“My PEO Health Insurance increased by 20%+! What do I do now!?”

Many companies within a Professional Employer Organization, known as a PEO, are accustomed to the usual rigors of the health insurance renewal process: readying employees for annual open enrollment, providing all the notices and documents for employees as required by the government, and figuring out how to mitigate the ever-increasing cost of health insurance.

 PEO’s largely help employers handle the first two of those items, but the issue of health insurance cost can have drastically different outcomes for any given employer. Sometimes the renewal rates fall in line with expectations, perhaps an increase of a few percent, but what happens if you receive an increase of 20%, 50%, or more?! At first, those numbers may seem like an extreme exaggeration, but here at AEIS we have personally worked with plenty of clients for whom this was a sudden and stark reality.

PEO Basics

For those who are not familiar with the concept, PEO’s (Professional Employer Organizations) are businesses that help employers by assisting in a variety of administrative functions from Human Resources to payroll. PEO’s can also often help provide employers with insurances, both commercial insurance, such as worker’s compensation and employment practices liability, as well as employee benefits like health, dental, and life insurance.

For the administration portion they typically charge a fixed fee on a “per employee, per month” or “PEPM” basis that tends to become lower as the employee population increases. For the insurance side, the business model is a bit more nuanced.

PEO’s and Health Benefits

The advantages of having insurance through a PEO can be enticing. It is usually priced by the PEO carefully managing the collective risk within the pool of their employer clients. This generally leads to health plans with better coverage for similar or lower cost than what can often be found in the small group health insurance market, but not always.

Inevitably, from time to time employers will have employees who will accumulate very expensive medical claims either for themselves or their dependents. When this happens for employers, PEO’s can choose to channel some of the hit of the high claims onto the employer in the form of exorbitantly large increases.

Over the years we’ve had groups come to us in these instances with renewal increases well above 20%, at times even exceeding 50%! Sometimes they endure multiple of these increases during a period of several years. It can be a tough pill to swallow for an employer who had been relying on the stability the PEO brought to their business functions to then be faced with such a daunting, often unsustainable, increasing cost of benefits. It leaves employers looking at the possibility of having to either drastically reduce the benefits or push more of the cost to employees through lowered employer contributions (which is essentially a pay cut to employees), but employers should not feel as though they have no options.

So… now what?

Employers may feel like they have nowhere to turn in these situations, but we’ve partnered with many businesses to get their benefits back on track to sustainability. There is more than one way to face this challenge, but the two we see have the best outcomes the most often are:

1)    Explore the Small Group Insurance Market (less than 100 full time equivalent employees)

While PEO’s can factor in health history when determining their health insurance rates, small group health insurance carriers cannot. Since the enactment of the Affordable Care Act, small group carriers use a modified community rating methodology which in this case means they cannot charge employers or individuals higher costs based on individuals’ preexisting health conditions or a checkered health histories.

Small group rates do consistently trend upward annually because of this, but because the modified community rating does not penalize employers for high claims in the way that PEO’s can, the increases often do not exceed more than 10% in a given year. Going from consistent 20%-50%+% renewals with a PEO to an average increase of less than 10% with small group can have a significant impact on the healthcare cost, especially over the long run.

Moving from PEO brokered benefits to small group health plans can sometimes mean completely leaving the PEO, but some PEO’s will allow clients to move to the small group insurance market while continuing to receive the PEO’s administrative and commercial insurance services.

2)    Explore Different PEO’s

We briefly covered how PEO’s generally rate their health insurance plans for their clients based on utilization and claims history, but each PEO can potentially have different processes and methodologies for how they go about doing that.

For example, many PEO’s broker their insurance plans meaning the health insurance is a profit and revenue center for their company, whereas some PEO’s are set up such that they are not even legally allowed to make revenue off the health insurance and it must instead be a pass through cost.

Some PEO’s put aside funds in special reserve accounts to be specifically doled out for high claims in order to mitigate the increase that clients receive when a few catastrophic claims come through in any given year.

You can imagine how these and many other differences in practices might affect what one’s health insurance renewal numbers will look like. All things being equal, each PEO’s personal rating methods are idiosyncratic to one another’s, and while one might give you a massive increase, another might have a more productive way to help you manage and mitigate the risk.

We at AEIS work with a number of different PEO’s and have helped employers successfully transition out of the PEO model entirely or move from one PEO to another. If you want to learn more about whether other PEO’s might be a better fit then your current provider, check out another blog of ours on what is a PEO broker and set up a call to speak with us.

PEO’s can be incredibly helpful for employers looking to outsource a variety of business and administrative functions, but there are times when things such as huge health insurance renewal increases can begin to outweigh the other benefits of the PEO.

If you find yourself in this position and want to consider either looking at small group benefits or perhaps shopping for a different PEO altogether, set up an appointment with our benefits consultants or give us a call to go over your company and what ways you can get your health insurance back on track!