Dental Insurance Isn’t Really Insurance
So, if dental insurance isn’t true insurance, what is it?
Insurance is meant to protect you from major financial losses due to catastrophic events. For example, life, home, and auto insurance help cover significant issues like death, natural disasters, or car accidents. These policies protect you or your loved ones from large financial burdens.
Traditional insurance usually involves an underwriting process, where your risk of needing a claim is assessed to determine your premium.
Other “Insurance” Products
Some products are called insurance but provide different types of protection. Health insurance typically has an out-of-pocket maximum to protect you from the financial impact of hospitalization and complex chronic health conditions, but it also provides coverage for preventive and more routine medical procedures.
However, dental, vision, and pet “insurance” don’t protect against catastrophic financial loss. They often limit the amount of benefit paid, leaving you to cover any expenses that exceed those limits. This is the opposite of what insurance is meant to do.
Dental and Vision “Plans”
These products are better described as “plans.” They do offer valuable benefits, but mainly through discounted service costs. When a plan covers many people, it can negotiate lower rates with providers.
For example, a dental plan might have thousands of members, allowing it to secure better prices with a network of dentists who are willing to provide reduced rates in exchange for access to a large patient clientele. Your dentist likely participates with several different dental plans.
Caps and Limits
Insurance products, including dental plans, try to avoid “adverse selection.” Adverse selection occurs when someone enrolls in coverage with the expectation of immediately using the benefit. Thereby extracting more benefit from the plan than they will pay in through premiums. These situations result in the insurance policy or plan needing to raise the rates for those with more normal utilization. Most insurance and similar plans will have what is called a loss ratio. This is the portion of the premiums collected that they project having to pay out in benefits. These ratios typically range from 80-85%. That means the insurance or plan has 15-20% of the premiums collected left over for operational costs and profits.
Most insurance has an underwriting process that evaluates an individual’s risk and sets their premium accordingly. They may also impose pre-existing condition exclusions or limit benefits through caps and waiting periods to arrive at a reasonable premium and acceptable loss ratio.
When looking to purchase your own dental plan (outside of an employer provided plan)you will likely encounter these limits. Most dental plans will cover 100% of in-network preventive care but may reduce or exclude benefits for services like fillings or crowns during the first 6 to 12 months of coverage. These practices protect the plan from adverse selection, keeping costs down for everyone.
If you’re part of a large employer’s dental plan, you probably have a limited enrollment period and are then locked into coverage (and premium payments) for the year. This reduces the potential for adverse selection, so you are less likely to have time-based limitations in large employer plans. Due to the lower risks inherent in a large group enrolled in an employer’s dental plan you will likely pay lower premiums than if purchasing an individual plan.
If you want to learn more about how dental and vision plans work, check out these podcasts from Freakonomics:
An employer sponsored dental plan, will have about 80% of those who are benefits eligible enroll in dental coverage. With the acknowledged links between dental health and general wellness and wellbeing, it is a good idea to enroll in dental benefits and utilize the preventive care benefits.
Written by Brian Mitchell
Brian Mitchell has experience leading Total Rewards strategy and implementation for large employers.
Benefit Boosts by Brian Mitchell© – Vol 2024-014
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