Some small and medium-sized companies are looking to self-insurance and third-party administrators as an alternative to the sometimes murky world of group insurance experience.

When small businesses decide to provide self-insurance coverage to their employees, “administrative services only” firms take the place of traditional insurers. In these cases, the employer chooses to pay the entire cost of its employees’ health and dental expenses without a traditional insurance policy.

The logic is that most employees spend a predictable amount on health care each year, and when the employer pays for it entirely, it claims the cost as a business expense while saving money vs the ever-bulging premiums and the administrative services of the large insurers.

From the perspective of the client’s employees, the result is the same. They receive their health cards and a list of treatments that are eligible from the employer.

From the advisor’s point of view, the commission looks the same and, according to Tracy Broeze, a certified financial planner based in Oakville, Ont., the outcome is better for all parties.

“It’s a great retention plan for employees,” says Broeze, an advisor at Cumming & Cumming Wealth Management Inc. who has several group clients with ASO arrangements. “It’s 100% a business deduction for the business. It’s easy for the business owners, and the backup is still there if they need to make large claims.”

Insurance is still a part of the picture, to some extent, in the ASO self-insurance model: the company buys stop-loss insurance to cover the risk of having to pay out on a large health claim. Premiums are between $1,000 and $5,000 annually.

“The insurance contract is between the small business and the insurance company,” explains Robert Rutledge, CEO of Toronto-based Benecaid Health Benefits Solutions Inc. , which provides the ASO service. Benecaid administers the benefits plan, does all the paperwork and sets up the policy with the stop-loss insurer.

The employer pays the first $1,000 of health expenses for each of its employees and dependents combined. The insurance company assumes responsibility for anything beyond that.

Advisors and their group clients have long complained about the lack of transparency on premium pricing and claims experience. Insurers often impose a “reserve charge” when a policy comes up for renewal, for example, Rutledge says.

Insurance companies make this charge on the assumption that certain claims will be made near the end of the year and not filed until the following year.

The result is an inflated price when the policy comes up for renewal.

Rutledge says Benecaid provides a transparent report on employee claims so that the firms can identify patterns and make adjustments to manage their plans accordingly.

Small and medium-sized companies could expect as much as 30% savings using this self-insurance model, Rutledge says: “Some will see more; some will see less.”

Some companies choose to add health-care spending accounts in addition to traditional group life insurance. Still others simply contract Benecaid to administer their existing benefits programs.