Plan sponsors need to know the basics—and the cold hard facts—of selecting a benefits plan provider. Sift through the options by following this guide.
Due to the administrative and computing resources required, the advantages of administrative services only (ASO) plans have historically been accessible only to large employers. Smaller employers have had fewer options in group benefits plan design and funding. Increasingly, employers are looking to control costs and to gain plan design flexibility.
Technology has brought down administrative costs, enabling third-party administrators (TPAs) to offer the advantages of ASO plans to smaller employers, including lower administration fees and flexibility in plan design. Cost transparency provided by monthly reporting and predictable billing with a budgeted ASO plan have also contributed to the increasing popularity of this option.
Read: The basics of ASO
On the one hand, conventional plans offered by many large insurers are easy to compare against one another and provide every employee with standard coverage. On the other, a customized ASO plan can offer employers greater control over their benefits plan design and, consequently, over the dollars that are paid out. With more funding options available, employers are considering their risk tolerance and the level of customization they need to meet their benefits objectives.
When employers compare conventional group insurance coverage with ASO plans, there are many different factors to consider. The starting point for any employer is to understand the components and costs of its benefits plan.
What is an ASO Plan?
An ASO plan is merely an alternative way for employers to fund their employee group benefits. Using this funding method, an employer is directly responsible for the cost of routine health and dental claims. Essentially, the employer pays one large monthly cheque to its benefits provider; in turn, the provider pays out many small cheques to employees for their claims.
Day-to-day claims can be suitably funded on an ASO basis. Claims with the potential for very high costs (for example, life insurance, AD&D, long-term disability and catastrophic drug claims) remain insured in a traditional fully insured pool. ASO plans clearly separate routine transactions from claims that require risk insurance.
ASO plans are offered by large insurers and by TPAs (organizations that manage employee group benefits plans on behalf of an employer). The TPA has the expertise to administer the entire claims process—a task historically handled by conventional group insurance carriers. Conventional insurers often focus on larger employers that have in-house HR and benefits administration capabilities, and the insurers’ services are designed accordingly. Small and mid-size employers often work with TPAs that focus on providing services for this size of employee group, with a business and service model designed around smaller employers’ needs.
Equal Billing
One of the concerns an employer may have about ASO funding is the unpredictable nature of a month-to-month claims experience. It can be challenging for smaller employers in particular to fund $1,000 in claims one month and $7,500 in claims the next. To address this concern, some benefits providers offer budgeted ASO plans.
With a budgeted ASO plan, the employer pays a predictable fixed amount every month based on its own group’s previous claims history. (This plan works similarly to an equal billing plan for your home natural gas utility.)
Read: Transitioning to an ASO benefits plan
The budgeting process each year is straightforward. Monthly surplus and deficit reports ensure that companies are not subjected to renewal surprises at year-end. Should actual claims exceed the budgeted amount, the employer is responsible for the deficit. If claims are less than anticipated, the surplus belongs to the employer. With full and transparent monthly reporting, the employer is always aware of its surplus or deficit position.
Compare and Contrast
Conventional benefits plans and budgeted ASO plans have much in common. Conventional group benefits plans, no matter what size, have monthly premiums set based on catastrophic risk insurance costs, anticipated routine claims, insurer reserves and administration expenses. Budgeted ASO plans also set their funding levels based on these same factors, except that insurer reserves are not required. The budgeting analysis and mathematical models work the same way for small and mid-size groups of 10 to 100, as they do for large groups of thousands. Insurers and TPAs also generally offer the same range of administrative services and conveniences, including pay-direct drug cards, electronic dental claims submissions and direct deposit of claims payments into employee bank accounts. Both types of plans typically renew annually, with new rates set for the upcoming year. ASO plans differ from conventional insured plans in some important ways, and the chart on page 49 highlights a number of these key differences.
Pricing Factors
The key pricing factors to consider when comparing benefits plan providers are the competitiveness of the administration fees for the services provided and who has ownership of any surpluses or deficits (i.e., the employer or the insurer).
With an ASO plan, the employer keeps any surplus in lower claims years, while being protected from the risk of catastrophic claims costs through pooled stop-loss insurance. With traditional insurance plans, the annual renewal is based on an evaluation of anticipated claims.
With an ASO plan, the annual funding level is based on the group’s actual paid claims, rather than anticipated claims. Unlike a budgeted ASO plan, the monthly premiums for traditional insured plans also include insurer reserves, and often significantly higher inflation factors, which add to the renewal cost of an employer’s plan. Insurers tend to apply high administration fees to smaller businesses, which may include higher overheads and profit requirements per case when compared to TPAs offering budgeted ASO plans.
Case study: Chalk it up to experience
Situation
Eastern Meat Solutions is a leading meat trading company with 20 employees that completed an ownership transition in 2006. The new owner needed to spark a culture shift in all aspects of the business, from growth targets to compensation philosophy. One of the priorities was to understand the components of the company’s benefits plan costs and gain control over those costs while introducing more employee empowerment. “We didn’t have a clear picture of what we were paying for,” says Robert Vanden Broek, president of Eastern Meat Solutions. “Were we getting good value for our money? We didn’t have enough information on our benefits plan costs and where they were coming from.” The company also wanted to include more flexibility and choice in its plan, but a market review returned very few meaningful options for an employer of this size.
Solution
The company’s financial advisor proposed a budgeted ASO plan to provide a comprehensive picture of monthly claims costs. Adding a healthcare spending account component to the ASO plan rounded out the plan coverage and provided the desired flexibility. And, since this customized plan design was not an option with its existing insurer, the benefits plan was moved to a professional TPA. The monthly financial statements provided for the budgeted ASO plan were of particular interest to the business owner. With all business costs monitored closely, Eastern Meat Solutions’ internal budgets were now more accurate.
Results
The budgeted ASO benefits plan has remained in effect since 2006. Vanden Broek says the company has doubled in size in the past seven years. “The flexibility and control we have with our benefits plan means we can stay competitive with our compensation,” he said. Management has a clear understanding of its ASO benefits plan costs with monthly financial reports and annual renewals based on the group’s own claims experience. With a customized design, including more employee choice, the Eastern Meat Solutions benefits plan reinforces the company’s compensation philosophy.
Karen Taylor Smith is senior manager, group benefits, with The Benefits Trust. ktsmith@thebenefitstrust.com