Hamilton AI (1976), Beware Third Party Power, Operative Dentistry, 1(2) 41.

Beware Third Party Power

For many years payment for dental service has been made directly to the dentist by the patient. This method of payment is being modified increasingly by the entry of a third party into the transaction. The third party may be a corporation organized by dentists or dental associations, an insurance company, or, in some countries, the government. The function of the third party is to contract with patients, usually groups of patients, to satisfy their demands for dental treatment and to pay directly the dentists that supply the treatment or, alternatively, to reimburse the patients for their costs. From the point of view of economics, the entry of the third party changes the dental market drastically from one of many individual buyers and sellers to one of many sellers but few buyers–in some cases only one. This arrangement concentrates buying enormously.

Selling power can be concentrated also and most know such concentrations by the familiar name of monopoly. Though he does not always use it, a monopolist has the power to raise prices and restrict output so that he can make more by selling less. He has also the power to engage in price discrimination by charging different customers different prices, so that if he cannot sell all his stock at the highest price he can sell the remainder by lowering the price to selected buyers rather than having to lower the price to everyone as would happen in an open market.

The buyer’s counterpart to the seller’s monopoly is called a monopsony. Monopsony is exemplified by a sugar-beet refinery which draws its supplies of beets from farmers in the surrounding area. The distance between sugarbeet refineries is usually substantial so any farmer not satisfied with the price offered for his beets by the local refinery must contemplate additional transport charges if he wants to sell his produce to another refinery. Thus, the monopsonist has the power to set prices lower than those that might prevail were another refinery nearby. The monopsonist has additional advantages in being able to set the terms of contracts and to specify types, quantity, and quality of produce.

Third party programs in dentistry have monopsony power if they pay the dentist directly rather than reimburse the patient. The power of a third party over a dentist grows directly as the proportion of his patients participating in the program increases. Some of the abuses of monopsony power are now evident, such as not paying the dentist his full fee, withholding payment, refusing to pay for certain types of treatment, notifying patients of the names of dentists that belong to third party corporations, as well as requiring a monumental and costly traffic in paper. Some of these practices border on unfair competition and restraint of trade, both of which are illegal and benefit neither patient nor dentist.

A classical example of the use of monopsony power against dentists is provided by the General Dental Services of the National Health Service of the United Kingdom. The health service began on July 5, 1948, at which time about 50 percent of the dentists were induced to participate. Within six months the proportion had risen to 85 percent. A month later the government began to lower fees.

Some dentists believe that third party programs can be controlled if dentists participate actively in establishing or managing them. This is as effective as setting the fox to guard the chickens. Fundamental principles of economics cannot be contravened with impunity. Dentists should insist on being paid by the patient, not by the third party. Third party power is dangerous. Beware!

A. Ian Hamilton