Understanding Your PEO Health Insurance Renewal

Many PEO health insurance renewals come out in Q4 and January 1st is always a big benefits renewal period - so let's explore how you can prepare and evaluate for your annual insurance renewal review.

Let’s first revisit how benefits work within a PEO relationship.  PEO’s use a “co-employment” arrangement with their clients so when a business joins a PEO, through that co-employment arrangement the small business now becomes part of a large business (i.e. all the PEO’s clients aggregated).

This means the PEO can spread the risk over a large number of employees amongst many of its clients and offer health insurance along with other benefits at a lower cost compared to the options available in the open market.  They also are able to add higher levels of predictability and flatten the renewal curve.  However, in order to get these advantages, your benefit choices are somewhat limited since you are covered under the PEO’s Master plan and hence limited to the plan options that the master plan offers.

In general, anything below 10% is considered a strong renewal and over the past 10 years or so the PEO relationship has provided the best results at achieving that goal.  As healthcare and pharmaceutical costs continue to rise most states are seeing trend increases between 11% and 15% on the open market health insurance plan options.

When participating in a PEO master plan what determines your renewal is a myriad of factors but it's primarily a combination of the overall pool of groups that make up the health insurance plan and your personal groups claims performance or loss history, which is the number of claims and severity/cost of those claims as compared to the total collected premium.  The PEO will also factor in the likelihood of what claims will be ongoing vs which were individual instances such as child birth or a broken bone.

While your Medical Loss Ratio or MLR can play a large role in your renewal, it can often be difficult to obtain as PEO's do not always have access to specific claims history that can paint a clearer picture of the groups overall health.  For the PEOs that do have access to the information it is also possible that the teams that you have access to are unaware making it very difficult for you to get ahold of that information.

Some Other Factors that Can Influence PEO Health Insurance Renewals - What to Look Out For

Association Style Medical as Opposed to Master Plan 

The PEO may spread the renewal equally across all clients regardless of how each individual client performed - in this scenario, your renewal will be a result of quality of clients the PEO brings on.  If you are a relatively healthy group you may be negatively impacted in this scenario compared to other PEO options.

Plan Balancing 

The PEO may strategically apply rate increases to specific plans to drive (or limit) usage – for example, to keep a renewal low, they could greatly increase the rates on their richer PPO plans and have a very low increase on the HDHP plans to drive client usage to HDHPs which tend to keep claims low (since the user has to first satisfy the “high deductible” before insurance kicks in and shares some of the cost).  This is a potential sign that the PEO is not managing their book well and could be in danger of higher renewals in the future.

Performance Weighted

The PEO may strategically apply rate increases by customer to encourage clients to “self-select” away from the PEO – high cost of service clients or those driving high benefits or Workers Compensation claims may get higher benefits renewals to encourage them to 

switch PEOs (or the PEO captures a higher margin should that client decide to remain with the incumbent at the higher rates).  This is an unethical practice that can be difficult to navigate.  It is important to get as much data as possible in this scenario to provide to alternative providers in an effort to keep costs in line with where they should be.

Exploring Options if You Receive A High Increase

If you receive a high rate increase on your renewal, there is no need to panic just yet as there there are several options that may work to reduce the initial number.

There may be an opportunity to negotiate with your current PEO (they may not necessarily want to give a high renewal as they know that increases the chances of losing client).

Some groups know that they will have a lot of ongoing claims for the next year and instead of attempting to lower the premiums they adjust their overall benefits strategy (plans offered and employer contribution scheme) which typically dilutes the benefit solution while reducing pricing.

Then for those where it makes sense, switching to a new PEO or looking at open market options (fully insured, level-funded, self-funded, Reference Based Pricing, etc) will often produce the best long term results.

A couple of things to keep in mind if you are considering switching PEOs: 

1. If your renewal is over 20%, some PEO groups will not want to quote you on their master health plan without having employees complete health questionnaires.  It is important to know which PEO groups will be able to underwrite the more traditional way and which will not.

       In some cases when your renewal is this high, there are drivers     

       that may be known to be ongoing over the next 12 to 15 months.   

       This is where a PEO with good flexibility to work with open market

       or self funded health insurance solutions can become very

       valuable.           

       There are many PEO groups who are able to bundle in the open     

       market health insurance solutions into their systems and have

       them still feel like they are the PEO master plan when it comes to

       administrating the plans.   

       This can allow your group to take advantage of the open market     

       plans until the know claims have run their course before hopping

       back on to a different health insurance strategy without sacrificing

       the preferred administrative experience that PEOs can offer

       via their HRIS systems .

  2.  Insurance Carriers often put in place a "Parity Rule" on PEO master         plans.  This rule varies from agreement to agreement and most

       commonly caps a health insurance rate reduction to 5% for groups         coming to the new PEO if the previous PEO had the same health

       insurance carrier.  This is seen with Aetna plans the most, but all 

       carriers have been known to put these clauses in place. 

       For example, if are on Aetna via PEO A and request a quote from     

       PEO B who also uses Aetna for their master health plan, PEO B may

       not be able to provide a quote lower than the 5% parity rule allows

       even if they feel the group has considerably less risk than that price

       point.  If this is identified it is good to look at alternative carriers or

       level funded insurance plans to maximize savings for health

       insurance premiums.

We Can Help Reduce Your Health Insurance Costs

As you can see there are a lot of moving parts to the renewal and your options for addressing it.  It's unlikely you can afford to take your focus off running your business to devote the time to dealing with this but given the magnitude of benefits costs, you almost can't afford not to and that's where we can help.

Why not leverage industry experts that can procure quotes for you, that understand the underwriting requirements of various PEOs and Insurance Carriers, and come back to you with a consolidated, comparable comparison of the options and provide reccomendations?

PEO Focus is happy to provide this consultative approach at no cost- we can not only help with the PEO and benefits selection but also with devising a benefits strategy that makes your firm highly competitive for talent while avoiding breaking the budget!

To keep costs low, even with low renewals year or year this evaluation should take place at a minimum once every three years.  With changes in demographics, changing healthcare needs, and other factors that impact pricing we often are able to find ways to reduce costs.

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