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Administrative Services Only is a health benefits arrangement in which an employer funds its own employee health claims directly instead of paying premiums to an insurance company, while hiring a third-party administrator or insurance carrier to handle the administrative side, such as claims processing, customer service, and compliance reporting. Under a traditional fully insured plan, the insurer collects premiums and takes on the financial risk of claims. Under an Administrative Services Only arrangement, that financial risk stays entirely with the employer.
The employer establishes a dedicated fund to cover employee health claims. Rather than writing a fixed monthly premium check to an insurer, the employer pays actual claims as they occur, plus a per-employee administrative fee to the third-party administrator. The third-party administrator processes claims, manages provider networks, handles appeals, and ensures regulatory compliance, but never takes responsibility for claim costs.
Think of the insurer or administrator in an Administrative Services Only arrangement as a claims management vendor, not a risk-sharing partner. They provide the operational infrastructure; the employer provides the money.
Cost control is the primary driver. In a fully insured plan, the insurer builds profit margins, administrative overhead, and risk buffers into the premium. When actual claims come in below what the premium projected, the insurer keeps the difference. Under an Administrative Services Only plan, any surplus stays with the employer. According to survey data reported by BambooHR, 65% of all private sector employers offered a self-funded plan as of recent years, with 20% of those being small firms.
Transparency is another advantage. Employers with Administrative Services Only plans gain direct access to claims data, allowing them to see which health conditions are driving costs, which providers are most and least efficient, and where targeted wellness programs could reduce spending. A fully insured employer typically cannot access this granular claims detail.
The financial risk of self-funding is real. If a handful of employees experience catastrophic illnesses in a single year, claims costs can far exceed projections. Most employers with Administrative Services Only plans purchase stop-loss insurance to manage this exposure. Stop-loss coverage comes in two forms. Specific stop-loss coverage kicks in when a single employee's claims exceed a set dollar threshold in a plan year, often ranging from $50,000 to $150,000 depending on the employer's risk tolerance. Aggregate stop-loss coverage activates when the total claims for the entire group exceed a predetermined percentage of expected costs.
Stop-loss insurance does not change the self-funded status of the plan. The employer still funds primary claims up to the threshold; the stop-loss carrier covers the excess.
Self-funded plans with Administrative Services Only arrangements are governed primarily by the Employee Retirement Income Security Act of 1974, which is a federal law, rather than by state insurance regulations. This federal preemption gives larger employers significant flexibility to design benefits that differ from what state insurance mandates would otherwise require. Self-funded plans are generally not required to cover state-mandated essential health benefits, with the exception of preventive care, and are not subject to state minimum loss ratio requirements.
However, self-funded plans still must comply with certain federal Affordable Care Act provisions, including dependent coverage through age 26, prohibition on annual and lifetime limits, and prohibitions on rescission.
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