A lot of articles have been written lately about administrative services only (ASO) funding arrangements for health and dental benefits, specifically targeted at smaller-size organizations with fewer than 100 employees. There’s nothing new about ASO—it was a viable funding option long before I showed up on the group insurance scene 20 years ago.

What has changed recently is access to ASO funding through third-party administrators (TPAs) for groups smaller than the 100-employee minimum required by many insurers before they will consider offering this funding method.

Most of the articles I’ve read have focused largely on the benefits of ASO for groups as low as about 25 employees. However, there has not been much written about the risks, specifically catastrophic risk, under ASO health plans.

I can’t argue that many small employers have benefited greatly by switching from a fully insured to an ASO funding arrangement for their health and dental benefits. I would argue, based simply on the law of averages, that for many of these success stories there is an equal number of stories where ASO has not produced the full desired result.

The great thing about insurance is that you are only ever responsible for the negotiated premium rates regardless of your actual claims experience. This is particularly attractive to small business and not-for-profit organizations that may be less financially able to absorb fluctuations in expenses. ASO is not insurance; it’s purely an administrative services arrangement. And while additional pooling insurance protection can be added, businesses must be prepared to pay out the maximum risk under their contract.

So what’s the maximum risk exposure? Let’s use an organization with 50 employees as an example, comparing costs under a fully insured arrangement to ASO scenarios under both probable and maximum risk conditions. Under normal conditions, the organization might save about 5% on ASO health expenses or approximately $3,400 annually (there may be additional tax savings in some provinces). However, if all plan members (both employees and dependents) were to claim up to a $10,000 high-amount pooling limit, the organization’s costs skyrocket from about $81,000 to nearly $1.1 million, as illustrated in the table below.

 

 

Fully insured

ASO probable

ASO maximum risk

 

Volume

 Claims/
expenses

 Aggregate costs

 Claims/
expenses

 Aggregate costs

 Claims/
expenses

 Aggregate costs

Single

10

 $    750

 $      7,500

 $    750

 $      7,500

 $ 10,000

 $     100,000

Family*

40

 $   1,500

 $     60,000

 $   1,500

 $    60,000

 $ 20,000

 $     800,000

 

50

 

 $     67,500

 

 $    67,500

 

 $     900,000

 

 

 

 

 

 

 

 

Expenses

 

25%

 $     16,875

20%

 $    13,500

20%

 $     180,000

Total cost

 

 

 $     84,375

 

 $    81,000

 

 $   1,080,000

 

 

 

 

 

 

 

 

Difference

 

 

 

 

-$     3,375

 

 $     995,625

*Assumes two members per family

Now I’ll be the first to admit that the probability of the above doomsday scenario occurring is extremely low. However, it’s not out of the realm of possibilities to think that five plan members could hit the $10,000 pooling limit, in which case annual benefit costs would increase from about $81,000 to $137,000, a difference of $56,000 or about 16 years’ worth of potential savings. Even one claimant hitting the pooling limit would likely wipe out any financial benefit for the year.

Risk exposure can be further mitigated with a lower high-amount pooling limit (e.g., $5,000 per member) and/or aggregate stop-loss pooling (e.g., 120% of expected claims). However, the higher pooling fees for this greater protection would only further erode the potential cost savings of an ASO arrangement.

There will be eternal optimists, who might say these types of catastrophic events will never happen, but let me remind you of an important date in history: Sept. 11, 2001. Up until this event, property and casualty insurers underwrote large modern office towers on the premise that the biggest risk of loss was due to fire and that the maximum risk exposure would be five floors: the floor in which the fire started, plus two floors above and below. We all know how this story ended. More recently, a train explosion completely destroyed the main street in Lac-Mégantic, Que., killing more than 40 people, including three employees belonging to the same business.

None of us can say with any degree of certainty what events the future has in store for us. If anyone could they’d be either zillionaires or insane, or both. Insurers have traditionally offered ASO to groups larger than 100 lives for a reason—because the spread of risk over a larger group greatly reduces the probability that a catastrophic event will increase claims beyond a level that the organization is capable of dealing with financially. As I’ve hopefully illustrated, in smaller organizations even a single high claimant may negate any potential ASO savings, and if a handful of plan members were to hit the maximum risk exposure, the result could be financially challenging. Small groups should think long and hard about their risk tolerance before taking a leap to ASO.

Kenneth MacDonald is manager of small- and mid-sized business for Morneau Shepell Ltd. in Western Canada. These are the views of the author and not necessarily those of Benefits Canada.
Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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Jacob A. Krahn:

You are in the realm of mystic life insurers. We have ASO’d for 20 years, as low as 5 employees, the savings are carmungis and the risk 0, if managed properly.

Monday, August 26 at 12:26 pm | Reply

Joe Nunes:

I have been a pension actuary my entire career but still think insurance is the best product ever designed by our profession.

I have never understood why people who buy insurance and don’t have a claim feel like they ‘lost.’ I am thrilled every year when I pay for car insurance and have no claims–it means no injury and no lost time even though I have paid for someone else’s accident instead of my own.

ASO has its merits, but as Ken points out, both the advantages and the risks need to be understood.

Monday, August 26 at 1:05 pm | Reply

George:

This article explores a 50 life employer adopting ASO with no excess protection. Any employer adopting that approach IS taking on too much risk. I believe few would argue with that position.

That does not mean ASO for small business is a bad decision. ASO WITHOUT STOP LOSS protection is a bad decision for small employers. And there are options of ASO with stop loss for small employers that represent a reasonable risk to assume. Depending on the length of the plan, stability of the employee base, and nature of the benefits covered, ASO with stop loss could be a viable option for small business.

This article is extreme in its perspective and does not represent a rationed and reasoned approach to solving important benefit issues.

Monday, August 26 at 1:39 pm | Reply

Gordon Hart:

Working in this industry, I too am amazed by shortcuts taken by advisors and clients surrounding the decision to take more or less risk based on projections that are best case senario. While the worst case senario is entertaining, and I am not a big fan of ASO for small group, I think it would be more reasonable to point out differences in reserves (if any) and the use of trend and inflation on prospectively rated insured accounts. This does improve the outlook of ASO. But again, clients are hedging against actual lag and trend/inflation.

Monday, August 26 at 3:10 pm | Reply

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