What is Administrative Services Only (ASO)?
– Definition: ASO is a contract arrangement in which an employer pays the actual costs of employee benefit claims (self-funds the plan) while hiring an outside company—an insurer or third‑party administrator (TPA)—to handle plan administration (claims processing, provider payments, customer service). The vendor provides administrative services but does not assume the insurance risk.
How an ASO arrangement works (short)
1. Employer funds claim payments from its own cash flow or reserve accounts.
2. Employer contracts a TPA or insurer to run day‑to‑day plan operations and process claims.
3. Employer pays the administrator a fee (often per‑employee per‑month).
4. Employer typically retains any underwriting surplus and absorbs deficits; many employers buy stop‑loss insurance to limit extreme losses.
Key points and terminology
– Self‑funded / self‑insured: The employer bears claim cost risk. ASO plans are a form of self‑funding.
– Administrative fee: The fixed charge paid to the TPA/insurer for services.
– Specific (or individual) stop‑loss: Insurance that covers costs for a single claim beyond a stated dollar threshold (attachment point).
– Aggregate stop‑loss: Insurance that reimburses the employer if total plan claims exceed a stated amount for the policy period.
– Traditional fully insured plan: Employer pays a premium to an insurer, which administers and guarantees payment of claims and keeps any underwriting gains.
Advantages (why employers choose ASO)
– Cash‑flow and transparency: Employers can see actual claims experience in near real time and control reserves.
– Potential cost savings: No risk premium paid to insurer; employer keeps any surplus if claims are lower than expected.
– Flexibility: Employers can customize benefits, networks, and cost‑management programs.
– Administrative efficiency: Outsourcing to a TPA can be cheaper than building an internal claims operation.
Disadvantages and risks
– Financial exposure: Employer absorbs claim volatility; large or unexpected claims can create deficits.
– Need for expertise: Requires benefits, payroll and accounting capability to manage reserves and compliance.
– Not always suitable for smaller employers: Scale helps smooth claim variability and negotiate better stop‑loss terms.
– Some coverages may be harder to place under ASO (e.g., certain life or long‑term disability arrangements).
A common statistic
– 65% — (reported for 2022) — commonly cited figure for the share of employees covered under ASO/self‑funded arrangements in employer plans (see cited sources).
Checklist for an employer considering ASO
– Workforce size and claim predictability: Do you have enough employees to smooth risk?
– Cash reserves and liquidity: Can you pay large claims as they occur?
– Stop‑loss options: What are attachment points, exclusions, and premium costs?
– Administrative vendor capabilities: Claims adjudication, provider networks, reporting, compliance (ERISA/HIPAA) support.
– Total cost comparison: Estimate admin fees + expected claims + stop‑loss vs. fully insured premium.
– Pharmacy benefits: Will PBM services be integrated or carved out?
– Legal/compliance review: Understand fiduciary duties and reporting responsibilities.
– Transition plan: How will you migrate employees and data, and communicate changes?
Worked numeric example (simple)
Assumptions:
– Employer has 200 employees.
– Expected annual claims (based on past experience): $2,000 per employee = $400,000 total.
– TPA administrative fee: $20 per employee per month = $4,800 annually.
– Employer purchases a specific stop‑loss with a $10,000 attachment point per person and an aggregate stop‑loss covering totals above $500,000. Stop‑loss premium: $30,000 annually.
Scenario A — Actual claims are lower than expected
– Actual claims total: $360,000.
– Employer pays claims: $360,000 + admin fee $4,800 + stop‑loss premium $30,000 = $394,800.
– Compared with expected spend ($400,000 + $4,800 + $30,000 = $434,800), employer retains the surplus and can reinvest.
Scenario B — One catastrophic claim occurs
– One employee has a $50,000 claim; others total $350,000 → total claims $400,000.
– Specific stop‑loss with $10,000 attachment applies: insurer reimburses $40,000 of that employee’s claim (50,000 − 10,000).
– Employer pays: (claims net of stop‑loss) $360,000 + admin fee $4,800 + stop‑loss premium $30,000 = $394,800.
– Without stop‑loss, employer would have paid the entire $400,000 claims plus admin and premium.
This example shows how stop‑loss limits employer downside on large individual claims while the employer retains routine savings when claims are below expectations.
Short FAQs
– Recommended stop‑loss level for an ASO plan?
A commonly reported specific (individual) attachment point is $10,000 per eligible employee, but the right level depends on plan size, claims volatility, and risk tolerance.
– Is self‑funded healthcare the same as ASO?
Yes. ASO arrangements are a type of self‑funded plan where the employer pays claims and outsources administration.
– Who keeps profits in a fully insured plan?
Under a fully insured contract, the insurer bears risk and retains underwriting gains or losses.
Practical considerations (summary)
– ASO can lower long‑term costs and offer customization, but it shifts financial risk to the employer.
– Most employers using ASO carry stop‑loss insurance to protect against unusually large claims.
– Evaluate vendor capabilities, stop‑loss terms, and your organization’s tolerance for funding variability before switching.
Sources
– Investopedia — Administrative Services Only (ASO): https://www.investopedia.com/terms/a/administrative-services-only.asp
– Kaiser Family Foundation — 2022 Employer Health Benefits Survey: https://www.kff.org/report-section/2022-employer-health-benefits-survey-section-1-cost-of-health-insurance/
– SHRM — Administrative Services Only (ASO) overview: https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/administrativeservicesonly.aspx
Educational disclaimer
This explainer is for educational purposes and does not constitute individualized financial, legal, or insurance advice. Consult an attorney, accountant, or benefits specialist before making plan design or funding decisions.