The Incentive Structure of Dental Insurance
Last August, I spent 10 nights in the hospital.
The bill: $50,000. How much did I have to pay? $0
Yes, I have good health insurance, but I also have good dental insurance.
In June, a patient racked up a $25,000 check for a new set of top teeth.
How much did they have to pay? $23,000.
This is unfortunately the reality of dental insurance. With normal health insurance, patient’s out of pocket liability is capped. In dental, the insurance carrier’s liability is capped. Patients pay anything above that amount.
In the 1970s, $1,500 was considered normal for this insurance cap. In the 2020s, $1,500 is still considered normal.
What is the point of dental insurance if it barely covers anything and insured patients are suffering?
Why Dental Insurance Sucks
Until the 1950s, dentistry was regarded by carriers as uninsurable. Insurance spreads the risk of black swan events across a large population.
But dental work is 1) common 2) not that expensive 3) predictable. Not the kind of thing insurance provides that much value on. The carriers stayed away.
This was until 1954 when a mariner's union found themselves sitting on an extra $750k. The no-brainer thing they spent it on? A dental plan.
Insurance companies took note. If they couldn't sell real insurance, why not spin off this membership plan model and throw the label of dental insurance on it?
This continues to this day and is why when patients go to the dentist they are quite shocked that their amazing dental insurance doesn't really cover anything.
The most common dental plan model is called the PPO plan.
Preferred Provider Organizations (PPOs) allow insured patients to choose any dentist. If that dentist is "in-network", the patient pays for the dental work at the rate dentists and insurance companies negotiate. If instead the dentist is “out of network”, it means the dentist did not agree to that insurance carrier's rates and often the patient will have to pay more.
The average PPO plan (call it PPO 1500) saves patients 100% on preventative care, 80% on basic treatment, and 50% on big ticket treatment according to these rates. This is called 100/80/50. However, the 1500 means this insurance plan will only provide these “discounts” up to $1,500.
The $25,000 procedure. That’s on the patient.
The Dentist
If Dental Insurance is bad for the patient (the buyer), then it must be good for the dentist (the seller).
Unfortunately, no. Dentists sacrifice to be "in-network" with PPOs. Delta Dental, the largest PPO, with more than 50% of insured Americans, uses its leverage to negotiate down fees (the amount reimbursed for a procedure) with dentists. If the dentist refuses to accept, Delta will label them "Out Of Network" to disincentivize 50% of the American population to go.
Well, surely Delta Dental, the non-profit, is nice to its dentists on fees...
In a market where both the buyer and the seller lose, a non-profit company (Delta Dental) wins. And not only are they winning, they are winning big. Big enough that they are in antitrust litigation.
Let's look at Delta Dental of California's data from 2024. Where did all of their winnings go?
Only 72% of premiums go to dentists to pay claims (the loss ratio).
So if not to the dentist, where? In 2024, Delta Dental of California collected $6.3 Billion in premiums. $3B came from self funded plans, but there’s still $1 Billion left over.
The CEO of the non-profit in California made a smooth $6 Million, but that's hardly a dent.
25% of the premiums went to the administration of paying a claim.
25%. Compare this to 10%, the amount dentists spend on practice operations.
A company that exists to move numbers around computers spends more on administration than a dental clinic that actually provides care to patients. In the 1990s, that made sense. In the 2020s, it's incompetence.
Low reimbursement rates, high corporate salaries, and bad plans for the patient. How the hell did this happen?
The Marketplace
Naively, the marketplace for a patient seeing a dentist involves a patient and a dentist. However, the people in control of the cash aren't in that scenario at all. The people in control of the cash are the corporations employing the patients and the insurance companies paying the dentists.
Roughly 25% of Americans have dental benefits paid for by their company. Another 25% of Americans pay for their own dental benefits via their company. Then 30% of Americans receive dental benefits via the government. The other 20% either choose insurance for themselves (3%) or are uninsured (17%).
This means 80% of Americans don’t choose the carrier they get benefits from.
Naively, one could hope to improve dental insurance by creating better plans for the patient. But no, a better plan for the patient won’t help. They aren’t the buyers. Employers are the buyers.
Employers will not pay more for dental insurance (unless mandated). Employers will only pay for a plan if it is cheaper. If there's enough plausible deniability, they don't even care if it’s better.
Okay, so in summary
- Patients: need better coverage
- Dentists: need to be reimbursed more
- Employers: want to pay less
When people say dental insurance has an incentive problem, this is all they mean. Employers want to pay less. Insurance companies don’t mind. They want to pay less too.
Insurance incumbents live in a regulatory moat, a distribution moat, and perfectly cater to the incentives of the buyer. They make plans cheaper by reimbursing less. That is the incentive of the insurance companies.
A New Day
Today is not yesterday. Technology now exists to beat the incumbents at their own game. And luckily for Denta, the incumbents have no ability to use it.
Hey Delta Dental, there's a company called Denta that uses AI to evaluate and pay claims in real time. That company charges less in premiums and reimburses dentists at a higher rate.
In the best case, Delta sees this message and will have a board meeting next month to discuss their "AI Strategy." That AI strategy will involve giving their 7,000 employees claude or chatgpt. Great, another expense to drive up admin spending.
In reality, the incumbents are all sitting ducks. They have 3 moats: capital, regulatory, and distribution. Technology just allowed a small startup to cut through them all.
- Capital: not as much needed when the largest cost (people) is replaced by AI
- Distribution: brokers will help, but cheaper always wins
- Regulations: nothing for a stubborn kid who sees dentistry as his life's work
The moats are collapsing. It is a new day to build a company that will last 100 years.
AI-Native Insurance
I will lay out exactly how this AI-first insurance model will work. It’s really quite simple as it’s the same model that every AI company follows. Fewer humans. More AI. Own the full vertical.
The more you rely on legacy third parties - brokers, software vendors, clearinghouses - the quicker your margins vanish. Denta just cuts out the BS and gives it back to the dentists and employers.
I dare Delta to copy the playbook and win. The technology is there.
Self Funded Dental Insurance
Denta doesn't want to be like Delta. Denta wants to do good for the industry.
Let’s see how Denta can do it by
- Reimbursing the dentists more
- Still making the plans cheaper for the employers
In fact, this is actually quite easy.
Most Fortune 500 companies already prove this is possible by self insuring.
Companies like Walmart, understanding that 28% of their premiums aren’t going to dentists, opt out by self funding their insurance.
When a Walmart employee goes to the dentist, Walmart pays the dentist straight from the Walmart bank account.
Now, Walmart doesn’t have the ability to read X-Rays or process dental claims, so they pay a Third Party Administrator (TPA) to do this for them. That TPA performs all of the administrative work but sure doesn’t cost Walmart 28% of their premiums.
Matter of fact, who is Walmart’s TPA?
Delta Dental.
One could argue that Delta’s real value is in spreading risk across a large population. The only reason Walmart can get these savings is because they have such a large population too. Companies outside of the Fortune 500 would be stupid to self insure. One catastrophic event could wipe them.
For general medicine, where the liability is uncapped, I agree. For dental, where the most a company has to pay is $2,000 a year for an employee, this argument loses footing.
Now, this doesn’t mean every company should self insure. This is more to prove that it is possible to make plans significantly cheaper by decreasing admin costs. Even Delta can prove that. Now let’s see if they can take it further?
The real question is if one can simultaneously make it cheaper for employers while benefitting the patient and doctor. With the amount of bloat still in the system, my answer is yes.
Let’s look at how Denta does it for a specific company. The type of company that Denta primarily sells to: the tech startup.
Tech Startups
Tech startups are for many reasons not like normal companies. One of those reasons is their yearly attendance to the dentist.
63% of American Adults go to the dentist at least once in a given year.
How many tech employees would you estimate go to the dentist in a given year? And do you think tech employees need more or less dental work done than the average American?
Although I’m abstracting to the tech worker, research backs that adults between 18-35 are the least likely to go to the dentist. Pair that with the fact Americans in the upper quartile of economic welfare require less treatment when they do go to the dentist and you start realizing dental care for a tech worker is pretty cheap.
Now, the question is, does Delta Dental bake this in when they give startups their quote?Perhaps.
More likely, they use startups to subsidize the plans they offer other companies.
With the combination of admin bloat, payments to brokers, and unfair rates based on demographics, Delta’s plans are not the true cost of dental work.
Denta changes that. Denta gives startups insurance without administrative overhead.
How good is this for a startup?
Quite good. Conservatively, a startup could save upwards of 35% a year.
Denta is a software company for dental practices?
This might come as a surprise to see Denta so focused on Dental Insurance. Isn't Denta the dental practice that runs itself? Yes. That's exactly why Denta is so focused on Insurance.
Clinics spend between 10% and 15% on non-critical operations. For the average practice on Denta that's around 2% on software and IT, 3% on front desk labor, 6% on practice management labor, and 2% on insurance billing.
The 2% spent on billing should’ve been gone 5 years ago. Insurance companies just won't let it happen.
Insurance companies win when claims get denied. Insurance companies win when dental practice’s are put on hold for 2 hours. Insurance companies win when money slips through cracks. As much as AI RCM companies fight, insurance carriers will fight harder.
But Denta is an insurance company? Won't Denta be incentivized to do the same?
No, Denta is not an insurance company. Denta is a dental company. By building both the insurance company and the software that runs practices, Denta wins when dentists win.
Reduce admin spending. Increase reimbursements. Share the profits.
As the kid of a dentist, I don't build Denta Insurance to screw him over. I build Denta Insurance because I understand the abundance that will exist when the bureaucracy is dismantled.
My dad had a saying when I was a kid: do you want to be a producer or a consumer?
Tackling insurance, I want to produce, not just skim a quick margin off the top. Every dental practice in the US benefits from this mission.
Denta will always work towards the dental practice that runs itself. Denta is now building the insurance company that makes it possible.
Insurance at Light Speed.
Denta.