As experienced employee benefits consultants, there are several key cost containment measures that we look at when analyzing a new benefit plan design, with one of the most potentially drastic options being switching to an Administrative Services Only (ASO) plan. In order to fully understand the benefits and drawbacks of an ASO plan, we must first understand the differences between Fully Insured (standard) and ASO plans.
Fully Insured Plans
In a standard Fully Insured benefit plan, the insurance company takes on all of the risk. No matter how much the plan is used by employees, the employer pays a set premium per month negotiated ahead of time, which is usually locked in for a year. This monthly premium is derived from how much the benefits cost to administer. The average expected usage of health and dental benefits, or the "Target Loss Ratio" that insurance companies are looking for is around 75-80% (including all inflation factors), meaning that for every 1$ the employer pays in premium, they expect the employees to use about $0.75-$0.80 on health and dental services.
For example, let's say that Company XYZ has a Fully Insured benefit plan and the premium is $8000.00 per month. It doesn't matter if the employees spend $7000.00 one month and then $11000.00 another month, the premium will always remain level at $8000.00. However, when it comes time for plan renewal, rates will change based on the usage of the plan. Insurance companies can also tend to attempt to make back some money in years where they under-billed an employer for premiums by keeping rates higher even if usage has dropped. This is why we always suggest taking a plan to market every 3-4 years to ensure that an employer is still getting good value for every dollar spent on the plan.
Administrative Services Only Plans
In an ASO plan, things function quite differently. The insurance company manages the "administrative services" such as providing drug cards, managing claims, etc. but the risk is mostly on the employer. Think of an ATM that the employer deposits a large sum of money into at the beginning of the year, and then money is taken out as claims are paid. At the end of the year, any money that isn't spent can either be saved by the company, or used as a float for next years benefit claims. The benefit to an ASO plan is that there can be the potential for huge savings, especially if the plan isn't being used as much by plan members.
There are also Stop Loss features that can be put in place to control the cost of plan members who use the plan more aggressively, usually those who take biologic drugs. A couple of these members taking drugs that cost north of $3000-$5000 per month could easily drain the account. In this scenario Stop Loss insurance provides the employer with claim protection against large expenses. Each time a members claims exceed the limit set by the employer, the Stop Loss Insurer covers the excess amounts - protecting the integrity of the plan.
Even with stop loss measures put in place, there still is the chance that the employer will have to pay out more premium than originally expected to cover claims. This risk, however, is mitigated usually by having more members on the plan. In a company of about 10-20 employees having 1-2 heavy plan users can be detrimental to claims experience, in which case having a fully insured plan would provide more premium stability and the ability to better budget for claims. However, in a company with 100 employees, having 1 or 2 heavier users of the plan wouldn't be enough to offset the expected claims to be paid out to the employees as a whole, making budgeting a lot easier.
With our clients who are on ASO plans, we provide them with regular updates and member usage reports so that they can accurately plan their company budgets for the following year.
Which one is right for your company?
As much as I hate giving this answer..."it depends". It really does depend though! Behind every good employee benefits plan, lies effective plan design and an appropriate funding platform. The truth is, is that even though these are two of the most common plan funding platforms, there are a variety of factors that play into determining what the best benefit plan for your company is and funding platforms are just one of them. We have clients with 100+ employees who are on fully insured plans because of their member usage and the employers desire to budget effectively and we also have similar sized companies on ASO plans. It just "depends" on the needs of the company, as well as another number of factors. Most of which, are related to plan design.
One of the phrases I hear most often when talking to business owners is "I haven't heard from my benefits broker in a long time" or "I only hear from them when I need to sign off on a renewal". Unfortunately, this is the sad reality many business owners face and this should not be the case.
Looking for a second opinion on your employee benefit plan to see if you are overpaying for benefits? or wondering if there might be a better plan design for your company? Email me at michael@bogressfinancialgroup.ca or give me a call at 604-996-7464. I would be happy to hear about your current situation and provide some recommendations.