A popular funding model in the United States for many years, administrative services only (ASO) has been the solution for Canadian companies with more than 250 employees. Over the past 10 years however, ASO has been viewed as the solution for companies as small as 50 lives. Why? Because it cuts out a lot of the costs traditionally embedded in a fully insured model.

A target loss ratio (TLR) is arguably the most crucial factor in a fully insured premium. It is a set percentage dictated by the insurance carrier at the onset of a benefits plan. Let us imagine a TLR is 80 per cent. This essentially means for every dollar paid in premium, an organization is allowed to claim 80 cents. The carrier will compare claims incurred at year-end to the TLR. If claims are higher than the TLR, rates will increase. If claims are lower than the TLR, then theoretically, rates should decrease. Therefore, the higher the TLR, the more cents on the dollar are allocated towards claims.

The challenge is the embedded factors in a premium, which consist of risk pooling, administrative fees, overhead/profit, inflation/trend, and reserves. All these costs are incorporated in a premium.

Routine Claims

However, many employers do not know they can purchase health and dental in different ways. One alternative is ASO, whereby the cost of routine claims for extended healthcare (EHC) and dental, plus a fair administrative fee, is the employer’s responsibility. The other ‘premium’ factors mentioned are immediately removed. The main concern when comparing the two models is exposure to high-cost claims.

Stop-loss coverage is embedded in a fully insured’s EHC rates. It typically is around $10,000 per year per employee. This ‘airbag’ deploys when there is a high-cost drug on the plan. The insurer will allow the first $10,000 to be used in the calculation of the renewal. Anything over this amount then hits the large amount pool claims. Basically, it is like an auto insurance deductible: the amount over the deductible is covered by the insurance carrier, but the likelihood of an increase in rates the following year is pretty high because insurance carriers absorb anything over the amount. However, they will look to recoup those dollars. Moreover, if an organization attempts to move the plan to another carrier, they may be reluctant in producing quotes, knowing full well there is liability.

ASO should have a per certificate stop loss, with an overall group aggregate limit. Employers immediately reduce the company’s risk profile by a significant amount and on a cost-neutral basis. Adding a third ‘airbag’ is an innovative way of managing formulary high-cost specialty drugs claims that are known to be covered by provincial governments or pharmaceutical programs, while ensuring employees are still covered. Airbags installed in an ASO model limit the exposure of these high-cost medications, essential if an organization is worried about risk exposure by self-funding.

For organizations that have already switched to ASO, the impact of COVID-19 on their costs is even more pronounced:

While fully insured clients received partial discounts on EHC dental rates, ASO clients simply paid for claims incurred, which, as we know, were well below normal trends. If anything, the pandemic emphasized the need for change.

The ASO model self-funds the health and dental portion of the benefits. The other bucket of benefits traditionally part of a plan are the pooled benefits. This includes life and long-term disability (LTD). Insurance carriers will aggressively compete to provide organizations with good rates. These benefits represent 20 to 30 per cent of total premium spend. If an organization can save 10 to 20 per cent on these benefits and lock in a 36- to 40-month rate guarantee, it means fixed savings for the next three years.

The pandemic posed a new challenge to organizations: how do they get Canadians to start working again, to attract top talent, and to retain them? The question means a thorough review of their compensation model, imperative in differentiating them from their competitors. The potential long-term savings from a change in funding models means the potential to reinvest using house-money. According to the ‘2020 Sanofi Healthcare survey,’ virtual telehealth, wellness, and employee assistance programs were at the top of Canadian employers’ wish lists.

Lower Costs

Most employers do not know how their plan compares to their competition or national averages, and most do not have adequate reporting to make sound management decisions. By understanding one’s metrics on a granular level, an organization can make sound management decisions, which can lower costs.

The ability to remove fixed costs from a premium affords an organization the opportunity to re-invest those dollars back into the plan. Installing better stop-loss products (risk management) and shifting costs to other entities, significantly lowers an organization’s risk profile. The addition of virtual healthcare, wellness, and employee assistance programs can make the plan more robust in its offering. As a result, organizations will be able to leverage their plan as a tool to attract, retain, and reward top talent. 

Jamil Jamal is a Benefits Consultant at People Corporation.