The traditional growth engine for Professional Employer Organizations (PEOs) is slowing down. Where once clients rapidly scaled from 10 to 120 employees in a year, today’s economic climate tells a different story. Many companies are stabilizing or even downsizing, and that shift is sending ripples through the PEO business model.
Fewer worksite employees (WSEs) mean less total revenue from per-employee fees, administrative charges, and insurance-related margins. Meanwhile, healthcare costs continue to climb — projected to rise by 8% in 2025,1 according to PwC’s Health Research Institute. This dual pressure is squeezing margins and putting profitability at risk.
In this new reality, scale doesn’t look like it used to. Shrinking risk pools, static install bases, and higher per capita costs are forcing PEOs to rethink how they deliver value and maintain profits. Traditional economies of scale simply don’t offer the same cost efficiencies when the workforce contracts.
That’s why forward-thinking PEOs are looking for a smarter path forward. A path that prioritizes cost management, empowers better employee decision-making, and preserves client satisfaction without inflating operational overhead.
When your client’s headcount shrinks, your cost to serve doesn’t necessarily shrink with it. In fact, it often goes up. That’s because fixed costs spread across a smaller base lead to higher per-employee expenses. For PEOs, this is especially challenging in the benefits space, where scale has traditionally helped manage risk and keep premiums in check.
With fewer WSEs, the risk pool narrows, potentially driving up per capita premiums. Smaller populations also mean less negotiating power with carriers and providers, reducing your leverage to lock in competitive rates. On top of that, even underutilized benefits come with administrative overhead. So whether employees are using their plans wisely or not, you’re still footing the bill for access.
It’s no longer just about shaving off expenses. The real differentiator lies in cost management — understanding how and where dollars are spent and steering employees toward higher-value care. Without that level of insight and control, rising costs will continue to eat into your margins and raise premiums for your customers, which they can little afford.
To understand why shrinking headcount hurts so much, it’s important to zoom out and look at how PEOs make money. At the heart of the model is co-employment: PEOs serve as the Statutory Insurance Employer (SIE), managing payroll, taxes, benefits, and insurance for client employees, known as Worksite Employees (WSEs).
Revenue streams typically include per-employee fees, administrative charges, and margins tied to the cost of administering benefits. This model works beautifully when the WSE base is growing. In the high-growth tech era, for example, companies could scale from 10 to 120 employees in months, driving strong free cash flow with minimal increase in service costs.
But today’s environment is different. Many PEO clients may have gone from 100 to 80 WSEs over the last five years. Revenue has stagnated. Costs, especially healthcare premiums, have not.
And this isn’t just a client-specific issue. It’s an emerging trend across the PEO space. In a flat or contracting environment, profitability demands a shift from relying on predictable customer growth to optimizing what already exists.
When margins are tight and growth is slow, technology becomes a cost containment strategy, not just a convenience. Smart platforms like Healthee help PEOs operate leaner by giving employees the tools to make better decisions in real-time. And those better decisions translate directly into savings.
At the core of Healthee’s platform is Zoe, Healthee’s AI-powered personal health assistant. Zoe helps employees:
And the impact isn’t theoretical. One Healthee client saved $80,000 in just 10 weeks by redirecting employees from high-cost care settings to telehealth.
When your clients can lower their claims costs without sacrificing care quality, everyone wins. That’s the kind of value you can scale.
In today’s PEO landscape, managing medical costs isn’t just a goal; it’s a business imperative. After payroll, health benefits are typically the second-largest operating expense for U.S. employers, according to the Society for Human Resource Management.2
What’s driving that relentless increase in premium expense? One key factor is a lack of education and visibility.
Most employees don’t fully understand or use their benefits. They often default to costly options like emergency rooms for non-emergent issues or miss out on free preventive services. Others may over-insure during open enrollment, choosing plans that cost more than they need.
You can’t control every healthcare decision employees make, but you can guide them. Behavioral nudging is one of the most effective and underutilized strategies for lowering healthcare spend without reducing access or quality.
The difference between an ER visit and an urgent care appointment can be more than $2,000 per visit. And yet, around half of ER visits are for non-life-threatening issues. Similarly, employees who unknowingly go out-of-network can incur thousands in unexpected charges — all of which contribute to rising claims costs and higher premiums at renewal.
Healthee helps change that behavior in real-time. Through Zoe, our AI-powered assistant, employees get clear, actionable prompts that:
When employees can see the financial impact of their decisions — and get guidance in the moment — they’re far more likely to choose cost-effective, high-quality care. Over time, this adds up to major savings for both the client and the PEO. Importantly, employee satisfaction goes up with this visibility and support.
Open enrollment shouldn’t feel like guesswork. Yet, too often, plan design decisions are based on legacy structures or anecdotal feedback, not real data. That’s a missed opportunity, especially when rising healthcare costs demand smarter, more strategic planning.
Healthee equips PEOs and their clients with the data they need to make OE a powerful cost management moment. By aggregating claims data and monitoring real-time utilization trends, our platform helps you:
The result? More efficient spending, fewer surprises at renewal, and a benefits strategy that’s grounded in reality, not assumptions.
And just as importantly, Healthee enables ongoing collaboration between finance, HR, and provider networks. When these stakeholders are all looking at the same data, better decisions happen faster and with more confidence.
For years, growth covered up inefficiencies. As long as new WSEs were coming in, there was less pressure to optimize benefits spend or re-evaluate plan performance. But in today’s environment, that safety net is gone — and what’s left is a major strategic opportunity.
PEOs can no longer rely solely on growth of the installed customer base to grow revenue. Instead, the path forward lies in:
Healthee was built for this moment. Our platform empowers employees to make smarter healthcare decisions, reduces the administrative strain on HR teams during open enrollment, and gives your clients the tools they need to control spending without sacrificing care.
This isn’t just about cutting costs. It’s about evolving the value you provide so you can retain more clients, grow smarter, and position yourself as an indispensable partner.
Growth isn’t the only thing that scales. Strategy does, too, especially when it’s powered by the right technology.
For PEOs navigating shrinking workforces and rising healthcare costs, Healthee offers a smarter way forward. By helping employees make informed decisions, reducing administrative overhead, and surfacing actionable insights, we help you improve margins without adding headcount.
Whether your WSE base is growing, holding steady, or contracting, you need tools that scale intelligently — not just widely.
With Healthee, you can operate leaner while delivering a better employee experience, reduce churn by boosting satisfaction and outcomes, and give your sales and implementation teams a true differentiator in the market.
Let’s talk about how Healthee helps PEOs like yours cut costs without cutting corners.
References:
How Third-Party Administrators (TPAs) streamline claims adjudication and enhances the employer benefits experience for self-funded employers.
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