What managers should ask their Professional Employer Organization (PEO)?

Written by Lou D'Agostino, Principal | Jan 19, 2019 3:05:20 AM

The below article was published in the October 2018 Edition of Wells Fargo Prime Brokerage Consulting's quarterly journal.

Wells Fargo's Business Consulting Group speaks with Lou D’Agostino, Principal at Iron Cove, a division of EPIC Brokers that specializes in PEO consulting and brokerage, to hear his opinions on where he is seeing managers gain efficiencies in their human resources management.

One of the resources PEOs provide is health insurance. This is offered either as a pass-through model or as a self-insured model. What is the difference between the two models?

The pass-through model is when the PEO functions as the intermediary between a health insurance company and your firm and the insurance company takes your premium to cover employees for medical expenses. The PEO passes through the cost and risk of health insurance.

On the other hand, if a PEO collects your premium and keeps it until they have to pay your medical expenses, that’s a self-insured model. In this setup, the PEO utilizes the medical network of a major health insurer (e.g. Aetna, United, Oxford) in order to provide a vast network of doctors. However, the true insurance risk still falls on the PEO.

The danger of working with a self-insured PEO comes when occasional cycles of extraordinary claims occur. This phenomenon not only depletes the cash reserves (aka float), but also puts the balance sheet of the PEO at risk – this in turn degrades the PEO’s financial health. In order for the PEO to recover (and meet Wall Street expectations), it will need to increase its revenue drastically.

In a pass-through model, the PEO’s financial health is immune from an extraordinary year of bad claims. In a manager’s analysis, they should consider the fact that a self-insured PEO may sustain much more financial impact in a bad claims year than a pass through model.