August 19, 2021 | By Jason Randall
There is a common misconception that simply pooling all of a Professional Employer Organization's (PEO) clients together will result in reduced health insurance premiums and keeping medical costs down. While the co-employment relationship with a PEO provides savings through the pooling of employees, there must also be strong medical underwriting practices to provide a reduction in health insurance premiums.
Maximum healthcare cost savings are only realized when pooling employees is combined with strong medical underwriting. Without good underwriting practices, your company may end up paying the wrong amount for health insurance.
Medical underwriting is the process of evaluating a person's application for health insurance coverage by reviewing their medical history. This is a major determinant of healthcare premiums.
Employers looking to outsource their health benefits are looking for cost reductions. But when companies are small, medical underwriting can only factor in employee's age, gender, and location. This is referred to as loose underwriting.
Even when employers pool worksite employees under a PEO's healthcare plan, different underwriting practices can occur. A best-in-class PEO will have medical underwriting that includes information about prescriptions and medical claims, in addition to demographics.
Loose underwriting has several problems for businesses. One of the biggest is that it simply does not account for all of the relevant information. By ignoring some data, loose underwriting could result in your company overpaying or underpaying for healthcare coverage.
When a PEO pools employees together, the idea is that it mitigates the risk of the insurance company so the PEO can get lower healthcare premiums. But this may not happen with loose underwriting.
If a PEO only practices loose underwriting, health insurance providers cannot distinguish between healthy employees and employees who may be more likely to make claims. Because of this, the PEO may pad their costs by charging healthier employees a higher premium than the insurance company actually charges the PEO. Even though the healthy employees should get better rates, they pay the same rates as more claim-prone employees because of the PEO's loose underwriting practices. While this may result in mild cost-savings for the company, the overall cost savings are greatly reduced by this practice.
Similarly, PEOs with loose underwriting practices tend to not be picky about which group they include in the pool even if it could possibly raise rates for everyone else due to loose underwriting. A best-in-class PEO will protect their pool and make sure that they are able to deliver promising renewal rates for their clients.
Loose underwriting also has the potential to provide misleadingly low healthcare premiums for your company's first year. These are called honeymoon rates, and they often serve to get you hooked. Then, the rates drastically increase during your second year.
In fact, some companies may even see increases of over 20% after their honeymoon period expires, and they are set to renew for their second year of coverage. Health insurance providers do this to cover the prescription and medical claim costs they absorbed during your company's first year.
Avoiding loose underwriting is key to having transparent healthcare costs with your PEO but also being able to accurately predict cost increases so you can properly budget year after year. To start, you should ask a potential PEO what their underwriting practices are and what factors they consider.
You should also ask about how they come up with their medical pricing. Ask whether the premiums costs you would see are the premiums provided by the insurance company or if the PEO adds on an additional fee. Having this information will help you decide whether a PEO is being transparent and forthcoming with you about their underwriting practices and how their master plan deals with medical costs.
Small companies, by themselves, can only engage in loose underwriting. This is a legal standard to help protect certain employees of smaller companies.
Where loose underwriting can really penalize businesses is when they have healthy employees who may end up paying higher health insurance premiums because the underwriting only considers broad factors, not specifics. Having this extra information may provide a greater cost savings for both the company and the employees. This information could also help reduce the annual premium increases that many businesses see, especially if employees make very few or no claims at all during a plan year.
When your company joins a PEO, you can ditch loose underwriting. Because all employees will be pooled together, the company size will essentially increase dramatically, making stronger underwriting available to you. Not only will your company be able to get more accurate health insurance rates for your employees, you will get more stable rates and not have to sweat over how much the premiums will go up next year.
A PEO may be just the solution you need to help you better anticipate and budget for healthcare premiums. By putting loose underwriting behind you, a best-in-class PEO can help you reduce your costs and give your employees better and more affordable coverage.