The choice of whether to select an insured group benefits plan versus going the self-insured route depends on a number of variables. Often price plays a role. The challenge is, how do you compare two service models that are on the surface somewhat similar and yet completely different in design?
An insured contract is made up of a number of different constituent parts. These include claims administration, commissions, funding a reserve, risk charge, general administration, profit charges, inflation trends and taxes.
The sum of all these parts reflects the billed premium charged to the client. The final number is expressed as a target loss ratio (TLR), which represents the costs that must be covered by the premiums to maintain the policy.
By extrapolation, a TLR may be expressed as a percentage (i.e., 75% of premium). If the difference between 75% and 100% (the logical sum of all parts in a contract) is 25%, does that mean that the cost to the client to maintain the plan is 25%? No.
Insurance can best be defined as collecting money from a client and paying it back to them to cover claims costs, keeping a little at the end as profit. If the 75% TLR is a representation of allowable losses (including all the items listed above), then, by extrapolation, the 25% difference is the residual kept by the insurance company as income and shared with the broker as commissions paying the government its share in the form of applicable taxes. Here in lies the confusion. How does that 25% compare to the costs to run an administrative services only (ASO) policy?
ASO or self-insured plans are structured as charges applied to the total cost of claims. These charges include claims administration, general administration, broker commissions, profit and applicable taxes. Stop-loss and travel insurance premiums may also be added to manage risk for the client. The grand total represents the total cost to run the plan. Here’s an example for a typical ASO plan:
| Adjudication, administration and profit | 8% |
| Commission | 5% |
| Premium tax | 2% |
| Travel | 2% |
| Stop loss | 8% |
| Total | 25% |
On the surface, it appears the insured contract might be the better deal. Such is not the case because the two numbers in an insurance policy combine to reflect total premium. The 25% difference is therefore a function of the total premium charged and not something added to the cost of claims.
In order to compare insured versus ASO, we must begin by expressing the true expenses as a function of paid claims, not as a percentage of premium. An apples-to-apples comparison converts the 25% of premium to 33% of paid claims (25/75 = 33%).
The true comparison of cost of claims for the fully insured model is therefore 33.3% versus 25% of paid claims for the ASO contract. That makes the insured contract 33% more expensive to operate [(33.3-25)/25 = 33%].
Inherently, this lower cost makes sense as ASO funding avoids several of the insurance component parts listed above (risk, reserve and overstated trend/inflation and utilization factors). And with the inclusion of stop-loss and travel insurance, it makes the ASO policy equal in risk certainty to the client.
ASO providers today are also offering budgeted ASO plans to smooth out fluctuations in the amounts billed each month and the associated challenges in managing company cash flow. This makes an ASO plan even more attractive.
Obviously these numbers are an illustration only and may not reflect your experience. It’s also important to recognize that a simple cost comparison may not be enough to determine the best benefits financing model for you and your company. Nonetheless, it’s important to make comparisons on a level playing field.