Cost impacts of insourcing or outsourcing leave administration

Optimizing leave of absence administration is increasingly important for employers, as shown by our 2025 Leave of Absence and Time Away Benchmarking Survey. Outsourcing considerations ranked as the #5 work in progress for large employers, highlighting frustrations with compliance and current administrative models. Many are exploring different solutions—whether insourced, outsourced, or co-sourced—to improve compliance and operational efficiency.

In this blog post, we will focus on one of the main factors influencing these decisions: cost. We will explore the cost effects of leave administration, including implementation, ongoing expenses, and hidden costs.

Implementation costs

Outsourcing: The costs associated with outsourcing revolve around the vendor, contract negotiations, system integrations, and data migration. Engaging a third-party administrator (TPA) or insurer often requires an initial implementation fee. This fee can vary significantly based on the vendor, the number and complexity of system integrations, customizations, the timeframe, and other factors.

Insourcing: Organizations that choose to insource typically need to invest in a software-as-a-service (SaaS) solution to manage LOA claims effectively. These costs can vary based on the software’s features and capabilities, but they provide process consistency, increased standardization, and offer a foundational level of compliance. Insourcing also requires the necessary FTEs to administer claims. This will require an initial output to identify the necessary roles, create job descriptions, interview, and onboard those employees. Employers should be aware of the need to hire employees directly involved in case administration (e.g., LOA case managers) as well as indirectly involved employees (e.g., support functions), including managers, IT, clinical, and quality roles.

Ongoing costs

Outsourcing: Outsourcing can be more predictable with regular fees from your vendor, who handles tasks such as managing leave requests, ensuring compliance, and maintaining system integrations to keep them up to date. This is typically a Per Employee Per Month (PEPM) fee for LOA administration, or it can be paid on a per-claim basis. These ongoing fees cover the administration of LOA claims and can add up quickly, especially for larger organizations.

Insourcing: With insourcing, you will incur recurring costs, including salaries, benefits, and development expenses related to the FTEs needed to administer claims. This includes not only salaries but also benefits, training, and ongoing management costs. You’ll also need to maintain systems, whether that involves updating, IT infrastructure, or your support services.

Hidden costs

Outsourcing: When outsourcing, you may encounter hidden costs, such as renegotiating contracts, addressing communication issues, or non-compliance with specific service-level agreements. Many employers will also need internal resources for vendor management and to help with escalations.

Insourcing: With insourcing, you may encounter increased expenses due to employee turnover or continuous system upgrades. Additionally, insourcing may lead to risks, including data breaches or the mismanagement of sensitive information, which can have financial repercussions.

The bottom line of cost

Each administration path has pros and cons, including costs. Insourcing will incur more upfront costs and potential for variability, but it will provide you with greater control and flexibility over how your program operates. And depending on your organization’s demographics and goals, this may have other impacts, such as an improved employee experience or operational efficiencies.

Outsourcing will have more consistent ongoing costs after implementation, but it may also allow for greater scalability of indirect resources, such as clinical reviews and specialized support. It will also allow you to rely on the vendor to shoulder the burden of compliance requirements and regular management of the leave process. This can be particularly beneficial when managing complex cases or when a fluctuating workforce causes variations in LOA volumes throughout the year.

Is cost the deciding factor?

No. Choosing whether to insource or outsource LOA administration requires careful consideration of costs, compliance needs, your resource availability, and the employee experience. While cost is important, it’s also crucial to consider the broader implications of each option.

In a recent blog post with the New England Employee Benefits Council, To Insource or Outsource Leave of Absence Administration? There’s No Easy Way ‘In’ or ‘Out.’ We considered other factors when it comes to insourcing and outsourcing that may help determine where your organization needs to go.

Where to start: conducting a cost-benefit analysis

A solid first step is to conduct a thorough cost-benefit analysis. This process helps you understand the financial implications of each option. You’ll want to examine both direct and indirect costs, including everything from implementation expenses and ongoing operational costs. For insourcing, think about salaries, benefits, training, and technology investments. On the other hand, when outsourcing, consider vendor fees, service charges, and any potential hidden costs that may arise. Don’t forget to factor in the long-term financial implications, like employee turnover costs and compliance risks, which can have a significant impact on your organization’s bottom line.

This type of analysis can benefit from an outside party, such as your broker consultant. They can help you identify the most relevant cost factors, compare them against industry standards, and analyze them in relation to your business goals and demographics. By leveraging their expertise, you can make informed decisions that not only consider immediate financial implications but also align with your broader strategic objectives.

How can Marsh McLennan Agency’s Absence, Disability, & Life Practice help?

Marsh McLennan Agency’s Absence, Disability, and Leave practice specializes in providing organizations with insights and strategies to improve their leave management processes. Our team of experts can assist with cost-benefit analyses and discuss the best options for leave administration. With over 25 years of experience, we have built strong vendor relationships, a deep understanding of complex leave laws, and can help organizations develop strategies that align with their business goals. Contact us to learn how we can support your efforts.