THE PEO PARADOX TURNING RISING HEALTHCARE COSTS INTO COMPETITIVE ADVANTAGE

THE $25,572 REALITY CHECK

Let me share a number that should concern every PEO executive: $25,572 (KFF, 2024).

That’s what the average employer now pays annually for family health coverage. Premiums are projected to jump another 9%, the steepest increase since 2011 (Mercer, 2025). Small businesses face an even harsher reality, with projected increases of 11% before plan changes (KFF, 2025).

For years, I worried these spikes would erode the PEO model through lost clients and shrinking margins. But I’ve come to understand that rising costs actually make the PEO model more valuable than ever. The key is recognizing what clients truly need from us.

BEYOND PREMIUM NEGOTIATIONS

Clients often tell you they want lower premiums. What they actually need is predictability, control, and strategic guidance.

The data reveals what’s really at stake: 68% of employees prioritize health insurance as the most important retention factor (SHRM, 2024). Further, health insurance remains the second most important employee benefit after wages, according to multiple 2025 surveys. These numbers go beyond mere benefits statistics. They’re retention and recruitment metrics that directly impact your clients’ bottom lines.

Most companies overpay not because premiums are inherently high, but because they’re purchasing misaligned coverage. A tech startup doesn’t need the same plan structure as a construction company. A workforce averaging 28 years old has different needs than one averaging 45. Yet too many PEOs offer one-size-fits-all solutions, then wonder why clients leave for competitors promising marginal savings.

THE SMALL BUSINESS REALITY

Small and mid-sized businesses now pay nearly twice as much for health coverage as large companies. Most alarming: 98 percent of small business owners fear they won’t be able to afford coverage in the coming years (NFIB, 2025).

Nearly every small business owner believes healthcare costs threaten their survival. For PEOs, this widespread concern represents an unprecedented opportunity to demonstrate value through strategic benefits management rather than simple cost-shifting.

The traditional response has been to trim services and squeeze margins, hoping to compete on price. This approach leads nowhere productive. It weakens differentiation, triggers price wars, and ultimately fails to solve the underlying problem.

BUILDING A STRATEGIC RESPONSE

Focus Resources Where They Matter

In recent years, five conditions account for more than half of employer healthcare spend: musculoskeletal, cardiovascular, cancer, diabetes, and mental health. To put this in perspective, musculoskeletal issues alone cost hundreds of billions annually.

When half your clients’ workforce deals with these conditions, your strategy should reflect that reality. This means partnering with centers of excellence, implementing targeted case management, and ensuring your provider networks have adequate specialists in these areas.

Deploy Technology with Purpose

The economics of virtual care are compelling. Telehealth visits average $40 (or $0 with some vendor partners) compared to $1,500 or more for ER visits. These are massive savings worth noting.

AI-powered benefits navigation platforms take this further, reducing costs and delivering upwards of 232% ROI. These tools work because they solve a fundamental problem: employees don’t understand their benefits. When a benefits navigation platform provides instant, accurate guidance about coverage, in-network providers, and cost implications, it eliminates the confusion that drives unnecessary ER visits and out-of-network care.

Address Pharmaceutical Trends Proactively

GLP-1 medications now represent more than 10 percent of total insurance claims, with users averaging $21,758 annually versus $13,961 for non-users (IFEBP, 2025; USI, 2025). This is a fundamental shift in how we manage chronic conditions.

Smart PEOs are developing comprehensive strategies: implementing prior authorization protocols, creating step therapy programs, and providing targeted education about appropriate use. The goal isn’t to restrict access but to ensure these expensive medications go to those who will benefit most.

The leading-edge vendors are developing hands-on care pathways that merge pharmacy distribution and medication adherence with mandatory routine provider check-ins. These high-touch care delivery models can help drive down costs over time and save PEOs from wasted spend on unused or unnecessary GLP-1 spend.

REFRAMING THE VALUE PROPOSITION

Most PEOs still lead with spreadsheets showing marginal premium differences. But the real value shows up in different metrics entirely. Businesses using PEOs grow twice as fast, experience 12 percent lower turnover, and are 50 percent less likely to fail.

When meeting with clients and prospects, I’ve learned to ask a different question: “What would predictable healthcare costs mean for your business planning?” This shifts the conversation from this year’s premiums to long-term strategic planning. It positions the PEO as a business partner, not a side-lined vendor.

MEASURING WHAT MATTERS

Organizations implementing comprehensive navigation and condition management strategies report consistent improvements. HR teams typically recover 8-10 hours weekly from reduced benefits inquiries. Open enrollment management is seamless. Most importantly, cost trends stabilize enough for meaningful budget forecasting.

We’re entering the third consecutive year of increases above 5 percent. Every employer is searching for cost-cutting changes in 2026. This combination of sustained pressure and active response creates ideal conditions for PEOs offering genuine solutions.

Success requires integrating three elements: condition-specific strategies that address cost drivers, technology that simplifies navigation and access, and prevention programs with demonstrated ROI. PEOs mastering this integration won’t need to compete on price. They’ll compete on their ability to make healthcare costs predictable and manageable.

THE PATH FORWARD

When 98% of small businesses fear healthcare costs will overwhelm them, PEOs have a clear mandate. These businesses need partners who can transform an existential threat into a manageable operating expense.

Start by selecting one client facing typical challenges: rising costs, confused employees, overwhelmed HR. Implement focused condition management for their highest-cost areas. Deploy navigation technology that eliminates benefits confusion. Measure everything: cost trends, utilization patterns, employee satisfaction, HR time savings. Document the transformation.

That single success story becomes your blueprint. It proves that rising healthcare costs don’t have to destabilize businesses. With the right strategies and tools, PEOs can deliver what clients desperately need: predictable costs with better health outcomes.