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The central tenet of insurance is to pay slightly more on average while getting protected from paying very large amounts of money should disaster strike. In essence it's paying a premium to lower risk. A large company can pool risk, so it doesn't feel the effects of a small number of i.e. houses being burned down by a wildfire in California.

From this link, it's very common for dental insurance to have quite low annual maximum benefits in the $1000 range, in addition to a lifetime maximum. But major dental procedures with surgery can cost much more. The companies are very large risk pools, so they only care about average cost like most insurance companies. This means the only reason they impose benefit limits is because not doing so would significantly add to the average cost. Thus, a substantial fraction of dollars spent are spent beyond this limit.

This leaves two questions:

  1. Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?
  2. Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?
Kevin Kostlan
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    I assume you are asking about the US in particular since most of the issues you raise only exist in the US with its odd health care system. If so, can you please add the US tag or otherwise indicate that you are focusing on the US? – terdon Apr 25 '22 at 13:56
  • I can't provide a ton of facts to back this up, but I suspect two things weigh into this: 1) A number of the more expensive procedures are "cosmetic", involving straightening teeth (crooked teeth can carry their own health risk, but the general feeling is that braces and the like are about "looking better") and 2) many dentists have very little oversight for what is necessary. I could probably find the article again, but there are many cases of dentists doing extensive dental work, root canals and replacements, where it takes years before someone else notices they're drilling healthy teeth. – Sean Duggan Apr 25 '22 at 14:06
  • @SeanDuggan, that might be true, but I can say that normal repairs can get into "cosmetic" and expensive. I had a broken tooth that required replacing the tooth to the tune of $1500. And I didn't have insurance, so they even gave me a break on the price. – computercarguy Apr 25 '22 at 20:09
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    @computercarguy: I totally get you. My wife went to an emergency dentist after my wife broke a tooth, and they managed to convince her to replace several teeth. We got an upfront quote of $2000 after insurance, which was manageable. After doing all of the work, they gave us a bill for something closer to $10,000! And then tried to convince us that they were doing us a favor by reducing it to $5000 if we agreed to sign to pay it immediately. Needless to say, I was very glad that I had kept good records and could prove that they had a lower estimate. – Sean Duggan Apr 25 '22 at 20:55
  • @terdon: Added the US tag. – Kevin Kostlan Apr 25 '22 at 23:33
  • @SeanDuggan Their oversight doesn't seem more or less for general practice medicine. But it does seem like you can easily defraud your patients as a dentist. –  Apr 26 '22 at 12:33
  • FWIW, one article discussing "creative diagnosis" although they note the low dental maximums as one of the reasons dentists do this (they don't earn enough from cleanings, so they find additional work to do). – Sean Duggan Apr 26 '22 at 13:54
  • I should point out that paying more on average is not always true. Because insurance companies can negotiate lower rates, it's possible to pay lower on average costs for services under insurance. That being said, insurance companies are also notorious for pocketing the difference themselves, but some negotiated rates do happen. I was offered insurance for my store on a plan that specializes in my type of store so we can lower costs by not covering things that don't apply to my type of store but might apply to general commercial insurance plans. – corsiKa Apr 26 '22 at 23:00
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    I've stopped referring to these plans as insurance because they're not (primarily) designed for those protect against rare things that could be financially catastrophic. This is especially true for dental and vision plans. They're group discount plans, with some incentives to get regular care in hopes of heading off catastrophic problems. Depending on your plan, "major dental procedures with surgery" may actually fall under a medical plan rather than a dental plan. – Adrian McCarthy Apr 27 '22 at 23:57

8 Answers8

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Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?

Because houses don't routinely go on fire, but teeth do routinely rot. The chances of you needing a dental treatment are exponentially higher than the chances that your house would undergo a catastrophic event. In the end, insurance companies are in it to make a profit, so if the chances of covered event to occur are very high, the cost of the covered event cannot be significantly higher than the premium because the pool of people who subsidize the insurance payout (those who don't have a covered event but do pay premium) is small.

Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?

Dental insurance provides additional benefits: negotiated rates, discounts, covered preventative measures (that alone may be comparable with the premium costs, if paying the list price), etc.

littleadv
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    I'll note: Many non-dental health insurers will provide some of those benefits you mention anyway (my HDHP covers basic preventative care, and negotiates discounted rates for everything else, even if it doesn't pay for it). So the dental insurance in that case ends up strictly a dollars for premium vs. dollars for procedures comparison. The dollars-for-premium can end up winning solely because it's taken out pre-tax (if you pay a cumulative 35% of your pay in taxes, for federal+state+local income tax plus social security and medicare, then $1000 for insurance is just $650 out-of-pocket). – ShadowRanger Apr 25 '22 at 16:38
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    @ShadowRanger for dental? I've actually never had a health insurance that would cover dental proceedings (unless you are having a health issue in your mouth) – littleadv Apr 25 '22 at 16:41
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    Yep. I thought it was weird too, but I've had at least two different health insurance providers that provide some dental coverage as a kicker. Not just HDHPs either; here's one provider of gov't employee plans that covers a little dental work (preventative cleanings, minor filling and extractions) for all three plans, low and high "standard" plans, plus the HDHP. I assume at least part of the goal is to prevent complete dental neglect from eventually leading to a health issue, but who knows? They don't give reasons. – ShadowRanger Apr 25 '22 at 16:51
  • @ShadowRanger I guess there are perks being a Federal employee :-D This may also be State-specific, as insurances are regulated per State. I don't think there's any particular requirement for dental coverage in ACA. – littleadv Apr 25 '22 at 17:04
  • @littleadv: HDHPs are weird in general, because you can spend HSA money on all kinds of stuff that insurance isn't "supposed to cover," including dental IIRC, and HSA money is pre-tax, so that's already a significant bargain by itself. You can also opt for an LPFSA, which only covers vision and dental, but I usually skip that because I never end up using it anyway, and it doesn't roll over (unlike an HSA), so it's basically just inferior unless you know you're going to spend a lot of money on vision/dental in a given year. – Kevin Apr 26 '22 at 04:09
  • @Kevin my LPFSA most definitely rolls over (up to ~$500 IIRC) – littleadv Apr 26 '22 at 06:48
  • @littleadv: OK, yes, you can carry a small amount over. But you can stuff thousands into an HSA and then treat it as a retirement account, which you certainly can't do with an LPFSA, and if you're going to do that anyway, the LPFSA makes far less logical sense. – Kevin Apr 26 '22 at 17:44
  • @Kevin well... LPFSA is a different kind of beast. You use it for ad-hoc things that are not covered by your primary coverage. You cannot use it until you meet deductible for regular health expenses, but things like eyeware, dental, etc - it's perfect for them. – littleadv Apr 26 '22 at 17:47
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    This argument doesn't really make sense when compared to other types of health insurance. You're basically guaranteed to have an health issue at some point in your life, yet health insurance generally does not have a low maximum benefit. – BlueRaja - Danny Pflughoeft Apr 27 '22 at 05:39
  • @BlueRaja-DannyPflughoeft that's because there's much higher participation in the insurance pool. That was, after all, the whole point of ACA. In addition, in the US, people over 65 move into Medicare and are covered by taxpayers (in most other countries all people are covered by taxpayers), and younger people are less likely to have health issues. – littleadv Apr 27 '22 at 06:20
  • Also for the same reason car insurance doesn't cover tyres. – Alan B Apr 27 '22 at 08:24
  • US dental insurance is more like a prepaid discount club. Typically if you actually do your two cleanings a year it's just slightly cheaper with insurance than without, and if you have any fillings it easily pays off – thegreatemu Apr 27 '22 at 22:50
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    also please don't misuse "exponentially" in a forum discussing quantitative matters! – thegreatemu Apr 27 '22 at 22:51
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Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?

These policies exist because there is demand for them. Most likely because these low maximums are a cheap way for employers to offer dental insurance, and perhaps because most people view the risk of a significant dental expense as fairly low.

There are also dental plans with no maximums, or plans where the maximum goes up each successive year of coverage.

Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?

If the maximum they cover exceeds the premiums then it is protecting you from some risk, it's just a question of degree. That's a value question for you to decide.

Many plans include preventive care and don't count it towards the annual maximum, if you take advantage of that, that's a few hundred dollars of value included, and then the rest of your premium would cover the risk of a higher-cost procedure.

You might also benefit from contracted rates. Regardless of your plan's maximum most insurer contracts with providers dictate how much the provider can charge for various services/procedures, so it could be that even when you're paying out of pocket you save due to the contracted rate. This can go the other way too where paying cash is better than going through insurance, so it's not a clear pro/con for dental insurance.

For some people, having paid for something already makes them more likely to use it, so a plan that includes preventative care visits might encourage them to actually go more frequently than they otherwise would.

Hart CO
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    It's likely that having a low maximum allows for having a low premium, which many people are interested in due to believing they will never hit the maximum coverage. Basically, I'm just restating the first paragraph, since it only implies the low premium part. – computercarguy Apr 25 '22 at 20:14
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One of the big problems with insurance of any sort is adverse selection which is when the people who buy an insurance policy are more likely to need it than the population average. When that happens, there is a death spiral where the carrier rapidly raises premiums to offset their realized expenses which drives even more healthy people out. Here's an article that shows empirically that there is adverse selection in dental coverage. https://www.researchgate.net/publication/228450919_Adverse_Selection_and_the_Demand_for_Supplementary_Dental_Insurance

From the provider's perspective, a good way to curb that adverse selection is to put a spending cap that people with good teeth think is moot and people with bad teeth think makes the plan not worth buying.

I think the above answers your first question.

As to why people still buy the insurance, there could be a few reasons. Some people might just buy dental insurance because it's offered without looking into the details. Some people may look at the details and decide that the out of pocket maximum is, for them, very expensive. Another reason is that by buying dental insurance, you get different rates from dentists. As an anecdote. I left a job that provided dental insurance and became a self pay dental patient. I found that for just biannual dental appointments, it was cheaper to buy new dental insurance than it was to be a cash customer at my dentist.

Dean MacGregor
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  • Also, some dentists accept the contracted rates even when they don't explicitly participate in the plan. People shop around less that way, and 80% of something is usually better than 100% of nothing. –  Apr 27 '22 at 23:51
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You need to do the math. Because I have always had dental coverage as an option from my employer the math has been simple. Selecting dental insurance has been worth the cost.

About 10 years ago my portion for the monthly cost of the insurance for family coverage was well below the cost of the 8 cleanings, 8 exams, and 4 sets of x-rays. All of which were covered 100% as preventative care.

The reason why the monthly premium was low was because the employer covered some of the monthly cost. During the years that we know we needed orthodontics coverage the calculus was even easier.

If the coverage isn't partially paid for by your employer, you have to decide if you get enough benefit to justify the insurance.

mhoran_psprep
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  • This seems right. When I started working for a small company without health/dental, so I had to pay for them myself, I didn't think dental was worth it as a single person. The premiums were about the same or more than the cost of routine procedures – Barmar Apr 25 '22 at 14:24
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    "The reason why the monthly premium was low was because the employer covered some of the monthly cost." You're still paying in that scenario, just via lowered salaries. – ceejayoz Apr 25 '22 at 15:41
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    But if I decline the coverage they don't raise my salary. – mhoran_psprep Apr 25 '22 at 16:14
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    @ceejayoz But not as much as if you paid for it yourself because the amount paid for medical insurance is exempt from a number of taxes that both you and your employer would otherwise have to pay. (And that's half the real answer to this question.) – David Schwartz Apr 25 '22 at 19:21
  • I always find it amusing that they call that really hard stuff on your teeth 'calculus'. I guess dentists don't like math! –  Apr 27 '22 at 23:53
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Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?

Because they can make money this way and people/HR consultants are misled enough to buy it

Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?

I don't. I ran the exact analysis when I moved out of my employment based insurance and came to the conclusion that dental insurance makes no sense at all for us. The sum of of the premiums are very close to the annual maximum, so the potential benefit is really small.

Instead we negotiated a yearly preventive care plan with our dentist which covers all regular stuff at a 3rd of the price that insurance would cost and also includes discounts for elective procedures.

The only exception would be if you already know you will have significant dental expenses (more than twice the annual max) over multiple consecutive years. In this case, you might as well get insurance and collect the small difference between premiums and annual max. Don't get your hopes up: it'll be a few hundred dollars at most.

See also https://www.investopedia.com/articles/pf/07/dental-insurance.asp

Hilmar
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All the other answers, focusing on whether premiums exceed payouts, are missing the point. "Health insurance" in the US isn't insurance either and for the same reason: company-provided health and dental insurance is paid pre-tax.

If your company pays you the cost of dental insurance in salary, that money is taxed. If you then pay that amount at the dentist the extra salary isn't enough to cover the dentist. But if your company pays for your dental insurance instead, that benefit isn't taxed. So companies provide health and dental insurance to increase employee compensation while avoiding taxes.

There's an incentive for as many expenses as possible to be covered by insurance that the employer provides because that allows as many costs as possible to avoid taxes. That's why health and dental insurance cover routine costs whereas insurance that's paid directly by employees like auto and homeowner's don't cover routine costs. It's also, indirectly, the root cause for high health care costs in the US (insurance-covered health care costs have surged while out-of-pocket health care such as over-the-counter drugs and elective cosmetic and laser eye surgery has gone down in price).

Reinstate Monica
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  • That makes no sense. You're saying that employers pay this expense to avoid taxes, but they do pay this expense, it's not a made-up write off. A more reasonable rationalization for your thesis would be that employers are interested in healthy employees and are incentivized to provide subsidized insurance to avoid higher churn. Or just want to provide a perk and stand out to attract better employees. The costs are low anyway. – littleadv Apr 25 '22 at 19:48
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    @littleadv I think OP means they can provide higher compensation at a lower cost, because it is taxed differently. Say my marginal tax rate is at 30%. If my employer increases my salary by $1000, I only get to keep $700 of it. If they give me an extra $1000 in healthcare, I get to use all $1000 of it, because I'm not taxed on it. I get more money in the latter case while costing the employer the same amount. – Kat Apr 25 '22 at 20:04
  • @Kat: well, to more precise you get more money supposing that you would have spent $1000 post-tax dollars on healthcare (including insurance) in the event your employer paid you $1000 pre-tax instead of $1000 insurance. More generally, if you value $1000-cost of insurance at $1000 then you get more value out of the package even if you don't literally get more money. OTOH maybe you wouldn't have spent so much on insurance, in which case there's some deadweight loss, which may or may not be more than the $300 tax saved. – Steve Jessop Apr 26 '22 at 05:21
  • ... then littleadv's theory kicks in, that the employer might have a different opinion from the employee how much they should spend on health insurance, so that the employer doesn't mind the deadweight loss. Extreme of this, of course, is ACA, where some number of people who (left to their own devices) would spend $0 on health insurance are spending more than $0, and it's the government that doesn't mind this deadweight loss. – Steve Jessop Apr 26 '22 at 05:24
  • Deadweight loss being the difference between what a non-cash benefit costs the person who chooses it, compared with how much the recipient would have been willing and able to pay for it. If you're sufficiently short on cash, almost anything you're given will have some deadweight loss unless it's stuff you'd have prioritised anyway, like food/shelter/power. I over-simplify ACA, since as well as doing what I said it also makes pricepoints available that wouldn't otherwise exist, at least for some, so without ACA they wouldn't have the opportunity to take or leave what they're now buying. – Steve Jessop Apr 26 '22 at 05:32
  • Healthcare insurance came about in the US as a way of increasing compensation (to lure more people to become employees of a company) during WW2 when wages were prevented from being increased by government decree. If not for the war, HC ins might never have been a thing, and probably not in UK or Europe either. –  Apr 28 '22 at 00:00
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Because some of the most expensive work is cosmetic

And insurance usually doesn't cover cosmetics work even in health care. Dental insurance covers things like fillings, crowns, and root canals. To make you feel better they also "cover" 2 cleanings a year, even though you're paying for those in the premiums since insurance companies know you'll do it.

And companies get tax breaks for insurance premiums

As you correctly point out, dental insurance don't cover many expensive things, it's also generally possible to "self-insure" yourself for dental visits.

So why is dental insurance so popular with companies - the government gives them tax breaks to buy insurance for workers.

They can buy nice insurance plans for workers as a way to up compensation. Workers like it because they don't get taxed on money they don't spend directly. The federal government added tax loop-holes for it, so companies use them.

Thus, there are several pretty terrible plans for low income earners. They get a tax break on dental care up to $1000 (in your example). After that it's out of pocket.

sevensevens
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Insurance works best when the damage is very costly, the probability to incur the damage is very low and also hard to know. Otherwse, the overall costs of payouts and adverse selection effects force insurers to demand very high premium and offer relatively low coverage.

Many insurance contracts that exist on the market just aren't very good deals. They exist because people like the peace of mind, don't understand the terms, or don't pay the premium themselves.

Even some of the most common and useful insurance contracts like car (liability) insurance or regular health insurance work because they are heavily regulated and (more-or-less) mandatory so the risk is diluted.

Relaxed
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