When 10 + 10 + 10 = 33.1
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.