The Insurance Piggy Bank Delusion

Enforcing medical loss ratio on dental insurers means more competition, more accountability, and more savings for consumers

What critics of the US healthcare system often get wrong is their claim that America’s healthcare system is a free market run amok, with profit-driven hospitals, merciless drug companies, and greedy providers pushing up prices everywhere you look.

The truth is a lot more murky. America’s healthcare system is every bit as bureaucratic or regimented as any other government-managed health system in the world – America just does it a particular way.

American patients rarely end up paying for health services directly (whether government or insurance), prices oscillate wildly depending on the payer, and there are usually dozens of layers of bureaucracy, government mandates, or tax incentives that drive price inflation for health insurance and healthcare.

This is true for dental patients, clients of general practitioners, or anyone who’s unfortunately ended up going to the hospital.

Added to that, specific tax credits and employer mandates force private companies into being arbiters of healthcare for their employees, as well as perpetuating the surplus of insurance coverage that naturally pushes up prices rather than keep them low.

All these factors distort the actual purpose of insurance and create a middleman economy between us and our health practitioners. 

The promise of MLR

What if we have solid policy tools that could help keep that price inflation in check, promote more competition, and keep insurance accountable?

At least one that we’ve championed at the Consumer Choice Center is that of medical loss ratios imposed on insurance companies, specifically for dental care. While the Affordable Care Act imposed an 80% medical-loss ratio on general health insurance firms, no such requirement exists for dental plans.

Our policy primer, entitled The Feasibility of Medical Loss Ratio for Dental Insurance Patients and Consumers, examines the policy in detail, and how these would benefit patients who want more affordable and competitive care.

Seeing this policy put into place across states would have a positive impact toward lowering our costs as individual patients.

And, hopefully, this would also create momentum for large-scale reforms aimed at decoupling insurance plans from employers altogether, providing more direct-to-consumer funding options that eschew insurance, and remove red tape at both the state and federal level to empower consumers within a thriving market for dental care.

The Commonwealth of Massachusetts passed the first enforceable MLR law by popular referendum in 2022, requiring that dental insurance plans spend at least 83% of their premiums directly on patients. It entered into force earlier this year. Other states have MLR reporting requirements, and are actively considering rebates as well.

Considering the law has only been in place for a few months, we do not yet have reliable quantitative data to analyze its effectiveness.

One recent post at American Action Forum believes enforcing medical loss ratios on dental insurers will “disincentive competition, reduce carrier options, and ultimately leave more patients without any dental coverage at all.”

While it’s too early to measure these claims, we can at least tease out the arguments.

To begin, dental insurance is not the same as health insurance.

Dental plans are all capped. Every plan has a maximum they will fork over for your dental procedures and care as a patient. Traditional plans are capped near $1,500, leaving patients meeting the cap responsible for the remaining dental care costs for the year.

In addition, the networks of coverage that exist for dental insurance are complex and not very well unified, consisting of gaps in coverage that make it more difficult for patients to apply their insurance or have to chase after rebates.

We should first consider what the point of any of these reforms is: to lower the costs of dental care. The goal of state-level legislation should not be to artificially prop up one particular insurance product that benefits a handful of companies.

Measuring the success or failure of medical loss ratios on the number of insurance companies who enter or leave or state is faulty, because that’s not the goal. Neither is the overall cost of premiums. It’s about patient prices for care.

Each year, Americans spend $136 billion on dental care. In the last 20 years, dental costs have risen more than 30% per patient. Those without dental insurance are least likely to visit dentists for important check-ups and procedures, worried about costs.

Therefore, all our focus in this debate should be on how patient costs are affected.

We should be most concerned about how legislative fixes will make dental care and overall healthcare more affordable for patients and consumers, and not necessarily how they will impact a specific business model that, as we have argued, is flawed on its face.

When did insurance become a piggy bank?

Insurance, if we recall, is intended to be a product of risk management, protecting consumers from catastrophic financial loss due to unforeseen or unpredictable events that mean you’ll get higher bills. As consumers and patients, we gladly transfer risk to reduce costs while maintaining protection. 

We pay a monthly premium to contribute to a fund held by an insurance company accessed when needed, especially in emergencies. That balancing of financial risk is how insurers make money, hoping to pay out less than they take in from premiums, while consumers benefit by not having to bear the full cost when unexpected expenses occur.

Farmers are happy to pay this premium when their crops run dry for a season. Drivers are delighted they won’t bear the full brunt of the cost if they total their vehicle or someone else’s. These are emergency situations that no one can accurately predict, and thus consumers and companies make worthwhile investments to protect themselves against that risk.

Somewhere along the way, though, especially with health insurance and dental insurance, our insurance plans became piggy banks instead of emergency lines. This, along with many other factors, have led to eye-watering price inflation at hospitals, dental clinics, and every aspect of the healthcare economy.

At the Consumer Choice Center, we’ve long written about the over-reliance on health and dental insurance plans to cover ordinary, routine checkups and visits rather than emergencies. For the sake of consumers, insurance should be simplified, reimagined, and subject to intense competition.

Insurance policies on our cars exist in case we get into severe accidents that cause damage and injury. We do not insure the tires, windshield wipers, or oil changes, which we know we will spend money on.

This is the principal flaw of researchers, insurers, and activists who oppose the imposition of medical loss ratio requirements on insurance products.

One elephant in the room that isn’t often discussed is the role of government plans, subsidies, and tax credits that generally distort the naturally competitive market of dental insurance and dental care.

Government tax credits distort the health and dental insurance market

Apart from the significant role of Medicare and Medicaid in paying for dental services and insurance, 59% of Americans have dental benefits offered by their employer.

Employers negotiate on behalf of their employees for these insurance plans, and agree on premiums to be paid. Employers, in return, are offered significant tax credits by the federal government, sometimes as much as 50% of premiums, according to the IRS, though the Small Business Health Options Program Marketplace.

When government subsidies are handed out for specific products or products, it is only natural that prices will rise. Nonpartisan think tanks such as the Cato Institute have made the argument for getting rid of tax exclusions for employer-sponsored healthcare for this very reason. It has merit.

How this could apply to dental insurance plans, and further to the impact on dental prices overall, would be an appropriate topic for further study. But we have some policy tools available now to provide a fix.

Unlock savings and empower patients

Medical loss ratio is one of our most vital policy tools to hold insurance accountable, unlock benefit spending for patients, and to promote competition among insurers who will provide the most innovative plans.

Similar to general healthcare, the most consumer-friendly option would be to render insurance to its original purpose: as a tool for weighing risk.

Indeed, there are plenty of easy reforms state legislatures could enact that would help improve care: fostering innovation, reducing bureaucracy, giving incentives to patients to use direct-to-consumer options and more. But this has little to do with giving a leg up to insurance providers.

When we use insurance to pay for our care, rather than as an emergency buffer in case the worst happens, there will be natural price inflation. Too many of us are familiar with it.

Medical loss ratios and rebate requirements imposed on dental insurance plans are the quickest short-term fixes to address these issues and unlock savings for patients and consumers. We should eagerly await the results in Massachusetts and beyond.

Read our policy primer on the feasibility of medical loss ratio for dental insurance and patients here.



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