Like many group insurance brokers, when I first entered the industry, I was taught that an Administrative Services Only (ASO) agreement was a NO-NO for small business. After all, how can a small business carry the unpredictable risk of their employees’ claims? With time, I realized that the risk is not as high as it may seem and that ASO can be a powerful alternative to insuring employee benefits under the right circumstances.
What is ASO?
ASO is a contract with a third-party administrator (TPA) to adjudicate health and dental claims on the employer’s behalf. The administrator does not insure the benefits plan and there is no formal premium. Instead, the employer pays for all the claims as well as an administration fee.
ASO lends itself well to health and dental claims which are relatively low and predictable in nature. Since life and long term disability claims are significantly higher and far more volatile, these benefits would remain fully insured with no risk to the employer.
Health and dental premiums represent 80% of total plan costs which means there is great potential for savings in opting for a different model for these benefits.
How is ASO similar to a fully insured health and dental plan?
From a day-to-day perspective, both approaches are identical. The employer determines what coverage is available to employees who are issued benefit booklets and drug cards. Employees have a customer care number in case of questions about their plan and can submit claims using a paper claim form or electronically. In both scenarios, the employer determines how much employees contribute towards the cost of the plan through payroll deductions.
In both scenarios, employees’ claims remain 100% confidential. Only aggregate claims are shared with the employer.
How is ASO different from a fully insured health and dental plan?
The key difference is the funding approach.
Under a fully insured model:
- All the risk is transferred to the insurance company in exchanged for a fixed monthly premium.
- The premium is established by projecting past claims forward using a set of assumptions like reserves for Incurred But Not Reported (IBNR) claims, and trend factors.
- At the end of the period, if the claims were below target, the insurer keeps the extra. If claims exceed the target, the insurer will not charge the employer retroactively for their loss but will adjust claims upwards for the next renewal period.
Under an ASO model:
- The employer assumes the risk (up until the stop-loss)
- With guidance from the broker, the employer sets a budget for the upcoming year.
- At the end of the period, the employer (and employees) keep the surplus but are also responsible for any deficit.
What is a surplus?
A surplus is generated when the budget is higher than the claims and administrative fees paid out. The extra funds are deposited into a reserve to cover any potential future deficits and can be used to give employees a premium holiday or maintain rates when an increase would have been justified.
Surpluses put you in the driver seat. You control how funds are used.
What is a deficit?
A deficit is generated when the budget is lower than the claims and administrative fees paid out. Any past surpluses can cover the deficit. The additional gap, if any, is usually recovered over time.
How can ASO save me money?
Regardless of the approach retained, your costs are composed of claims and fees. Under an insured model, insurers use conservative factors to project claims forward and fees tend to be higher. On the other hand, with ASO, the employer not only saves on the cost of many types of fees but has maximum flexibility and control in the methodology used to establish the budget for the upcoming year.
Can I get ASO if my group has high claims?
If your claims are consistently high from year to year, your premium rates already reflect this additional risk. ASO can still save you money if the fees are lower than those under your insured contract.
What if my plan is hit with an unexpected high claim?
Your plan, also includes a Stop Loss. This limits your risk against unusually high or unpredictable claims. For example, if your health stop loss is $15,000 per person, you would never pay more than $15,000 in health or drug claims per year for any given person.
Similarly, you would not be responsible for claims incurred outside of Canada.
A stop loss is not required for dental because the annual maximum per person generally ranges
Will claims differ from month to month causing my budget to fluctuate?
Employers are sometimes concerned about the unpredictable nature of claims from month-to-month. To address this, TPAs bill the same budgeted amount per employee per month for a 12-month period, regardless of actual level of claims reimbursed. Budgeted ASO plans also provide monthly surplus and deficit reports, so employers know where they stand and are not subjected to any surprises at year-end.
Is ASO the right fit for my business?
ASO can be a great way to save money, stabilize renewals and provide the employer with maximum control and flexibility. While claims are limited to the Stop Loss, there remains a level of risk which employers must be comfortable taking on. ASO may not be appropriate for new plans or plans which have experienced a lot of claim volatility of the last few years. ASO is best suited for groups with at least 30 employees whose claims have been stable. To find out if ASO is right for you, request a free analysis.
