To PEO or Not to PEO, That is the Question…

To many small businesses, the term “PEO” has become synonymous with health insurance, payroll administration and HR. There is good reason for this as Professional Employer Organizations do a very good job of providing all of these services and sometimes more, with the convenience of one stop shopping. The question for business owners is whether this ease of access represents a good deal in terms of cost and in terms of maximizing buying power as a business grows. I am regularly asked if PEOs make sense and they do, in two specific circumstances.

First, starting a small business and getting over the hump from survival to prosperity is not for the faint of heart. It takes hard work, guile, good management and a little luck. In the early stages of a business when there are but a handful of employees, the convenience of PEOs enables a small business owner to outsource payroll and HR, and provide generous benefits in one fell swoop. By eliminating the distraction of setting up all of these pieces separately and then staffing for them a business owner is free to concentrate on customers and survival. There may be cost savings from needing fewer employees as well.

The second situation in which I recommend a PEO is when a small business has poor claims history and has difficulty finding competitively priced health insurance. PEOs often operate large, self-insured plans and are able to absorb the expense of catastrophic claims better than a small employer would on their own.

When is a PEO not a good deal? As we learned in school, “there is no such thing as a free lunch”. Convenience comes with a price as the cost of bundled PEO services often greatly exceeds what a business could purchase independently. Insurance purchased independently is easier to customize and as there are more employees to cover, bargaining power increases as well. Payroll services are also much less expensive when purchased separately and HR support is available through numerous sources.

Another problem with PEOs relates to one of the things I mentioned they actually do well. While PEOs are able to spread catastrophic health insurance claims over a larger population, over time they tend to attract many employers facing the challenge of getting affordable coverage. In insurance this is known as “adverse selection”, the tendency to attract higher risk. Inevitably PEOs need to increase their health insurance rates and when combined with higher costs for other services, things can head south quickly.

The last thing to consider is that PEOs create golden handcuffs. In other words, an individual business is generally unable to get financial data such as premiums versus claims pertaining to their own plan. This makes health insurers and workers compensation insurers very leery.

In summary, if your company is very small or if you have several employees with large, ongoing health insurance claims, PEOs offer good value. As a business grows to ten or more employees, the risks and price points generally begin to outweigh the advantages.


It’s almost renewal time; do you know where your claims data is?

Years ago, a similar question was asked in a PSA on television. It admonished parents to know what their children were up to late in the evening. Knowledge is power as the saying goes. The same applies to the performance of a group health insurance plan. Insurance companies apply the financial results of your plan, known as Claims Experience, to varying degrees in the formulation of pricing. If you have insight into Claims Experience, you have insight into what to expect and how to plan for the next renewal.

Large employers tend to have fairly easy access to this data. For smaller employers it may be trickier. Either way, your broker/advisor ought to be monitoring the results and sharing them with you along with analysis and insight into drivers of results and recommendations for action.

In Texas, all employer sponsored group plans are entitled to Claims Experience per HB 2015. At renewal and one other time per year, insurers must supply total paid claims as well as details of any claims in excess of $15,000. There is a formal request process and insurers have 30 days to respond so it is important to be proactive. Each insurer uses a slightly different form. If you need help with this part of the process please let me know and I will be glad to assist.

Insurance rates keep rising but there is no reason to be surprised and forced to make hurried decisions. Insurers are managing your money and lots of it. Be sure to take full advantage of every resource available to make sure you’re getting the best possible results.


Should Health Insurance be Mandatory?

So far, thirteen states have challenged the mandatory coverage provision contained in the health care reform bill. Some regard this as intrusive and yet another aspect of Big Brother controlling our lives. Others see this as a boon to insurance companies, not exactly their favorite corporate citizens. Both positions are understandable but the basis for this requirement is actually quite sound. Insurance is fundamentally a pool in which all participants pay a little in return for protection from the risk of having to pay a lot. Currently many young people forgo health insurance. Without these good risks to balance out the higher claims costs of others rates are driven higher for all. Similarly if a disproportionate number those who lived in straw houses purchased fire insurance and there were relatively few owners of brick homes in the mix, rates would be higher for this insurance too. What further complicates things is that when those who opt out of insurance do have claims, they are treated for free in hospital emergency rooms and the burden is borne by taxpayers or shifted to the bills of those who are insured. Either way, those who choose not to purchase insurance currently get a free ride. This is both unfair and burdensome to the rest of us. Keep in mind that income tax, registration for the draft and school attendance are all required for the greater good of society as a whole. One may argue that health insurance is expensive and rife with limitations and these are valid points. Nevertheless, until all are covered we will not have a level playing field and those who do carry insurance will continue to pay more than their fair share.

October 2018
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