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Is Your PEO Ready for a Master Medical Plan?

PEO businessman explaining medical plan report



When deciding whether to switch from servicing client-sponsored plans (CSP) to a master medical plan, there are many factors a professional employer organization (PEO) should consider.


First, why do it? Most switch for administrative ease — one renewal instead of many. A second reason is to streamline plan-design offerings to differentiate from the countless options in the open market. Also, large-group pricing is typically more favorable than Affordable Care Act (ACA) coverage for small groups, with average savings of 6-8%, and a PEOs large group status allows for the ability to evaluate and review incoming risk.


These are all good reasons to make the move, but unfortunately getting a master medical plan isn’t always easy. This leads many PEOs to ask “How do we best position ourselves for success?”


Client-Sponsored Plans and Master Medical Plans: Understanding the Difference

A client-sponsored plan (CSP) is one where each worksite employer has its own plan and renewal. A master medical plan is one where a policy is issued to the professional employer organization (PEO).

Master medical plans offer advantages over CSPS when it comes to plan design and administration, and changes to group pricing under the ACA have increasingly made master medical plans an attractive option for employers. But employers can also face challenges in moving from a CSP to a master medical plan. 


Sins of the Past

In “The 7 Habits of Highly Effective People,” Stephen Covey writes that one should “Seek first to understand, then to be understood.” To understand why carriers are reluctant to write master plans for PEOs, let’s look at industry history.


In the early to mid-1990s, PEO health plans were more prevalent and had little structure. Many PEOs had little or no risk management and offered only a single set of composite rates. For these PEOs, risk grew, and rates increased over time. Eventually, many PEOs were only attracting or retaining high-risk groups. Consequently, plans went into a death spiral of increasing rates and higher-risk groups, many times leaving the carrier with large claims.


In response, carriers shied away from writing new risk and began carefully managing the risk they already had on their books. By the early 2000s, many PEOs moved to a tiered composite set of rates and began using underwriting models and tools that improved performance. Still, carriers were wary of the past and cautious with new business opportunities.


To address this, many carriers established dedicated PEO teams and criteria to measure risk for those seeking master medical plans. So what are those criteria and how do you make your PEO stand out?


Many carriers established dedicated PEO teams and criteria to measure risk for those seeking master medical plans.


ACA Impacts

When the ACA was signed into law in 2010, many speculated on how it would affect group medical insurance for the small groups that PEOs serve. By the time most provisions were in force by 2014, it seemed PEOs with master or consolidated health plans would be major beneficiaries of the ACA. Small employers sought alternatives to the ACA community-rated pools, and a PEO master plan was just such an alternative.


As a result, most carriers that offered PEO master health plans experienced significant growth, with some even doubling their blocks of business over the past four years. With this type of growth, one would expect carriers to eagerly write more PEO master health plans.


However, despite the rapid growth under the ACA, carriers are still reluctant to offer new medical master plans to PEOs. Oftentimes carriers aren’t interested in offering master plans to PEOs that don’t already have one. It’s a catch-22 that frustrates many PEOs with client-sponsored plans that seek to consolidate and gain efficiencies.


While there is no silver bullet to getting a carrier to offer a master health plan, there are things you can do to better position your PEO for the conversation.


How Can Your PEO Stand Out?
  • Demonstrate financial stability. 
  • Offer detailed market and group information.
  • Provide information about your deliver model.
  • Exhibit sound risk-management practices.
  • Outline your unique value proposition.
  • Articulate your PEO's well-thought-out strategy and commitment to a master plan.


All the Right Stuff

In general, most PEOs take the stance that their group health plans are not multiple-employer welfare arrangements (MEWAs). This limits the carriers that can be considered. Several national and regional carriers offer such plans, but most prefer to take over existing plans and aren’t interested in writing new startup plans.


However, there are a few exceptions. If you currently offer client-sponsored plans (each worksite employer has its own plan and renewal) but are seeking to move to a master plan 
(policy is issued to the PEO with a limited set of plan designs), how do you put yourself in the best position with the carrier to consider you for a master plan? It’s important to know what carriers are looking for in a PEO partner and the information they will request. Here are several focus areas to be aware of.


Carriers Want to Know the PEO Is Financially Stable


Under fully insured arrangements, the carrier is responsible for claims that exceed the premiums collected. Carriers want a PEO partner that can effectively manage the potential block of business, balancing premiums and claims.


Financial stability is a key indicator of the PEO’s ability to manage risk. Without a strong balance sheet, a carrier is unlikely to enter into a long-term partnership with a PEO. Your PEO should be prepared to share two years of audited financials to demonstrate financial stability to carriers.


Carriers Need Information About the Groups and Markets Your PEO Serves


A complete employee and dependent census should be provided to carriers. Carriers will want to understand the demographic characteristics of the groups that will be offered medical coverage, participation levels and the types of plans currently offered via CSPs. What effective date are you seeking? Establishing a new master plan may require as much as six months lead time depending on the carrier. A good membership benchmark for starting a new master plan is approximately 500 members.


Carriers Consider Your PEO's Delivery Model


Do you have a captive salesforce or do you use brokers; if so, what type (PEO, property and casualty, employee benefits)? Is it managed by one broker? If so, is that broker in an agency controlled by the PEO? It’s helpful if the PEO controls the block of business through an affiliate agency, because working with several agents to move the business to a master plan is a more complex process and could mean less adoption in the master plan. Carriers want to understand the expected growth in a master plan as limited new employee growth may have a negative impact on the plan's performance and scalability.


Carriers Value Sound Risk Management Practices from PEOs


How will you evaluate and manage prospects entering the plan? Carriers want to ensure sound underwriting practices are in place to minimize your pool’s adverse risk. How will you allocate renewals to your existing book prospectively? Third parties approved by carriers can provide risk-management guidance via tools and systems, and working with these organizations can improve your standing with a potential carrier.


Carriers Are Seeking Firmly Established and Committed PEO Partners


What’s your PEO’s level of commitment to a master plan and do you have the operational and compliance processes in place to support it? Are you willing to commit to it and make it your primary offering? Your PEO must decide whether monetary tradeoffs for greater efficiency is a strategy to which you can commit prior to moving to a master plan.


Also, what is your PEO’s value proposition? What makes you different from other PEOs that have master plans or those seeking one? Be prepared to demonstrate your PEO’s value and what makes it stand out. What do you do differently that sets you apart? Are you in a geographic area where a carrier wants to expand? Is your PEO selling in a vertical that offers good risk or new opportunities for the carrier? Demonstrating your PEO’s advantages will make you stand out to carriers.


While it’s not easy for PEOs to get master medical plans, opportunities exist for those that can attract carrier attention by articulating a sound strategy, providing sound financials and demonstrating a commitment to the master plan delivery model.