Administrative Services Only (ASO): Definition, Pros & Cons

What Is Administrative Services Only (ASO)?

Administrative services only (ASO) refers to an agreement that companies use when they fund their employee benefit plan but hire an outside vendor to administer it. For example, an organization may hire an insurance company to evaluate and process claims under its employee health plan while maintaining the responsibility of paying the claims itself. An ASO arrangement contrasts with a company that purchases health insurance for its employees from an external provider.

In-Depth Analysis of Administrative Services Only (ASO) Plans

ASO plan details vary based on the company's agreement with insurance firms and third-party administrators (TPA). In ASO arrangements, the insurance company provides little to no insurance protection, which is in contrast to a fully insured plan sold to the employer.

As such, an ASO plan is a type of self-insured or self-funded plan. The employer takes full responsibility for claims made to the plan. For this reason, many employers using ASO plans also establish aggregate stop-loss policies in which the insurance company takes responsibility for paying claims that exceed a certain level—for example, $10,000 per insured person in exchange for a premium.

ASO insurance plans typically cover short-term disability, health, and dental benefits. Occasionally, they cover long-term disability for larger employers. ASO services are gaining popularity as many employers, particularly larger ones, explore the potential financial advantages that this type of plan can provide. An ASO may allow an employer to take greater control of benefit costs to meet the organization's needs. However, ASO arrangements may not be suitable for all companies, and they come with certain risks. 

Comparing Traditional Administrator and Administrative Services Only (ASO) Plans

A traditional administrator agreement is an arrangement whereby an insurance company fully administers claims. The insurance company is responsible for the services to maintain and manage plans, including making decisions on and covering the costs of claims.

Alternatively, under the ASO, the insurance company only provides administrative services for plans. The insurer serves as a third-party administrator to the employer, who assumes the duty to cover claim costs.

Traditional administrator agreements have fixed premiums that are reviewed yearly. This arrangement makes it difficult for employers to know the impact of claims until premiums are assessed for the next year. With ASO arrangements, employers can, in real-time, keep track of fluctuating costs and plan accordingly.

If costs are higher than expected, the traditional administrator increases premiums the next year. If costs are less than expected, the surplus remains with the insurance company. On the other hand, with an ASO agreement, the surplus is reinvested with the employer.

Pros and Cons of Administrative Services Only (ASO) Agreements

The costs for fully insured plans depend on an insurer's evaluation of anticipated claims for a given year. For an ASO, however, annual funding levels are based on actual paid claims. If there are fewer claims than anticipated, then employers keep the surplus and reinvest the reserves. The surplus can translate into employers offering additional benefits, many of which would not be ordinarily covered by conventional health plans.

ASO costs are usually lower than traditional plans because employers pay a negotiated fee instead of staffing expenses. These cost savings can offset rises in claims and be used to help the company grow. If claims regularly surpass forecasts, ASO costs might be higher than traditional plans.

On the other hand, employers would be responsible for any deficit if claims exceed budgeted amounts. Catastrophic claims or sudden events can exceed budgets and erode profits, which is a major concern. Employers often invest in a stop-loss insurance policy to provide an additional level of protection in the event of these cases.

ASO arrangements might not be suitable for life insurance and extended healthcare benefits in some cases. Employers need to weigh the risks and benefits of how different ASO arrangements might affect their organizations.

Administrative Services Only FAQs

What Is a Recommended Stop Loss Level for an ASO Plan?

A common stop loss level for an ASO plan is $10,000 per eligible employee.

Is Self-Funded Healthcare the Same as Administrative Services Only?

Self-funded healthcare and administrative services only (ASO) are the same. These terms indicate an insurance arrangement in which the employer or organization assumes full responsibility for the cost of covered claims.

Who Keeps the Profits in Fully Insured Coverage?

Under a fully insured plan, the insurance company retains profits.