Insperity (NSP) Q3 2025: Healthcare Claims Spike 9.1%, Margin Recovery Hinges on 2026 Repricing
Insperity’s Q3 underscored the outsized impact of a 9.1% surge in healthcare claims costs, driving a sharp margin compression and a substantial earnings shortfall versus initial 2025 targets. Despite this setback, management is betting on aggressive repricing, a newly renegotiated UnitedHealthcare contract, and the rollout of HR Scale, its Workday-powered mid-market solution, to restore profitability in 2026. Investors should watch for evidence that pricing actions and cost controls can offset persistent industry-wide benefit inflation.
Summary
- Healthcare Cost Shock: Unprecedented claims inflation overwhelmed cost controls, forcing urgent repricing and contract renegotiation.
- Strategic Bet on HR Scale: The Workday partnership launches on time and budget, targeting mid-market growth as a new catalyst.
- 2026 Margin Recovery Plan: Management expects majority of 2025’s earnings shortfall to rebound next year, contingent on successful execution.
Performance Analysis
Insperity’s core PEO (Professional Employer Organization) business model—generating revenue through HR outsourcing and benefits administration—was materially disrupted by a 9.1% year-over-year spike in healthcare claims costs for Q3 2025. This surge, driven by higher utilization of outpatient and pharmacy services as well as a jump in large claims, overwhelmed both demographic tailwinds and cost controls, resulting in a sharp drop in gross profit per worksite employee and negative adjusted EPS for the quarter.
While operating expenses were reduced by 4% year-over-year and sequentially by $10 million, these savings could not offset the benefits cost overrun, which management attributes to industry-wide inflation, new high-cost treatments, and the use of AI tools in healthcare billing and diagnostics. The company’s dividend and buyback programs continued, but the primary narrative was one of margin compression and urgent cost containment.
- Gross Profit Erosion: Gross profit per worksite employee dropped sharply due to benefit cost inflation, undercutting profitability despite stable client retention.
- Expense Discipline: Operating expenses fell below budget, particularly in salaries and general administrative costs, as management prioritized margin defense.
- Capital Deployment: Dividend payouts and share repurchases continued, signaling confidence in long-term recovery despite near-term earnings pressure.
The quarter’s results spotlighted the structural vulnerability of Insperity’s model to healthcare cost volatility, and set the stage for a high-stakes 2026 recovery effort built on pricing, contract renegotiation, and new product launches.
Executive Commentary
"The most urgent issue that we continue to address is the health insurance claim cost escalation. This issue has occurred across the marketplace and industry and has impacted Insperity in a severe manner over the last three quarters... We believe the actions we have taken in response have been progressing on track to achieve a rebound in 2026."
Paul J. Sarvadi, President and Chief Executive Officer
"We responded quickly to the emergence of higher than expected benefits costs earlier in the year by increasing our pricing targets... We believe that the plan we are executing remains competitive in the broader marketplace and will continue throughout 2026."
James R. Servati, Chief Financial Officer
Strategic Positioning
1. Healthcare Cost Containment and Pricing Power
Insperity’s immediate strategic priority is to restore profitability by repricing its book of business and renegotiating its benefits contracts. The company moved quickly to increase pricing for both new and renewing clients, and expects these actions—combined with plan design changes and a lower pooling level (insurance stop-loss threshold)—to materially reduce exposure to large claims in 2026. The newly extended UnitedHealthcare contract, with updated financial terms and risk-sharing, is intended to further mitigate benefit cost volatility.
2. HR Scale and Workday Partnership as Growth Catalyst
The official rollout of HR Scale, Insperity’s mid-market PEO solution built in partnership with Workday, is positioned as the next major growth engine. This product targets companies with 150 to 5,000 employees—a segment with over 25 million employees in the US—and integrates Insperity’s HR services with Workday’s technology. The launch was delivered on time and within the initial $120 million two-year investment estimate, with early sales traction and strong client interest, especially among larger accounts.
3. Booked Sales Momentum and Retention
Despite the challenging benefits environment, Insperity reported Q3 HR360 booked sales 45% above prior year and stable client retention rates at 99%. The company’s dual-offering strategy (HR360 and HR Scale at different price points) is intended to support both upsell and retention, with the largest account in company history set to onboard in January. Management expects these sales wins to help offset any attrition from repricing lower-profitability clients.
4. Three-Year Plan for Double-Digit Growth
Insperity’s leadership is finalizing a three-year plan to return to historical double-digit unit growth and EBITDA expansion above 20% annually. The plan relies on margin recovery from pricing actions, cost reductions, and new business from HR Scale, even if the broader SMB labor market remains sluggish. AI-driven internal tools are expected to further improve operating leverage and client service efficiency.
Key Considerations
This quarter’s results highlight both the vulnerability of Insperity’s business model to healthcare cost shocks and the company’s commitment to strategic reinvention and disciplined execution. Management’s multi-pronged response—repricing, contract renegotiation, and product innovation—will be tested in 2026 as industry-wide cost pressures persist.
Key Considerations:
- Healthcare Inflation Persistence: Industry consensus is that elevated claims trends will continue through 2026, requiring sustained pricing discipline and client communication.
- Contractual Risk Mitigation: The UnitedHealthcare extension lowers large claim pooling levels, but also introduces potential new cost-sharing dynamics that must be monitored for effectiveness.
- HR Scale Execution Risk: While the Workday partnership is on track, scaling client adoption and realizing revenue uplift will be critical to offsetting margin headwinds.
- Client Mix Management: Exiting lower-profitability clients may support margins but could pressure top-line growth if not offset by strong new sales.
Risks
Insperity remains acutely exposed to further healthcare cost escalation, macroeconomic softness in SMB employment, and execution risk around HR Scale’s rollout and client adoption. The repricing strategy could test client retention, and any misalignment between price increases and industry trends may open the door for competitors. The company’s ability to achieve planned margin recovery in 2026 is not guaranteed given ongoing industry volatility and evolving healthcare billing practices.
Forward Outlook
For Q4 2025, Insperity guided to:
- Average paid worksite employees between 313,000 and 315,000, up 1.3% to 1.9% year-over-year.
- Adjusted EBITDA in a range of negative $25 million to $9 million, and adjusted EPS between minus $0.79 and minus $0.16.
For full-year 2025, management expects:
- Adjusted EPS of $0.84 to $1.47 and adjusted EBITDA of $119 million to $153 million.
- Operating expenses to be approximately 3% below 2024 levels.
Management emphasized that 2026 should see a “majority” of 2025’s earnings shortfall recovered, contingent on pricing execution, cost controls, and successful HR Scale adoption. They will provide a formal 2026 outlook in February.
- Margin recovery depends on benefit cost containment and successful client repricing.
- HR Scale client ramp and retention rates will be key watchpoints.
Takeaways
Insperity’s 2025 story is one of margin compression from healthcare inflation, but the company is moving decisively to restore profitability through pricing, contract renegotiation, and new product launches.
- Cost Shock Drives Urgency: Healthcare claims volatility exposed a structural vulnerability, but leadership responded with contract and pricing resets.
- Growth Engine in HR Scale: The Workday partnership is positioned as a multi-year catalyst, but execution and adoption will determine its impact.
- 2026 as Inflection Point: Investors should focus on evidence that pricing power and cost containment can deliver the promised margin rebound.
Conclusion
Insperity’s Q3 results highlighted acute sensitivity to healthcare cost trends, but management’s rapid response and strategic pivots set the stage for a potential 2026 recovery. The next year will be a critical test of Insperity’s ability to translate pricing actions and innovation into sustainable profit growth.
Industry Read-Through
Insperity’s experience is a cautionary signal for the entire HR outsourcing and benefits administration sector: healthcare cost inflation, driven by higher utilization and AI-driven billing practices, is outpacing legacy pricing models and compressing margins industry-wide. The need for rapid repricing, contract renegotiation, and technology-enabled service differentiation is now a sector imperative. Competitors with less pricing power or slower innovation cycles may see even greater margin erosion, while those investing in mid-market solutions and AI-enabled efficiencies could gain share as clients seek value and predictability.