Traditionally, benefits in an employee group plan are fully insured. This means that the insurer sets the required premium levels, based on their assessment of the risk and the employer pays the premium. At the end of the policy year, the rates are renewed based on claims experience.
Other factors such as the Incurred but Not Reported (IBNR) reserve, trend, credibility, expenses, profit and risk charges are calculated into the renewal rates. Because of the increasing cost of group benefits, employers have looked for ways to control these rising costs. One method that has grown in popularity is Administrative Services Only (ASO).
An ASO plan is an arrangement where the employer assumes the financial risk in providing benefits to its employees. By accepting this risk, the employer assumes financial responsibility for payment of eligible claims.
The overall purpose of ASO is to control the high administration costs charged by the insurance carrier.
Which Benefits to Consider
There are certain lines of benefits that are more appropriate for an ASO arrangement than others.
For example, benefits that cover specific events such as death or disability do not usually lend themselves to this arrangement. Life Insurance, AD&D, Dependent Life and Long Term Disability generate less frequent but significant claims. Traditional insurance is the best way to approach this coverage. Health and Dental benefits may be a more appropriate candidate for an ASO arrangement. These benefits normally have a predictable claiming pattern and cover expenses incurred by employees rather than specific events. In addition, the frequency of claim is high but the amount of each claim does not vary widely.
Health benefits, however, do have the potential for “catastrophic” claims either through emergency medical costs incurred while traveling or significant long-term illnesses that could extensively use benefits like prescription drugs, private duty nursing, etc. With this risk, most ASO plans have Travel and Stop Loss protection built in to minimize the risk to the employer.
Implementing an ASO plan depends on a company’s size, demographics, claims history and the company’s philosophy or tolerance for risk.