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When 10 + 10 + 10 = 33.1

September 19, 2017

Math can be a funny thing.  Just when you think you know how it works, there are other ways of looking at the same numbers and coming up with a different solution.  The title of this post is a great example of what I am talking about.  

 

If your organization receives a renewal of 10% a year for three consecutive years, you don't actually have a 30% increase over that period, but a 33.1% increase (just like compounding interest).  Therefore, controlling your medical renewals is so important to small and mid-size organizations.  Every year those renewals get out of control have a compounding, long term impact on your budget.  

 

Let's look at two examples, a traditional open market renewal trend vs a PEO renewal trend. 

 

We will call the organizations "A" and "B" and they both had a $500k medical premium in 2016 and have 50 employees.  They renew in January of each year.  Here are how their renewals look and the financial impact. 

 

 

Company A - open market benefits with 14% renewals 

  • 2016 Premium : $500k

  • 2017 Premium : $570k

  • 2018 Premium : $649k

  • 2019 Premium : $740k 

In this example, Company A who is not in a PEO relationship sees an increase of 48% in their premiums over three years and a $240k increase (fun math formula below). 

 

Principal = Premium​​
Annual Rate = Renewal Rate

Compounds = Number of Renewals a Year

 

 

 

 

 

 

Company B - PEO benefits with 8% renewals

  • 2016 Premium : $500k

  • 2017 Premium : $540k

  • 2018 Premium : $583k

  • 2019 Premium : $629k

Company B decided to partner with a PEO as part of cost containment strategy.  Over the same period with the same baseline for premium, their overall costs increased by 25% and $129k.  

 

To put it in perspective, the average premium per employee with Company A in 2019 is expected to be $14,800.  That same premium for Company B in the PEO relationship is trending at $12,580. 

 

Those are some big numbers. 

 

One of the many advantages of a PEO not just in a cost containment strategy and divestiture of risk, but in a true benefits strategy.  One that can help design a game plan for your organization over the next 3-5 years to help further reduce renewal rates and costs.

 

 

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