As employers look for ways to reduce the cost of providing benefits, they have increasingly self-insured a greater portion of risk through administrative services only (ASO) arrangements. Today, health, dental, and short-term disability (STD) are commonly provided on an ASO basis for large employers.
The use of ASO plans has grown since the concept first arrived on the Canadian market in the 1970’s. At the end of 2009 some 9 million Canadians have extended healthcare and/or dental care expenses under an ASO arrangement.
ASO plans offer distinct advantages for some employers, but these perks must be carefully weighed against the dangers inherent in these plans. Under an ASO arrangement, organizations provide benefits to employees on a self-insured or uninsured basis. Often insurance companies and third party administrators (TPA’s) administer the plan and provide claims adjudication and payment services.
The term ‘self-insured’ is a misnomer though, because there is no insurance element or risk-sharing aspect to ASO arrangements. Since plans are not insured, insurance companies do not guarantee benefits or costs for ASO plans. So why do these plans continue to grow in popularity? The attraction lies largely in the potential savings.
With the exception of Ontario, Quebec and Newfoundland, ASO plans are not subject to premium tax applied to insurance. ASO arrangements eliminate the need for the risk charge, which typically ranges from 0.5% to 1.50%.
Bringing reserves in-house is also regarded as an advantage because many plan sponsors with ASO arrangements believe the funds can be invested at a higher yield than offered by insurance companies or TPA’S. These savings can also be reinvested in the business. In addition to the potential savings, ASO plans can usually offer greater flexibility than insured arrangements. For example, the employer can alter coverage without having to negotiate amendments with the insurer provided that the plan meets the Private Health Services Plan limits in the Income
ASO isn’t for every employer, nor is it suitable for every benefit. If proper precautions are not taken, the end result could be devastating for both the employer and the employee. It’s for that reason that ASO plans are more appropriately offered on health, dental and short-term disability benefits since these claims are frequent, relatively small and fairly predictable, thereby minimizing the risk taken on by the employer. Notice I said minimizing the risk. With an increasing number of expensive drugs and greater availability of life sustaining medical equipment entering the marketplace, the risk associated with self-insuring cannot be overlooked.
However, there are options available to both small and large organizations that help to mitigate this risk. Employers can purchase stop loss pooling from their insurance provider, a feature that limits claims to a dollar amount that the company can handle. Plan sponsors can also redesign their plans to reduce the amount of benefit coverage. Employers who choose to do the administration themselves need to know that they could be running afoul of Federal Privacy Laws. They also run the risk of creating the perception that only some employees need to go on to the plan. If the perception by plan members is that the employer is the one who chooses who goes on to
the plan, this could lead to adversarial relationships and litigation. Choosing to place the administration in the hands of an insurance company provides a buffer between the employer and its employees, improving the likelihood that proper administration with defined guidelines will be followed.
In Canada, there has been little regulation of self-insured plans. There is no requirement that employers set aside adequate reserves to cover future liabilities arising from these plans. If reserves are set aside, there is no restriction on how those funds are invested. There is also no obligation to keep funds in trust to protect them from creditors. This means that a bankruptcy could spell the end of the benefits plan, including benefits for individuals who may be on a short-term disability, even a long-term disability should it happen that the employer also self-insures this.
In 1988, Canada caught its first glimpse of what happens when a large employer that self-insures its own disabilityplan runs into financial difficulty. When Massey Combines Corp. went into receivership some of the hardest hit victims were workers collecting payments under the company’s LTD plan. More than 350 employees saw their disability payments vanish.
Many in the industry thought this case would prompt government to pass legislation regulating the use of ASO plans. But nothing was done. And 10 years later in 1998, along came the Eaton case. While administered by an insurer on an ASO basis, the Eaton’s LTD plan was self-insured and, unfortunately, unfunded. When Eaton filed for bankruptcy protection its disability plan ceased to exist.
The government of Alberta decided that this should never again happen in their province. Alberta changed their insurance regulations to place limitations on the amount of uninsured disability benefit that could be in place. Under their rules, disability benefits payable beyond two years to Alberta residents are subject to the Insurance Act and those benefits must be insured. Self-insured disability plans are still permitted, but they are only allowed to provide benefits for a maximum period of two years on an uninsured basis. This requirement applies to any plan covering one or more residents of Alberta, regardless of the jurisdiction in which the plan was established. For national and multi-provincial plans, the limitations apply to Alberta members only.
Administrative Services Only plans offer flexibility, choice, and costs savings. They aren’t the perfect panacea, but for the well informed plan sponsor who understands the limitations of ASO, the risk may very well be worth the reward.
This article was taken and edited for content from the October 2006 Insights Bulletin.
The Leslie Group is a full service benefits consulting firm that is, in keeping with market conditions and legislative changes, committed to providing you with the best advice needed to manage your group benefits program. We would be pleased to address any questions and can be reached at (416) 510-8966.