is not likely. This is because members of the large unions in the major U.S. industries are, for the most part, already covered. For dental insurance to grow, mechanisms will have to be developed to reach small businesses and individuals. A second reason why dental insurance will grow only slowly is the general climate of cost control in all aspects of business, which in turn comes from the fierce demands on the United States to be competitive in the global economy. Increased concern for worldwide competitiveness works against offering benefits to workers not already covered, and there are already some signs of cutbacks in some industries. A third factor that may work against further expansion of dental insurance is the improvement in oral health, which is especially evident in young adults and children (see Chapters 19–21 Chapter 19Chapter 20Chapter 21). It may be that because people in these younger age cohorts have experienced little need for expensive and unexpected dental treatment, they will not push their employers as hard for dental insurance as did their elders, who had much higher levels of need for treatment.
Control of the costs of third-party plans is essential to their success, for if the insurance plan is seen as a bottomless money pit, the plan will have to raise premiums to higher and higher levels, which makes it unlikely that anyone will be willing to buy the policy. Because the implications of “control” in this context are anathema to most practitioners, methods of reimbursing dentists under third-party plans have long preoccupied the American Dental Association (ADA). The ADA sees the need for controls but also tries to maximize the independence of the dental practitioner. Major forms of third-party reimbursement currently in use are:
In line with its philosophy of maximizing practitioner independence, the ADA has consistently supported the concept of the UCR fee as a reimbursement method for dentists in prepayment plans. However, ADA resolutions that UCR fees should be the preferred method of reimbursement were rescinded on legal grounds after the U.S. Supreme Court decision in June 1975 in Goldfarb v. Virginia State Bar et al. This decision ruled that learned professions were not exempt from antitrust laws.5,7,8 In effect, the Court said that each practitioner should be free to choose how he or she wants to be reimbursed and that it was inappropriate for a professional association to suggest to its members which choice to make.
When third-party dental programs first began, many dentists were opposed to them on the grounds that they would be forced to adopt lower fees than those that they usually charged. The evolution of the UCR fee concept as a mechanism acceptable both to dentists and carriers has allowed third-party dental care to be provided while still permitting individual dentists to charge what they believe their services are worth. It is reasonable to suggest that dental prepayment plans would not have been accepted by dentists to the extent they have been without the UCR fee concept.
A table of allowances (or schedule) is defined as a list of covered services with an assigned dollar amount that represents the total obligation of the plan with respect to payment for such service but that does not necessarily represent the dentist’s full fee for that service.4 For example, if a dentist’s usual fee for a particular service is $20 and the plan lists a fee of $15 as payable for that service, the dentist will provide the service, collect $15 from the carrier, and may charge the patient $5 to make up the difference. Under the UCR fee method, on the other hand, the plan pays the dentist’s usual fee in full (less any required patient copayment), in this case $20. Use of a table of allowances as a method of reimbursement requires that dentists carefully explain to patients the limited nature of the insurance payment, because some patients are unaware that their plan may not cover the costs in full.
A fee schedule is defined as a list of the charges established or agreed to by a dentist for specific dental services.4 A fee schedule is usually taken to represent payment in full, whereas a table of allowances, as just explained, may not. With a fee schedule, the dentist must accept the listed amount as payment in full and not charge the patient at all. Fee schedules for dental care are sometimes established by public programs, such as Medicaid in many states. Dentistry’s opposition to fee schedules is based on (1) the potential inflexibility of such schedules, meaning that the fees listed can fall below customary fees, particularly in times of rapid inflation; (2) the implicit assumption that all dentists’ treatment is of the same quality and therefore worth the same fee; and (3) the fear that autonomy is threatened, especially if the fee schedule is not controlled by the dentists. A potential risk with use of a fee schedule is that, if the fees paid are too far below the usual level, few dentists will be willing to treat the covered patients. This has been cited as one reason why many dentists either severely limit the number of their Medicaid patients or refuse to accept such patients altogether.17,35,64
Discounted fees are usually the basis for PPO plans. Participating dentists have agreed to provide care for fees that are usually lower than those charged by many dentists in their area. Most preferred provider dental plans do provide partial payment for care received from a nonparticipating dentist, but in this case the patient is responsible for all of the difference between the dentist’s fee and the amount paid by the plan.
Reimbursement of the dentist by capitation, as in a medical health maintenance organization (HMO), became more common during the 1980s and 1990s but plays a much smaller role in dentistry than it has in medicine. The ADA defines capitation as a dental benefit program in which a dentist or dentists contract with the program’s sponsor or administrator to provide all or most of the dental services covered under the program to subscribers in return for a payment on a per capita basis.4 A capitation fee is usually a fixed monthly payment paid by a carrier to a dentist based on the number of patients assigned to the dentist for treatment. Capitation requires that patients be assigned to specific dentists or dental practices for care, so that the capitation payment can be paid to the appropriate dentist or practice. This assignment is important, because the dentist receives a fixed sum of money per enrolled person per month, regardless of whether the participants in the plan receive care during that particular month. The assumption is that, although some patients will need a lot of care, others will need little or none, and therefore the total amount of money paid to the dentist will be sufficient to cover the overall costs of care for the covered group.
Many dentists are resistant to capitation because of a fear that high utilization and demands for expensive forms of care could rapidly outrun the capitation fee and that dentists will thus be at an economic disadvantage. As a dissenting voice, Schoen45–47 argued that capitation works every bit as well as fee for service and that with proper planning it is a highly efficient method of financing group dental care, especially for less affluent groups. Despite Schoen’s claims of success with capitation in his own group practice, however, many dentists and the ADA remain cautious. The ADA is opposed to capitation and fee schedules as the sole forms of reimbursement in prepayment plans, arguing that where such mechanisms exist they should be on an equal footing with UCR fees so that prospective patients have a choice. In fact, by the 1990s there were very few “pure” capitation plans. Most capitation plans now include copayments, especially for more expensive services, and annual maximums, both of which limit the economic risks faced by the dentist.
In June 1954, the Seattle District Dental Society in Washington State was approached by the International Longshoremen’s and Warehousemen’s Union-Pacific Maritime Association with a request that the society submit a proposal for a comprehensive dental care program for the children of the union’s members up to 14 years of age. The proposal requested by the union required information on administration, fees, methods of operation, dental care provided, and control of quality. At that time there was almost no previous experience with plans of this type. The dental society nevertheless wished to discourage the union from setting up its own clinics, and it developed a plan whereby the children could be treated in the offices of private dentists. Shortly thereafter, the first dental service corporation was born.72 Within a few years dental service corporations were also formed in Oregon and California, and in subsequent years the idea of the dental service corporation spread throughout the country from the West Coast.
A dental service corporation is a legally constituted not-for-profit organization, incorporated on a state-by-state basis, that negotiates and administers contracts for dental care. The original dental service corporations, now know as Delta Dental Plans in most states, were sponsored by the constituent dental societies in each state where they were initially formed. A service plan is a program in which the payment is meant to represent full payment, with no additional charge to the patient allowed beyond a preestablished copayment or deductible. Following the success of the early Delta plans, Blue Cross and Blue Shield organizations also began organizing dental plans in many states, which usually also were organized as not-for-profit service corporations.
As the number of state dental association– sponsored service corporations increased through the early 1960s and the size of the groups for which dental care benefits were negotiated grew, the need for a national organization of dental service organizations became apparent. Accordingly, the National Association of Dental Service Plans was formed in 1966, with staff and financial help from the ADA. The name became Delta Dental Plans Association (DDPA) in 1969,28 and most of the member corporations became known as the Delta Dental Plan for the particular state.
DDPA has also become the vehicle through which the Delta plans in individual states compete with national for-profit insurance companies for contracts with companies with employees in more than one state. Through DDPA, an organization called DeltaUSA was formed to coordinate and administer these multistate contracts. In 2003 more than 108,000 participating dentists were available to DeltaUSA through the individual state Delta plans, accounting for at least 70% of all dentists in practice nationwide. Collectively, Delta plans cover approximately 42 million people in the United States.18
The underlying philosophy of the Delta Dental Plans was to permit dental practitioners to adapt their traditional patterns of practice to meet the demand for group purchase of dental care. In this sense, Delta plans have followed the lead of the professionally sponsored Blue Cross and Blue Shield hospital and medical plans. Most Delta plans were formed for the sole purpose of providing dental prepayment, and most have retained dental insurance as their sole or major business.
Delta also pioneered specific approaches to ensure the quality of care provided and to keep a program’s costs under control, although other carriers now use many of these approaches as well. Quality of care is sometimes monitored by posttreatment examinations, in which a sample of individual patients who have received care through a plan are examined by a panel of independent consultant dentists to ensure (1) that the care claimed and paid for was in fact provided and (2) that it is of “acceptable” quality (see Chapter 7). When there are concerns about quality, referral can be made to the state’s peer review mechanism if the matter cannot be resolved to the satisfaction of all involved.
Billing for services not actually provided and other instances of noncompliance with the contract such as waiving required copayments are taken seriously by insurers. Although the problem with billing for services not provided is obvious, that with waiving of copayment is perhaps less so. For insurers who base payments on the UCR method, the copayment is part of the “usual” fee and often an important part of the cost-control mechanism as well. If a dentist has claimed $40 as the usual fee for a service that has a 20% copayment, the insurer will pay the dentist $32 and expect the dentist to collect the remaining $8 from the patient. If the dentist chooses not to collect this $8, then the fee is in fact $32, no/>