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© Copyright 2000 Rogers Media. The following article first appeared in the May 2001 edition of
BENEFITS CANADA magazine.
The ins and outs of ASO
Administrative services only plans offer flexibility and cost savings but they are not without
pitfalls. Are the risks worth the rewards?
By Amy Stahlke
As employers look for ways to reduce the cost of providing benefits, they have increasingly self-insured a
greater portion of risk through administrative services only (ASO) arrangements. Today, health and dental
benefits, short-term (STD) and even long-term disability (LTD) benefits are provided on an ASO basis.
The use of ASO plans has grown since the concept first arrived on the Canadian market in the 1970s. By the
end of 1999, self-insured plans provided over 800,000 workers with STD income protection and 900,000 with
LTD income protection. In addition, more than three million employees and their 4.6 million dependents have
extended healthcare coverage and over 2.9 million workers and their 4.4 million dependents are reimbursed
for dental care expenses under ASO arrangements.
ASO plans offer distinct advantages for some employers. But these perks must be carefully weighed against
the dangers inherent in these plans. Under an ASO arrangement, organizations provide benefits to employees
on a self-insured or uninsured basis. Often insurance companies administer the plan and provide claims
adjudication and payment services.
The term 'self-insured' is a misnomer though, because there is no insurance element or risk-sharing
elements in ASO arrangements. Since plans are not insured, insurance companies do not guarantee benefits or
costs for ASO plans. So why do these plans continue to grow in popularity? The attraction lies largely in
the potential savings.
With the exception of Ontario, Quebec and Newfoundland, ASO plans are not subject to premium tax applied to
insurance. ASO arrangements eliminate the need for the risk charge, which typically ranges from 0.5% to 2%.
Bringing reserves in-house is also regarded as an advantage because many plan sponsors with ASO
arrangements believe the funds can be invested at a higher yield than offered by insurance companies. These
savings can also be reinvested in the business. In addition to the potential savings, ASO plans can offer
greater flexibility than insured arrangements. For example, the employer can alter coverage without having
to negotiate amendments with the insurer provided that the plan meets the Private Health Services Plan
limits in the Incom Tax Act.
But ASO arrangements aren't for every employer, nor are they suitable for every benefit. If proper
precautions are not taken, the end result can be devastating for employees and employers.
Under an ASO arrangement the employer assumes all of the risk associated with the plan. For this reason,
life benefits are generally not provided on an ASO basis.
There is a high degree of risk associated with this benefit. Although the claims may be infrequent, they
can be large with significant differences in experience. In addition, the beneficiary of a death benefit in
excess of $10,000 would be subject to taxation under this type of arrangement.
LTD is occasionally self-insured by larger employers. But there is also a high degree of variance
associated with using ASO plans for this benefit. These claims may also be infrequent in occurrence, but
they are unpredictable in duration. This uncertainty can result in high liabilities for these as well as
disaster claims. For these reasons, an ASO plan is probably not the right approach for a smaller employer
who wants to provide LTD benefits.
ASO arrangements are more appropriately offered on health, dental and STD benefits. These claims are
frequent, relatively small and fairly predictable so there is limited risk taken on by the employer. But
with an increasing number of expensive drugs entering the market it appears that there will be greater risk
associated with self-insuring a drug plan in the future.
Options for smaller organizations include some sort of stop loss arrangement with an insurance company to
mitigate the effects of a catastrophic claim.
There are other risks associated with ASO arrangements. For instance, the perception that an employer
decides whether or not an employee is entitled to benefits can lead to adversarial relationships and
litigation of claims. Employees' escalating claims direct litigation squarely at the employer, and the
organization must then hire legal counsel in order to defend or settle the claim. On the other hand,
insurance companies provide a buffer between an employer and its employees that could be lost in an ASO
arrangement. Most importantly, under an ASO system, the employer is responsible for all inadequacies in the
reserves established for future liabilities.
In Canada, there has been little regulation of self-insured plans. There is no requirement that employers
set aside adequate reserves to cover future liabilities arising from these plans. If reserves are set
aside, there is no restriction on how those funds are invested. There is also no obligation to keep funds
in trust to protect them from creditors. This means that a bankruptcy could spell the end of the benefits
plan, including benefits for individuals already on disability.
In the case of a disabled worker, the individual could be deprived of his or her primary source of income
when the need for an income replacement benefit is the most critical. There is nothing to guarantee
payments of a long-term nature, such as LTD, when the plan is ASO.
Over 20 years ago, the Canadian Life and Health Insurance Association (CLHIA) identified a number of
concerns with ASO arrangements and recommended that self-insured plans be regulated to ensure that
disability benefits would continue to be paid to existing beneficiaries in the event that the plan was
terminated. Other recommendations include identifying the accrued liabilities of the plan through periodic
actuarial evaluations, establishing funding requirements and protecting the funds under a trust agreement
to ensure they are out of the reach of creditors.
In 1988, Canada caught its first glimpse of what happens when a large employer that self-insures its own
disability plan runs into financial difficulty. When Massey Combines Corp. went into receivership some of
the hardest hit victims were workers collecting payments under the company's LTD plan. More than 350
employees saw their disability payments vanish.
Many in the industry thought this case would prompt government to pass legislation regulating the use of
ASO plans. But nothing was done. And 10 years later, along came the Eaton's case. While administered by an
insurer on an ASO basis, the Eaton's LTD plan was self-insured and, unfortunately, unfunded. When Eaton's
filed for bankruptcy protection its disability plan ceased to exist.
Disabled Eaton's workers had also counted on their disability payments as a primary source of income
throughout the duration of disability up to age 65. Stories surfaced of disabled Eaton's workers being
forced onto welfare, borrowing from friends and family, or tapping into their retirement savings in order
to survive.
LEADING THE WAY
The government of Alberta has now decided to address these concerns. In one of the changes in the current
revisions of its Insurance Act and Regulations, the province is proposing that limitations be placed on
uninsured disability benefits.
Under these new rules, disability benefits payable beyond two years to Alberta residents will be subject to
the Insurance Act and will have to be insured. Self-insured disability plans will still be permitted, but
they will only be allowed to provide benefits for a maximum period of two years on an uninsured basis. This
requirement will apply to any plan covering one or more residents of Alberta, regardless of the
jurisdiction in which the plan was established. For national and multi-provincial plans, the limitations
will apply to Alberta members only. It is also expected that a one-year transition period will be allowed
for existing plans to make necessary arrangements.
While implementation of these revisions is still subject to cabinet approval, the protective measures are
moving forward and may come into effect as early as this summer. It is also possible that other provinces
may follow Alberta's lead and implement additional standards for self-insured plans.
As a number of business failures have demonstrated, employees assume risks when benefits that they likely
don't understand are uninsured. The emerging regulations are a natural response to protect the financial
security of individuals.
Amy Stahlke is legislation and compliance consultant with Clarica in Waterloo, Ont. This article was
written with the Canadian Life and Health Insurance Association. Contact iklatt@clhia.ca.
Risks and rewards
An evaluation of an organization's needs along with the advantages and disadvantages of insured and ASO
benefits plans will help employers determine which approach is best for their business.
Insured benefits
Insurance company provides:
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Claims adjudication.
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Claim payment services.
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Risk assumption.
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Insurance company assumes the risk and guarantees benefits according to the provisions of a contract
between the insurer and the plan sponsor.
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Premiums are defined by the insurance company.
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An insurance risk charge applies.
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Suitable for all types of benefits, including life, shortand long-term disability, health and dental
benefits.
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Necessary reserves are maintained by the insurance company.
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Coverage changes must be negotiated with the insurer.
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In the event of an employer's bankruptcy, LTD benefits continue to disabled claimants and funds are
protected from the plan sponsor's creditors.
ASO arrangement
Insurance company provides:
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Claims adjudication.
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Claim payment services.
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No risk assumption.
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Plan sponsor assumes all the risks associated with the plan; the insurance company administers the
benefits set out in the plan document.
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Costs are determined by actual claims experience and the administrative fee.
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No insurance company risk charge applies.
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Not subject to premium tax, except in Ontario, Quebec and Newfoundland.
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Funds may be re-invested in-house without restriction.
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An employer can make coverage amendments without negotiating the change with the insurer.
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No continuity of disability benefits is guaranteed to disabled claimants.
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Not suitable for life insurance over $10,000.
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May not be suitable for LTD, especially if benefits are unfunded.
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May not be suitable for high, extended healthcare costs.
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