Sometimes? Always? Never? It depends? This is a difficult question and not that simple to answer. It starts with understanding exactly what a PEO is and what type of PEO you are dealing with. Most agents I talk to start off with a resounding FOE when I ask this question and it is followed by a rant of some kind. I cannot argue with them, because the classic PEO is definitely a threat.
However, there are many types. In fact according to NAPEO there are over 700 PEO’s operating in the United States. Not all can be bad can they?
First let’s take a look at what a PEO really is: Professional Employment Organizations are just that, employers (Or co-employers). That is it, by definition, they are nothing more. If I own a company and have employees, I am going to put those employees on the peo’s payroll thus making them the peo’s employees. Everything else we have come to know about PEOs are add-ons to the co-employment core. A company that operates a PEO solution then can leverage the co-employment relationship to build its own service. It can add HR services, Safety programs, Insurance Products, or even accounting. This is why they all have vague names like Wonderful HR or Pro-Staff-systems. (I hope those really are not company names)
With all the different flavors of out there, the Friend or Foe question becomes more difficult. So let’s try to categorize them a little bit. There are generally three types; I like to call them the Classic PEO, the Options PEO and the Services PEO.
Classic PEO-
This is what most Agents think of when they hear PEO. It is sold by the following statement: “Join my PEO and I will save you money on Health Ins” they sometimes amend this statement and replace ‘health ins’ with any number of products such and workers comp or 401k. The Classic PEO is a true all-or-none solution. You have to take everything if you want one thing. The theory behind it is a simple economy of scale. The more co-employees, the better deals I can get, thus saving my clients money. There are a shrinking number of companies that run this exact model, although the ones that do are some of the largest and most well know. The problem is (as it relates to health ins), a pool of ten thousand employees is not always better than a pool of ten. It depends on the overall health of the pool. Guess what types of companies want to join a Classic PEO? That is right, give me your tired, your week….your sick and uninsurable. So how can a Classic PEO make money and keep rates better than the open market if the pool gets more and more unhealthy? The answer lies in the ‘all-or-none’ requirement. The Classic PEO can make money in all kinds of other areas like payroll taxes and HR services. In addition, they don’t have to pass through the insurance costs exactly to the client companies. Example: If the carrier rate to the PEO is $500 per employee, the PEO may charge their client $600 which could still be less than what the client had for a similar plan on the open market. Now the PEO is making an additional $100 per employee per month. The opposite can also be true in the example that the client is currently paying $450 per employee and wants to save money. The PEO can charge $400 even thought the Carrier costs are higher. It is a calculated risk by the PEO, the client must have an employee pool that is fairly healthy which should bring down the cost of the PEO pool. Plus the PEO can move the cost of everything else they offer way up. Here is how one Broker recently described it to me: “why would I want to save $50 on Health insurance when it costs me $100 more than it should for payroll processing”. So let’s put this one the rest, Classic PEO = Foe.
Options PEO-
This can also be described as a ‘carve out’ PEO. The main difference is that the all-or-none requirement is somewhat gone. The PEO may have the big insurance programs, but they don’t mandate their clients to use them. The client will have the choice to keep the policy (health, comp, or any other) they are on. For an insurance agent, this is still a little scary. They PEO may initially say that the client can keep the agent, but eventually they will get pitched the ‘master policy’, or they may try to swipe the BOR. Ok, so we can clearly see how an Options PEO can be a Foe, but how could they be friend? There are two possible ways: 1) you develop a strong relationship with them and have multiple shared clients. This way, an amount of trust and fear is established. Trust in that you know each other and fear that if they try anything funny, you will take a bigger book of business else ware. 2) Commissions. Many PEO’s are willing to pay agents’ commissions under the master health plan agreement. Be careful with this one, the commissions will be less than if you are the broker by yourself, and are you really doing what is best for your client? (see classic PEO) The verdict, Options PEO = Friend and/or Foe.
Services PEO –
These generally come in one of two packages. 1) The very small and self contained PEO. For example an investment firm owns five companies and starts a PEO to service only those companies. And 2) the HR services company or payroll company that uses the PEO relationship to save time and reduce the liability of their clients. The first example is absolutely friend to an agent; your customer is the parent company. Sell them and five more deals come with it. The second is also no threat because they do not utilize master policies for health, comp or anything else. Their pitch is very different from the ‘classic PEO’, they say join my PEO and I will save you time, money and lower your exposure. There is no mention of insurance savings. These are clearly friends, but be careful they are hard to find. The Options PEO and even the Classic PEO try to pitch themselves as a Services PEO and then when the sales rep gets down to it, the first thing they need is a health census. Services PEO = Friend
By now, I am sure you can see where I stand on the subject. There are some really great Services PEO’s in the market place, and they make outstanding partners for Health Agents. It is just a matter of keeping an open mind and knowing what to look for. If you would like more information on the PEO industry or how we work with them, please contact us.