An Insider’s Insight Into PEO Group Health Insurance (That’s a Lot of “Ins”)
When PEOs prospect for new clients, they espouse the many advantages of partnering with a PEO. PEOs really push the "economies of scale" concept, especially when it comes to group medical insurance. Do PEOs really have these large economies of scale or great buying power in the world of health insurance? Well, yes and no. In essence, PEOs are like any other large employer. They have thousands of employees (the PEO I work for has tens of thousands) so they insure a larger number of people than smaller businesses. But does insuring a larger number of people create bulk buying power like it would if you were purchasing other commodities? Not really.
Insurance companies have to collect enough premiums to cover actual billed claims with enough left over to cover their overhead and end up with some profit. Since the small employer and the large employer are using the exact same network of medical service providers, the insurance company can't provide discounts since they are being billed the exact same rate by the medical provider. Let's face it, there are a lot more 10-1000 person companies out there than 50,000-100,000 person companies so when you add the smaller employers together, they actually have the greater leverage.
The other misconception with PEO health insurance is that all PEO employees are in the same "pool" thus the risk is spread out over the entire covered group. Not necessarily so. Most large groups are further divided into smaller groups based upon geography and plan design. A 50,000 employee PEO may have 50,000+ covered employees and dependents but each employer will be in a much smaller group based upon their geographic location, which determines which network they participate in, and the plan they select. There are many different networks today, PPO, HMO, POS, etc. SO an employer with 30 employees who joins a PEO with 50,000 employees may end up in a "risk pool" with 3,000 covered lives once the plan and geographic network is applied.
I work for a PEO, so why am I telling you all of this? Well, using the example above, being in a risk pool of 3,000 is a heck of a lot better than being in a risk pool of 30. Also, there are PEOs such as the one I work for that allows companies to take our group medical or choose an alternative plan from one of our brokered solutions or one they find on their own. The long and short of it is that obtaining group medical insurance through a PEO can be a good thing but not always. There may be some smoke and mirrors going on in "the pitch." Let's face it, if it was such a great deal for everyone, every small business would be doing it.
The best advice is to include a PEO quote or two in with your quotes you get from your group medical broker each year and see how things align. Typically it comes down to a timing issue. You may have been lucky for many years and never had any catastrophic medical claims and had very moderate year-over-year increases in your premiums. If so, congratulations, that's great. But the time may come when you have some larger claims and your carrier decides to pass on 20%, 30%, or even 40% or more in annual premium increases. You may then come running to a PEO solution. The question then is, will they take you? You may then be too great of a risk to bring into the pool with their other clients.
