Inefficiencies of Dental Market

The market for dental services is highly inefficient, causing patients to receive, and pay for, procedures that are either incorrect or unnecessary. These inefficiencies result in higher prices and lower quantities and quality of service from dental professionals. The most significant causes of these inefficiencies can be broken down into:

• Information asymmetry
• Credence good
• Imperfect competition
• Unstandardized service
• Inadequate technology
• 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 simplification, defined as an average annual expenditure for dental services (including insurance premiums, out of pocket payments, and subsidies) per patient. There are no available studies about the overpricedness of dental services apart from the comparisons between different countries. Many different external effects are in play that affect these differences, and no country is free from the underlying causes of inefficiencies which means that there is no reliable benchmark. This information is rather useful for defining the customer segments and go-to-market strategy.

It would be a mistake to quantify dental services as the quantity of examinations, consultations and treatments provided. The reason why this is wrong is the fact that when patient buys healthcare service, they actually buy disease relief. So actual way to quantify the quantity provided by healthcare marketplaces is the level of attained health of the patients. Quantity of dental market is thus defined as an average percentage of preserved healthy dental tissue of patients.

These definitions are entirely arbitrary, as we haven’t found other existing suitable definitions, and we will develop them further at a later time.

Information Asymmetry

Information asymmetry is a situation in which one side knows the actual quality of the service or a product sold, and the other side doesn’t. The most common case is one where the seller has an information advantage. Examples of this are markets for used cars, repair services, education etc. Lack of information makes the purchases highly uncertain with high likelihood of getting a low quality service although paying the high price. Aware of this uncertainty, in an effort to avoid getting scammed, buyers only consider low price purchases. In theory this leaves all high-value services or products unsold. The average value of the commodity tends to go down, even for those of perfectly good quality. This situation kills the market.

Dentists are the sellers and service providers with deep expertise, and patients are unable to know the quality of the service they get which fits the above model. However, this is not the best explanation of how dental market works since there are high and low priced services. This has to do with the fact that dental services are not a commodity of uniform qualities. There are highly skilled dentists providing high quality services and patients are actively looking for these.

Since they have no way of knowing which provider and service is of high quality, they look for signals. 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 price and social proof. The price is generally considered a signal of the quality or value of the product or service, and when coupled with social proof, like the number of patients, social presence, certificates, years of experience, office equipment and interiors, patient reviews and word of mouth, as well as psychology, it is used by patients to determine which dental clinic to choose. Unfortunately, none of these signals predict the actual quality of service.

In the dental services market information asymmetry is a common problem. Dentists can accidentally or intentionally exploit information asymmetry. There are different potential causes of such situations:

• Inexperience
• Lack of knowledge
• Tiredness
• Incapacity
• Neglect
• 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 overall dental market.

Diagnosis

Medical diagnosis is a service which can be reliably given only by experts such as dentists and dental professionals. Even with presented images from x-rays and scans, patients face limits to understanding their health status on their own.

Most dentists are perfectly capable of providing the correct diagnosis. Unfortunately, even if and when they are, there are obstacles:

• Weak incentives to provide an accurate diagnosis
• Strong incentives to provide a particular inaccurate diagnosis

Giving a correct diagnosis often means investing more resources, as well as continuously investing in education and tooling. If the patient doesn’t see the difference between a correct diagnosis and “probably correct diagnosis” then they will react the same in both cases.

This situation where every diagnosis is perceived as the 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:

• Patients on average get a less correct diagnosis
• Dentists earn little to nothing for their diagnostic work

Therapy Advice

As mentioned before, dentists are able to recommend wrong therapy plans without patients knowing. Even when a patient gets the correct diagnosis, they can be recommended drastically different therapy plans.

This happens because there are many ways to solve the same medical problem. Depending on the financial capacity of the patient and the desired quality which is most commonly measured by the length of durability or visual appearance, as well as other factors.

Another related issue is the aesthetic dental work paid for by the patient, which can cause the need for more treatments down the line. All these decisions influence the health of the patient in a way they aren’t able to fully comprehend, and they rely on dentists as experts to advise them.

Generally, advice and diagnosis are not separate. This creates a venue for unethical behavior. Dentists might resort to recommending “the tools from their toolbox.”

The results of all this are:

• Patients get suboptimal/wrong health treatments
• Treatments are still performed long after there are better approaches available
• Dentists are less able to give the right advice

Treatment

Even if a patient is given the right diagnosis and therapy plan, they might receive low-quality treatment. Dentists use this situation to decrease costs by recommending steps that can be skipped, done in less time, with wrong tools, in the wrong order, with longer waiting periods, and with cheap materials.

Since patients are most often unable to distinguish between good and poorly done treatment, they won’t know if the service they paid for truly solved their problem. They will perceive every dentist and treatment the same way because they have fully placed their faith in a professional who may not have their best interests at heart, but instead is more worried about time and money.

This attitude that is held by some dentists makes it economically unsustainable for other dentists to provide these services at a higher rate of quality. It makes selling exceptional dental treatments difficult and eventually pushes quality providers out of the market. The result is adverse selection, sub-par to average practices becoming the defacto standard of the market.

Insurance

Patients have an advantage over insurance companies. They may know what treatments they need, or the risks of needing expensive treatments. There is a strong incentive for patients to hide the 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 face, and that those keenest to buy insurance were probably the riskiest bets. Also, people who purchase 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 resulting in higher premiums and lower coverage
• Lower revenue for the insurance industry
• More health cost risk for the average patient

Credence Good

The fact that dental service is a credence gooda aligns with information asymmetry. With credence goods, sellers not only provide the repair services but they also act as experts who determine how much treatment is necessary because the customers are unfamiliar with the intricacies and peculiarities of the good in question. There are two common cases of credence good problems in the dental industry: the buyer doesn’t know a proposed treatment is needed and their insurance doesn’t know that the treatment was provided, often called “phantom billing.”

The main difference comes from the markets with only an information asymmetry. The problem here is that providers can influence the demand for services.

Overtreatment

The most important motivation for a dentist is to earn as much as they can. More work means more revenue, and if a patient is already there, they can create an earning opportunity by suggesting and 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 a substantial phenomenon: The test patient received overtreatment recommendations on more than every fourth visit.

Unnecessary treatments add 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 required out-of-pocket payments by the patient. This way they avoid the collusion of patient and dentist, but it doesn’t solve the problem of when a patient is exploited. Also, coverage limits are introduced to avoid exposure to this but also decreases the insurance value.

Excessive costs increase premiums and decrease the amount of coverage. The overall effect of this is unattractiveness of dental insurance, coaxing many to be without. A lot of money is left on the table because of this information asymmetry, to to mention adverse health risks of not taking care of oral health.

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

Phantom Billing

Hidden fees and costs are a common exploit of dental insurance by dentist and patient. It emerges from another information asymmetry case where the dentist and patient are the only ones who can surely know about work performed. This allows them to falsify dental treatments in order to squeeze money from insurance companies. Another form of this exploit is when dentists perform unnecessary treatments in accordance with patients. Medicaid likely is billed hundreds of millions of dollars a year for false dental treatments on 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 the 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 in a monopoly, duopoly, or oligopoly, and buyers as a monopsony or oligopsony, or highly differentiated products sold by many sellers to many buyers like monopolistic competition. Unlike perfect a competition market, in imperfect markets, buyers or sellers can be of influence on the market, and there is a lack of product information. The critical implication is that market equilibrium is suboptimal, meaning the price is higher, while quantity and revenue are lower.

Currently, the dental service market is an example of imperfect competition. 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 examinations, 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 unique market characteristics which further decrease the efficiency of the market:

• Rigid long term relationships between patient and dentist

This is connected to the information asymmetry problem. Patients use the ability to establish long term close relationship with one dentist as a tactic to prevent being exploited. Dentists also nurture these relationships to decrease competition pressure.

• Collective dental plans.

The patient often doesn’t execute their market interests because their employer is the one negotiating the conditions and choosing their insurance provider. Usually, 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 that dentists adhere to a set of rules and standards when they are enforced inconsistently. This results in bad health outcomes. Markets of unstandardized services are by default inefficient. Dentists can influence the price.

Although dentists’ associations define every service protocol and criteria, it’s up to an individual 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 rules and continue doing business as usual.

Inadequate Technology

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

Using digital imaging technology can enable better diagnosis, better treatment precision, and quality, lower costs of getting a 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. He also believed that total output is increased when one worker specializes in one type of activity and trades with other specialized workers. 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 general dentists. 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 second opinions. Also, they may 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.