Pros and Cons of ASO
Employers often hear about group insurance concepts that are not as familiar to them. This review is designed to assist in understanding a complex concept: ASO. Every group insurance plan is in the form of a contract. The most common contract for health and dental benefits is an insured group contract. Another option is an ASO (Administrative Services Only) contract. What does an ASO contract mean? Exactly what it states: this type of group contract includes only the administrative services of the insurance carrier to adjudicate claims. An ASO, therefore, has no insurance element included for health and dental benefits. There are times when an ASO makes perfect sense, but there are also times when employers should avoid this type of contract. To assist employers in finding the right group insurance contract to fit their goals and needs, we have outlined the main pros and cons of an ASO.
Cost: Under an ASO contract, the cost the carrier charges for running the plan can be lower by a few percentage points. This cost is often referred to as the Breakeven (BE) or Target Loss Ratio (TLR).
Surpluses: Under an ASO arrangement, there can be surpluses paid back to the employer if the premiums paid are not fully consumed by the ASO charge for adjudicating the claims and the actual costs of the claims. Surpluses can develop and grow over time if the plan is properly funded.
Flexibility: There can be more flexibility with an ASO contract to pay claims that are not technically eligible under the normal terms of an insured health and dental contract. This occurs because the carrier has no risk in making exceptions to an ASO contract since the employer pays 100 of the cost.
Reserve flexibility: Some ASO contracts will exclude reserve requirements. Traditional insured plans establish a reserve or slush fund to pay for the late claims, referred to as run-off, that will be received by the carrier after the employer termination date of the contract. Under most ASO contracts, a reserve is not required. For this reason, an ASO contract can reduce costs when compared to an insured contract. Note that some carriers can offer special arrangements allowing an insured contract to include this same advantage.
Deficits: When claims are higher than the premiums that have been paid into an ASO contract, a deficit will occur. The insurance carrier will require this deficit to be paid immediately. When there is no surplus in an ASO, it can be alarming to employers, especially if they haven’t clearly understood this risk. It is for this reason that historically only larger employers were considered for ASO contracts. But today, many advisors prospecting clients will use an ASO approach to attack the cost of an insured group plan, without addressing the possibility of having to pay back a deficit on demand. This is a critical reality as there is no negotiating the claims cost of an ASO contract.
Cost Fluctuations: Under an ASO contract, there is no negotiating with a carrier to spread the cost impact over a longer period of time. In an ASO, the claims costs equal the premium−no discussion.
Plan maximums: Critical to a successful ASO contract is either a spread of risk (through the volume of a larger number of employees) and/or plan design features that control costs. For this reason, implementing maximums and caps on benefits is essential to protecting against the growing issue of rising claims costs. This doesn’t always suit employer visions for their benefits plan, but it is a critical component to ensuring long-term success under an ASO contract.
Carrier focus: Given that the carrier is responsible only for the paying of claims, there can be less concern for the trends and mechanics of a plan, as the carrier does not share in the financial outcomes. Employers will be required to become more engaged and scrutinizing to ensure their interests are served, to ensure a plan runs well from all aspects.
Pooling charges: Pooling is a type of claims cost-share between the employer and the carrier and is incorporated into almost all plans today. It is designed to share the risk of higher cost claims. Under all plans, it is either included in the healthcare rates or separately priced as its own benefit, depending on the carrier. Each carrier has a different pooling threshold. Some carriers offer pooling protection beginning at claims totalling $10,000 per person per year, while others have increased their threshold for pooling claims to $15,000 per person per year. The higher the pooling threshold number, the more financial exposure an employer has. The number of claims being pooled today is increasing exponentially due to the rising cost of drugs. This trend has resulted in significant increases in all pooling arrangements with all carriers. However, the ASO pooling charge is the most expensive given the carrier must bear the full brunt of the pooling claims exposure alone, as ASO contracts do not qualify under the industry pooling EP3 arrangement (the industry pool where all carriers participate); other insured plans do qualify. Consequently, ASO pooling charges are higher and are seeing even more substantial increases than traditional insured plans.
For more information on the above, or to get answers to any questions you may have regarding ASOs, please contact Rosemary Marsh, Managing Partner, Business Insurance Services, firstname.lastname@example.org, or contact any BIS team member at www.bisinc.ca.
This post was written by Rosemary Marsh