Administrative Services Only (ASO) insurance refers to a plan set up where business owners self-insure health insurance plans but hire a Third-Party Administrator (TPA) to maintain the details. As the costs of health insurance continue to rise, more and more companies are running the cost-benefit analysis to see if there is a better way for healthcare plan design. ASO insurance is becoming a more popular option for business owners wanting more control over benefits.

What is ASO Insurance

An ASO insurance plan is the third-party human resource management of a self-funded health plan that employers create that pays for the medical services of employees. Self-funded plans to get the money for health benefits from the company rather than health insurance carriers. The company sets up an account, called a reserve trust account, that has two to seven months of claims reserves in it to pay for employees’ medical care.

There is a lot that goes into the administration of any health insurance plan. Without the support of the insurance carrier that most employee benefits plans utilize, the company is left on its own to manage the paperwork, accept or deny claims, work with employees through claims management and handle provider requirements. This process alone for a small business owner could be a full-time job. The Administrative Services Only (ASO) insurance provider is the solution.

How ASO Helps Business Owners

When a small or mid-sized business decides to fund its own health benefits for employees, it must remain compliant with all state and federal regulations. Part of the plan design requires proper administration of benefits. This means that someone must make sure that the proper financial documents are maintained and account balances remain above reserve requirements.

Then there is the coordination of care with providers and employees (or their dependents). The administrator must understand the benefits coverage limits, what claims are allowed and to what monetary limit, and be able to handle the calls from both the employees and providers needing to confirm care are covered and bills are paid. The ASO is hired to do all of this so that the business owner doesn’t need to learn any of it, deal with it, or make a potential mistake with any segment of it.

Self-Funded Health Insurance

To fully understand how the ASO works, you must understand how self-insured health benefits work. Employers have a choice to offer health insurance benefits through an insurance carrier or to put money into an account and pay the claims directly. These plans are more popular than you might anticipate.

Unlike traditional health insurance plans where the financial risk is transferred to the insurance carrier, the self-insured plan puts all risk on the company. Approximately 50 million employees and their families receive health benefits through a self-funded plan according to the Self-Insurance Institute of America. As long as the employer’s trust account maintains the proper reserves to handle normal and catastrophic claims, the state and the federal government allow companies to opt out of traditional health insurance plans and opt for self-funded health plans.

Benefits to the Employer with Self-Funded Plans

Employers don’t just save on insurance premiums with self-funded plans, they also get other key benefits for taking on this part of employee benefits. While this isn’t a plan for every employer, it does make a lot of sense for many small to mid-sized companies.

New York City subway track view of the city.

The benefits of a self-funded health insurance plan include:

Plan Customization: Employers are able to develop health care programs that address specific needs within their business.
Control of Reserves: Trust accounts can earn interest, helping the long-term growth of accounts that help facilitate company growth or catastrophic claims.
Cash Flow Improvement: Insurance premiums are a prepayment of plan benefits that the employer no longer needs to do.
Easier Health Insurance Compliance: Employee Retirement Income Security Act (ERISA) governs self-insured plans thus reducing the compliance issues with state mandates of health insurance.
No State Health Insurance Premium Tax: Most states charge a 2% - 3% tax on the premium, adding to the already expensive cost.
Flexible Provider Network: The business is able to contract with any provider network and offer the best solutions for employees.

These are among the many reasons that employers choose to self-fund health insurance benefits on top of the direct savings on health insurance premiums.

Catastrophic Claims and Stop-Loss Insurance

When self-insuring, the biggest concern for employers is the unknown financial risk of catastrophic claims. Catastrophic claims are those claims that exceed the predetermined levels of financial loss due to claim payments that is deemed acceptable by the business and planned for with the reserve trust account. If a company exceeds its standard two months of reserves that anticipates normal claims, this would start to move into a catastrophic claim period. Companies should have at least seven months of reserves to cover catastrophic claims periods.

Many companies want to limit financial risk while still maintaining the independence of group health insurance benefits with self-insured plans. This is best accomplished with a stop-loss insurance plan. The stop-loss plan is not responsible for claims processing and will only step in if the initial plan ceiling has been hit. This means that if medical expenses are defined with a claims ceiling of $300,000 in a given period and the claims exceed this, then the stop-loss plan kicks in to cover the difference.

Two Types of Stop-Loss Options

There are two types of stop-loss insurance plan options for self-funded health plans to choose from. The first is the specific stop-loss plan that covers individual claims. The second is the aggregate stop-loss plan that covers company-wide medical expenses. It is important to understand both when structuring your stop-loss insurance plan and trust account reserves.

Specific Stop-Loss

This is known as excessive risk coverage because it only starts to pay as a financial risk mitigation option for companies who use self-insured retention strategies. The specific stop-loss option looks at the cap of any particular employee’s medical claim ceiling. Assume that childbirth has a cap of $50,000 and an employee experiences compilation during labor leading to $150,000 in expenses. The specific stop-loss reimburses the company for the added $100,000 after the first $50,000 is met.

Aggregate Stop-Loss

The aggregate stop-loss considers the total claims paid in a policy period and covers the excess if the ceiling is met. If a company has a $500,000 high claim ceiling – essentially a deductible – for all covered medical expenses incurred by employees, the aggregate stop-loss pays after that ceiling is met. If there is an influx of claims due to a measles outbreak in the area on top of the normal claims experience known to the employer, the company pays up to the ceiling and then files for reimbursement for all costs over that ceiling.

Stop-loss policies are usually written as a trust and considers the company as a participating employer in the trust administration. The trust specifically defines how specific and aggregate stop-loss coverage is provided, the mechanisms for reimbursement and confirmation of claims coverage. The Administrative Services Only (ASO) provider executes the trust’s directives.

Third-Party Administrators (TPAs)

To manage everything and make sure that the entire plan remains in compliance with regulations including claims data maintenance, the self-insured business usually hires a Third-Party Administrator (TPA). While larger businesses may choose to bring an administrator in under the company as an in-house employee, there could be conflicts of interest and added liability to claims management.

An in-house administrator could more easily be accused of discriminating claims practices if one person gets a claim approved and a similar claim is denied for another. This is why a third-party administrator is so important. The company is able to outsource the management need in a cost-effective fashion that puts the liability on the TPA to keep all administrative tasks compliant. There is less chance of internal accusations of impropriety when specialized companies handle TPA duties.

Choosing the Right Health Insurance Plan

Employers need to consider what the best health insurance options for their employees and for the company’s bottom line when implementing a group benefits plan. While the initial goal is to save money, consider the overall financial risk to the company with self-funded health plans and the advantages of transferring risk to insurance carriers.

If you are looking at health insurance plans such as Anthem health plans or Kaiser health and wellness programs, take the time to understand the differences. As the group plan provider, it is up to you to choose the plan that best serves your employees.

The Preferred Provider Organization (PPO)

A Preferred Provider Organization (PPO) is a health provider network. While health plan members have a primary care physician chosen that handles most exams and basic illnesses, plan members can seek out care from specialists without having to go through the primary provider. This allows more freedom to find healthcare professionals for specific conditions such as dermatology or allergists without needing special approval.

A PPO plan is often more expensive than other plan alternatives because of the flexibility. These plans also have better benefits for out-of-network healthcare costs compared to HMO plans. Examples of PPOs include Anthem Blue Cross Blue Shield, United Health, and First Health. Prices vary depending on the state your company and your employees are in. Remote workers may have different rates than those located in the same state as the company’s physical operations.

The Health Maintenance Organization (HMO)

A Health Maintenance Organization (HMO) plan often refers to itself as a preventative care or health and wellness providers. The reason it you have a primary care physician that you see for annual checkups and anytime you need care. If your primary care physician feels you need to see a specialist or get diagnostic tests completed, he refers you out to the right doctor or department.

The HMO plan design is often less expensive in monthly premium costs for policyholders and group benefit plan members. However, remember that a copay is due every time you see the primary care physician and for any other specialist or test he refers you out for. You won’t be able to make an appointment with a specialist without first seeing the primary care provider, making it cumbersome and time-consuming to get care at times.

Seeing providers outside the plan network often has reduced reimbursement or coverage benefits unless it is a true emergency requiring an ER visit. Examples of HMOs include Kaiser Permanente and the Aetna HMO Plan. Like all insurance plans, rates for individual members are contingent on the state of residence, age, and specific benefits plan chosen.

Outsourcing Health Benefits Administration

Outsourcing HR department tasks are beneficial on many fronts. Many employers outsource payroll at the very least, removing the laborious task and liability of the task. More and more small employers are looking at Professional Employer Organizations to partner with to handle payroll processing, employee benefits, and group health insurance plans.

There are a couple of things to keep in mind when working with a PEO and working with an ASO. The PEO serves as the employer of record and is able to use this model to develop economies of scale to reduce overall human resources cost.

The ASO is a service provider that is outsourced to provide one specific type of service; the administration of group health insurance. The ASO does not own employees. In fact, when it comes to self-insured health benefits, employers would be constrained by using a PEO. With the PEO as the employer of record, it would have to offer self-insured benefits across the board to all employees. This would change the entire reserve account structure and require all client companies to opt-in to the plan.

The PEO Vs. The ASO

The crux of the difference between the Professional Employer Organization (PEO) and Administrative Services Organization (ASO) is where employees remain. The PEO becomes the employer of record while the ASO never is in a position to lease employees back to client companies. The ASO is a hired HR outsourcing provider.

There are pros and cons to both and every business should look at both models before finalizing human resource and employee benefits programs.

Pros of PEOs

Consider these advantages of partnering with a PEO:

Assumes responsibility, thus the liability of filing federal and state taxes, compliance and risk mitigate issues.
Obtains better State Unemployment Tax Act (SUTA) rates due to the volume of employees.
Sponsors workers’ compensation rates and employee benefits.
Manages all HR functions including administrative and strategic planning.
Shares and spreads risk to reduce costs to multiple client companies.

Cons of PEOs

Consider the disadvantages of partnering with a PEO:

Reduced flexibility in shopping for benefits providers.
Coverage changes can happen unexpectedly.
Outside HR services may seem less personal and negatively affect existing corporate culture.
Requires package of services with few a la carte options.

Pros of ASOs

Consider these advantages of partnering with an ASO:

Allows all services to be contracted as needed on an a la carte basis.
The company maintains control over employees.
Cost-effective administrative and back-office human resources support.
Brings expertise to tasks reducing risk and compliance liability.

Cons of ASOs

Consider the disadvantages of partnering with an ASO:

The client maintains vendor communications and interactions.
Limited services (i.e. does not provide workers’ compensation insurance).
Does not sponsor employer benefits packages, only administers them.
Assumes no liability or risk.

Assessing Small Business Needs

Businesses differ in what they need assistance with and what should be outsourced. If a small or mid-sized business is seeking to self-fund group health insurance, then they probably want to work with an ASO. Affordable care is a key consideration for all employers and finding the right solutions sometimes takes some deeper investigation.

When looking at what a Professional Employer Organization offers, a business owner should first determine the most relevant tasks and benefits the organization needs. The more that a business wants to outsource, the better the PEO option becomes. Simply put, it becomes the price-effective solution to have all the HR tasks under one roof.

If you do go with a PEO, you may not choose a self-insured plan because the pooled employee strength often gets much lower health insurance rates. Assess the overall costs and talk to the PEO broker about potentially working a self-insured health benefits program around the other PEO’s group benefits. Some PEOs have more flexibility in their package options than others.

Making Your Choice About an ASO

Once you have reviewed all options and know that the self-funded health insurance plan if the right choice for your business, it’s time to sit down and choose from the ASO plans out there. Don’t make a decision solely based on cost. Expect to pay anywhere from $600 to $1,200 per employee annually for ASO services. This is considerably less than the 2% - 6% most employers pay for PEO services but remember this is just for administrative services.

When you’re ready to review the options for your company, contact us. The PEO and ASO markets change frequently and we specialize in developing the best possible solution for your business.

ASO Insurance: A Self-Funded Health Plan