An executive from a well-known national third-party administrator (TPA) recently commented how administrative services only (ASO) is hot these days. He further added that several brokers were selling ASO plans as the panacea for all the evils in today’s benefits environment and an instant road to rich discounts of up to 40%. While ASO plans may offer plan sponsors some degree of savings over conventional insured plans, the true benefits may lay elsewhere.
In the past, many plan sponsors have been programmed to believe that ASO plans can only be entertained by large companies with communities of employees and dependents large enough to spread the risk. Today, several small- and mid-size companies of fewer than 50 employees have successfully implemented sensible, risk-appropriate ASO benefits plans.
Plan sponsors need to be sure they are considering the entire spectrum of plan financing and administrative options available. Advisors need to be aware of the limitations of ASO plans offered by the carriers they support and the differences in plan features offered in the market. Several carriers may not even offer ASO plans for companies with fewer than 100 employees or simply price themselves out of the market as a segment of the corporate universe they wish not to support.
So who would benefit by considering ASO benefits plans?
Companies that exhibit three sets of criteria would benefit most by considering ASO plans. These include the following:
- companies with stable claims experience;
- companies with low turnover, favourable demographics and growth patterns; and
- company owners craving simple-to-understand and completely transparent benefits plans.
Companies with stable claims experience
Advisors should work with plan sponsors to analyze paid claims data for two to three years previous to the renewal being considered. If claims patterns show natural and organic growth in line with reasonable inflation (perhaps 3% to 7%) and utilization increases in line with any growth in the size of the employee base, then an ASO plan should be considered.
One of the greatest concerns about employing an ASO plan is the possibility that claims experience and the resulting invoice will be prone to volatility. Carriers may provide budgeted ASO options to companies with as few as 40 to 45 employees. Expected annualized claims will be spread equally over the course of the year and billed in equal amounts, similar to a home’s utility bill. This simple practice will help provide the levels of cost certainty that many employers need to make to switch to an ASO or self-insured funding model.
Some carriers will require that plans be kept onside with quarterly checkup payments to bring plans in deficit onside. Other options will allow the sponsor to carry forward a deficit (within reason) to the end of the year when a shortfall would be made good or rolled into the premiums required for the following year.
Read: Transitioning to an ASO benefits plan
It is important to remember that the greatest risk to keeping plan costs stable is the exposure to claims for high-cost specialty drugs. This risk is mitigated—even in insured plans—by including appropriate stop-loss protection. Here, the playing field is arguably, and largely, the same as that provided by insured plans.
Companies with low turnover, favourable demographics and growth patterns
Companies with stable staff are those that are most likely to exhibit a stable claims track record. Employee censuses that reflects a balanced cross-section of all age brackets without overexposure to older age groups may also be more likely to avoid an overabundance of high-claiming members. Finally, those companies that grow organically as opposed to by way of merger and acquisition may provide a better measure of keeping growth in plan costs under control.
There may be a way to balance any possible demographic risk by employing and encouraging positive measures to enhance the health and wellness of plan members. Taking steps to provide fitness facilities, healthy food choices at the office and proactive health screening may help companies avoid or mitigate the higher cost claims associated with an unhealthy lifestyle. This might further support the desire to control plan costs by utilizing an ASO funding model.
Company owners craving simple-to-understand and completely transparent benefits plans
Insured plans include the costs of claims, reserve funds, general administration and claims adjudication fees, trend and inflation factors, risk charges, and profit charges and taxes—not to mention funding a claims fluctuation reserve. The complexity of all this requires nothing short of a PhD in economics and/or statistical analysis. Many company owners realize the need for a sustainable benefits plan but crave a more simple-to-understand funding model.
Small- and mid-size company owners may also be loath to accept the premise that a third party is the best custodian for the company’s cash reserves. Losing control of the company’s cash (especially in light of the apparent lack of transparency in an insured model) may simply be unacceptable to those company owners who insist on keeping control or access to company funds to be employed elsewhere in their operations.
All funding models are, at least to some extent, experience-rated. The inherent risk in both insured and self-insured plans is controlled by the presence of appropriate stop-loss and other pooled options. Realizing all of this should free up plan sponsors to consider ASO self-insured funding models as a viable alternative.
ASO funding models may not be right for everyone, but given the fact that many smaller size companies have been enjoying a stable claims experience, paying more attention to achieving health in the workplace and a need for greater transparency in their plans, the self-insured funding model may be best for more companies than previously considered.
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