Does direct reimbursment cut dental costs? Directly reimbursing employees for dental expenses is a route some small and large employers are taking

Offering employees dental coverage can pay off for a company, and direct reimbursement may be a simple, cost effective way to do it.

Direct reimbursement plans offer companies of any size a self-funded way to provide dental coverage, bypassing insurers and, in many cases, third-party administrators. Therefore, they can save employers considerable money in administrative costs, according to a number of companies that have implemented such plans.

Meanwhile, those who are not as enthusiastic about direct reimbursement plans note that direct reimbursement is not something that all companies should pursue. Opponents of direct reimbursement say that the employer has limited control over benefit costs. And assuming responsibility for plan administration can become a burden.

Reflecting what many experts see as a general insurance trend toward self-funding, direct reimbursement is an alternative to paying premiums to managed care companies.

Self-insuring dental benefits can be a fairly low-risk option because, unlike medical costs, dental expenses are predictable, stable, and noncatastropic. In some severe cases, when a car accident victim requires extensive dental reconstruction, for example, an employee's medical plan would pick up coverage.

Direct reimbursement is simple. Typically, an employer sets aside a certain amount of money annually for dental coverage. After an employee visits the dentist of her choice, she presents the employer with a signed, paid receipt for treatment and is reimbursed up to the plan's limits. Benefits are based on a percentage of dollars spent, up to a maximum limit per year. Unlike traditional plans, there are no complicated claim forms, no exclusions (except for cosmetic procedures) and few, if any, service limitations.

The benefits

Direct reimbursement has advantages for both plan sponsors and employees. Perhaps the most significant plus for some employers is cost savings gained through eliminating the insurance company and, therefore, most of the administrative overhead costs. The American Association of Orthodontists, a dental association in St. Louis, estimates that the direct reimbursement approach lowers administration costs by about 18%.

Recalls Joy Benedict, personnel director for Pattie A. Clay Hospital in Richmond, Ky., "When we considered offering dental coverage in 1989, we compared what we'd pay a third-party administrator for an insured plan and what we'd save if we handled a direct reimbursement plan ourselves." Of the hospital's 420 employees, 375 take advantage of Clay's dental coverage. "We saved $30,000 the first year going the direct reimbursement route, and costs have remained constant," says Benedict.

The city of Wilmington, Del., considers its direct reimbursement dental program a great success for the same reason. "We started direct reimbursement in 1987 when we had 1,200 employees," says Nancy Roberts, benefits manager. "During the first year, we paid out slightly over $116,000 in claims, which was about $452,000 under what the company anticipated paying in insurance premiums. We now have 1,350 employees and spend about $200,000 a year on dental. We've looked into changing but found we couldn't get a better deal."

For employers, direct reimbursement provides control over plan design, according to Ellyn Mastako, marketing specialist for the Purchaser Information Service at the American Dental Association's Council on Dental Care Programs, in Chicago. "For companies that pay claims in-house, all the money in the plan goes directly for dental care, not to a third party," says Mastako. "And they pay for dental care for only those employees who want and use the benefit," as opposed to paying premiums for employees who do not use their dental benefits.

Direct reimbursement works to employees' advantage, too, since they can choose their dentist, rather than choosing from a preselected network of providers. Employees also find direct reimbursement easy to understand and use, and they (and their dentists) do not have to fill out claim forms or deal with exclusions, predeterminations, and second opinions. Employees know in advance exactly how much they'll be reimbursed by referring to their company's plan design formula.

Both the ADA and the AAO, with 140,000 and 10,000 members, respectively, offer extensive support, free of charge (except for the ADA's administration software program), to companies exploring the feasibility of direct reimbursement and designing and implementing coverage. They provide extensive information (the ADA's booklet has step-by-step instrustions and forms to complete), consultation, and actuarial estimates based on employee population and plan design to help companies arrive at likely costs. (Employers that are interested in obtaining assistance can contact Mark Leach at the AAO, 401 N. Lindbergh Blvd., St. Louis, Mo. 63141, 800/424-2841; or Ellyn Mastako at the ADA, 211 E. Chicago Drive, Chicago, Ill. 60611, 312/440-2500.)

Lack of cost control

Not everyone, however, sings the unqualified praises of direct reimbursement. "I don't see that the direct reimbursement approach benefits anyone but the dentist," offers Bob Eicher, a partner in A. Foster Higgins & Co.'s New York office. "It's structured in such a way that it will cover procedures that aren't medically necessary, and that drives up costs. Employees, as a rule, aren't well educated dental consumers, and there aren't any utilization restrictions," he adds.

One dental insurance vendor noted that direct reimbursement has four major shortcomings. First, treatment cost management is almost nonexistent because the plan has no mechanism to check whether dentists' fees are reasonable. Employers, when they buy dental benefits, want to pay for reasonable care and they want to place limitations on that care with the understanding that the employee has a responsibility to help control costs as well. Reviewing necessity of care goes hand in hand with cost management. In other words, there is no way to prevent someone from opting for a cap in place of a filling.

Second, directly reimbursing employees for dental costs can become an administrative burden in terms of keeping track of eligibility of dependents and tracking dollar maximums per person. Usually it's a hidden cost for employers.

Third, many employers don't want to be the ones to handle coverage disputes. For example, the personnel department might not want to weaken its relationship with employees by telling them why they can't be reimbursed, even though employees have already paid for treatment. And finally, direct reimbursement can impede some employees from seeking care if they have to pay for the dental treatment up front.

On the other hand, a skilled third party administrator can establish a preferred provider network with both price savings and quality of care reviews and provide a cental resource for employees to ask questions and lodge complaints.

FireKing International Inc., a manufacturer of insulated filing cabinets, in New Albany, Ind., converted from a direct reimbursement plan three years ago because of the difficulties in checking dentists' fees and keeping track of deductibles. FireKing now pays a company to handle administration, check dentists' fees, and check employees' eligibility.

Doing so saved the company money. "We've seen a real reduction in the expenses of our dental program," said Doug Risher, vice president of finance for the company, which has 236 employees. In FireKing's peak year, its dental costs were $47,000. The first year it switched from a direct reimbursement plan, the company paid $30,000 in dental claims, including the premium to the company handling its administration. In the second year, FireKing's dental care costs were close to $25,000, Risher said.

The company handling FireKing's claims also helped the company save money by instituting a separate deduction for dental benefits and asking employees to make a small contribution to the premium. As a result, some employees who had duplicate coverage from a spouse's plan decided not to participate.

"When we have employers compare direct reimbursement to HMOs, in many cases they'll go with an HMO plus an opt-out," says Charles Blanksteen, a consultant in William M. Mercer's New York office. (An opt-out allows the employee to receive treatment from an out-of-network provider.) The reason, he says, is that the managed care approach offers more services and more quality control for the money. "Sure, direct reimbursement is an easier game than an HMO," he concedes. "You lock in your expenses and that's it. Filling out claim forms, predetermination, utilization review--all those are a nuisance. Direct reimbursement is much cleaner and easier, but there's another side to the story. What about plans that pay the same amount for a large family as they do for a single person? And what about when an employee or dependent has a bad year and needs $3,000 to $5,000 worth of dental work? Should one employee have to absorb that expense?

"Then there's the coordination of benefits hassle--and fraud. Suppose an employee gives his dental benefit to a friend to use? I've seen it happen. If the whole thing is legitimate, case by case, then, yes, direct reimbursement is a way for companies to get out of dental insurance. But I think managed care is a viable alternative, and you can often get more for your money."

Companies polled that offer direct reimbursement insist that they've experienced none of the pitfalls Blanksteen mentions. "We're not worried about employees cheating the plan," says Stephen Davis, director of human resources, Lafayette Life Insurance Co., in Lafayette, Ind., "because, in essence, they're spending dollar for dollar what we spend for their dental care." Davis says, "Occasionally, when our suspicion is aroused, we simply call the dentist to verify the treatment and cost."

In spite of consultants' reservations about direct reimbursement, companies that offer this type of dental coverage are almost unreservedly enthusiastic. The AAO, in fact, claims that not one of the nearly 500 companies that it has assisted in setting up a direct reimbursement plan has ever changed back to insured coverage.

Everyone, however, agrees that direct reimbursement is not for all companies. A company should consider its budget and administrative resources before rushing into directly reimbursing employees for dental expenses, many consultants advise.

Estimating costs

If an interested company already has a dental plan, the ADA, for instance, uses an "experience" formula involving detailed information on premiums paid and claims incurred to estimate costs. Those that want to offer dental benefits for the first time may decide how much to spend in total, or how much to spend per month per employee. The AAO uses actuarial estimates and suggests that companies with more than 100 employees regard the numbers as fairly accurate predictors of plan costs. Businesses with between 25 and 99 employees, according to Leach, AAO spokesperson, should view the numbers as benchmarks only. The estimates vary according to number of employees. Employers with fewer than 25 employees are better off setting a total amount, then dividing it by the number of employees to determine the annual maximum reimbursement.

Employers shouldn't expect to have to shell out the full amount of their aggregate maximum reimbursement. According to the ADA, plans rarely reach their maximum potential because 40% to 45% of all individuals with dental coverage don't go to a dentist at all during a given year. Of those who do use their benefits, few incur costs exceeding $150 annually.

Eli Lilly & Co., a pharmaceuticals company, in indianapolis, Ind., began reimbursing employees directly for dental costs in 1973, according to the ADA.

A local orthodontist counseled Eli Lilly and several other Indianapolis companies to go the direct reimbursement route, and the ADA and AAO subsequently got involved in refining and promoting the approach. No one knows exactly how many companies have direct reimbursement plans today, but the two professional organizations guess the number is close to 1,000. Each group has helped set up about half of these plans.

Though direct reimbursement plans are relatively simple, they can be designed to be flexible. Depending on cost and company orientation, coverage may include employees only of combinations of dependents, as well as various administrative systems. Some companies require that employees pay their bills up front and present paid receipts for reimbursement; other companies with employees who have difficulty paying may assign benefits to the dentist.

Lafayette Life Insurance has had its direct reimbursement plan for more than 10 years. Its dental plan is part of a total medical, dental, and vision package.

Of the company's 256 employees, the 239 who are covered pay a $10.58 biweekly premium for the package for single coverage, says Davis. Employees chose coverage for themselves alone, employee plus spouse, employee plus children, or employee and entire family. The biweekly family rate is $30,25. For dental, Lafayette reimburses 50% of the first $2,500 of dental expenses, with a $ 1,250 annual maximum per family. Last year, Lafayette spent $34,404 on dental expenses.

The Rutland Herald, a daily newspaper in Vermont, switched in early 1988 from an insured plan in order to save money, expand coverage to include orthodontia, and gain flexibility.

Susan Zoesch, benefits and salary coordinator, says direct reimbursement has saved the company money, but couldn't specify how much. "Direct reimbursement makes it possible to be a lot more flexible," she says. "Insurance companies are fussy about the timing of treatment and preexisting conditions. With direct reimbursement, these aren't issues."

The Rutland Herald pays 100% of the first $100 and 50% of the next $1,800, for a maximum of $1,000 per family per year. In 1991, the newspaper spent $24,787.25 total on dental--2%, or $486, of which is administrative cost. The newspaper pays $255.54 annually for each of its 97 covered employees. "Only in two instances have people reached their maximum," Zoesch says.

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