NSP Q3 Deep Dive: Health Benefits Cost Surge Triggers Guidance Reset and Margin Pressure

HR outsourcing provider Insperity (NYSE:NSP) met Wall Streets revenue expectations in Q3 CY2025, with sales up 4% year on year to $1.62 billion. Its non-GAAP loss of $0.20 per share was significantly below analysts’ consensus estimates.

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StockStory’s Take

Insperity’s third quarter saw a pronounced negative market reaction, with management attributing underperformance to a spike in healthcare claims, particularly higher outpatient and pharmacy utilization as well as an increase in large claims frequency. CEO Paul Sarvadi described this as a “significant and unexpected step-up in health care claims,” highlighting that these industry-wide cost pressures led to a material shortfall in profitability. CFO Jim Allison acknowledged, “These results fell below our forecasted ranges, primarily due to a further continuation of higher-than-expected benefits costs.” While client retention remained high, the company faced ongoing headwinds tied to the broader healthcare cost environment.

Looking ahead, management’s revised outlook is shaped by persistent healthcare cost inflation and the rollout of pricing actions designed to restore margins. The introduction of HRScale, a new joint solution with Workday, is expected to serve as a growth driver in 2026, especially in the underserved mid-market segment. Sarvadi emphasized, “We believe the launch of HRScale as a significant growth catalyst for Insperity is particularly timely,” but also cautioned that full recovery depends on successful execution of cost controls and new product adoption. Allison noted that the company aims to “recover a majority of the earnings shortfall” in 2026, contingent on benefit cost trends and client retention.

Key Insights from Management’s Remarks

Management attributed third quarter margin compression primarily to a surge in healthcare benefit claims and outlined decisive steps, including pricing adjustments and product launches, to address these headwinds.

• Healthcare cost escalation: Insperity experienced a sharp rise in health insurance claims, with higher outpatient services, prescription drug use, and large claims frequency impacting gross profit. Management noted these trends were consistent with broader industry challenges and not unique to the company.
• Immediate pricing response: To counter rising benefits costs, Insperity moved to increase pricing for both new and renewing clients. Management stated that these increases are being carefully calibrated to remain competitive and focused on retaining profitable accounts, while less profitable clients may exit due to higher rates.
• HRScale solution rollout: The company launched HRScale, a comprehensive HR service and technology platform developed in partnership with Workday, targeting mid-market businesses (150 to 5,000 employees). Early sales activity and client feedback were described as positive, with the first beta clients scheduled for deployment in early 2026.
• Contract renegotiation with UnitedHealthcare: Insperity secured a new contract with UnitedHealthcare, extending through 2028. This agreement introduces plan design changes and risk-sharing provisions expected to reduce claims costs and provide margin support starting in 2026.
• Operating expense discipline: Despite investment in HRScale and the Workday partnership, Insperity reduced operating expenses by 4% year-over-year, primarily through lower salaries and general administrative costs. Management underscored ongoing cost management as a priority amid revenue headwinds.

Drivers of Future Performance

Insperity’s guidance for the next year centers on controlling healthcare benefit costs, executing pricing strategy, and leveraging new product launches to drive margin recovery.

• Persistent healthcare inflation risk: Management expects elevated benefits cost trends to continue into 2026, reflecting ongoing utilization, pharmacy expenses, and the introduction of new treatments. The company’s ability to offset these costs through pricing will be a key determinant of profitability.
• HRScale as a growth lever: The rollout of the HRScale solution is anticipated to boost worksite employee growth and revenue, particularly among mid-market clients. Management views HRScale as a differentiator that could support a return to double-digit growth rates, even if small- and medium-sized business employment growth remains sluggish.
• Operational and cost containment initiatives: Insperity is focused on lowering its exposure to large claims through a new pooling level and leveraging efficiencies from both client-facing and internal AI tools. These steps, combined with lower planned operating expenses for HRScale in 2026, are expected to help restore historical margin levels, although management warned that macroeconomic and labor market uncertainties remain.

Catalysts in Upcoming Quarters

In upcoming quarters, we will closely monitor (1) the adoption rate and revenue contribution from HRScale as it moves from beta to broader rollout, (2) the effectiveness of pricing actions in offsetting elevated healthcare claims costs and preserving client retention, and (3) the impact of the new UnitedHealthcare contract on cost trends and margin recovery. Progress in these areas will signal whether Insperity can execute its turnaround strategy and return to historical growth metrics.

Insperity currently trades at $33.56, down from $45.09 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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