Administrative Services Only (ASO)

What Is an Administrative Services Only (ASO) Agreement?

Administrative Services Only (ASO) is a type of business arrangement in which employers choose to pay out of pocket for employee health benefits. Businesses then hire a third-party firm solely to provide administrative services (such as customer service or claims processing) for those benefits.

This third-party firm is often an insurance company, but the insurer does not provide or cover the cost of any health benefits. The employer alone is responsible for payment.

Comparing ASO Plans to Traditional Administrator Arrangements

The biggest difference between an ASO health plan and a traditional administrator arrangement is who covers the cost of the claim.

In a traditional arrangement, the insurance company both administers claims and provides at least some financial coverage for their costs. The insurance company still administers claims under an ASO plan, but the employer covers the cost.

In a traditional administrator arrangement, the insurance company decides what to charge for premiums yearly. If health benefit costs exceed expectations, premiums are raised the following year. However, employers cannot track or plan for these costs.

With an ASO insurance plan, there is no fixed premium. Instead, employers have full control to track fluctuating health costs and adjust their plans and forecasts as needed.

If costs are less than expected with a traditional administrator arrangement, the insurance company gets to keep the surplus. Under an ASO plan, the employer keeps the extra money and reinvests it as it sees fit.

What Health Benefits Do Administrative Services Only Plans Support?

Administrative Services Only plans are most often used to provide support to employers who are paying out of pocket for traditional healthcare needs such as doctor visits, prescription medications, and hospitalizations. However, an insurance company or third-party firm may also provide administrative support for:

• Dental benefits
• Short-term disability coverage
• Long-term disability coverage

The type of ASO benefits a third-party firm administers depends entirely on what the employer is willing to pay for.

What Kinds of Administrative Support Are Offered in an ASO Plan?

An ASO plan often requires employers to choose specific administrative services that they want the insurance company or third-party firm to handle on their behalf. Some of these services may include:

• Managing health reimbursement, flexible spending, and health savings accounts
• Managing COBRA coverage for employees losing health coverage due to a change in employment status
• Determining which benefits will be made available to employees
• Managing the health benefits enrollment process
• Evaluating and processing health benefits claims
• Communicating with employees throughout the benefits enrollment and claims processes
• Preparing administration manuals and summary plan descriptions
• Preparing and filing government reports
• Conducting accounting calculations to assist with financial matters

While the full menu of services may be vast, not all employers may elect to receive every service offered. What the insurance company or third-party firm provides will ultimately be up to the employer and their unique service agreement.

What Are the Advantages of Administrative Services Only Plans?

Administrative Services Only plans offer a number of potential benefits compared to traditional insurance plans, including:

• Lower costs (this is common but not guaranteed; see below)
• Improved cash flow
• Greater flexibility and control in designing benefits
• Access to national preferred provider organizations

No one at your company can take advantage of health insurance benefits without someone to administer them. ASO is a beneficial way for companies to provide benefits without taking on the legal and administrative burden that comes with it.

If your company does not have the personnel to take care of group health plans in-house, outsourcing to a third-party firm may be the way to go.

Companies can also benefit from the fee-based payment arrangement many ASO plans provide. Experts estimate that the cost of hiring a new employee may be up to three to four times the position’s salary, which can be cost-prohibitive for small businesses and startups.

In many cases, an ASO can be more cost-effective than hiring an employee to manage the group health insurance plan.

Additionally, administering health benefits will likely present a significant learning curve for any human resources professional, and mistakes are bound to happen.

Because health insurance is a highly regulated industry, these mistakes can cost employers in the form of fines, penalties, and lawsuits. These are on top of the cost of improperly processed claims.

Under traditional plans, companies have no idea and no say in how the cost of their premium is calculated. With an ASO plan, companies know they are only paying for claims incurred by their employees.

Finally, companies opting to go the ASO route have the added benefit of retaining more control over their group health insurance coverage.

Since company leadership controls the cash flow, they get to determine what benefits are offered and how those benefits work. This is in stark contrast to how traditional plans work, where an insurance company determines the types of plans (such as an HMO or PPO) and coverage offered.

Are There Drawbacks to Administrative Services Only Plans?

Administrative Services Only plans come with substantial financial risk. The employer assumes full legal responsibility for paying all covered claims. If employees are generally healthy, the employer saves money. However, incurring many costly claims can have a serious impact on the employer’s budget and financial outlook.

Mitigating the Risks of an ASO Plan

To protect against this risk, most companies with ASO plans purchase stop-loss insurance. This coverage pays only if the cost of employee health claims exceeds a predetermined amount, much like the deductible on an auto insurance policy. The employer still pays for claims up to that amount but is protected from enormous, unforeseen expenses. A stop-loss policy costs a fraction of the amount an employer would pay for traditional employee health insurance.

How Common Are Administrative Services Only Plans?

Administrative Services Only plans continue to increase in popularity. In fact, enrollment in employer-funded ASO plans increased by 30 million between 2012 and 2022. They have long been favored by large companies that can spread the risk of expensive claims over a large number of employees and dependents.

In recent years, as health insurance has become more costly, a growing number of small and medium-sized businesses have also turned to ASO plans, hoping to save money. Recently, 65% of all private sector employers offered a self-funded health plan, with 20% of those being small firms.