Budgeted ASO vs. Pay As You Go (In Arrears) ASO – What’s the Right Choice?

Mar 23, 2015

Okay, you’ve done the research and you understand the full spectrum of the different financial underwriting arrangements for your extended health, dental and vision benefits, from being fully-insured to self-insured, and you’ve made the decision to proceed with the self-insured administrative services only (ASO) arrangement. The question then turns to, “how best to operate and fund the ASO plan”?

There are essentially two options – budgeted or pay as you go (in arrears).

Budgeted ASO is slightly more involved as there are rates generated – usually on a single and family covered basis. The administrator of the plan will charge monthly rates similar to a fully-insured benefits arrangement and then these deposits are applied against the claims and administrative expenses of the plan.

The budgeted approach works well when employees are paying a portion of the cost of one or all of the ASO benefits. When the rates have been determined, the employees can pay a percentage of these rates as a portion of the benefit cost for which they are responsible. As the name suggests, budgeted ASO makes it easier to budget the monthly incoming funds to pay for the claims and expenses.

Also to note is that the budgeted arrangement can often produce surpluses when the deposited amounts become greater than the claims and administrative expenses over time. In this situation, the surplus is paid back to the employer – usually at the end of a 12-month reporting period when the reconciliation of deposits paid to actual claims incurred occurs. The surplus can be used to help reduce the rates for the upcoming benefits year. If a deficit occurs, the rates would be increased.

The alternative is the pay as you go (in arrears) ASO arrangement, where the administrator of the plan reports to the employer what the claims and administrative expenses are for the period in question (usually monthly) and then automatically withdraws this amount from the employers’ bank account.

The pay as you go (in arrears) ASO arrangement works well if there isn’t any contribution to the plan by employees. If it is just the employer funding the plan, it’s simple just to take the required funds directly from the employer’s account. However, this arrangement has a higher cash flow risk especially if one large unforeseen claim in a given month happens.

It is important to understand all the above mentioned advantages and disadvantages of each ASO option when it comes to funding the plan (paying the claims and expenses) on an ongoing basis.

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