Administrative Services Only Details

If a business decides to offer its employees a benefit plan, it may contract an insurance provider to provide a suitable group plan and pay premiums to that insurer, or the business may decide to directly fund the plan itself but pay an insurance company to administer it through an Administrative Services Only agreement. An ASO agreement means the business will regularly pay funds into an account and pay claims made against the benefit plan directly from the total accumulated in the account. Generally, ASO agreements are used for benefit plans in which the amount paid out is not very large, such as a dental plan. They are not usually used for plans that pay large amounts over a long period of time, such as a pension plan.

ASO agreements used to be more common in larger businesses, but as health insurance policies are getting more expensive, smaller businesses are turning to ASO agreements in the hope of saving money. Doing this allows the business to choose exactly what it wants its benefit plan to cover and avoid paying for coverage that it neither wants nor needs.

Example of Administrative Services Only

Mega has decided to offer its staff a benefit plan but discovers that plans offered by insurance companies are very expensive. The plan that Mega wants to implement will cover dental treatment for its employees and their immediate families, but it will cover essential treatment only and not cosmetic work. Mega calculates how much it expects the plan to have to pay out and estimates how much money it will take to fund the plan. However, Mega has no experience in the administration of such a plan and whether or not it should pay a claim.

Mega decides to enter into an ASO agreement with an insurance provider. Under this agreement, the insurance company has no financial liability but will use its expertise in judging the validity of claims made against the benefit plan. For Mega, this has two advantages: it benefits from the insurance company's experience and can't be blamed if the insurance company rejects a claim. Mega takes out a stop-loss policy, which would cover the extra cost the benefit plan has to pay if a demand is greater than the funds available, just in case the plan costs considerably more than Mega expected.

Significance of Administrative Services Only

There are advantages and disadvantages to ASO arrangements. One advantage is that the cost to the business will be significantly less than paying premiums to an insurance company. Another advantage is that an ASO agreement offers the business greater flexibility in deciding what to cover and therefore more control over the plan.

The main disadvantage lies in the financial risk that a business may face. If there are a substantial number of claims made against the benefit plan, the business may find there are insufficient funds to cover the liabilities. To protect itself against a shortage of funds, a business might purchase stop-loss insurance, as in the example above.