An ASO, or administrative services only, arrangement is a self-funded health plan. The employer pays its employees’ medical claims out of its own funds, and an insurance carrier or third-party administrator handles the administration for a fixed fee. The carrier does not take on the claims risk; the employer does, usually with stop-loss insurance behind it. Some self-funded employers also use reference-based pricing, which pays hospitals a set multiple of Medicare rates instead of relying on network discounts.
Key takeaways
- ASO means the employer is the insurer. Claims are paid from company money. The carrier or TPA processes them, provides the network and sends the bills.
- Costs split into fixed and variable. Fixed: an administrative fee per employee per month plus stop-loss premium. Variable: the claims your people actually incur.
- Good years stay with you. In a fully insured plan, low claims become carrier margin. In an ASO plan, they stay in the plan.
- So do bad years, up to your stop-loss limits. ASO fits employers with the cash flow and stomach to ride out a large claim year.
How an ASO plan works
In a fully insured plan the employer pays a fixed premium and the carrier pays whatever claims come in. In an ASO plan those roles separate. The employer sponsors and funds the plan; the administrator runs it.
- An employee visits a doctor in the network and the claim goes to the administrator.
- The administrator reprices the claim at the network rate, applies the plan design (deductible, copays, coinsurance) and determines what the plan owes.
- The administrator pays the provider, then draws the money from the employer’s account, typically weekly.
- Each month the employer also pays the administrative fee and the stop-loss premium.
- If one person’s claims or the whole group’s claims pass the stop-loss limits, the stop-loss carrier reimburses the excess.
The employee experience is usually identical to a fully insured plan: the same ID card layout, the same network and the same customer service line. The difference is behind the scenes, in who owns the risk and the money.
ASO compared with fully insured and level-funded plans
| Fully insured | Level-funded | ASO (self-funded) | |
|---|---|---|---|
| Who pays claims | Carrier | Employer, through a fixed monthly amount | Employer, as claims occur |
| Monthly cost | Fixed premium | Fixed | Fixed fees plus variable claims |
| Surplus in a good year | Kept by carrier | Partly refunded or credited, depending on the contract | Stays with the employer |
| Claims data | Limited, especially for smaller groups | Summary reporting | Detailed reporting |
| State insurance mandates | Apply | Generally do not apply | Generally do not apply |
| State premium tax | Built into premium | Applies to stop-loss only | Applies to stop-loss only |
| Typical fit | Smaller or volatile groups | Small and mid-size groups testing self-funding | Mid-size and larger groups with stable cash flow |
For a deeper comparison of every option, including captives, see health plan funding options compared and medical stop-loss: captive vs level-funded.
ASO vs TPA: is there a difference?
Both administer self-funded plans. The difference is who is doing it and what comes bundled.
- Carrier ASO. An insurance carrier administers your plan on its own claims system and gives you its own provider network and discounts. Pharmacy, stop-loss and care management are often bundled with it.
- Independent TPA. A third-party administrator that is not an insurer. It usually rents a network, and it lets you choose the pharmacy benefit manager, stop-loss carrier and cost-containment programs separately.
Carrier ASO tends to win on network discounts and simplicity; an independent TPA tends to win on flexibility and transparency. The right answer depends on where your people get care and how much you want to unbundle.
What the administrative fee covers
ASO fees are quoted per employee per month (PEPM). What is inside that fee varies more than most employers realize, so compare line by line.
| Usually included | Often priced separately |
|---|---|
| Claims processing and payment | Pharmacy benefit management |
| Network access and repricing | Stop-loss insurance |
| Member services and ID cards | COBRA and FSA or HSA administration |
| Standard reporting | Care management, disease management and wellness programs |
| Utilization review and precertification | Network access fees or a share of savings on out-of-network claims |
Watch for fees expressed as a percentage of savings, network access fees charged per claim, and pharmacy rebates that are not passed through. They can add more than the headline PEPM.
Stop-loss: the safety net
Almost every ASO plan buys stop-loss insurance, which reimburses the plan, not the employee, above set limits.
- Specific stop-loss caps what the plan pays for any one person in a year. Above that deductible, stop-loss reimburses the plan.
- Aggregate stop-loss caps total claims for the whole group, usually at 120% or more of expected claims.
Contract terms matter as much as price: the contract basis (which claims incurred and paid in which months are covered), lasers on known large claimants, and renewal rate caps. We cover these in stop-loss negotiation and on our alternative funding and stop-loss page.
Compliance duties that come with ASO
When the employer funds the plan, more of the compliance load lands on the employer as plan sponsor and fiduciary under ERISA.
- A written plan document and summary plan description, kept current with each change.
- Form 5500 filing when required, based on participant count and how the plan is funded.
- The PCORI fee, reported on IRS Form 720 by July 31 each year.
- Forms 1094-C and 1095-C with Part III completed, or Form 1095-B for a self-insured employer under 50. See what Form 1095-C is.
- HIPAA privacy and security rules for any claims data the employer can see.
- Mental health parity analyses, gag clause attestations and prescription drug data reporting.
The administrator performs most of the mechanics, but the legal responsibility stays with the employer. That is why the administrator contract, the reporting you receive and the review process around it matter.
Is an ASO plan right for your company?
ASO tends to make sense when a group is large enough for its claims to be reasonably predictable, has the cash flow to absorb a bad quarter, and wants the data and control to manage costs actively. It tends not to make sense for a company that needs a fixed number for the budget, or one with a known catastrophic claim and no appetite for risk.
Our employer guide to self-funded health plans and guide to moving from fully insured to self-funded walk through the decision in detail, and our funding model analysis page explains how we model it.
More plain-English benefits explainers
- What Is an HSA?: health savings accounts, limits and employer rules
- What Is an HMO?: how HMO plans work and who they fit
- What Does EE Mean?: EE, ES, EC and family coverage tiers
- What Is Form 1094-C?: the employer transmittal and the 95% offer test
- What Is Form 1095-C?: the employee statement, its codes and deadlines
- How Much Does COBRA Insurance Cost?: averages, deadlines and cheaper options
- What Is a PBM?: how pharmacy benefit managers make money
- What Is EBSA?: the Department of Labor agency that enforces ERISA
- What Is a Broker of Record Letter?: how to change brokers without changing your plan
- Offering Group Health Insurance With No Employer Contribution: a guide for businesses with 2-50 employees
- What Is Stop-Loss Insurance?: specific and aggregate coverage for self-funded plans
- Medical Loss Ratio Rebates: what employers must do with the check
Frequently asked questions
What does ASO stand for in health insurance?
ASO stands for administrative services only. The employer self-funds the health plan and pays claims, and a carrier or third-party administrator provides administration only, for a fee.
Is an ASO plan the same as a self-funded plan?
Yes, an ASO arrangement is a type of self-funded plan. The term usually describes the contract with the administrator, while self-funded describes who carries the claims risk.
What is the difference between ASO and TPA?
Both administer self-funded plans. ASO usually refers to an insurance carrier administering the plan with its own network, while a TPA is an independent administrator that typically rents a network and lets the employer choose pharmacy and stop-loss separately.
Does an ASO plan need stop-loss insurance?
It is not legally required, but almost every ASO plan buys it. Specific stop-loss limits the cost of any one person’s claims, and aggregate stop-loss limits total claims for the group.
Do state insurance mandates apply to ASO plans?
Generally no. Self-funded plans are governed by federal ERISA rules, which preempt most state insurance mandates. Federal requirements, including many Affordable Care Act and mental health parity rules, still apply.
Find out whether ASO would pay off for you
CFH Insurance Consultants is an independent employee benefits firm. We are licensed insurance brokers, and for proper coverage of an account we work in teams of five. Send us your current renewal and any claims reporting you have, and we will model fully insured, level-funded and ASO side by side so you can see the cost and the risk before you decide. The carrier or administrator runs the plan; our job is to make sure the numbers and the contract work for you. Start here, call 248.370.8853, or book a 30-minute call.
This article is general information, not tax, legal or actuarial advice. Self-funding involves financial risk, and suitability depends on your group’s size, claims history and cash flow.
