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.
ASO maximum risk
*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.