Dental Loss Ratios and Questionable Bedfellows in the Insurance Industry

Michael W. Davis, DDS

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Insurance industry dental loss ratios (DLRs) represent expenditures for patient services as a percentage of total premium dollars. A well-managed dental insurance plan will allot maximal dollars toward patient care and the least amount toward administrative overhead.

Under the Affordable Care Act (ACA), medical insurance plans are required to minimally operate at an 85% medical loss ratio (MLR) for larger carriers and 80% MLR for smaller health insurance companies. By contrast, dental insurance companies were exempt from compliance with this provision of the ACA.

Dental insurance is quite different than medical insurance in fundamental ways. Potential dental insurance company losses for payout of patient benefits are far more actuarially predictable. Most dental insurance companies impose yearly maximal payouts limited to only $1,000 to $1,500. Medical insurance may be on the hook for unlimited sums, in the event of catastrophic illness. In fact, few if any dental plans cover catastrophic events or major oral rehabilitation.

Dental insurance plans focus coverage on low-cost preventive care. The least percentage coverage is for more involved restorative treatments, like crowns and fixed bridge work. Further, many dental plans disallow payments for implant services altogether.

Medical insurance, especially modern plans with a higher deductible patient cost, pay out minimally for basic services. Their value kicks in with coverage, in the event of major diagnostic testing and serious illness and rehabilitation. Unlike modern medical insurance, dental insurance is not barred from disallowing pre-existing conditions.

In fact, the ADA openly states to the public, “Dental benefit plans are not really insurance in the traditional sense, but are designed to provide you with assistance in paying for your dental care.”

Thus, operational costs in the dental “insurance” industry are far more predictable and much less expensive than they are in the medical insurance business. The public and the dental profession have every reasonable right to assume the DLRs will be much higher and far less varied than MLRs. Unfortunately, that hasn’t always been the case.

California

The California Dental Association (CDA) has been a leader in advocacy for dental plans to operate with transparency in reporting DLRs. It has stated, “In fact, the average dental DLR in 2014-15 in California was 61 percent, considerably lower than the 76 percent average reported nationwide… (D)ental plan reporting demonstrated a wide variation in DLR by product type and market, with some plans falling as low as 4 percent spent on patient care, raising significant questions about the consistency and value they provide to patients.”

To highlight just how outrageous these figures are, the ACA mandates a minimal 85% MLR for larger medical insurers. Moreover, medical insurance is far more challenging and costly to administer compared to dental insurance, which truly doesn’t rise to the complexity and risk of a valid insurance product.

California Governor Gerry Brown signed CDA-sponsored SB 1008, the Dental Plan Transparency Act, on September 29, 2018. The CDA said it was specifically concerned that “plan-reported data validates the concern, that too much of dental plan premiums are spent on administrative overhead costs and not enough are spent on patient care.”

“As providers, we all too often see patients in our offices struggle to understand what procedures are and are not covered,” said CDA president Natasha Lee, DDS. “We aim to stop that and ensure patients get the care they need with SB 1008.”

“No one should have to drill into 80 pages of legalese to understand their dental plan,” said the bill’s author, Sen. Nancy Skinner (D-Berkeley). “SB 1008 requires dental insurers to provide details on what their plans cover in a simple, easy to understand format, so consumers understand what services are covered and what services they may have to pay for out of pocket.” 

Dental plans now will be required to meet the same standards for transparency in California as medical plans currently do. DLRs are also now mandatory for annual reporting to California state regulators.

The ADA’s examination of lack of transparency within the dental insurance industry specifically focused on California. Delta Dental of California was by far the single dominant carrier, with more than 40% of market share. The remainder of the market consisted of dozens of insurance companies, with next largest competitor only retaining an 8% market share. One might also assume a competitive advantage for Delta Dental of California because of its nonprofit 501c status.

In fact, Delta Dental of California’s dominating market presence is allegedly a monopsony. In economics, a monopsony represents a market structure in which a single buyer (allegedly Delta Dental of California) essentially controls a market of many sellers (dental providers) of goods or services. The power player in a monopsony essentially establishes low noncompetitive prices for dental services. This is similar to a coal mining town with a large dominant employer and multiple workers with very limited outlets to sell their services.

Washington State

The Washington State Dental Association (WSDA) asked the state’s attorney general to investigate the nonprofit 501c company Delta Dental of Washington and potential antitrust monopsony practices earlier this year.

“We believe Delta Dental’s position and practices in Washington inappropriately leverage monopsony power for its corporate benefit to the detriment of both dental service providers and their patients,” said WSDA president Cynthia Pauley, DDS. “We are optimistic that a careful examination of the facts will lead the Attorney General’s Office to reach the same conclusion.”

The WSDA also filed a formal complaint against Delta Dental of Washington this year with the state’s Office of Insurance Commissioner (OIC). The WSDA supports a 94% DLR so maximal dollars reach patient care or are refunded to plan purchasers. It also supports very transparent operation of Delta Dental of Washington, including mechanisms (independent review) for disputes in claims processing and full detailed disclosures on company expenditures. The WSDA further supports greater control of this nonprofit company by member dentists, versus a board of directors, which has allegedly unfairly usurped company control.

Concerned Dentists of Washington State (CDWS) has obtained figures from the OIC demonstrating that Delta Dental of Washington operated at an 82.97% DLR (claims paid $410,642,000.00/premiums earned $494,937,000.00) in 2017. CDWS has been successful in establishing bylaw changes in the operation of Delta Dental of Washington.

The next Delta Dental of Washington Special Meeting is scheduled for November. For the first time and at all future meetings, member dentists will be allowed representation by legal counsel and a formal parliamentarian.

“We have changed other bylaws that forced Delta Dental of WA to allow in a parliamentarian and an attorney to represent us for all future meetings,” said CDWS officer Kal Klass, DDS.

Wisconsin 

Concerns in Wisconsin center on nonprofit 501c company Delta Dental of Wisconsin’s (DDWI) involvement in Wyssta Investments, a for-profit entity fully owned and subordinate to DDWI. It has been reported as “out of business.”

Reported co-investors in Wyssta besides DDWI include Hawaii Dental Service (Delta Dental of HI), WDS Holdings (a subsidiary of Washington Dental Service, doing business as Delta Dental of WA), and Corvesta (parent company of Delta Dental of Virginia).

Wyssta Investments is a holding company for a high-risk startup private investment company. One venture of DDWI’s Wyssta Investments was its $20 million stake in C3 Jian (today C3J Therapeutics). This biotech company is privately held by four investors, inclusive of Wyssta Investments. The other three investors include Delta Dental of California, Corvesta, and Renaissance Health Service (a nonprofit 501c4 and parent company of Delta Dental of Michigan, Ohio, Indiana, Tennessee, Kentucky, New Mexico, North Carolina, and Arkansas). Under the equity method of accounting, Wyssta’s share of the equity in C3 Jian was $0 as of December 31, 2016.  

Multiple nonprofit insurance companies, seemingly all competitors, cooperatively elected to invest in a very high-risk private venture (C3 Jian) directly and also via Wyssta Investments as a parent company. Again, Wyssta is fully controlled and managed by DDWI. Fiduciary judgment and ethical responsibility must be questioned, not only for standards with insurance business investments, but for those companies maintaining nonprofit standing. As Wyssta’s share of the equity in C3 Jian was $0 ,how does one explain those loses?

Insurance companies, especially healthcare insurance businesses, generally will invest in very low to modest risk ventures: Treasury bonds, high-rated corporate bonds, municipal bonds, or even preferred stock of Fortune 500 companies. High-risk venture-capital private equity investments usually aren’t part of their investment portfolios.

At the very least, this represents very ill-conceived investment philosophy on a fairly large scale. At worst, it possibly represents a mechanism to launder nonprofit revenues into a slush fund, to later be kicked back in management fees, as additional retirement funding to nonprofit officers and directors. One can only speculate without a thorough criminal forensic auditing. Regardless of the reality, a serious red flag has been raised.

Another company in the Wyssta Investments portfolio is Healthentic. This firm collects, measures, and analyses healthcare data. Its customers include employers (including government), insurance companies, and banks. Besides Wyssta, its investors include Corvesta, Hawaii Dental Service, and WDS Holdings.

“This company has a solid user base, a great go-to-market business model, and is ready to scale,” said Jim Dwyer, president and chief executive officer of WDS Holdings in Seattle and chair of Healthentic’s Board. “We’ve seen the value Healthentic brings to employers. That’s why we’re investing.”

Wyssta Investments also has an interesting arrangement with DDWI.

“DDWI has a service agreement with Wyssta Investments, Inc., dated January 1, 2008, according to which DDWI provides administrative and managerial services necessary for Wyssta Investments, Inc., to conduct its normal business operations. Wyssta Investments, Inc., reimburses DDWI for the actual cost of these services,” the agreement says.

“As of December 31, 2016, Wyssta, Inc., and Subsidiaries audited financial statements reported total assets of $2,028,997, total liabilities of $750,000, and total stockholder’s equity of $1,278,997, for Wyssta Investments, Inc. Operations for 2016 produced a net loss of $248,218. Beyond the losses for Wyssta Investments for 2016 were the losses of $20 million relating to C3 Jian,” the agreement continues.  

The IRS filing of Form 990, schedule J, part III (part II “deferred compensation”), of DDWI for 2015 included: “In prior years, Delta conducted an analysis of compensation paid and projected retirement benefits to its senior executives. It was determined that these senior executives had accepted compensation and retirement benefits below market rates for several years as the organization was not then in a position to pay market rates. The board agreed at the time to establish a supplemental retirement plan and received a reasonableness opinion from an independent compensation organization. The compensation from this supplemental retirement plan is noted in Schedule J, part II, (C) and the amounts accrued and reported on previous Forms 990 are reported on Schedule J, Part II, (F).” 

In short, that meant an extra bump in income to the DDWI president and CEO salary of more than $1.06 million for an added $51,000. The treasurer, vice president, and chief financial officer salaried at nearly $1.6 million received an additional $281,280.

Conclusion

Organized dentistry in both California and Washington has taken leadership roles advocating legislative action for transparency in the dental insurance industry generally and in DLRs specifically. The general public and dental plan purchasers (private employers and government) deserve full disclosures to make informed decisions.

The healthcare industry, inclusive of dental insurance, is not like ordinary commerce. Patients are at a distinct contractual disadvantage with understandings in contract language and reasonable access to information to make informed decisions. This market is quite distinct from the buying and selling of widgets.

If a single insurance carrier so dominates a market as to enjoy monopsony powers, serious oversight and disclosures must be in place. The public, plan purchasers, and doctors require protections. It’s seems like a distortion to free markets for a nonprofit insurance business with significant tax advantages to enjoy monopsony control.

It’s valid to question a nonprofit 501c insurance company’s investment activities into highly speculative private startup companies. It’s also rational to question exorbitant compensation for directors and officers of nonprofit entities. It’s further sensible to address why seemingly competitor companies apparently are conjoined on the same business ventures.

A public image (real or not) of backroom deals, slush funds for company officers, and phony self-serving individuals pretending to promote the public welfare may not be in the interest of the insurance industry or especially that of nonprofits.

DDWI is a relatively smaller and less visible player compared to much larger and more prominent Delta Dental companies. Possibly due to an apparently inconspicuous profile, it may be centered at the hub of highly interesting activities. Only a well-structured forensic accounting investigation on a large scale would come to conclusive answers.

In the meantime, organized dentistry in its pursuit of serving dentistry and the public interest must avoid even an appearance of conflict of interest. Doctors serving on boards for insurance firms like Delta Dental should not be remunerated to such a degree as to make their integrity questionable.

Likewise, those serving in national leadership positions for organized dentistry must be distanced from even an appearance of a conflict, especially if they’ve ever been employed in the dental insurance business. Unfortunately, the opposite is frequently the situation today.

Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at mwdavisdds@comcast.net or smilesofsantafe.com.

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