According to The Economist, customer service in America is getting worse, and that matches my own experience. For instance, I recently had trouble with my dental insurance, which was accidentally cut off at the beginning of the year. My wife and I had numerous phone conversations with the multiple layers of bureaucracy that handle this policy, but it’s like talking to a brick wall.
[If you are interested, my former employer has a company called Voya manage their employee benefits, and they were supposed to instruct CareFirst dental to re-instate my insurance. Voya insisted they sent the information, CareFirst denied getting it. Even a three way phone call failed to resolve the issue.]
I looked online, and Voya’s Los Angeles office seems to have a horrible record with customers, so we are not alone. In addition, the exact same problem happened last year, and it was a hassle to get the issue resolved.
Although these are all private companies, I blame the government for our distress. To see why, consider the market for auto repair insurance. You could buy insurance for auto repairs, to cover the cost when you need a transmission overhaul, a brake job or a replacement of calipers. But these insurance policies are typically not a very good deal, and I have no interest in purchasing one. The same is true of home repair policies.
So what makes dental insurance different? The answer is simple; these policies are heavily subsidized by the federal government, whereas home and auto repair policies are typically not subsidized. Dental insurance is a very inefficient system, which would have trouble surviving in a free market. But if a third party is going to pay 40% of the cost (via tax breaks), that’s enough to induce many firms to offer dental insurance as a “fringe benefit”, part of their total compensation package.
In this particular case, I would have opted to avoid dental insurance even with the subsidy if I had known how incompetent the firms would be. But when making a decision, one can only form an estimate of the quality of the output. With large government subsidies, a product can be highly wasteful to society and yet still be privately beneficial to the buyer. Note that even if the companies had not screwed up the delivery of my dental insurance, I’d still be paying the salaries of all the people who work for the dental insurance companies, and the companies that manage the benefit plans of my employer. That’s economic waste, as these people could be doing much more productive things with their time.
Dental insurance is only one of many problems with the dentistry industry. In a new post, Matt Yglesias explains how dentists often prescribe unneeded treatments. That’s also my experience. I’ve known of numerous cases where dentists said extensive work was needed, and a second opinion showed the person’s teeth were in fine shape. This is an example of the principal-agent problem. The agent (the dentist) has a strong financial incentive to overprescribe dental work.
Although dentists are private companies, I also blame the government for this problem. Yglesias explains the underlying problem:
One might think that since the work of a routine dental appointment is done by a hygienist rather than a dentist, a standard oral health appointment would simply be with a hygienist who lets you know if you need more specialized dental care. In reality, however, “scope of practice” rules pretty strictly limit which services a hygienist can provide, and only in Colorado and Oregon can hygienists perform diagnostic work.
In a free market, I’d try my best to avoid dentists and instead go to a dental hygienist that did not do actual dental repair. I would want my “agent” to have no financial interest in overprescribing dental work. If anything, I’d be more likely to go to a hygienists that under-prescribed dental work, as I’d feel happier leaving the office if told my teeth were in fine shape. Unfortunately, that sort of rational dental industry is only available in two states.
There are many industries where I have few problems, including grocery stores, hair salons, dry cleaners, clothing stores, etc. When I do have bad experiences, it’s generally with industries that are heavily distorted by bad regulations and subsidies. These include health care, insurance, travel, pharmacies, housing, and auto dealers. The problems fall into several categories:
1. Government subsidies that push customers toward inefficient and annoying firms, such as dental insurance.
2. Government regulations that prevent efficient ways of delivering a good or service, such as direct sales from a manufacturer to the consumer (as in the auto industry.)
3. Government regulations that dramatically increase costs and reduce quality by restricting supply, especially in health care and housing.
4. Government regulations that prevent people from signing contracts promising not to sue over certain issues.
Can’t find an effective painkiller for that toothache? Blame government rules requiring a prescription. Can’t find a Boston apartment that will rent to families with small children? Blame government regulations that ban contracts waving your right to sue over lead paint. Frustrated that US airlines don’t offer the good service you had on Singapore Airlines? Blame government regulations that ban foreign airlines from serving domestic markets. Frustrated that your children cannot afford to live where you grew up? Blame zoning regulations that restrict the supply of housing.
People who are ignorant of the role of government often blame “capitalism” for problems they have in various sectors of the economy. In some cases, that simple explanation is true. But in most cases I’ve seen, the ultimate problem is government subsidy and regulation.
PS. After writing this post I read the transcript of a Tyler Cowen interview of Patrick McKenzie. McKenzie was asked why fees for Western Union transfers are so high, and responded:
Due to anti–money laundering and know-your-customer requirements, the amount of compliance drag on small transfers of value in the world is very, very large.
Again, look closely enough and it’s almost always bad government policies.
READER COMMENTS
JoeF
Jan 18 2024 at 6:42am
Great post. Would you include primary and secondary education in the list of affected industries? Although choice exists (and I chose to send my kids to private K-12), I still had to pay for the other schools through property taxes.
Scott Sumner
Jan 18 2024 at 11:16am
Yes, I would include education.
steve
Jan 18 2024 at 10:37am
Think you are right about a lot of this but I go to a dentist that does not accept insurance. He tries to get people to do stuff they dont really need like everyone else, I just say no. If money is truly an incentive, you economists are weird about when you want that to be the case, then they always have the incentive to offer not needed care whether I pay for it or insurance does. Of note, if someone is providing fraudulent dental care it will be hard to catch them if they are doing it outside the insurance system. Insurance companies have incentives to catch people that are doing a high percentage of cases that involve fraud. (This happens in medicine, I dont actually know dental medicine well enough to know if this actually happens.)
Steve
Scott Sumner
Jan 18 2024 at 11:18am
The principal/agent problem is different from the over-insurance problem. Both are problems.
David Seltzer
Jan 18 2024 at 11:12am
Scott: My veterinarian Competes with 10 other animal care outlets within an 8 mile radius of our home. Prices are posted and payment is made the same day patient to provider with no third party insurance payer. One could purchase insurance, but the put is overvalued. My dogs get their teeth cleaned annually. the last visit, the vet called and said a tooth should be removed. She suggested I come in to look at the tooth before removing it. They receive no subsidies, no certificate of need that reduces competition and hence, market pricing. I also get a military discount of 5%. It seems the animal care industry has figured out its business model. In 2022, the veterinary market was valued at 70 billion dollars. Total pet care industry tops 100 billion.
Scott Sumner
Jan 18 2024 at 11:20am
The problem there is very strong barriers to entry. You need to get into veterinary school, and the number of positions is extremely limited.
David Seltzer
Jan 18 2024 at 11:37am
Scott, a lot of the work was done by vet techs. Licensure and barriers to entry are similar for physicians as well. It seems pet and animal owners still get the benefits of competition.
Scott Sumner
Jan 18 2024 at 9:33pm
Yes, licensing rules for physicians are equally bad. Both industries are stacked against consumers—set up to enrich providers.
Dylan
Jan 18 2024 at 11:20am
Lots of good content in this post, and I will probably come back with some other thoughts later, but a couple of quick thoughts.
What’s dental service like in other unregulated markets that don’t have dental insurance? Are dentists in India likely to also recommend unneeded treatments?
Car repair is another industry that has principal-agent problems and, as far as I know, isn’t particularly burdened by regulation. *Yet, when I had a car at least, finding a mechanic you could trust was incredibly difficult and there was always the worry that you were spending a bunch of money on stuff you didn’t really need. As cars have gotten harder for home mechanics to do very much on themselves, where you often need proprietary equipment just to be able to do proper diagnostics, I can’t imagine that has gotten better over the last 20 years?
*Yes, the dealership model is the product of regulation, but I don’t know how much of that spills over to the repair market, particularly with independent shops? The only things on the regulation side I’m aware of are right to repair laws that some states have passed that require manufacturers to make parts and diagnostic equipment available to all.
Cove77
Jan 18 2024 at 12:06pm
In northeast it’s been a long standing practice that dentists/orthodontists engage in massive bartering. Underground economy alive and well.
Dale Doback
Jan 18 2024 at 12:27pm
It has been my experience as well that heavily regulated and subsidized industries have been my worst customer service experiences. The problem is that regulations and subsidies are so widespread in all aspects of life it’s difficult to tease out harms and benefits (if they exist at all). For example, the grocery stores, hair salons, dry cleaners, and clothing stores still have numerous regulations and subsidies despite being pleasant experiences. Even broader, I doubt that airlines (and many other industries) would even exist in a deregulated, unsubsidized universe. (This would probably be a net benefit as we’d have built superior modes of transportation, trains, instead that don’t require high levels of coordination, a security apparatus, and high costs to maintain).
Matthias
Jan 19 2024 at 7:28am
What’s funny is that Singapore Airlines is basically owned by our government here. But there’s no domestic market for flying for them to hide in, so they have to compete internationally and can’t rely on the government to protect them with cumbersome special regulations that keeps the competition out.
So Scott is perfectly right.
Scott Sumner
Jan 20 2024 at 6:27am
Two factors make Singapore Airline essentially private:
No barriers to entry
No subsidy
If you do those two things then there’s no problem with state-owned firms.
Jose Pablo
Jan 21 2024 at 9:35pm
No barriers to entry in the airline industry?
Try to get access to gates in a busy airport being a new entrant.
Grand Rapids Mike
Jan 30 2024 at 10:11am
Finding a quality and honest dentist is the same as finding a quality auto mechanic. Both involve the principal agent problem. So that is where recommendations and experiences of friends, neighbors or relatives can be very helpful. As a result I have found and satisfied with my dentist and auto mechanic.
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