When small to mid-sized businesses in Texas begin looking for health insurance options, many turn to Professional Employer Organizations, or PEOs. These companies promise a comprehensive approach to HR, payroll, compliance, and group health insurance. At first glance, this bundled solution appears to save time and money. But once employers dig deeper, they often discover hidden limitations, rising costs, and reduced control that affect both leadership and employees.
If you are currently using a PEO or considering one for your group health insurance needs, it’s important to understand how these organizations operate and whether they truly align with your business goals. While some companies may benefit from the convenience of a PEO, others may find that a more tailored solution—such as working with a health insurance broker—delivers better value, greater flexibility, and improved employee satisfaction.
This article breaks down what PEOs offer, how they handle health insurance, the risks you should know about, and the alternatives that could be a better fit.
How PEOs Work With Health Insurance Plans
A PEO is a third-party company that provides outsourced HR services to small and mid-sized businesses. When a business enters into a co-employment agreement with a PEO, it allows the PEO to legally share responsibility for certain employee-related functions, including payroll, tax filings, benefits administration, and human resources.
One of the most attractive selling points of a PEO is its ability to offer group health insurance. By pooling employees from multiple companies into one large group, a PEO can negotiate insurance rates and plans with major carriers. This approach can give smaller employers access to health insurance options that they might not qualify for on their own.
Businesses are drawn to PEOs because they promise lower premiums, which is almost never the case, and streamlined administrative duties. The PEO handles open enrollment, compliance with COBRA, Section 125 Cafeteria Plans, and ongoing communications with the insurance carriers. Employers receive a single invoice for all bundled services, and employees have access to a platform to enroll in and manage their benefits.
However, these benefits are not without limitations. PEOs often restrict employers to a few insurance plans, offer limited transparency into how rates are calculated, and remove the opportunity for businesses to negotiate their own rates year after year. What initially seems like a cost-effective and convenient solution can quickly reveal its downsides.
Lack of Control Over Insurance Plan Customization
One of the most common frustrations among businesses that use PEOs is the inability to customize their group health insurance offerings. PEOs generally offer a limited selection of supposedly, pre-negotiated plans. Employers must choose from these existing options, with little to no ability to tailor coverage to their workforce’s specific needs.
This one-size-fits-all approach may simplify administration, but it often creates dissatisfaction among employees. For example, a team with employees who have families may require access to comprehensive family plans, while other employees may need access to specific specialists or providers. If the available plans do not include a broad enough network or provide the right balance of premiums and deductibles, employees may feel underserved.
The lack of flexibility also affects your ability to implement popular plan enhancements like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), tiered coverage options, or regional provider access for remote employees. Businesses that want to provide different levels of coverage to different classes of employees—such as offering a higher level of benefits to executives—often find these goals difficult or impossible to achieve under a PEO model.
When employers lose control over plan design, they also lose one of the most powerful tools for recruiting and retaining top talent.
Cost Inefficiencies With PEO Health Insurance Plans
Although PEOs advertise cost savings through group purchasing power, the reality can be quite different. Many businesses run into hidden fees, rising premiums, and limited financial transparency that make true savings hard to track.
Bundled Fees That Hide True Costs
PEOs typically charge either:
- A flat fee per employee, or
- A percentage of total payroll
This fee covers more than just health insurance. It includes HR services, compliance support, payroll, and admin tools. However, most employers are not told how much of their payment actually goes toward premiums versus overhead. Because you do not work directly with the carrier, you also cannot easily verify pricing or ask for a rate breakdown.
No Reward for Low Risk
Let’s say your team is young, healthy, and low-turnover. Under a PEO, you still pay the same rates as higher-risk companies in the pool. You’re subsidizing other businesses with more claims and less stability. Over time, that adds up.
Worse, because PEOs rarely shop rates each year, your premiums may quietly increase without anyone re-evaluating your plan. You miss out on potential savings simply because your PEO does not negotiate on your behalf.
Limited Control Over Cost-Management Strategies
Most PEO plans are rigid. That makes it hard to:
- Add high-deductible plans with HSA options
- Use telehealth or wellness incentives
- Customize plan tiers or provider networks
- Apply cost-containment strategies
If you want to reduce costs strategically, a PEO plan likely will not give you the flexibility or data to do so.
Lack of Billing Transparency
Unlike working with a broker, PEO invoices are often bundled and vague. You may never know:
- How much you’re paying in admin fees
- What portion is going to insurance premiums
- Whether your plan is priced competitively
That makes budget planning and forecasting difficult, especially for growing companies.
Surprise Charges and Lock-In Contracts
Some employers are surprised to see additional charges for:
- COBRA administration
- ACA compliance
- Enrollment platforms
These services often come standard from a health insurance broker, but with a PEO, they may appear as line-item add-ons you did not expect.
Additionally, PEO agreements are often structured with strict cancellation terms. That makes switching providers or separating mid-year expensive and time-consuming.
Employee Experience and Satisfaction With PEO Health Plans
The employee experience is a critical factor when evaluating any health insurance provider. In many cases, employees who receive their benefits through a PEO report lower satisfaction compared to those covered under a plan managed directly by their employer.
One major reason is the impersonal nature of support. When employees have questions about coverage, claims, or providers, they must contact the PEO’s general support center. These representatives often lack the context or familiarity to provide meaningful help. If employees run into issues during open enrollment or after receiving medical care, it can be difficult to get timely, accurate answers.
Many employees also feel disconnected from the benefits decision-making process. They may not understand why certain plans were chosen or how to make the most of their benefits. Because employers are not directly involved in plan selection or carrier communication, HR departments may feel helpless when trying to assist.
These issues can create frustration, reduce employee morale, and ultimately affect your ability to retain top performers. Your team may not blame the PEO for poor benefits. They will blame you, the employer.
The Impact of PEOs on Company Culture and HR Control
Beyond cost and coverage, there is a more subtle, but equally important issue to consider: how a PEO affects your internal culture, HR processes, and employee relationships. These impacts often go unnoticed at first, but can significantly influence team morale, trust, and operational agility over time.
Loss of Internal Ownership
When you outsource your benefits administration to a third party, your HR team loses direct access to key functions. Instead of handling benefits updates, onboarding, or compliance reporting in-house, your team now has to submit requests through the PEO. This adds layers of communication and approval that can cause:
- Delays in onboarding new hires
- Confusion during open enrollment periods
- Frustration when employees need help with urgent benefits issues
Even simple tasks, like correcting an address or updating dependents, may require coordination with an external administrator. The result is a system that slows down your HR operations and reduces responsiveness to employee needs.
Disconnection Between Employees and Leadership
Health insurance is personal. When employees must contact a third party about their benefits—especially when dealing with billing issues, provider questions, or urgent health matters—it creates distance between them and the company.
That separation can erode the trust and transparency you’ve worked to build. Employees may feel that their employer has taken a hands-off approach to something that directly impacts their health and financial security. Over time, that perception can lead to disengagement and decreased morale.
In contrast, when HR handles benefits internally or with support from a dedicated broker, employees are more likely to feel heard, supported, and valued.
Reduced Customization in HR Strategy
Your benefits package is more than a compliance requirement. It reflects your mission, values, and workplace culture. For companies that prioritize wellness, flexibility, and competitive perks, handing off this responsibility to a PEO limits your ability to innovate.
You may find it difficult to implement:
- Wellness stipends or fitness reimbursements
- Tiered benefits based on tenure or role
- Voluntary benefits like student loan assistance or financial coaching
- Company-wide health initiatives tied to your values
Because PEOs focus on uniformity and administrative efficiency, they may not support programs that fall outside their core offerings. This limits your ability to differentiate your company as a great place to work.
Weakened HR Autonomy
Finally, outsourcing major HR functions to a PEO can impact your team’s confidence and authority. HR professionals thrive when they have the tools and freedom to manage employee relations, solve problems, and shape policy. When they must constantly coordinate with an outside party, their influence diminishes.
If your business grows, changes industries, or shifts its strategic direction, your HR team may struggle to adapt quickly within the confines of a PEO system. That can stunt organizational growth and make it harder to execute new initiatives.
Exploring Alternatives to PEOs for Group Health Insurance
Fortunately, businesses have strong alternatives to the PEO model when it comes to providing group health insurance. The most effective option for companies seeking control, customization, and value is to work directly with a health insurance broker.
A broker represents your business, not the insurance carrier or a third-party administrator. That means the broker works in your best interest—shopping rates, reviewing plan performance, and helping you customize a benefits package that reflects your company’s priorities.
By working with a broker, you can:
- Choose from a wide range of carriers and plans
- Design a benefits package that fits your workforce’s needs
- Receive assistance with compliance, onboarding, and renewals
- Shop rates annually to find better value
- Create tiered plans for different employee classes
- Maintain control over your HR systems and data
At Selected Benefits, we specialize in helping Texas businesses—especially those with up to 250 employees—secure group health insurance plans that balance affordability with high-value coverage. We provide personalized service, free software for online enrollment, HIPAA-compliant handling of sensitive employee data, and HR and payroll services.
Our approach is consultative, not transactional. We do the legwork that large brokers and PEOs will not. We also stay with you long after the initial setup, helping your company grow and evolve its benefits strategy over time.
You can learn more by reviewing this group health insurance case study that shows how we helped one Texas business reduce costs and improve employee satisfaction after moving away from a PEO.
Making the Right Decision for Your Business
Before you commit to a PEO for group health insurance, take the time to understand how the model works. While it may offer convenience at first, the long-term implications can include reduced flexibility, higher costs, and lower employee satisfaction.
If you want to control your group health insurance, align your benefits strategy with your company culture, and make decisions that serve both your budget and your people, consider an alternative. Working with a trusted broker allows you to design a tailored solution that evolves with your business.
To explore your options, visit our group health insurance FAQs or learn more about group health insurance for businesses. You can also contact us for more details to speak with an advisor who will take the time to understand your goals.