Inefficiencies of the dental market

By April 18, 2019Economics

The market of dental services is very inefficient. Inefficiencies result in higher prices and lower quantities and quality of service. Most influential causes of inefficiencies can be broken down to:

  1. information asymmetry
  2. credence good
  3. imperfect competition
  4. unstandardized service
  5. inadequate technology
  6. low specialization

Here we show that these inefficiencies are indeed present in the dental market. They allow providers (dentists) to shape the market at the expense of buyers.

Buyers of dental services are:

  • patients
  • employers
  • insurance companies.

Cumulative economic effects of these inefficiencies are the lower market size (total revenue of providers), higher prices and lower quantity (value). The market produces worse health outcomes. In the long run, this is not sustainable for market participants. Price is, for the purpose of simplification, defined as the average annual expenditure for dental services (including insurance premiums, out of pocket payments and subsidies) per patient. Quantity is defined as the average percentage of preserved healthy dental tissue of the patient. These are completely arbitrary, as we haven’t find other existing suitable definitions, and we will develop them further.

Information asymmetry

Information asymmetry is a situation in which one side knows the true value of the service or a product sold, and the other side doesn’t. The most common case is the one where the seller has an advantage. This uncertainty makes buyers only consider low price purchases leaving all high-value services or product unsold. The average value of the commodity tends to go down, even for those of perfectly good quality. This situation kills the market. (Akerlof, 1970)

In dental services market information asymmetry is a common problem. Dentists are the sellers with deep expertise of the provided service, and patients are unable to know the quality of the service they get. Most harming information asymmetry situations with seller advantage are related to the services of diagnosis, therapy advice, and treatment.

Dentists are able to accidentally or intentionally exploit information asymmetry.

There are different causes of such situations:

  1. inexperience
  2. lack of knowledge
  3. tiredness
  4. incapacity
  5. neglect
  6. fraudulent intent

There is also a case of buyer advantage in the dental insurance market. Here we shortly explain each of these problems and how they affect the dental market.

Diagnosis

Medical diagnosis is a service which can be reliably given only by experts (dentists). Even with presented images, patients face limits to understanding by themselves their health status.

The most dentists are perfectly capable of providing the correct diagnosis. Unfortunately, even if they are, there are obstacles:

  1. weak incentives to give the correct diagnosis
  2. strong incentives to give a certain incorrect diagnosis

Giving a correct diagnosis often means investing more resources into it, as well as continuously investing in education and tooling. If the patient doesn’t see the difference between correct diagnosis and “probably correct diagnosis” then they will react the same to both cases. This situation where every diagnosis is perceived as same, an examination is one of the least profitable services provided by dentists and naturally falls into the problem of “adverse selection”. Some dentists recognize the opportunity of giving the wrong diagnosis to get a higher benefit. Be it by keeping or winning over the patient or by leaving room for the ability to recommend costly treatments.

The results of this are:

  1. patients on average get a less correct diagnosis
  2. dentists earn little to nothing for their diagnostic work

Therapy plan

As mentioned before, dentists are able to recommend wrong therapy plans without patients knowing. Even when the patient gets the correct diagnosis, they can get recommended drastically different therapy plans. This happens due to the fact that there are many ways to solve the same medical problem. Depending on the financial capacity of the patient, the desired quality (most commonly can be equated with the time lasting or the visual appearance), etc.

Here belongs also the health dental work paid by the patient for aesthetic reasons which can cause the need for more treatments down the line. All these decisions influence the health of the patient in the way they aren’t able to fully comprehend and they rely on dentists as experts to advise them. Generally, advice and diagnosis are not separated. This is a venue for unethical behavior. Dentists might resort to recommending “the tools from their toolbox”.

The results of all this are:

  1. patients get suboptimal/wrong health treatments
  2. treatments are still performed long after there are better approaches available
  3. dentists are less able to give the right advice

Treatment

Even if the patient is given the right diagnosis and therapy plan, they might get bad treatment.  Dentists use this situation to decrease costs. To achieve this, some recommended steps can be skipped, done in less time, with the wrong tools, in the wrong order, with longer waiting periods, with cheap materials, etc.

Since they are most often unable to distinguish between good and poorly done treatment, they won’t know if the service they paid solved their problem or not. They will treat every dentist and treatment the same. This practice by some dentists makes it economically unsustainable for other dentists to provide the service with the full quality. This makes selling exceptionally good dental treatments really hard and eventually pushes the providers of the market. The result is again adverse selection, bad practices become the defacto standard of the market.

Currently, buyers use different approaches in order to solve this problem. They are all based on signaling. Signaling is the idea that one party credibly conveys some information about itself to another party. The most used signal in the dental market is a combination of a price and social proof. Price is generally considered a signal of the quality or value of the product or service, and when coupled with social proof (number of patients, social presence, tools and interiors, patient reviews and word of mouth, psychology) it is used by patients to determine which dental clinic to choose. Unfortunately, none of these signals actually correlate with the quality of service.

Insurance

Patients have an advantage over insurance companies. They know better what treatments they might need, or what are their risks of needing expensive treatments. There is a strong incentive for risky patients to hide their real risk factor and obtain good coverage.

By artificially lowering their perceived risk level, they can get better coverage at a lower price. Insurers had long recognized that their customers might be the best judges of what risks they faced and that those keenest to buy insurance were probably the riskiest bets. Also, people who buy insurance are more likely to take risks. To avoid this kind of insurance fraud, insurance companies employ few tactics:

  • locking in patients for life
  • ordering independent evaluation
  • higher premiums and lower coverage for new adult patients

The result is:

  • less competition among insurance companies (higher premiums and lower coverage)
  • lower revenue of the insurance industry
  • more health cost risk for the average patient

Credence good

In line with information asymmetry goes the fact that dental service is a credence good. In credence goods, seller not only provides the repair services; at the same time, the seller acts as the expert who determines how much treatment is necessary because the customer is unfamiliar with the intricacies and peculiarities of the good in question.

There are two common cases of credence good problem in dental industry: Buyer doesn’t know is a proposed treatment is needed Insurance doesn’t know if the treatment was really provided (phantom billing). The main difference from the markets with only an information asymmetry problem is that here providers can influence the demand for services.

Overtreatment

A most important motivation for a dentist is to earn as much as she can. More work means more revenues, and if a patient is already there she can use the opportunity by doing some rather unnecessary work. Examples of these exploits are everywhere. Recent research employing a single test patient who undertook 180 dentist visits, found that overtreatment is an important phenomenon: The test patient receives over treatment recommendations on more than every fourth visit.

Unnecessary treatments present an additional revenue for the dentists, cost for an insurance and a health derogation for a patient. Insurance companies partially shield themselves from this risk by instituting obligatory out-of-pocket payments by patients. This way they avoid collusion of patient and dentist, but this doesn’t solve the problem when a patient is also exploited. Also, coverage limits are introduced to avoid high exposure but this decreases the insurance value.

Unnecessary costs increase premiums and decrease of the coverage. The general effect of this is the unattractiveness of this dental insurance products. A lot of money is left on the table because of this information asymmetry.

The combination of wrong diagnosis and wrong therapy advice results in a high percentage of over treatment recommendations. Field research from 2017. has found that in Switzerland, in 28% of cases, unnecessary treatment is recommended. (Gottschalk, Mimra and Waibel, 2017)

Phantom billing

This is a common exploit of dental insurance by dentist and patient. It emerges from another information asymmetry case where dentist and patient are the only ones who can surely know about work being done. This allows them to falsify dental treatments in order to squeeze money from insurance. Another form of this exploit is when dentists perform unnecessary treatments in accordion with patients. Medicaid likely is billed hundreds of millions of dollars a year in the false dental treatment of children.

Laurie Davies of the NHS Counter Fraud and Security Management Service estimated that of the one trillion euros spent on healthcare in the EU, 3 to 10 percent (30-100 billion euros) is lost every year to fraud. Dentistry is one of the areas within healthcare with most possibilities for such fraud.

Imperfect competition

In economic theory, imperfect competition is a type of market structure showing some but not all features of competitive markets. There might be a limited number of sellers (monopoly, duopoly, oligopoly) and buyers (monopsony, oligopsony) or highly differentiated products sold by many sellers to many buyers (monopolistic competition). Unlike perfect competition market, in imperfect market buyers or sellers can influence the market, and there is a lack of product information. Key implication is that market equilibrium is suboptimal – price is higher, quantity and revenue lower.

Currently, dental services market is an example of imperfect competition market. It is generally characterized either as monopolistic competition in services of diagnosis, advice and treatment; or an oligopoly in the market for dental insurance services. Characteristics of the market for dental examination, diagnosis, advice and treatment are:

  • each dentist makes independent decisions about price and output,
  • information is unevenly distributed,
  • increased risks associated with decision making,
  • there are considerable barriers to enter and exit the market,
  • services are differentiated through location, marketing and human capital differentiation
  • dentists are price makers and are faced with a downward sloping demand curve,
  • dentists invest significantly in advertising,
  • dentists are assumed to be profit maximizers,
  • there are usually large numbers of independent dentists competing in the market.

The dental market has some other special market characteristics which further decrease the efficiency of the market:

– Rigid long term relationships between patient and dentist

This is connected with the information asymmetry problem. Patients use the ability to establish long term close relationship with one dentist as a tactic for preventing of being exploited. Dentists also nurtured these relations to decrease competition pressure.

– Collective dental plans Patient often doesn’t execute his market interests due to the fact that often their employer is the one negotiating the conditions and choosing the insurance. Often, dental plans aren’t aligned with what a patient needs.

Unstandardized service

Dental service is surprisingly unstandardized. Even with the dentist’s best intentions, a patient can end up with a wrong diagnosis or a bad treatment. It is hard to ensure dentists adhere to a set of rules and standards when these are enforced inconsistently. This results in bad health outcomes. Markets of unstandardized services are by default inefficient. Dentists can influence price.

Although every service protocol and criteria are defined by dentists’ associations, it’s up to a dentist to learn and implement these new rules. There is no revision and punishment. So, because there aren’t enough economic incentives to align, dentists often ignore these and continue doing business as usual.

Inadequate technology

Technology in the dental industry is developing rapidly. Abilities of the cutting edge technology have long outrun the abilities of human eye and hand. Diagnostic technologies such as CBCT, Carivu infrared scanner, 3Shape 3D scanner, transillumination and even digital photography enable better insight than regular physical inspection. But, without clear economic incentives and specialization, adoption of this technology has been poor. Same as with unstandardized service, this results in bad health outcomes.

Using digital imaging technology can enable better diagnosis, better treatment precision, and quality, lower costs of the second opinion, better data analysis and research, accountability and more.

Low specialization

Adam Smith, who is often referred to as the father of economics, believed that specialization and the division of labor were the most important causes of economic progress. Total output is increased when one worker specializes in one type of activity and trades with other specialized workers, said Smith. He pointed out that specialization could occur at the individual level, along with different firms or even countries. By concentrating on what they can do best rather than relying on self-sufficiency, market participants create:

  • Higher output: Total production of goods and services is raised and quality can be improved
  • Variety: Consumers have access to a greater variety of higher quality products
  • A bigger market: Specialization and global trade increase the size of the market offering opportunities for economies of scale
  • Competition and lower prices: Increased competition acts as an incentive to minimize costs, keep prices down and therefore maintains low inflation

Most dental services are provided by a general dentist. Traditional market structure is formed in a way of one dentist providing virtually all the services to 500-1000 patients. There is no specialization by service type or a market segment. This results in lower quality and higher prices of services.

There are different ways dental providers can specialize to increase outcomes of their work. They might specialize in dental imaging or providing an opinion. Also, they might specialize in a narrow set of dental treatments.

References

  1. Akerlof, G. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84(3), p.488.
  2. Gottschalk, F., Mimra, W. and Waibel, C. (2017). Health Services as Credence Goods: A Field Experiment.

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