Will high inflation be the end of PPOs?

Dentists face a dilemma they have never had to navigate before: staying profitable while participating in PPO plans in a rapidly rising inflationary environment. For dentists who are stuck on the PPO treadmill, they may not realize the extreme financial danger they will face with likely ever-increasing inflation.

How did we get here?

Historically, the last high inflation period was in the ’70s and into the early ’80s.

Although dental insurance started in the ’60s and became popular over the next decade, these plans did not include PPOs. They were only conceived and became widespread after the Federal Reserve Board tamed inflation in 1982.

How did the “Fed” tame the inflation rate? It had reached 14.2% in February of 1980. Led by Paul Volcker, then Federal Reserve chair, they raised the federal fund rate to 20%. This ultimately cooled inflation but created much pain and sent the country into two recessions.

Today, the Fed has two options to try to control the economy. First, like Volcker’s Fed, they can raise the federal fund rate to attempt to lower inflation. But if they raise it over a few percentage points, they risk sending the US government into default. This is due to the fact that back in 1980, our national debt was measured in the high billions, and today, it is closing in on $30 trillion. Because of the huge national debt, our government survives on low interest rates.

The other option would be to just keep printing money to attempt to hold off a financial Armageddon. As the money supply goes up, the value of the dollar goes down, and this creates a rapidly rising inflationary stimulus. This approach has a finite limitation on how far it can go before catastrophe strikes. One of the axioms of economists is that once inflation starts spiraling upward, it is almost impossible to control. Some economists feel the only thing that could save us now would be an outright depression.

The high risk of inflation

Most dentists today were not practicing during the early ’80s and perhaps don’t appreciate how destructive high inflation is. On the CNBC Trading Nation broadcast, Torsten Slok, chief international economist at Deutsche Bank, said after considering all the problems we face in the world today, “I think inflation is the mother of all risks here.”

In May of 1980, I started a practice from scratch in a small town in Arkansas. I had an adjustable-rate mortgage that was 0.5% over New York prime and rose quickly to 21.5%. The local bank felt sorry for me (scared I would default) and informed me they were “maxing” my interest at 19%. Boy, did that help! [Sarcasm]

Recently, in preparation for talking with my staff about PPOs, I wrote this: “Inflation is becoming a real threat to dental practices that are contracted (PPO provider) with dental insurance companies because, across the board, insurance companies are inflexible and lack the desire to adjust their payment schedules.” I was wrong!

In a Dental Economics article called “Freedom! 4 steps to reduce insurance dependence,” Brett Wells, DDS, writes, “I was absolutely shocked to see one of the largest dental PPO networks send letters to a large swath of providers to let us know they are significantly cutting their reimbursement rates.”¹ This is shocking! Obviously, they are not lacking in the desire to reduce the rate of reimbursement. I can imagine in this insurance company boardroom, as they were discussing inflation and their rising costs, it could have sounded like this: “Are we going to have to raise our premiums to adjust for rising costs? No, why don’t we just decrease our reimbursement to dentists? Dentists will accept it because they are predominately a passive population!”

The inflation index has been changed in the way it is measured multiple times since 1980. The latest year-over-year inflation rate by the government is 7.5%. To identify the real inflation rate, many economists include other items left out of the Consumer Price Index. This can raise the real inflation rate considerably. How long will it take a 7.5%+ inflation rate to eat away your profit margin?

Transitioning out of PPOs

The larger the percentage of PPOs you have in your practice, the greater the financial risk is to your practice. Fear and trepidation about getting out of PPOs needs to be replaced by fear and trepidation of staying in them.

In my practice, we are trying to mitigate the loss of patients by dropping the most inferior plans first and the remaining ones spread over the next few months. We will continue to work with all insurance plans that allow unrestricted providers (out-of-network) and will continue to file insurance claims for our patients. Because rural Arkansas is not the most affluent area, our office does accept assignment of benefits. This helps with greater case acceptance.

Being out-of-network, a patient’s dental insurance then becomes like a coupon that they can apply to their case fee. There are many resources to help you transition your practice out of PPOs, including Dental Economics and other CE offerings such as Madow On Demand.

If you are looking for businesses to invest in (stocks) in inflationary times, many investment advisors will recommend finding good value companies with strong financials and that have the ability to raise their prices. This should also be the model we use to build our dental practices.

How can you keep up with rising overhead and salary demands without the ability to raise fees? Spoiler alert: You can’t! High inflation should help bring about the end of PPOs or it could be the end of PPO dental practices.

Editor's note: This article appeared in the May 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.

Reference

1. Wells B. Freedom! 4 steps to reduce insurance dependence. Dental Economics. February 14, 2022. https://www.dentaleconomics.com/money/article/14223153/freedom-4-steps-to-reduce-insurance-dependence